Registration No. 02-35570
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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POST-EFFECTIVE AMENDMENT NO. 45 TO
FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
and
REGISTRATION STATEMENT
under
THE INVESTMENT COMPANY ACT OF 1940
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PRINCIPAL VARIABLE CONTRACTS FUND, INC.
(Exact name of Registrant as specified in Charter)
The Principal Financial Group
Des Moines, Iowa 50392
(Address of principal executive offices)
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Telephone Number (515) 248-3842
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MICHAEL D. ROUGHTON Copy to:
The Principal Financial Group JONES & BLOUCH L.L.P.
Des Moines, Iowa 50392 Suite 405 West
1025 Thomas Jefferson Street, N.W.
Washington, DC 20007-0805
(Name and address of agent for service)
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It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b)of Rule 485
X on May 1, 2000 pursuant to paragraph (b) of Rule 485
60 days after filing pursuant to paragraph (a)(1) of Rule 485
on (date) pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
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<PAGE>
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
ACCOUNTS OF THE FUND
Aggressive Growth Account MidCap Account
Asset Allocation Account MidCap Growth Account
Balanced Account Money Market Account
Bond Account Real Estate Account
Capital Value Account SmallCap Account
Government Securities Account SmallCap Growth Account
Growth Account SmallCap Value Account
International Account Stock Index 500 Account
International SmallCap Account Utilities Account
MicroCap 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
Aggressive Growth Account..................................... 6
Asset Allocation Account...................................... 8
Balanced Account.............................................. 10
Bond Account.................................................. 12
Capital Value Account......................................... 14
Government Securities Account................................. 16
Growth Account................................................ 18
International Account......................................... 20
International SmallCap Account................................ 22
MicroCap Account.............................................. 24
MidCap Account................................................ 26
MidCap Growth Account......................................... 28
Money Market Account.......................................... 30
Real Estate Account........................................... 32
SmallCap Account.............................................. 34
SmallCap Growth Account....................................... 36
SmallCap Value Account........................................ 38
Stock Index 500 Account....................................... 40
Utilities Account............................................. 42
CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS.................... 44
PRICING OF ACCOUNT SHARES.......................................... 48
DIVIDENDS AND DISTRIBUTIONS........................................ 48
MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE..................... 49
The Manager................................................... 49
The Sub-Advisors.............................................. 49
GENERAL INFORMATION ABOUT AN ACCOUNT............................... 66
Shareholders Rights........................................... 66
Purchase of Account Shares.................................... 67
Sale of Account Shares........................................ 67
Financial Statements.......................................... 69
FINANCIAL HIGHLIGHTS............................................... 70
Notes to Financial Highlights................................. 78
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 for certain Accounts (based on
the Sub-Advisor's experience with the investment strategy for which it was
selected). The Manager seeks to provide a full range of investment approaches
through the Fund.
<TABLE>
<CAPTION>
<S> <C>
Sub-Advisor Account
Berger LLC ("Berger") SmallCap Growth
Dreyfus Corporation ("Dreyfus") MidCap Growth
Goldman Sachs Asset Management ("Goldman") MicroCap
Invista Capital Management, LLC ("Invista") Balanced, Capital Value, Government Securities,
Growth, International, International SmallCap,
MidCap, SmallCap, Stock Index 500 and Utilities
J.P. Morgan Investment Management, Inc. ("Morgan") SmallCap Value
Morgan Stanley Asset Management ("Morgan Stanley") Aggressive Growth and Asset Allocation
</TABLE>
Principal Management Corporation and Invista are members of the Principal
Financial Group.
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 example is intended to help you compare the cost of
investing in a particular Account with the cost of investing in other mutual
funds. The example assumes you invest $10,000 in an Account for the time periods
indicated. The example also assumes 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 (or estimated expenses for the new Account).
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. As
certain Accounts have been operating for a limited period of time, complete
historical information is not available for those Accounts. If complete
historical information is available, a 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
Aggressive Growth Account
The Account seeks to provide long-term capital appreciation by investing
primarily in equity securities.
Main Strategies
The Account seeks to maximize long-term capital appreciation by investing
primarily in equity securities of U.S. and, to a limited extent, foreign
companies that exhibit strong or accelerating earnings growth. The universe of
eligible companies generally includes those with market capitalizations of $1
billion or more. The Sub-Advisor Morgan Stanley, emphasizes individual security
selection and may focus the Account's holdings within the limits permissible for
a diversified fund.
Morgan Stanley follows a flexible investment program in looking for companies
with above average capital appreciation potential. Morgan Stanley focuses on
companies with consistent or rising earnings growth records and compelling
business strategies. Morgan Stanley continually and rigorously studies company
developments, including business strategy, management focus and financial
results, to identify companies with earnings growth and business momentum. In
addition, Morgan Stanley closely monitors analysts' expectations to identify
issuers that have the potential for positive earnings surprises versus consensus
expectations. Valuation is of secondary importance and is viewed in the context
of prospects for sustainable earnings growth and the potential for positive
earnings surprises in relation to consensus expectations.
The Account has a long-term investment approach. However, Morgan Stanley
considers selling securities of issuers that no longer meet its criteria. To the
extent that the Account engages in short-term trading, it may have increased
transaction costs.
Main Risks
The value of the stocks owned by the Account changes on a daily basis. Stock
prices can fluctuate dramatically both in the long-term and short-term. The
current price reflects the activities of individual companies and general market
and economic conditions. Prices of equity securities tend to be more volatile
than prices of fixed income securities. The prices of equity securities rise and
fall in response to a number of different factors. In particular, prices of
equity securities respond to events that affect entire financial markets or
industries (for example, changes in inflation or consumer demand) and to events
that affect particular issuers (for example, news about the success or failure
of a new product).
The Account may invest up to 25% 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.
At times, the Account's market sector (mid- to large-capitalization
growth-oriented equity securities) may underperform relative to other sectors.
The Account may purchase stocks of companies that may have greater risks than
other stocks with lower potential for earnings growth.
Investor Profile
The Account is generally a suitable investment if you are willing to accept the
risks and uncertainties of investing in equity securities in the hope of earning
superior returns. As with all mutual funds, as the value of the Account's assets
rise and fall, the Account's share price changes. If you sell your shares when
their value is less than the price you paid, you will lose money.
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
1995 44.19
1996 28.05
1997 30.86
1998 18.95
1999 39.50
The account's highest/lowest quarterly results during this time period were:
Highest 22.68% (12/31/1998)
Lowest -16.05% (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 Five Past Ten Past One Past Five Past Ten
Account Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth 39.50% 32.01% 28.82%* S&P 500 Stock Index 21.04% 28.55% 18.21%
Lipper Large-Cap Growth Fund Average(1) 38.09 30.55 19.73
<FN>
* Period from June 1, 1994, date first offered to the public, through
December 31, 1999.
(1) 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
--------------------------------------------------------
$79 $246 $428 $954
Account Operating Expenses
Management Fees...................... 0.75%
Other Expenses....................... 0.02
-----
Total Account Operating Expenses 0.77%
Day-to-day Account Management
Since October 1998 Co-Manager: William S. Auslander, Portfolio Manager and
Principal of Morgan Stanley & Co. Incorporated and Morgan
Stanley Dean Witter Investment Management Inc. Prior
thereto, equity analyst since 1995. Equity analyst at Icahn
& Co., 1986-1995. He holds a BA in Economics from the
University of Wisconsin and an MBA from Columbia University.
Since October 1998 Co-Manager: Philip W. Friedman, Managing Director of Morgan
Stanley & Co. Incorporated and Morgan Stanley Dean Witter
Investment Management Inc. since 1997. Member of Morgan
Stanley & Co. Research since 1990, served as Director of
North America Research 1995-1997. Prior thereto, Assistant
to the Controller and Chief Equity Financial Officer, Arthur
Andersen & Company. He holds a BA from Rutgers University
and an MBA from Northwestern - J.L. Kellogg School.
GROWTH-ORIENTED ACCOUNT
Asset Allocation Account
The Account seeks to generate a total investment return consistent with
preservation of capital.
Main Strategies
The Account uses a flexible investment policy to establish a diversified global
portfolio that will invest in equities and fixed income securities. The
Sub-Advisor, Morgan Stanley, will invest in equity securities of domestic and
foreign corporations that appear to be undervalued relative to their earnings
results or potential, or whose earnings growth prospects appear to be more
attractive than the economy as a whole. In addition, Morgan Stanley will invest
in debt securities to provide income and to moderate the overall portfolio risk.
Typically Morgan Stanley will invest in high quality fixed-income securities but
may invest up to 20% of the Account's assets in high yield securities.
The securities which the Account purchases are identified as belonging to an
asset class which include:
o stocks of growth-oriented companies (companies with earnings that are
expected to grow more rapidly than the economy as a whole), both foreign
and domestic;
o stocks of value-oriented companies (companies with distinctly below average
stock price to earnings ratios and stock price to book value ratios, and
higher than average dividend yields), both foreign and domestic;
o domestic real estate investment trusts;
o fixed income securities, both foreign and domestic; and
o domestic high yield fixed-income securities.
Morgan Stanley does not allocate a specific percentage of the Account's assets
to a class. Over time, it expects the asset mix to be within the following
ranges:
o 25% to 75% in equity securities;
o 20% to 60% in debt securities; and
o 0% to 40% in money market instruments.
The allocation is based on Morgan Stanley's judgement as to the general market
and economic conditions, trends and investment yields, interest rates, and
changes in fiscal or monetary policies.
Main Risks
As with any security, the securities in which the Account invests have
associated risks. These include risks of:
o High yield securities. 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.
o Foreign securities. These have risks that are not generally found in
securities of U.S. companies. For example, 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.
o Securities of smaller companies. Historically, small company securities
have been more volatile in price than larger company securities, especially
over the short-term. While small companies may offer greater opportunities
for capital growth than larger, more established companies, they also
involve greater risks and should be considered speculative.
Allocation among asset classes is designed to lessen overall investment risk by
diversifying the Account's assets among different types of investments in
different markets. Morgan Stanley reallocates among asset classes and eliminates
asset classes for a period of time, when in it's judgment the shift offers
better prospects of achieving the investment objective of the Account. Under
normal market conditions, abrupt shifts among asset classes will not occur.
The net asset value of the Account's shares is effected by changes in the value
of the securities it owns. The prices of equity securities held by the Account
may decline in response to certain events including those directly involving
issuers of these securities, adverse conditions affecting the general economy,
or overall market declines. In the short term, stock prices can fluctuate
dramatically in response to these factors. The value of debt securities held by
the Account may be affected by factors such as changing interest rates, credit
rating, and effective maturities. When interest rates fall, the price of a bond
rises and when interest rates rise, the price declines. Lower quality and longer
maturity bonds will be subject to greater credit risk and price fluctuations
than higher quality and shorter maturity bonds. Money market instruments held by
the Account may be affected by unfavorable political, economic, or governmental
developments that could affect the repayment of principal or the payment of
interest.
Investor Profile
The Account is generally a suitable investment if you are seeking a moderate
risk approach towards long-term growth. As with all mutual funds, if you sell
your shares when their value is less than the price you paid, you will lose
money.
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
1995 20.66
1996 12.92
1997 18.19
1998 9.18
1999 19.49
The account's highest/lowest quarterly results during this time period were:
Highest 11.48% (12/31/1999)
Lowest -8.16% (9/30/1998)
Average annual total returns for the period ending Decmeber 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>
Asset Allocation 19.49% 16.01% 14.32%* S&P 500 Stock Index 21.04% 28.55% 18.21%
Lipper Flexible Portfolio Fund Average 12.55 17.17 12.81
<FN>
* Period from June 1, 1994, date shares first offered to the public,
through December 31, 1999.
</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
------------------------------------------------------
$87 $271 $471 $1,049
Account Operating Expenses
Management Fees.................... 0.80%
Other Expenses..................... 0.05
-----
Total Account Operating Expenses 0.85%
Day-to-day Account Management
Since May 1994 Francine J. Bovich, Managing Director of Morgan Stanley Dean
(Account's inception) Witter Investment Management Inc. and Morgan Stanley &
Co. Incorporated since 1997. Principal 1993-1996. She holds
a BA in Economics from Connecticut College, and an MBA in
Finance from New York University.
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
Government Securities Account
The Account seeks a high level of current income, liquidity and safety of
principal.
Main Strategies
The Account invests in securities supported by:
o full faith and credit of the U.S. Government (e.g. GNMA certificates); or
o credit of a U.S. Government agency or instrumentality (e.g. bonds issued by
the Federal Home Loan Bank).
In addition, the Account may invest in money market investments.
The Account invests in modified pass-through GNMA Certificates. GNMA
Certificates are mortgage-backed securities representing an interest in a pool
of mortgage loans. Various lenders make loans that are then insured (by the
Federal Housing Administration) or loans that are guaranteed (by Veterans
Administration or Farmers Home Administration). The lender or other security
issuer creates a pool of mortgages that it submits to GNMA for approval.
Owners of modified pass-through Certificates receive all interest and principal
payments owed on the mortgages in the pool, regardless of whether or not the
mortgagor has made the payment. Timely payment of interest and principal is
guaranteed by the full faith and credit of the U.S. Government.
Main Risks
Although some of the securities the Account purchases are backed by the U.S.
government and its agencies, shares of the Account are not guaranteed. When
interest rates fall, the value of the Account's shares rises, and when rates
rise, the value declines. Because of the fluctuation in the value of Account
shares, if you sell your shares when their value is less than the price you
paid, you will lose money.
U.S. Government securities do not involve the degree of credit risk associated
with investments in lower quality fixed-income securities. As a result, the
yields available from U.S. Government securities are generally lower than the
yields available from many other fixed-income securities. Like other
fixed-income securities, the values of U.S. Government securities change as
interest rates fluctuate. Fluctuations in the value of the Account's securities
do not affect interest income on securities already held by the Account, but are
reflected in the Account's price per share. Since the magnitude of these
fluctuations generally is greater at times when the Account's average maturity
is longer, under certain market conditions the Account may invest in short term
investments yielding lower current income rather than investing in higher
yielding longer term securities.
Mortgage-backed securities are subject to prepayment risk. Prepayments,
unscheduled principal payments, may result from voluntary prepayment,
refinancing or foreclosure of the underlying mortgage. When interest rates
decline, significant unscheduled prepayments may result. These prepayments must
then be reinvested at lower rates. Prepayments may also shorten the effective
maturities of these securities, especially during periods of declining interest
rates. On the other hand, during period of rising interest rates, a reduction in
prepayments may increase the effective maturities of these securities,
subjecting them to the risk of decline in market value in response to rising
interest and potentially increasing the volatility of the Account.
In addition, prepayments may cause losses on securities purchased at a premium
(dollar amount by which the price of the bond exceeds its face value). At times,
mortgage-backed securities may have higher than market interest rates and are
purchased at a premium. Unscheduled prepayments are made at par and cause the
Account to experience a loss of some or all of the premium.
Investor Profile
The Account is generally a suitable investment if you want monthly dividends to
provide income or to be reinvested in additional Account shares to produce
growth and prefer to have the repayment of principal and interest on most of the
securities in which the Account invests to be backed by the U.S. Government or
its agencies.
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 9.54
1991 16.95
1992 6.84
1993 10.07
1994 -4.53
1995 19.07
1996 3.35
1997 10.39
1998 8.27
1999 -0.29
The account's highest/lowest quarterly results during this time period were:
Highest 6.17% (6/30/1995)
Lowest -3.94% (3/31/1994)
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>
Government Securities -0.29% 7.96% 7.75% Lehman Brothers Mortgage Index 1.86% 7.98% 7.78%
Lipper U.S. Mortgage Fund Average 0.65 7.00 6.95
</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 May 1987 Martin J. Schafer. Mr. Schafer joined the Principal in 1977
(Account's and has broad experience in residential mortgage related
inception) securities. He served as Director of Investment Securities
at the Principal prior to joining Invista Capital Management
in 1992. He holds a BBA in Accounting and Finance from the
University of Iowa.
GROWTH-ORIENTED ACCOUNT
Growth Account
The Account seeks growth of capital through the purchase primarily of common
stocks, but the Account may invest in other securities.
Main Strategies
The Account seeks to achieve its objective by investing in common stocks and
other equity securities. In selecting securities for investment, the
Sub-Advisor, Invista, looks at stocks it believes have prospects for above
average growth over an extended period of time. Invista uses an approach
described as "fundamental analysis" as it selection process.
The three basic steps of fundamental analysis are:
o Research - consideration of 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 - use of the research to allow Invista to identify segments of
the market for investment. Invista considers various factors including
sustainable, superior earnings growth and above average or accelerating
rates of growth;
o Stock selection - Invista buys and sells stocks using its research and
valuation as the basis. It attempts to identify the individual issuers that
it considers to have high growth potential, that are market share leaders
and/or have high quality management with consistent track records and solid
balance sheets.
Main Risks
Prices of equity securities rise and fall in response to a number of factors
including events that affect entire financial markets or industries (for
example, changes in inflation or consumer demand) as well as events impacting a
particular issuer (for example, news about the success or failure of a new
product). The securities purchased by the Account present greater opportunities
for growth because of high potential earnings growth, but may also involve
greater risks than securities that do not have the same potential. The Account
may invest in companies with limited product lines, markets or financial
resources. As a result, these securities may change in value more than those of
larger, more established companies. As the value of the stocks owned by the
Account changes, the Account share price changes. In the short-term, the price
can fluctuate dramatically.
As with all mutual funds, as the value of the Account's assets rise and fall,
the Account's share price changes. 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. You must be willing to accept the risks of investing in common stocks
that may have greater risks than stocks of companies with lower potential for
earnings growth.
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
1995 25.62
1996 12.51
1997 26.96
1998 21.36
1999 16.44
The account's highest/lowest quarterly results during this time period were:
Highest 21.35% (12/31/1998)
Lowest -14.63% (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> <C>
Growth 16.44% 20.45% 18.94%* S&P 500 Stock Index 21.04% 28.55% 18.21%
Lipper Large-Cap Growth Fund Average(1) 38.09 30.55 19.73
<FN>
* Period from May 1, 1994, date first offered to the public, through
December 31, 1999.
(1) 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
-------------------------------------------------------
$46 $144 $252 $567
Account Operating Expenses
Management Fees................... 0.45%
Other Expenses.................... 0.00
-----
Total Account Operating Expenses 0.45%
Day-to-day Fund Management
Since January 2000 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.
GROWTH-ORIENTED ACCOUNT
International Account
The Account seeks long-term growth of capital by investing in a portfolio of
equity securities of companies established outside of the U.S.
Main Strategies
The Account invests in equity securities of:
o companies with their principal place of business or principal office
outside the U.S.;
o companies for which the principal securities trading market is outside the
U.S.; and
o companies, regardless of where their securities are traded, that derive 50%
or more of their total revenue from goods or services produced or sales
made outside the U.S.
The Account has no limitation on the percentage of assets that are invested in
any one country or denominated in any one currency. However under normal market
conditions, the Account intends to have at least 65% of its assets invested in
companies of at least three countries. One of those countries may be the U.S.
though currently the Account does not intend to invest in equity securities of
U.S. companies.
Investments may be made anywhere in the world. Primary consideration is given to
securities of corporations of Western Europe, North America and Australasia
(Australia, Japan and Far East Asia). Changes in investments are made as
prospects change for particular countries, industries or companies.
In choosing investments for the Account, the Sub-Advisor, Invista, pays
particular attention to the long-term earnings prospects of the various
companies under consideration. Invista then weighs those prospects relative to
the price of the security.
Main Risks
The values of the stocks owned by the Account change on a daily basis. Stock
prices reflect the activities of individual companies as well as general market
and economic conditions. In the short term, stock prices and currencies can
fluctuate dramatically in response to these factors. In addition, there are
risks involved with any investment in foreign securities 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.
Because foreign securities generally are denominated in foreign currencies, the
value of the net assets of the Account as measured in U.S. dollars will be
affected by changes in exchange rates. To protect against future uncertainties
in foreign currency exchange rates, the Account is authorized to enter into
certain foreign currency exchange transactions. In addition, the Account's
foreign investments may be less liquid and their price more volatile than
comparable investments in U.S. securities. Settlement periods may be longer for
foreign securities and that may affect portfolio liquidity.
Under unusual market or economic conditions, the Account may invest in
securities issued by domestic or foreign corporations, governments or
governmental agencies, instrumentalities or political subdivisions. The
securities may be denominated in U.S. dollars or other currencies.
As with all mutual funds, the value of the Account's assets may rise or fall. 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 want to invest in non-U.S. companies. This Account is not an
appropriate investment if you are seeking either preservation of capital or high
current income. You must be able to assume the increased risks of higher price
volatility and currency fluctuations associated with investments in
international stocks which trade in non-U.S. currencies.
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
1995 14.17
1996 25.09
1997 12.24
1998 9.98
1999 25.93
The account's highest/lowest quarterly results during this time period were:
Highest 16.60% (12/31/1998)
Lowest -17.11% (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>
International 25.93% 17.29% 14.41%* Morgan Stanley Capital International EAFE
(Europe, Australia and Far East) Index 26.96% 12.83% 7.01%
Lipper International Fund Average 40.80 15.37 10.54
<FN>
* Period from May 1, 1994, date shares first offered to the public,
through December 31, 1999.
</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
-----------------------------------------------------
$80 $249 $433 $966
Account Operating Expenses
Management Fees.................. 0.73%
Other Expenses................... 0.05
-----
Total Account Operating Expenses 0.78%
Day-to-day Account Management
Since March 1994 Co-Manager: 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.
Since March 2000 Co-Manager: Kurtis D. Spieler, CFA. Mr. Spieler joined
Invista Capital Management in 1995. He holds an MBA from
Drake University and a BBA from Iowa State University. He
has earned the right to use the Chartered Financial Analyst
designation.
GROWTH-ORIENTED ACCOUNT
International SmallCap Account The Account seeks long-term growth of capital.
Main Strategies
The Account invests in stocks of non-U.S. companies with comparatively smaller
market capitalizations. Market capitalization is defined as total current market
value of a company's outstanding common stock. Under normal market conditions,
the Account invests at least 65% of its assets in securities of companies having
market capitalizations of $1 billion or less.
The Account diversifies its investments geographically. There is no limitation
of the percentage of assets that may be invested in one country or denominated
in any one currency. However, under normal market circumstances, the Account
intends to have at least 65% of its assets invested in securities of companies
of at least three countries.
Main Risks
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.
Because foreign securities generally are denominated in foreign currencies, the
value of the net assets of the Account as measured in U.S. dollars will be
affected by changes in exchange rates. To protect against future uncertainties
in foreign currency exchange rates, the Account is authorized to enter into
certain foreign currency exchange transactions. In addition, the Account's
foreign investments may be less liquid and their price more volatile than
comparable investments in U.S. securities. Settlement periods may be longer for
foreign securities and that may affect portfolio liquidity.
Investments in companies with small market capitalizations carry their own
risks. Historically, small company securities have been more volatile in price
than larger company securities, especially over the short-term. While small
companies may offer greater opportunities for capital growth than larger, more
established companies, they also involve greater risks and should be considered
speculative.
As with all mutual funds, the value of the Account's assets may rise or fall. If
you sell your shares when their value is less than the price you paid, you will
lose money.
Investor Profile
This Account is not an appropriate investment if you are seeking either
preservation of capital or high current income. You must be able to assume the
increased risks of higher price volatility and currency fluctuations associated
with investments in international stocks which trade in non-U.S. currencies. The
Account is generally a suitable investment if you are seeking long-term growth
and want to invest a portion of your assets in smaller, non-U.S. 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
1999 93.81
The account's highest/lowest quarterly results during this time period were:
Highest 36.59% (12/31/1999)
Lowest -19.31% (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 Five Past OnePast FivePast Ten
Account Year Years Year Years Years
<S> <C> <C> <C> <C> <C>
International SmallCap 93.81% 39.24%* Morgan Stanley Capital International EAFE
(Europe, Australia and Far East) Index 26.96% 12.83% 7.01%
Lipper International SmallCap Fund Average 75.41 19.91 13.04
<FN>
* Period from May 1, 1998, date shares first offered to the public,
through December 31, 1999.
</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
-------------------------------------------------------
$134 $418 $723 $1,590
Account Operating Expenses
Management Fees................... 1.20%
Other Expenses.................... 0.12
-----
Total Account Operating Expenses 1.32%
Day-to-day Account Management
Since March 2000 Co-Manager: Dan J. Sherman, CFA. Mr. Sherman joined Invista
Capital Management in 1998. Prior to joining the firm, he
led a regional research team for Salomon Smith Barney. He
holds an MBA from the University of Wisconsin. He has earned
the right to use the Chartered Financial Analyst
designation.
Since April 1998 Co-Manager: Darren K. Sleister, CFA. Mr. Sleister joined
(Account's Invista Capital Management as a Portfolio Strategist in
inception) 1993. He holds an MBA from the University of Iowa, and an
undergraduate degree from Central College. He has earned the
right to use the Chartered Financial Analyst designation.
GROWTH-ORIENTED ACCOUNT
MicroCap Account
The Account seeks to achieve long-term growth of capital.
Main Strategies
Under normal market conditions, the Account invests at least 65% of its total
assets in equity securities of companies with market capitalizations of $700
million or less at the time of investment. Under normal circumstances, the
Account's investment horizon for ownership of equity securities is two to three
years.
The Account invests in companies that the Sub-Advisor, Goldman, believes are
well managed niche businesses that have the potential to achieve high or
improving returns on capital and/or above average sustainable growth. Goldman
invests in companies that have value characteristics as well as those with
growth characteristics with no consistent preference between the two categories.
Growth stocks are considered to be those with potential for growth of capital
and earnings which is expected to be above average. Value stocks tend to have
higher yields and lower price to earnings (P/E) ratios than other stocks.
The Account may invest in securities of small market capitalization companies
that have experienced financial difficulties. Investments may also be made in
companies that are in the early stages of their life and that Goldman believes
have significant growth potential. Goldman believes that the companies in which
the Account may invest offer greater opportunities for growth of capital than
larger, more mature, better known companies.
The Account may invest up to 35% of its total assets in equity securities of
companies with market capitalizations of more than $700 million at the time of
the investment and in fixed-income securities. In addition, although the Account
invests primarily in securities of domestic corporations, it may invest up to
25% of its total assets in foreign securities. These may include securities of
issuers in emerging countries and securities denominated in foreign currencies.
The Account may invest in real estate investment trusts (REITs) which are pooled
investment vehicles that invest in either real estate or real estate related
loans.
Main Risks
Investments in such small market capitalization companies involve special risks.
Historically, small company securities have been more volatile in price than
larger company securities, especially over the short-term. Smaller companies may
also be developing or marketing new products or services for which markets are
not yet established and may never become established. 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.
Foreign stocks and those denominated in foreign currencies 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.
The value of a REIT is affected by changes in the value of the underlying
property owned by the trust, quality of any credit extended and the ability of
the trust's management. REITs are also subject to risks generally associated
with investments in real estate (a more complete discussion of these risks is
found in the description of the Real Estate Account). The Account will
indirectly bear its proportionate share of any expenses, including management
fees, paid by a REIT in which it invests.
The Account's share price may fluctuate more than that of funds primarily
invested in stocks of mid-sized and large companies. Occasionally, small company
securities may underperform as compared to the securities of larger companies.
As the value of the stocks owned by the Account changes, the Account's share
price changes. In the short-term, the share price can fluctuate dramatically. 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 want long-term growth of
capital. Additionally, you must be willing to accept the risks of investing in
securities that may have greater risks than stocks of companies with lower
potential for growth.
Account Performance Information
The Account's past performance is not necessarily an indication of future
performance.
Annual Total Returns
1999 -1.07
The account's highest/lowest quarterly results during this time period were:
Highest 27.70% (6/30/1999)
Lowest -26.11% (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 Five Past OnePast FivePast Ten
Account Year Years Year Years Years
<S> <C> <C> <C> <C> <C> <C>
MicroCap -1.07% -12.05%* Russell 2000 Index 21.26% 16.69% 13.40%
Lipper Small-Cap Core Fund Average 28.43 17.88 13.39
<FN>
* Period from May 1, 1998, date shares first offered to the public,
through December 31, 1999.
</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
-------------------------------------------------------
$130 $406 $702 $1,545
Account Operating Expenses
Management Fees................... 1.00%
Other Expenses.................... 0.28
-----
Total Account Operating Expenses 1.28%*
* Manager has agreed to reimburse operating expenses so that total
Account operating expenses will not be greater than 1.06% for 2000.
Day-to-day Account Management
Since April 1998 Co-Manager: Eileen A. Aptman, Vice President of Goldman
(Account's since 1993. Prior thereto, she worked at Delphi Management
inception) as an equity analyst. She holds a BA from Tufts University.
Since April 1998 Co-Manager: Matthew B. McLennan, Associate of Goldman since
(Account's 1995. Prior thereto, Queensland Investment Corporation in
inception) Australia. He holds an undergraduate degree in Commerce from
the University of Queensland, Australia as well as an
Honours degree.
Since October 1999 Co-Manager: Eileen Rominger, Ms. Rominger joined the
sub-advisor as a senior portfolio manager in 1999. From 1981
to 1999, she worked at Oppenheimer Capital, most recently as
a senior portfolio manager. She holds an MBA from Wharton
School of Business and a BA from Fairfield University.
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.
GROWTH-ORIENTED ACCOUNT
MidCap Growth Account
The Account seeks long-term growth of capital.
Main Strategies
The Account invests primarily in common stocks of medium capitalization
companies, generally firms with a market value between $1 billion and $10
billion. In the view of the Sub-Advisor, Dreyfus, many medium sized companies: o
are in fast growing industries; o offer superior earnings growth potential; and
o are characterized by strong balance sheets and high returns on equity.
The Account may also hold investments in large and small capitalization
companies, including emerging and cyclical growth companies.
Common stocks are selected for the Account so that in the aggregate, the
investment characteristics and risk profile of the Account are similar to the
Standard & Poor's MidCap 400 Index* (S&P MidCap). While it may maintain
investment characteristics similar to the S&P MidCap, the Account seeks to
invest in companies that in the aggregate will provide a higher total return
than the S&P MidCap. The Account is not an index fund and does not limit its
investments to the securities of issuers in the S&P MidCap.
Dreyfus uses valuation models designed to identify common stocks of companies
that have demonstrated consistent earnings momentum and delivered superior
results relative to market analyst expectations. Other considerations include
profit margins, growth in cash flow and other standard balance sheet measures.
The securities held are generally characterized by strong earnings momentum
measures and higher expected earnings per share growth.
Once such common stocks are identified, Dreyfus constructs a portfolio that in
the aggregate breakdown and risk profile resembles the S&P MidCap, but is
weighted toward the most attractive stocks. The valuation model incorporates
information about the relevant criteria as of the most recent period for which
data are available. Once ranked, the securities are categorized under the
headings "buy", "sell" or "hold". The decision to buy, sell or hold is made by
Dreyfus based primarily on output of the valuation model. However, that decision
may be modified due to subsequently available or other specific relevant
information about the security.
Main Risks
Because companies in this market are smaller, prices of their stocks tend to be
more volatile than stocks of companies with larger capitalizations. Smaller
companies may be developing or marketing new products or services for which
markets are not yet established and may never become established. 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.
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. 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. The Account is designed for a portion of your
investments. It is not appropriate if you are seeking income or conservation of
capital.
* "Standard & Poor's MidCap 400 Index" is a trademark of Standard & Poor's
Corporation (S&P). S&P is not affiliated with Principal Variable Contracts
Fund, Inc., Invista Capital Management, LLC or Principal Life Insurance
Company.
Account Performance Information
The Account's past performance is not necessarily an indication of future
performance.
Annual Total Returns
1999 10.67
The account's highest/lowest quarterly results during this time period were:
Highest 22.31% (12/31/1998)
Lowest -16.95% (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 Five Past OnePast FivePast Ten
Account Year Years Year Years Years
<S> <C> <C> <C> <C> <C> <C>
MidCap Growth 10.67% 4.09%* S&P 400 MidCap Index 14.72% 23.05% -- %
Lipper Mid-Cap Core Fund Average(1) 38.27 21.93 16.28
Lipper Mid-Cap Growth Fund Average(1) 72.86 28.03 19.11
<FN>
* Period from May 1, 1998, date first offered to the public, through
December 31, 1999.
(1) 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
-------------------------------------------------------
$111 $347 $601 $1,329
Account Operating Expenses
Management Fees................... 0.90%
Other Expenses.................... 0.19
-----
Total Account Operating Expenses 1.09%*
* Manager has agreed to reimburse operating expenses so that total
Account operating expenses will not be greater than 0.96% for 2000.
Day-to-day Account Management
Since April 1998 John O'Toole, CFA. Portfolio Manager of The Dreyfus
(Account's Corporation and Senior Vice President of Mellon Equity
inception) Associates LLP (an affiliate of The Dreyfus Corporation)
since 1990. He holds an MBA in Finance from the University
of Chicago and a BA in Economics from the University of
Pennsylvania. 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.
GROWTH-ORIENTED ACCOUNT
Real Estate Account
The Account seeks to generate a high total return by investing primarily in
equity securities of companies principally engaged in the real estate industry.
Main Strategies
The Account invests primarily in equity securities of companies engaged in the
real estate industry. For purposes of the Account's investment policies, a real
estate company has at least 50% of its assets, income or profits derived from
products or services related to the real estate industry. Real estate companies
include real estate investment trusts and companies with substantial real estate
holdings such as paper, lumber, hotel and entertainment companies. Companies
whose products and services relate to the real estate industry include building
supply manufacturers, mortgage lenders and mortgage servicing companies.
The Account may invest up to 25% of its assets in securities of foreign real
estate companies. Foreign securities carry risks that are not generally found in
securities 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.
Real estate investment trusts ("REITs") are corporations or business trusts that
are effectively permitted to eliminate corporate level federal income taxes if
they meet certain requirements of the Internal Revenue Code. The Account focuses
on equity REITs. REITs are characterized as:
o equity REITs, which primarily own property and generate revenue from rental
income;
o mortgage REITs, which invest in real estate mortgages; and
o hybrid REITs, which combine the characteristics of both equity and mortgage
REITs.
Main Risks
Securities of real estate companies are subject to securities market risks
similar those of direct ownership of real estate. These include:
o declines in the value of real estate
o risks related to general and local economic conditions
o dependency on management skills
o heavy cash flow dependency
o possible lack of available mortgage funds
o overbuilding
o extended vacancies in properties
o increases in property taxes and operating expenses
o changes in zoning laws
o expenses incurred in the cleanup of environmental problems
o casualty or condemnation losses
o changes in interest rates
In addition to the risks listed above, equity REITs are affected by the changes
in the value of the properties owned by the trust. Mortgage REITs are affected
by the quality of the credit extended. Both equity and mortgage REITs:
o are dependent upon management skills and may not be diversified;
o are subject to cash flow dependency and defaults by borrowers; and
o could fail to qualify for tax-free pass through of income under the Code.
Because of these factors, the values of the securities held by the Account, and
in turn the net asset value of the shares of the Account, change on a daily
basis. In addition, the prices of the equity securities held by the Account may
decline in response to certain events including those directly involving issuers
of these securities, adverse conditions affecting the general economy, or
overall market declines. In the short term, share prices can fluctuate
dramatically in response to these factors. Because of these fluctuations,
principal values and investment returns vary. When shares of the Account are
sold, they may be worth more or less than the amount paid for them.
Investor Profile
The Account is generally a suitable investment if you are seeking long-term
growth, want to invest in companies engaged in the real estate industry and are
willing to accept fluctuations in the value of your investment.
Account Performance Information
The Account's past performance is not necessarily an indication of future
performance.
Annual Total Returns
1999 -4.48
The account's highest/lowest quarterly results during this time period were:
Highest 11.37% (6/30/1999)
Lowest -8.40% (9/30/1999)
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 Five Past OnePast FivePast Ten
Account Year Years Year Years Years
<S> <C> <C> <C> <C> <C>
Real Estate -4.48% -6.58%* Morgan Stanley REIT Index -4.55% 7.61% -- %
Lipper Real Estate Fund Average -3.14 8.38 6.62
<FN>
* Period from May 1, 1998, date shares first offered to the public,
through December 31, 1999.
</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
-------------------------------------------------------
$101 $315 $547 $1,213
Account Operating Expenses
Management Fees................... 0.90%
Other Expenses.................... 0.09
-----
Total Account Operating Expenses 0.99%
Day-to-day Account Management
Since April 1998 Kelly D. Rush, CFA. Mr. Rush has been with the Principal
(Account's organization since 1995. He holds an MBA and a BA in Finance
inception) from the University of Iowa. He has earned the right to use
the Chartered Financial Analyst designation.
GROWTH-ORIENTED ACCOUNT
SmallCap Account
The Account seeks long-term growth of capital by investing primarily in equity
securities of companies with comparatively small market capitalizations.
Main Strategies
Under normal market conditions, the Account invests at least 65% of its assets
in securities of companies with market capitalizations of $1.5 billion or less
at the time of purchase. Market capitalization is defined as total current
market value of a company's outstanding common stock.
In selecting securities for investment, the Sub-Advisor, Invista, looks at
stocks with value and/or growth characteristics. In managing the assets of the
Account, Invista does not have a policy of preferring one of these categories to
the other. The value orientation emphasizes buying stocks at less than their
investment value and avoiding stocks whose price has been artificially built up.
The growth orientation emphasizes buying stocks of companies whose potential for
growth of capital and earnings is expected to be above average. Selection is
based on fundamental analysis of the company relative to other companies with
the focus being on Invista's estimation of forwarding looking rates of return.
Main Risks
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 developing or marketing
new products or services for which markets are not yet established and may never
become established. 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.
The net asset value of the Account's shares is based on the values of the
securities it holds. The value of the stocks owned by the Account changes on a
daily basis. The current share price reflects the activities of individual
companies as well as general market and economic conditions. In the short term,
stock prices can fluctuate dramatically in response to these factors. The
Account's share price may fluctuate more than that of funds primarily invested
in stocks of mid-sized and large companies and may underperform as compared to
the securities of larger companies. 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 volatile fluctuations in the
value of your investment. This Account is designed for a portion of your
investments.
Account Performance Information
The Account's past performance is not necessarily an indication of future
performance.
Annual Total Returns
1999 43.58
The account's highest/lowest quarterly results during this time period were:
Highest 26.75% (6/30/1999)
Lowest -24.33% (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 Five Past OnePast FivePast Ten
Account Year Years Year Years Years
<S> <C> <C> <C> <C> <C> <C>
SmallCap 43.58% 8.24%* S&P 600 Index 12.40% 17.05% 13.04%
Lipper Small-Cap Core Fund Average(1) 28.43 17.88 13.39
<FN>
* Period from May 1, 1998, date first offered to the public, through
December 31, 1999.
(1) 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
--------------------------------------------------------
$93 $290 $504 $1,120
Account Operating Expenses
Management Fees.................... 0.85%
Other Expenses..................... 0.06
-----
Total Account Operating Expenses 0.91%
Day-to-day Account Management
Since April 1998 Co-Manager: John F. McClain. Mr. McClain joined Invista
(Account's Capital Management as a Portfolio Analyst in 1990. He holds
inception) an undergraduate degree in Economics from the University of
Iowa and an MBA from Indiana University.
Since April 1998 Co-Manager: Mark T. Williams, CFA. Mr. Williams joined
(Account's Invista Capital Management in 1989. He holds an MBA from
inception) Drake University and a BA in Finance from the University of
the State of New York. He has earned the right to use the
Chartered Financial Analyst designation.
GROWTH-ORIENTED ACCOUNT
SmallCap Growth Account
The Account seeks long-term growth of capital.
Main Strategies
The Account invests primarily in a diversified group of equity securities of
small growth companies. Generally, at the time of the Account's initial purchase
of a security, the market capitalization of the issuer is less than $1 billion.
Growth companies are generally those with sales and earnings growth that is
expected to exceed the growth rate of corporate profits of the S&P 500.
Under normal market conditions, the Account invests at least 65% of its assets
in equity securities of small growth companies. The balance of the Account may
include equity securities of companies with market capitalizations in excess of
$1 billion, foreign securities, corporate fixed-income securities, government
securities and short term investments.
In selecting securities for investment, the Sub-Advisor, Berger, places primary
emphasis on companies which it believes have favorable growth prospects. Berger
seeks to identify small growth companies that either:
o occupy a dominant position in an emerging industry; or
o have a growing market share in larger, fragmented industries.
While these companies may present above average risk, Berger believes that they
may have the potential to achieve long-term earnings growth substantially above
the earnings growth of other companies.
Main Risks
Investments in companies with small market capitalizations carry their own
risks. Historically, small company securities have been more volatile in price
than larger company securities, especially over the short-term. Smaller
companies may be developing or marketing new products or services for which
markets are not yet established and may never become established. While small
companies may offer greater opportunities for capital growth than larger, more
established companies, they also involve greater risks and should be considered
speculative.
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.
The net asset value of the Account's shares is based on the values of the
securities it holds. The value of the stocks owned by the Account changes on a
daily basis. The current share 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. 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.
The Account's share price may fluctuate more than that of funds primarily
invested in stocks of mid-sized and large companies and may underperform as
compared to the securities of larger companies. This Account is designed for
long term investors for a portion of their investments. It is not designed for
investors seeking income or conservation of capital.
Investor Profile
The Account is generally a suitable investment if you are seeking long-term
growth and are willing to accept the potential for volatile fluctuations in the
value of your investment.
Account Performance Information
The Account's past performance is not necessarily an indication of future
performance.
Annual Total Returns
1999 95.69
The account's highest/lowest quarterly results during this time period were:
Highest 59.52% (12/31/1999)
Lowest -18.94% (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 Five Past OnePast FivePast Ten
Account Year Years Year Years Years
<S> <C> <C> <C> <C> <C> <C>
SmallCap Growth 95.69% 52.17%* Russell 2000 Growth Index 43.09% 18.99% 13.51%
Lipper Small-Cap Growth Fund Average(1) 62.63 24.05 18.36
<FN>
* Period from May 1, 1998, date first offered to the public, through
December 31, 1999.
(1) 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
-----------------------------------------------------
$109 $340 $590 $1,306
Account Operating Expenses
Management Fees................... 1.00%
Other Expenses.................... 0.07
-----
Total Account Operating Expenses 1.07%*
* Manager has agreed to reimburse operating expenses so that total
Account operating expenses will not be greater than 1.06% for 2000.
Day-to-day Account Management
Since November 1998 Amy K. Selner, Vice President and portfolio manager of
Berger Associates, Inc. since 1997. Senior Research Analyst,
1996-1997. Prior thereto, Assistant Portfolio Manager and
Research Analyst with INVESCO Trust Company, 1991-1996.
GROWTH-ORIENTED ACCOUNT
SmallCap Value Account
The Account seeks long-term growth of capital.
Main Strategies
The Account invests primarily in a diversified group of equity securities of
small U.S. companies with a market capitalization of less than $1 billion at the
time of the initial purchase. Under normal market conditions, the Account
invests at least 65% of its assets in equity securities of such companies.
Emphasis is given to those companies that exhibit value characteristics. These
characteristics are above average dividend yield and below average price to
earnings (P/E) ratios.
The Sub-Advisor, Morgan, uses fundamental research, systematic stock valuation
and a disciplined portfolio construction process. It seeks to enhance returns
and reduce the volatility in the value of the Account relative to that of the
U.S. small company value universe, represented by the Russell 2000(R) Value
Index. Morgan continuously screens the small company universe to identify for
further analysis those companies that exhibit favorable characteristics. Such
characteristics include significant and predictable cash flow and high quality
management. Based on fundamental research and using a dividend discount model,
Morgan ranks these companies within economic sectors according to their relative
values. Morgan then selects for purchase the companies it feels to be most
attractive within each economic sector.
Under normal market conditions, the Account will have sector weightings
comparable to that of the U.S. small company value universe though it may under
or over-weight selected economic sectors. In addition, as a company moves out of
the market capitalization range of the small company universe, it generally
becomes a candidate for sale by the Account.
The Account intends to manage its investments actively to accomplish its
investment objective. Since the Account has a long-term investment perspective,
it does not intend to respond to short-term market fluctuations or to acquire
securities for the purpose of short-term trading. The Account may however take
advantage of short-term trading opportunities that are consistent with its
objective. To the extent that the Account engages in short-term trading, it may
have increased transactions costs.
Main Risks
As with any security, the securities in which the Account invests have
associated risks. These include risks of:
o Securities of smaller companies. Historically, small company securities
have been more volatile in price than larger company securities, especially
over the short-term. While small companies may offer greater opportunities
for capital growth than larger, more established companies, they also
involve greater risks and should be considered speculative.
o Unseasoned issuers. Smaller companies may be developing or marketing new
products or services for which markets are not yet established and may
never become established.
o Foreign securities. These have risks that are not generally found in
securities of U.S. companies. For example, 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.
The Account's share price may fluctuate more than that of funds primarily
invested in stocks of mid-sized and large companies and may underperform as
compared to the securities of larger companies. The Account is not designed for
investors seeking income or conservation of capital. 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 volatile fluctuations in the value of your
investment.
Account Performance Information
The Account's past performance is not necessarily an indication of future
performance.
Annual Total Returns
1999 21.45
The account's highest/lowest quarterly results during this time period were:
Highest 15.32% (6/30/1999)
Lowest -19.14% (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 Five Past OnePast FivePast Ten
Account Year Years Year Years Years
<S> <C> <C> <C> <C> <C> <C>
SmallCap Value 21.45% 1.88%* Russell 2000 Value Index -1.49% 13.14% 12.46%
Lipper Small-Cap Value Fund Average(1) 6.33 13.92 12.04
<FN>
* Period from May 1, 1998, date first offered to the public, through
December 31, 1999.
(1) 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
------------------------------------------------------
$147 $456 $787 $1,724
Account Operating Expenses
Management Fees................... 1.10%
Other Expenses.................... 0.34
-----
Total Account Operating Expenses 1.44%*
* Manager has agreed to reimburse operating expenses so that total
Account operating expenses will not be greater than 1.16% for 2000.
Day-to-day Account Management
Since January 2000 Co-Manager: Marian U. Pardo, Managing Director of J.P.
Morgan Investment Management Inc. since 1998. Ms. Pardo is a
senior portfolio manager in the Small Cap Equity Group at
J.P. Morgan. She has been at J.P. Morgan since 1968, except
for 5 months in 1998 when she was president of a small
investment management firm. She holds a BA degree from
Barnard College.
Since January 2000 Co-Manager: Leon Roisenberg, Vice President of J.P. Morgan
Investment Management Inc. since 1996. Prior to joining J.P.
Morgan, Mr. Roisenberg worked as an analyst and portfolio
manager at Bankers Trust. He earned his MBA from Columbia
University and received his BS degree from MIT.
GROWTH-ORIENTED ACCOUNT
Stock Index 500 Account
The Account seeks long-term growth of capital.
Main Strategies
Under normal market conditions, the Account invests at least 80% of its assets
in common stocks of companies that compose the Standard & Poor's* ("S&P") 500
Index. The Sub-Advisor, Invista, will attempt to mirror the investment
performance of the index by allocating the Account's assets in approximately the
same weightings as the S&P 500. Over the long-term, Invista seeks a correlation
between the Account, before expenses, and that of the S&P 500. It is unlikely
that a perfect correlation of 1.00 will be achieved.
The Account is not managed according to traditional methods of "active"
investment management. Active management would include buying and selling
securities based on economic, financial and investment judgement. Instead, the
Account uses a passive investment approach. Rather than judging the merits of a
particular stock in selecting investments, Invista focuses on tracking the S&P
500.
Because of the difficulty and expense of executing relatively small stock
trades, the Account may not always be invested in the less heavily weighted S&P
500 stocks. At times, the Account's portfolio may be weighted differently from
the S&P 500, particularly if the Account has a small level of assets to invest.
In addition, the Account's ability to match the performance of the S&P 500 is
effected to some degree by the size and timing of cash flows into and out of the
Account. The Account is managed to attempt to minimize such effects.
Invista reserves the right to omit or remove any of the S&P 500 stocks from the
Account if it determines that the stock is not sufficiently liquid. In addition,
a stock might be excluded or removed from the Account if extraordinary events or
financial conditions lead Invista to believe that it should not be a part of the
Account's assets.
The Account uses an indexing strategy. It does not attempt to manage market
volatility, use defensive strategies or reduce the effects of any long-term
periods of poor stock performance. The correlation between Account and index
performance may be affected by the Account's expenses, changes in securities
markets, changes in the composition of the index and the timing of purchases and
sales of Account shares. The Account may invest in futures and options, which
could carry additional risks such as losses due to unanticipated market price
movements, and could also reduce the opportunity for gain.
Main Risks
While stocks have historically been a leading choice of long-term investors,
they do fluctuate in price. The value of your investment in the Account will go
up and down, which means that you could lose money. Because different types of
stocks tend to shift in and out of favor depending on market and economic
conditions, the Account's performance may sometimes be lower or higher than that
of other types of funds.
Investor Profile
The Account is generally a suitable investment if you are seeking long-term
growth, are willing to accept the risks of investing in common stocks and prefer
a passive rather than active management style.
* "Standard & Poor's 500 Index" is a trademark of Standard & Poor's
Corporation ("S&P"). S&P is not affiliated with Principal Variable
Contracts Fund, Inc., Invista Capital Management, LLC, or with Principal
Life Insurance Company.
Account Performance Information
As the inception date of the Account is May 1, 1999, historical performance data
based on a full calendar year is not available.
Annual Total Returns
The account's highest/lowest quarterly results during this time period were:
Highest 14.68% (12/31/1999)
Lowest -6.24% (9/30/1999)
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 OnePast FivePast Ten
Account Year Year Years Years
<S> <C> <C> <C> <C> <C> <C>
Stock Index 500 8.93%* S&P 500 Stock Index 21.04% 28.55% 18.21%
Lipper S&P 500 Fund Average 20.22 27.96 17.69
<FN>
* Period from May 1, 1999, date shares first offered to the public,
through December 31, 1999.
</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
-----------------------------------------------------
$50 $156 $271 $600
Account Operating Expenses
Management Fees.................... 0.35%
Other Expenses..................... 0.14
-----
Total Account Operating Expenses 0.49%*
* Manager has agreed to reimburse operating expenses so that total
Account operating expenses will not be greater than 0.40% for 2000.
Day-to-day Account Management
Since March 2000 Co-Manager: Robert Baur, Ph.D. Dr. Baur joined Invista
Capital Management in 1995. Prior to joining the firm, he
was a Professor of Finance and Economics at Drake University
and Grand View College. He received his Ph.D. in Economics
from Iowa State University and did post-doctoral study at
the University of Minnesota. He also holds a BS in
Mathematics from Iowa State University.
Since March 2000 Co-Manager: Rhonda VanderBeek. Ms. VanderBeek joined Invista
Capital Management in 1983. She directs trading operations
for the firm and has extensive experience trading both
domestic and international securities.
GROWTH-ORIENTED ACCOUNT
Utilities Account
The Account seeks to provide current income and long-term growth of income and
capital.
Main Strategies
The Account seeks to achieve its objective by investing primarily in equity and
fixed income securities companies in the public utilities industry. These
companies include:
o companies engaged in the manufacture, production, generation, sale or
distribution of electric or gas energy or other types of energy; and
o companies engaged in telecommunications, including telephone, telegraph,
satellite, microwave and other communications media (but not public
broadcasting or cable television).
The Sub-Advisor, Invista, considers a company to be in the public utilities
industry if, at the time of investment, at least 50% of the company's assets,
revenues or profits are derived from one or more of those industries.
Under normal market conditions, at least 65% (and up to 100%) of the assets of
the Account are invested in equity securities and fixed-income securities in the
public utilities industry. The Account does not have any policy to concentrate
its assets in any segment of the utilities industry. The portion of Account
assets invested in equity securities and fixed-income securities varies from
time to time. When determining how to invest the Account's assets to achieve its
investment objective, Invista considers:
o changes in interest rates;
o prevailing market conditions; and
o general economic and financial conditions.
The Account invests in fixed income securities, which at the time of purchase,
are:
o rated 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.
Main Risks
Since the Account's investments are concentrated in the utilities industry, the
value of its shares changes in response to factors affecting those industries.
Many utility companies have been subject to risks of:
o increase in fuel and other operating costs;
o changes in interests rates on borrowings for capital improvement programs;
o changes in applicable laws and regulations;
o changes in technology which render existing plants, equipment or products
obsolete;
o effects of conservation; and
o increase in costs and delays associated with environmental regulations.
Generally, the prices charged by utilities are regulated with the intention of
protecting the public while ensuring that utility companies earn a return
sufficient to attract capital to grow and provide appropriate services. However,
due to political and regulatory factors, rate changes ordinarily occur following
a change in financing costs. This delay tends to favorably affect a utility
company's earnings and dividends when costs are decreasing but also adversely
affects earnings and dividends when costs are rising. In addition, the value of
the utility company bonds rise when interest rates fall and fall when interest
rates rise. Certain states are adopting deregulation plans. These plans
generally allow for the utility company to set the amount of their earnings
without regulatory approval.
The share price of the Account may fluctuate more widely than the value of
shares of a fund that invests in a broader range of industries. 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 quarterly
dividends for income or to be reinvested for growth, want to invest in companies
in the utilities industry and are willing to accept fluctuations in the value of
your investment.
Account Performance Information
The Account's past performance is not necessarily an indication of future
performance.
Annual Total Returns
1999 2.29
The fund's highest/lowest quarterly results during this time period were:
Highest 11.80% (6/30/1999)
Lowest -6.22% (3/31/1999)
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 Five Past OnePast FivePast Ten
Account Year Years Year Years Years
<S> <C> <C> <C> <C> <C> <C>
Utilities 2.29% 10.43%* S&P 500 Stock Index 21.04% 28.55% 18.21%
Dow Jones Utilities Index with Income -5.73 14.74 --
Lipper Utilities Fund Average 15.82 18.70 12.80
<FN>
* Period from May 1, 1998, date shares first offered to the public,
through December 31, 1999.
</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
-----------------------------------------------------
$65 $205 $357 $798
Account Operating Expenses
Management Fees.................... 0.60%
Other Expenses..................... 0.04
-----
Total Account Operating Expenses 0.64%
Day-to-day Account Management
Since April 1998 Catherine A. Zaharis, CFA. Ms. Zaharis joined Invista
(Account's Capital Management in 1987. She holds a BA in Finance from
inception) the University of Iowa and an MBA from Drake University. She
has earned the right to use the Chartered Financial Analyst
designation.
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.
Accounts that focus their investments in equity securities include: Aggressive
Growth, Capital Value, Growth, International, International SmallCap, MicroCap,
MidCap, MidCap Value, SmallCap, SmallCap Growth, SmallCap Value, Stock Index 500
and Utilities. The Asset Allocation and Balanced Accounts invest in a mix of
equity and fixed income securities.
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 debt 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.
Accounts that focus their investments in fixed income securities include the
Bond and Government Securities Accounts.
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 Government Securities and 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 Government Securities and 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. For the International and International SmallCap
Accounts, the 2% limitation also applies to warrants not listed on the Toronto
Stock Exchange and Chicago Board Options Exchange.
Risks of High Yield Securities
The Asset Allocation, Balanced, and Bond 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, Futures Contract
Each of the Accounts (except Money Market) may buy and sell certain types of
options. Each type, and their associated risks, 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 Asset Allocation, International and International SmallCap Accounts - 100%;
o Aggressive Growth, MicroCap, Real Estate and SmallCap Growth Accounts -
25%;
o Bond, Capital Value, SmallCap and Utilities Accounts - 20%;
o Balanced, Growth, MidCap, MidCap Growth, SmallCap Value and Stock Index 500
Accounts - 10%.
The Money Market Account does not invest in foreign securities other than those
that are United States dollar denominated. All principal and interest payments
for the security are payable in U.S. dollars. The interest rate, the principal
amount to be repaid and the timing of payments related to the securities do not
vary or float with the value of a foreign currency, the rate of interest on
foreign currency borrowings or with any other interest rate or index expressed
in a currency other than U.S. dollars.
For purposes of these restrictions, foreign securities include:
o companies organized under the laws of countries outside of the U.S.;
o companies for which the principal securities trading market is outside of
the U.S.; and
o companies, regardless of where its securities are traded, that derive 50%
or more of their total revenue from either goods or services produced
outside the U.S. or sales made outside of the U.S.
Investment in foreign securities presents certain risks including: fluctuations
in currency exchange rates, revaluation of currencies, the imposition of foreign
taxes, future political and economic developments including war, expropriations,
nationalization, the possible imposition of currency exchange controls and other
foreign governmental laws or restrictions. In addition, there may be reduced
availability of public information concerning issuers compared to domestic
issuers. Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements that apply to domestic issuers. Transactions in foreign securities
may be subject to higher costs. Each Account's investment in foreign securities
may also result in higher custodial costs and the costs associated with currency
conversions.
Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. Foreign securities markets,
particularly those in emerging market countries, are known to experience long
delays between the trade and settlement dates of securities purchased and sold.
Such delays may result in a lack of liquidity and greater volatility in the
price of securities on those markets. As a result of these factors, the Board of
Directors of the Fund has adopted Daily Pricing and Valuation Procedures for the
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 Asset Allocation, International SmallCap, MicroCap, MidCap, MidCap Growth,
SmallCap, SmallCap Growth and SmallCap Value Accounts may invest in securities
of companies with small- or mid-sized market capitalizations. Market
capitalization is defined as total current market value of a company's
outstanding common stock. Investments in companies with smaller market
capitalizations may involve greater risks and price volatility (wide, rapid
fluctuations) than investments in larger, more mature companies. Smaller
companies may be less mature than older companies. At this earlier stage of
development, the companies may have limited product lines, reduced market
liquidity for their shares, limited financial resources or less depth in
management than larger or more established companies. Small companies also may
be less significant 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 (except Government Securities) 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: Aggressive Growth and Asset Allocation
Sub-Advisor: Morgan Stanley Asset Management ("Morgan Stanley"), with
principal offices at 1221 Avenue of the Americas, New York, NY 10020,
provides a broad range of portfolio management services to customers in the
U.S. and abroad. As of December 31, 1999, Morgan Stanley, together with its
affiliated institutional asset management companies, managed investments
totaling approximately $184.9 billion as named fiduciary or fiduciary
adviser. On December 1, 1998 Morgan Stanley Asset Management Inc. changed
its name to Morgan Stanley Dean Witter Investment Management Inc. but
continues to do business in certain instances using the name Morgan Stanley
Asset Management.
Accounts: Balanced, Capital Value, Government Securities, Growth,
International, International SmallCap, MidCap, SmallCap, Stock Index 500,
and Utilities
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.
Account: MicroCap
Sub-Advisor: Goldman Sachs Assets Management ("GSAM"), 32 Old Slip, 17th
Floor, New York, NY 10005. As of September 1, 1999, the Investment Division
("IMD") was established as a new operating division of Goldman, Sachs & Co.
("Goldman Sachs"). This newly created entity includes GSAM. GSAM provides a
wide range of discretionary investment advisory services, quantitatively
driven and actively managed to U.S. and international equity portfolios,
U.S. and global fixed-income portfolios, commodity and currency products
and money market accounts. As of December 31, 1999, GSAM, along with other
units of IMD, had assets under management of $258.5 billion.
Account: MidCap Growth
Sub-Advisor: The Dreyfus Corporation ("Dreyfus"), 200 Park Avenue, New
York, NY 10166, was formed in 1947. Dreyfus is a wholly owned subsidiary of
Mellon Bank, N.A., which is a wholly owned subsidiary of Mellon Bank
Corporation ("Mellon"). As of December 31, 1999, Dreyfus managed or
administered approximately $119.6 billion in assets for approximately 1.7
million investor accounts nationwide.
Account: SmallCap Growth
Sub-Advisor: Berger LLC ("Berger"), 210 University Boulevard, Suite 900,
Denver, CO 80206. It serves as investment advisor, sub-advisor,
administrator or sub-administrator to mutual funds and institutional
investors. Berger is a wholly owned subsidiary of Kansas City Southern
Industries, Inc. ("KCSI"). KCSI is a publicly traded holding company with
principal operations in rail transportation, through its subsidiary the
Kansas City Southern Railway Company, and financial asset management
businesses. Assets under management for Berger as of December 31, 1999 were
approximately $7.1 billion.
Account: SmallCap Value
Sub-Advisor: J.P. Morgan Investment Management, Inc. ("Morgan"), 522 Fifth
Avenue, New York, NY 10036 is a wholly-owned subsidiary of J.P. Morgan &
Co. Incorporated ("J.P. Morgan") a bank holding company. J.P. Morgan,
through Morgan and its other subsidiaries, offers a wide range of services
to governmental, institutional, corporate and individual customers and acts
as investment advisor to individual and institutional clients. As of
December 31, 1999, J.P. Morgan and its subsidiaries had total combined
assets under management of approximately $349 billion.
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
Aggressive Growth 0.75% 0.02% 0.77%
Asset Allocation 0.80 0.05 0.85
Balanced 0.57 0.01 0.58
Bond 0.49 0.01 0.50
Capital Value 0.43 0.00 0.43
Government Securities 0.49 0.01 0.50
Growth 0.45 0.00 0.45
International 0.73 0.05 0.78
International SmallCap 1.20 0.12 1.32
MicroCap 1.00 0.28 1.28*
MidCap 0.61 0.00 0.61
MidCap Growth 0.90 0.19 1.09*
Money Market 0.50 0.02 0.52
Real Estate 0.90 0.09 0.99
SmallCap 0.85 0.06 0.91
SmallCap Growth 1.00 0.07 1.07*
SmallCap Value 1.10 0.34 1.44*
Stock Index 500 0.35 0.14 0.49*
Utilities 0.60 0.04 0.64
* Before waiver
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 all of these
Accounts are available through this contract).
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
Aggressive Growth Account
(William Auslander and Philip Friedman)
The Aggressive Growth Account seeks to provide long-term capital appreciation by
investing primarily in growth-oriented common stocks of large capitalization
U.S. corporations and, to a limited extent, foreign corporations. The portfolio
of this Account generated excellent returns in 1999. The portfolio appreciated
40.2% versus 21.0% for the S&P 500 and 34.8% for the Lipper Large-Cap Growth
Index. Fourth quarter performance was solid as well with the portfolio
appreciating 22.0% versus 14.9% for the S&P 500 and 25.5% for the Lipper
Large-Cap Growth Index. The Account maintained and benefited from its philosophy
of opportunistic concentration driven by bottom-up fundamental company analysis
and an emphasis on gaining an "information edge" in the sectors and companies in
which the Account invests. At year-end, the Account's top 10 holdings accounted
for about 36% of total assets and the portfolio held positions in 80 stocks
U.S. equity markets again set records in 1999, led by large capitalization
growth stocks in general and a white-hot technology sector in particular. The
S&P 500's 21.0% increase left the index at an all-time high and 1999 marked the
10th consecutive up year for this index. The compounded return for the past five
years is a stunning 250%. With the exception of a brief period in the spring,
growth outperformed value throughout the year. Investors continue to believe and
invest in the sustainability of the growth of the largest companies, and for the
most part, these companies continue to deliver stellar results.
In the Aggressive Growth Account long-term capital appreciation is sought by
investing in growth-oriented equity securities of large capitalization,
predominantly U.S. corporations. The Account continues to reflect a mix of
classic growth stocks such as Microsoft, Cisco Systems, General Electric, Home
Depot and less well known growth names such as Tyco International, Clear Channel
Communications, and United Technologies. Managers were pleased with the
Account's broad-based performance, particularly in the context of a market that
continued to be dominated by a small number of large capitalization stocks. No
single stock accounted for more than 10% of the Account's absolute performance.
In addition, about 70% of the Account's relative outperformance was driven by
stock picking versus sector allocation.
Technology dominated the headlines and the sector performance charts in 1999.
Given the tremendous outperformance of the group, technology stocks now account
for 30% of the S&P 500's total market capitalization, up from 19% at the end of
1998 and 10% five years ago. Given technology's extremely strong performance,
one might find two things surprising. First, only about 27% of the Account's
1999 outperformance relative to the S&P 500 was attributable to technology
holdings. Second, about 86% of that relative outperformance was attributable to
successful stock picking within the group as the Account maintained a relatively
neutral posture toward technology versus the index weight throughout most of the
year. Account Managers feel this reflects well on the bottom-up, research
intensive approach used in stock picking.
Avoiding prominent underperformers remains important to the Account's success.
In a bull market, it is very easy to focus excessive attention on picking
winning stocks. Simple math reinforces the view that equal effort should be
spent attempting to avoid those companies with potential disappointing
fundamental changes, particularly in a current environment that has little
tolerance for "negative newsflow." In fact, much of the Account's outperformance
in 1999 was attributable to avoiding companies with deteriorating fundamentals.
Comparison of Change in Value of $10,000 Investment in the Aggressive Growth
Account, Lipper Large-Cap Growth Fund Average and S&P 500 Stock Index.
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
------------------------
39.50% 32.01% 28.82%**
** Since inception 6/1/94
S&P 500
PAG Broad Lipper Large-Cap
Total Based Growth
Return Index Average
10,000 10,000 10,000
1994 10,259 10,230 10,055
1995 14,793 14,069 13,151
1996 18,942 17,297 15,681
1997 24,788 23,066 19,649
1998 29,486 29,657 24,140
1999 41,130 35,896 33,335
Note: Past performance is not predictive of future performance.
Asset Allocation Account
(Francine Bovich)
Global equity markets finished 1999 with strong gains, as the global economy
began to heal after the Asian and Russian economic crises experienced in 1997
and 1998. The S&P 500 delivered its fifth year of double-digit returns rising
21.0% in calendar year 1999. Morgan Stanley Capital International EAFE (Europe,
Australia and Far East) Index returned 27.0%, beating the S&P 500 for the first
time in five years, despite weak currencies in Europe. The most disappointing
asset class was fixed-income. As global growth stabilized and resumed,
inflationary fears mounted driving bond yields higher in the U.S. and Europe.
The Lehman Aggregate Index returned -0.8% during a volatile year.
Although the U.S. bull market in the first half showed signs of broadening,
market leadership narrowed dramatically in the second half. Value stocks, which
began to outperform growth in February and March, stagnated later in the year,
as inflation fears moderated and economic growth surprised on the upside. The
year ended with growth stocks again dominating value stocks by a wide margin.
Although rising interest rates and inflation expectations are usually bad for
stocks, markets have shrugged off rising rates as growth surprises outpaced
inflation surprises throughout 1999. This growth environment was also reflected
in the bond market. As investor confidence improved, risk tolerance rose to more
normal levels, benefiting spread products, which had suffered large losses in
the flight to quality at the end of 1998. Fixed-income spreads narrowed, and
investment grade governments and corporates underperformed mortgages, high yield
debt, and emerging market debt.
Non-U.S. stock market performance was strong, despite being held back by weaker
European currencies. The strongest performing regions were those which had
suffered the most over the past three years of currency crises and debt
deflation. Japan led the developed markets, rising 61.5% in 1999, as the
Japanese economy bottomed and began to recover. The combination of low
valuations, low interest rates, and a better earnings outlook was a powerful
contributor to the rise in the Japanese market and a strengthening of the Yen.
Pacific region stock performance was also strong, but was highly differentiated,
as the countries hardest hit by the emerging market debt crisis, Hong Kong and
Singapore, outperformed the more stable economies of Australia and New Zealand.
Asian economies bottomed in the early part of the year, and began a steep
trajectory of recovery. The depegging of Asian currencies from the U.S. Dollar
enabled many countries to exercise more flexibility in economic management, and
to some extent, decreased their vulnerability to rising U.S. interest rates.
European stock performance was mixed during the year. In the first half,
Eurozone economic performance disappointed on the downside, as Germany continued
to lag contributing to poor equity performance and a weaker currency. Although
European economic performance was more robust in the second half, the Euro
continued to weaken, closing the year 15% below its January 1 level. Europe
returned 15.9% in 1999.
The Account appreciated 19.5% for the year, outperforming the Lipper Flexible
Portfolio Fund average gain of 12.6%. The outperformance of the Account was due
to allocation decisions and strong security selection within certain of the
underlying implementation strategies. Allocation decisions that contributed
positively to results included overweighting equities relative to fixed-income
throughout the year, as equities significantly outperformed fixed-income, and an
emphasis on growth. Security selection within the U.S. growth strategies (Large
Cap and Emerging Growth) was the largest contributor to outperformance.
Throughout the year, the Account maintained a diversified investment strategy.
The Account's allocation to non-U.S. stocks also added value, as non-U.S. stocks
outperformed the S&P during this period. Account allocations to value-based
equity strategies and fixed-income detracted from results, but were more than
offset by other favorable portfolio decisions.
Comparison of Change in Value of $10,000 Investment in the Asset Allocation
Account, Lipper Flexible Portfolio Fund Average and S&P 500 Stock Index.
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
19.49% 16.01% 14.32%**
** Since inception 6/1/94
PAA Lipper
Total Flexible Portfolio
Return S&P 500 Index
10,000 10,000 10,000
1994 10,052 10,230 10,008
1995 12,128 14,069 12,518
1996 13,696 17,297 14,220
1997 16,187 23,066 16,878
1998 17,673 29,657 19,268
1999 21,117 35,897 21,686
Note: Past performance is not predictive of future performance.
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 Investment 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, 1999
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 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.
Growth Account
(Mary Sunderland)
Technology stocks drove the market in 1999. The technology sector of the S&P 500
returned 74% for the year. Coming out of 1998, technology stocks had been down
on concerns of a global economic slowdown. The slowdown did not occur and, in
fact, accelerated as world economic growth picked up. Technology is very
sensitive to global growth since 50% of the S&P 500 technology companies
earnings come from outside the U.S. The other major driver of technology stocks
was the realization that the Internet is for real and that it requires
technology spending to support its growth. The Growth Account trailed the S&P
500 by 4.60% in 1999. Returns were hampered by healthcare overweighting
throughout the year and a technology underweighting over the first nine months
of the year. Healthcare stocks were hurt by fears of further governmental
involvement, patent expirations and moderating earnings growth.
At the beginning of this year, management of the Growth Account was assumed by a
new large cap growth team based in New York City. During the transition, the
Account's exposure to technology and financials was increased and exposure to
healthcare and consumer staples was decreased.
Going forward, the technology sector continues to be seen as the highest growth
area of the economy and Account Managers expect to remain overweighted in
technology. The Internet is still in the early stages of its development.
Companies representing both the "old" and "new" economy must continue their
aggressive spending on infrastructure, irrespective of economic conditions, in
order to remain competitive. This sector is expected to continue to benefit from
increased usage of the World Wide Web for a wide range of purposes including
business-to-business e-commerce, communication, and entertainment.
Account Managers are currently looking to increase exposure to the health care
area. They feel current political concerns are overblown and issues related to
product pipelines are manageable. This sector exhibits superior growth at a
reasonable value.
Account Managers plan to remain neutral-weighted in the financial sector. This
sector offers solid potential based on very favorable demographics; an aging
worldwide population will fuel demand for retirement savings products. There is
a trend globally for increased demand for financial services. Although the
current interest rate environment augurs a short-term period of uncertainty,
Account Managers believe that interest rates are near their top and they are
bullish longer term on the direction of rates.
Consumer cyclical and retail stores focused on the baby boomer offer very good
growth potential. Management plans to be over-weighted in this sector, with
positive contributions to performance likely over the next 6-12 months.
Comparison of Change in Value of $10,000 Investment in the Growth Account,
Lipper Large-Cap Growth Fund Average and S&P 500 Stock Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
16.44% 20.45% 18.94%**
** Since inception 5/2/94
Lipper
Growth S&P 500 Large-Cap Growth
Account Index Fund Avg.
10,000 10,000 10,000
1994 10,542 10,131 10,090
1995 13,243 13,934 13,197
1996 14,899 17,131 15,736
1997 18,916 22,844 19,717
1998 22,956 29,372 24,224
1999 26,729 35,552 33,451
Note: Past performance is not predictive of future performance.
International Account
(Kurtis Spieler and Scott Opsal)
The International Account's return of 25.93% in 1999 was slightly below the
Morgan Stanley Capital International EAFE (Europe, Australia and Far East) Index
return of 26.96%. Throughout 1999 the world economy continued to strengthen.
Leading economic indicators in Europe, Japan and the emerging markets were all
positive. Recovery of the emerging markets and Japan, as well as an attractively
valued European currency, resulted in an export-led recovery in Europe.
During 1999 merger and acquisition (M&A) activity in Europe doubled, setting a
record, and positively impacting several companies in the Account's portfolio.
Emerging markets exposure added marginally to performance, mainly in the fourth
quarter, as changes made in the emerging holdings in the beginning of the year
performed strongly. The largest move made in the Account during 1999 was the
entry into Japanese equities. As the Japanese market underperformed other
developed markets year after year, the forward-looking return spread relative to
equities in the rest of the world narrowed. As Account Managers monitored
valuation levels, investments were made in companies that were trading at
attractive levels. The Account also benefited from increased exposure to the
"new economy", including telecommunications, technology and media.
The Account continues to invest in companies that have sustainable competitive
advantages that will allow continued growth in earnings and cash flow sufficient
to justify their current trading price. This strategy is consistently applied to
build a diversified portfolio with exposure to both "new" and "old" economy
companies - all with positive forward-looking return profiles. Changes are being
made to the portfolio in media, energy and financials. Media stocks are highly
valued along with other technology and telecom stocks, but possess lower growth
rates, causing a lightening of the Account's weighting in select holdings.
Account Managers have become slightly more positive on the energy sector due to
the disconnect between oil prices and the valuation levels of the energy
companies and have added to the energy weighting. Within the financial sector
the Managers are lightening some banks and adding to diversified financials.
Companies that have ability to gather assets, benefiting from the long-term
savings trends throughout Europe are preferred. The Account has invested in some
brokerage firms in Japan which are expected to benefit from outflows out of the
postal savings system into the equity market.
Comparison of Change in Value of $10,000 Investment in the International
Account, Lipper International Fund Average and MSCI EAFE Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
25.93% 17.29% 14.41%**
** Since inception date 5/2/94
Morgan Stanley Lipper
Intern'l EAFE International
Account Index Index
10,000 10,000 10,000
1994 9,663 9,990 9,758
1995 11,032 11,110 10,676
1996 13,800 11,781 11,934
1997 15,488 11,991 12,583
1998 17,034 14,389 14,221
1999 21,451 18,268 20,023
Note: Past performance is not predictive of future performance.
International SmallCap Account
(Dan Sherman and Darren Sleister)
The international small cap arena saw returns that were unprecedented previous
to 1999. The median international small cap fund's return according to Lipper
was 75.41% for the year. The International SmallCapAccount's return exceeded the
Lipper International Small-Cap Fund Average by 18.4% on a 1-year basis. Earlier
this year Japan was a significant outperformer in the small cap world and the
Account's holdings outpaced the index, returning on average, some 60%. The
Account went from a zero weighting in Japan to one that more closely matched the
benchmark mid-year, to lightening, fourth quarter, as Managers felt much of the
Japanese market had simply run out of steam. Fourth quarter saw investors taking
gains in the Japanese small caps as the economy once again came into question of
what could be delivered and how much restructuring was actually occurring.
1999 was a year for European start-up companies, many of which were
technology-oriented that soon turned into mid-caps due to massive price
appreciation in a short time span. A fundamental change was seen in the
liquidity flows as capital began to pour into the European markets in the fourth
quarter. The top performing sectors included media, telecommunications and
technology as those companies that had exposure in these areas saw strong price
appreciation in the fourth quarter as investors scrambled to gain exposure to
these industries.
Account Managers continue to look for market leaders in their respective fields
with good growth characteristics, a solid business strategy and strong barriers
to entry. 1999 was a year of stellar performance for technology companies as the
Internet and e-commerce began to demonstrate that they would revolutionize the
business world. Account Managers found some strong companies that were global
leaders and would benefit from the explosion of growth in e-commerce. We have
rotated out of many of the stronger performers and continue to look for new
opportunities where growth opportunities are undervalued relative to stock
price.
The International SmallCap Account continues to benefit from themes such as
outsourcing of electronic components, increasing advertising expenditures,
market research companies and indirect e-commerce solutions. At the current
time, growth companies offer the most attractive investments from a risk/return
trade-off compared to the more traditional value stocks. Managers continue to
look for companies that are at attractive valuations and also offer long-term
earnings growth potential.
Comparison of Change in Value of $10,000 Investment in the International
SmallCap Account, Lipper International Small-Cap Fund Average and MSCI EAFE
Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
93.81% 39.24%** --
** Since inception date 5/1/98
Morgan Stanley Lipper International
Capital International International SmallCap SmallCap
EAFE Index Fund Average Account*
--------------------- ---------------------- -------------
10,000 10,000 10,000
"1998" 10,379 9,320 8,963
"1999" 13,177 16,348 17,371
Note: Past performance is not predictive of future performance.
MicroCap Account
(Eileen Aptman, Paul Farrell and Eileen Rominger)
1999 ended on a positive note, as interest rate concerns dissipated, Y2K-related
liquidity fears proved unsubstantiated and the marketplace evaded any actual
trading volume declines or grand-scale increases in cash levels. During the
year, restrained inflation, solid growth in corporate profits and gains by a few
lead sectors drove U.S. indexes to record levels; the S&P 500 Index, Russell
Midcap Index and Russell 2000 Index ("Index") gained 21.0%, 18.2% and 21.3%,
respectively.
The Account's performance lagged the Index, as the small cap market was led by
an extremely narrow band of companies in a select few industries. The top 10
performers in the Index logged an extraordinary gain of 719% (weighted average
return of top 10 performers); nine of these ten stocks were in technology or
telecommunications. In fact, technology and media/telecom industries accounted
for more than 100% of the gain for the Index in 1999. These industries -
wireless, semiconductors, media, computer software and hardware, electronic
equipment and information services - together contributed 24 percentage points
of positive performance, compared to the index total return of 21%. The
Account's underweight in several of these industries hurt performance for the
year.
In an extraordinary period for the overall economy, many companies have posted
solid operating results. Lacking the badges of a) high-visibility growth or b)
an obvious role in the "New Economy," however, these same solid operators have
lagged in the stock market. Investors' gravitation to a very few leaders has
driven remarkable stock price performance commensurate with remarkably high
growth expectations. Since the year end, though, the rising interest rate
environment has bred increased investor impatience toward those stocks which
have not yet delivered earnings results to match their valuations. This
impatience has translated into tremendous volatility among expensively priced
stocks and some solid returns among those stocks which had gone unrecognized
even as their underlying businesses performed well. The Microcap Account has
benefited by owning well-positioned businesses selling at conservative
valuations.
Even though there has been a broadening of the market since the end of 1999,
Account Managers feel there is no simple answer when asked about the "New
Economy" vs. the "Old Economy." The New Economy (i.e., companies and industries
which offer new technological tools and platforms) has indeed changed the way to
conduct - and for analysts, the way to evaluate - a business. We acknowledge the
vast potential for new technologies' ability to enhance productivity, provide
new delivery and access mechanisms for both hard goods and entertainment
content, and shorten cycle times. Many holdings in the Account have benefited
already from their exposure to the New Economy, and Account Managers feel any
company's ability to utilize new technologies - whether the company is in the
technology or transportation sector - will likely be critical to its long-term
success. By owning some of the companies which are in the business of these new
technologies, and many companies which are their direct beneficiaries, Account
Managers believe the Account offers substantial upside to the long-term
investor.
Although the Account has experienced strong gains since the end of 1999, the
narrow leadership of the market by technology, internet and telecom stocks over
the last two years has left many excellent, highly profitable, well-managed
companies behind in terms of performance, even as these companies have posted
solid operating results. Our research-based investments offer substantial upside
potential, as they represent quality businesses selling at conservative
valuations.
Comparison of Change in Value of $10,000 Investment in the MicroCap Account,
Lipper Small-Cap Core Fund Average and Russell 2000 Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
-1.07% -12.05%** --
** Since inception date 5/1/98
Lipper
Russell Small-Cap Core MicroCap
2000 Index Fund Average Account*
---------- -------------- --------
10,000 10,000 10,000
"1998" 8,806 8,468 8,158
"1999" 10,678 10,875 8,071
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 Year
-----------------------
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.
MidCap Growth Account
(John O'Toole)
For the calendar year 1999, the portfolio return was below the performance
benchmark, and obviously disappointing. The primary causes of the
underperformance relative to the benchmark were individual stock selection along
with a portfolio beta (price volatility) that was modestly below that of the
benchmark.
The quantitative process used in managing this Account performed below its
historical trend in 1999, which implies that individual stock selection had the
greatest negative impact on return. The Account Manager's approach to equity
management continues to focus on determining what types of valuation
characteristics are preferred by the market, and then to select stocks that
exhibit those preferred traits. Though this valuation system uses a number of
fundamental characteristics that are earnings (growth) driven, some factors that
are price (value) sensitive are also included. An economic sector neutral
approach to portfolio construction has also been maintained. During most of 1999
the Account operated in a market environment where investors also had total
focus on growth type valuation factors, and paid little attention to traditional
price sensitive measures of value.
Companies with the highest price multiples and in many cases very modest real
earnings provided the most attractive returns during 1999. Account Managers use
long-term trends to guide stock selection, and thus continue to operate with
some sensitivity to issues such as actual earnings and measures of value. A
review of 1999 seems to indicate that any valuation process that exhibited even
a modest focus on "value" type inputs, was penalized by the strong emphasis on
growth type factors by investors. The Account's management process did not
preclude the portfolio from owning any of these types of issues, and in fact a
number of holdings in a variety of industries owned by the Account had total
returns during the year of over 50%. These issues include Young & Rubicam,
Biogen, Lexmark International, and Kansas City Southern Industries. As for
issues that had a negative impact upon the annual return, Quintiles
Transnational and TJX Companies would be included.
Another factor that had a negative impact upon return was a modestly below
benchmark beta. The beta of the portfolio was within the historical range
(benchmark beta +/- 0.05), but given the positive equity market returns during
1999, this was a negative factor. 1999 was a year during which investors
rewarded volatility, and the portfolio was modestly less volatile than the
general middle capitalization equity market.
Finally, 1999 was also an equity market environment where the Account saw a
concentration of performance in certain sectors (technology). Thus, the
valuation process and the broadly diversified sector neutral portfolio
construction techniques used by Account Managers tended to result, at least in
the period of this report, in a portfolio whose structure did not generate
optimum results.
Comparison of Change in Value of $10,000 Investment in the MidCap Growth
Account, Lipper Mid-Cap Core Fund Average, Lipper Mid-Cap Growth Fund Average
and S&P 400 MidCap Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
10.67% 4.09%** --
** Since inception date 5/1/98
Lipper Lipper
S&P Mid-Cap Core Mid-Cap Growth
MidCap Growth 400 Fund Fund
Account MidCap Index Avg. Avg.
10,000 10,000 10,000 10,000
1998 9,660 10,538 9,814 9,814
1999 10,691 12,089 13,570 16,964
Note: Past performance is not predictive of future performance.
Real Estate Account
(Kelly Rush)
Signs that earnings growth was peaking in 1998 started a slide in real estate
stock prices that year which continued in 1999. Earnings growth of over 13% in
1998 fell to 10% in 1999. This pattern of decelerating earnings caused real
estate stocks to lose favor in a market focused on the extraordinary growth of
high technology companies. The result has been a price decline of over 30% in
the past two years.
The Real Estate Account performed in line with its benchmark index for the
twelve months ended December 31, 1999 and fell short of its peer group average.
Poor relative performance was concentrated in the first quarter where the
Account underperformed its peers by 1.90%.
The primary reason for underperformance versus peers was the Account's
underweighting in office property owners early in the year. Several office
companies delivered positive returns throughout the year and many peers elected
to overweight these companies. The Account lost ground in the first quarter
while it was underweighted in office owners. This exposure was later increased
and this shift helped contribute to the recovery in the Account's relative
performance.
The Account's exposure to industrial property owners also hampered performance.
The decision to overweight industrial owners proved right as this group
outperformed. However, security selection was poor causing a drag on returns.
Favorably impacting the Account's relative returns was the decision to
underweight owners of hotels and net leased properties. Account Managers
generally avoided hotel owners as lodging fundamentals declined and avoided net
lease property owners as they correctly anticipated rising interest rates would
hurt prices.
In 2000 Account Managers will continue to follow the relative valuation approach
used successfully in the past. Simply, the objective is to buy good companies at
attractive prices and sell them when more attractive opportunities are
uncovered. It is a fairly simple concept Account Managers diligently and
consistently seek to execute.
Comparison of Change in Value of $10,000 Investment in the Real Estate Account,
Lipper Real Estate Fund Average and Morgan Stanley REIT Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
-4.48% -6.58%** --
** Since inception date 5/1/98
Lipper
Morgan Stanley Real Estate Real Estate
REIT Index Fund Average Account*
10,000 10,000 10,000
-------------- ------------ -----------
"1998" 8,677 8,250 9,344
"1999" 8,282 7,991 8,925
Note: Past performance is not predictive of future performance.
SmallCap Account
( John McClain and Mark Williams)
The Account's yearly return figure of 43.6% compared favorably to the S&P 600
Index return of 12.4%. The growth segments of the Account and the benchmark
handily beat their value counterparts. The decision by Account Managers to
allocate more of the assets to the growth segment continues to pay dividends.
Because the Account was overweighted in the better performing growth sector, it
realized a positive asset allocation return.
The return and weighting components of certain sectors contributed to the
Account's outperformance relative to its benchmark. The technology sector return
of 68.1% led all sectors in the benchmark. The Account's technology sector
return was an incredible 208.5%. The Account's second best performing sector for
the year was consumer cyclicals. Teen retailing is the main contributor to this
return. Communication services sector's return was substantially higher than
that of the benchmark 179.6% versus 25.9%. The Account's sector weighting of
5.4% was approximately 11 times the benchmark sector weighting of 0.5%.
Comparison of Change in Value of $10,000 Investment in the SmallCap Account,
Lipper Small-Cap Core Fund Average and S&P 600 Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
43.58% 8.24%** --
** Since inception date 5/1/98
Lipper
S&P 600 Small-Cap Core SmallCap
Index Fund Average Account*
10,000 10,000 10,000
"1998" 8,835 8,873 7,949
"1999" 9,931 11,396 11,413
Note: Past performance is not predictive of future performance.
SmallCap Growth Account
(Amy Selner)
For the year, the SmallCap Growth Account rose 95.69 % versus the 43.09% rise of
the Russell 2000 Growth Index. The Account outperformed the Russell Growth Index
by 52.60 percentage points.
Small cap stocks began 1999 very weak, as seen in the 10.4% underperformance of
the Russell 2000 versus the S&P500 in the first quarter of 1999. During this
quarter, which signaled the end of the interest rate easing by the Federal
Reserve Bank, the market was fraught with volatility in illiquid stocks. The
second quarter of 1999 marked the best quarterly outperformance for small caps
since the fourth quarter of 1992, as small caps outperformed large caps by
7.93%. Small caps were much cheaper on a valuation basis, after their first
quarter drubbing, and bounced nicely in the second quarter. Also in June, small
cap funds had positive inflows of $1.3 billion, after experiencing large cash
outflows in the first five months of 1999. The general market quickly discounted
the Federal Reserve's .25% rise in interest rates during the second quarter and
continued to rise modestly.
The second half of 1999 was a roller coaster. During the third quarter, both
small and large cap stocks fell close to 6% as interest rate fears crept back
into the marketplace. This volatility was exaggerated by the slowdown in
news-flow over the summer period. The fourth quarter roared as the Russell 2000
rose over 18% and the Russell 2000 Growth rose over 33%. All in all, the Russell
2000 and the S&P 500 ended 1999 up over 21% and 19% respectively, marking a
solid year of gains.
Throughout the year, the U.S. economy has remained undeniably robust while
international economies were picking up. The deflationary boom continued as
labor markets remained tight and inflation remained relatively benign. Operating
profits were quite strong.
Despite this up and down year for small cap stocks, the Account was able to
considerably outperform its benchmarks mainly due to stock selection.
The Account remained heavily weighted in industries where growth prospects are
the most visible and consistent. Technology, the Account's largest sector,
continues to have the greatest long-term growth fundamentals. Account Managers
believe that the growth prospects are explosive for the Internet infrastructure
in particular. Therefore, a focus continues on telecommunication and broadband
companies, which provide the plumbing that enables broad acceptance of Internet
applications and services. Similarly, companies such as Proxim, which
manufactures wireless local-area networking products, contributed to
performance.
The Account lowered its exposure to the healthcare group over this fiscal year.
Uncertainty surrounding prescription drug benefits and the government's impact
on drug pricing kept a lid on these stocks. One bright spot in the sector was
biotechnology stocks. Account Managers believe the biotech industry continues to
acquire critical mass as genomics and combinatorial chemistry lead to an
explosion in new drug targets. Emerging biotechnology companies such as Biocryst
Pharmaceutical and Cephalon boosted Account performance.
An energy weighting contributed to the Account's outperformance in 1999.
Although there are worries that OPEC will irrationally increase oil production,
the Account remains positive on the long-term supply/demand fundamentals within
the sector.
Within the consumer group, radio stocks were solid performers. The environment
for radio advertising was robust in 1999, and we expect this group's strong
fundamentals to carry into next year. Over the short term these stocks may be
prone to profit taking as their valuations are high, but long term the
management team remains comfortable.
The Account Managers remain cautiously optimistic about the market entering
2000. The U.S. economy remains robust and international economies are picking
up. Productivity is expected to continue to grow and to fuel low inflationary
growth into 2000.
Moving through 2000, Account Managers are cautious as to the potential for
profit taking in the technology sector due to tremendous performance in the
fourth quarter of 1999. If economic metrics continue to show an overheating
economy, interest rates will continue to creep up and the market may become
volatile and move sideways as the slower summer period is entered. It is
estimated that a potential correction in technology stocks which, while
uncomfortable, will be healthy for the market over the long-term and may present
an excellent buying opportunity in the strongest growth stocks.
Comparison of Change in Value of $10,000 Investment in the SmallCap Growth
Account, Lipper Small-Cap Growth Fund Average and Russell 2000 Growth Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
95.69% 52.17%** --
** Since inception date 5/1/98
Lipper
Russell 2000 Small-Cap Growth SmallCap Growth
Growth Index Fund Average Account*
------------ ---------------- ---------------
10,000 10,000 10,000
"1998" 10,123 8,873 10,296
"1999" 14,485 14,430 20,148
Note: Past performance is not predictive of future performance.
SmallCap Value Account
(Marian Pardo and Leon Roisenberg)
The much anticipated Y2K rollover was the focus of attention for investors
throughout 1999. Expectations of a smooth transition were realized at year-end
with very little disruption. The Federal Reserve delayed raising interest rates
in December, despite a very strong economy, in order to prevent a Y2K market
correction. The resulting surge in the money supply contributed to a very strong
stock market. The S&P 500 ended the year up 21.04% but was surpassed by the
Russell 2000 Index (+21.26%) for the first time in six years.
As in the large cap market, technology stocks dominated the performance of the
small cap market. The growth in technology spending caused by the explosion of
the Internet has caused a frenzy among investors and many of the companies in
this sector traded at record high valuations. A number of newly public Internet
infrastructure, communications and software companies were top performers for
the year. The Initial Public Offering market flourished and merger and
acquisition activity continued at a record pace despite Y2K and interest rate
fears.
The strong performance by technology and Internet related shares perpetuated the
division between growth and value companies. The Russell 2000 Value Index
finished the year in negative territory -1.49% and significantly underperformed
the Russell 2000 Growth Index, which rose +43.09%.
The Account was up 21.5% for the year, versus the Russell 2000 Value Index,
which returned -1.5% for the 12-month period ending December 31, 1999.
The portfolio's top performing sectors were technology hardware +409.3%, drugs
+277.0% and technology software +80.8%. The weakest sector was retail, which
returned -44.4%. Other sectors that detracted from performance included health
services -24.5% and miscellaneous finance -24.4%. Stock selection had a
significant positive impact on performance.
Comparison of Change in Value of $10,000 Investment in the SmallCapValue
Account, Lipper Small-Cap Value Fund Average and Russell 2000 Value Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
21.45% 1.88%** --
** Since inception date 5/1/98
Lipper
Russell 2000 Small-Cap Value SmallCap Value
Value Index Fund Average Account*
------------ --------------- --------------
10,000 10,000 10,000
"1998" 8,592 8,873 8,494
"1999" 8,464 9,435 10,316
Note: Past performance is not predictive of future performance.
Stock Index 500 Account
(Robert Baur and Rhonda VanderBeek)
The Stock Index 500 Account seeks investment results that correspond with the
total return performance of the Standard & Poor's 500 Index. The percentage of
total assets of the Account allocated to each of the 500 stocks closely follows
the weighting of each of the stocks in the S&P 500 Index.
The Stock Index 500 Account began May 3, 1999. The total return from inception
through year-end 1999 was 8.93%; during the same period, the total return of the
S&P 500 Index was 11.00%. The difference was attributable to start-up costs and
other variables intrinsic to the creation of a new account.
The performance of the stock market since inception date of the Account was
strong, but there were some rough periods. During the third quarter, investors
had some fears about inflation, disappointing profits and the potential for the
Federal Reserve to raise interest rates. The broad market declined about 12% in
response. Those fears dissipated during the fourth quarter as business profits
perked up, the economy accelerated, and inflation stayed under control. As a
result, the return from the bottom of the correction was spectacular with the
S&P 500 Index up 17.5%.
Comparison of Change in Value of $10,000 Investment in the Stock Index 500
Account, Lipper S&P 500 Fund Average and S&P 500 Stock Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
8.93%** -- --
** Since inception date 5/3/99
Standard & Poor's Lipper Stock Index
500 Stock S&P 500 500
Index Fund Average Account*
----------------- ------------ ------------
10,000 10,000 10,000
"1999" 11,100 11,615 10,893
Note: Past performance is not predictive of future performance.
Utilities Account
(Catherine Zaharis)
The Utilities Account had a stronger return than its index, and was ahead of
many diversified managers even though it lagged behind the average utility fund.
The reason for the dichotomy of performance was quite evident. The Account's
performance relative to the benchmark was due to a focus on telecommunications
that is no longer represented in the index. The telecommunications portion of
the utility universe had stronger relative returns, as the core growth prospects
of these companies are stronger than the electric and gas companies. The
telecommunications sector is one where growth has come from a variety of new
sources, particularly the new need for data transmission.
Many members of the peer group had investments in companies outside of the U.S.
These companies, both in telecommunications and electricity, performed better
than their U.S. counterparts. That was the primary source of underperformance,
in addition to energy-related holdings that were not included in the portfolio
in 1999.
Going forward, Account Managers continue to focus on growth opportunities within
all industries of this sector. The telecommunications industry has many new
entrants who are not only establishing a piece of market share, but are also
creating new ways of delivering service.
On the electric and gas side, mergers and maximizing opportunities in all areas
of providing energy to customers are key to long-term success. Companies are
looking at the optimal ways to provide the energy needs for their clients,
whether it is through traditional services or a variety of new and exciting
options. Account Managers are continually monitoring these companies for the
most promising opportunities within these fields.
Comparison of Change in Value of $10,000 Investment in the Utilities Account,
Lipper Utilities Fund Average, Dow Jones Utilities Index with Income Fund
Average and S&P 500 Stock Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
2.29% 10.43%** --
** Since inception date 5/1/98
Standard & Poor's Dow Jones Lipper
500 Stock Utilities Index with Utilities Utilities
Index Income Fund Average Fund Average Account*
10,000 10,000 10,000 10,000
"1998" 11,172 10,250 10,957 11,536
"1999" 13,523 9,663 12,690 11,800
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.
Dow Jones Utility Index with Income: This average is a price-weighted average of
15 utility companies that are listed on the New York Stock Exchange and are
involved in the production of electrical energy.
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 Flexible Portfolio Fund Average: This average consists of funds which
allocate their investments across various asset classes, including domestic
common stocks, bonds and money market instruments, with a focus on total return.
The one-year average currently contains 223 funds.
Lipper International Fund Average: This average consists of funds which invest
in securities primarily traded in markets outside of the United States. The
one-year average currently contains 618 funds.
Lipper International Small-Cap Funds Average: This average consists of funds
which invest at least 65% of their assets in equity securities of non-United
States companies with market capitalizations less than U.S. $1 billion at the
time of purchase. The one-year average currently contains 70 funds.
Lipper Large-Cap Growth 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 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 364 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.
Lipper Real Estate Fund Average: This average consists of funds which invest 65%
of their equity portfolio in equity securities of domestic and foreign companies
engaged in the real estate industry. The one-year average currently contains 132
funds.
Lipper S&P 500 Fund Average: This average consists of funds that are passively
managed, have limited expenses (advisor fee no higher than 0.50%), and are
designed to replicate the performance of the Standard & Poor's 500 Index on a
reinvested basis. The one-year average currently contains 107 funds.
Lipper Small-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 250% of the dollar weighted median market capitalization of the S&P
Small-Cap 600 Index. These funds have wide latitude in the companies in which
they invest. The one-year average currently contains 188 funds.
Lipper Small-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 250% of the dollar weighted median market capitalization of the S&P
Small-Cap 600 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 263 funds.
Lipper Small-Cap Value Fund Average: This average consists of funds that invest
at least 75% of their equity assets in companies with market capitalizations of
less than 250% of the dollar weighted median market capitalization of the S&P
Small-Cap 600 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 263 funds.
Lipper Utilities Fund Average: This average consists of funds which invest 65%
of their equity portfolio in utility shares. The one-year average currently
contains 100 funds.
Morgan Stanley EAFE (Europe, Australia and Far East) Index: This average
reflects an arithmetic, market value weighted average of performance of more
than 900 securities which are listed on the stock exchanges of the following
countries: Australia, Austria, Belgium, Denmark, Netherlands, New Zealand,
Norway, Singapore/Malaysia, Spain, Sweden, Switzerland, and the United Kingdom.
Morgan Stanley REIT Index: This is a capitalization-weighted index of the most
actively traded real estate investment trusts, and is designed to be a measure
of real estate equity performance.
Russell 2000 Growth Index: This index measures the performance of those Russell
2000 companies with higher price-to-book ratios and lower forecasted growth
values.
Russell 2000 Value Index measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.
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 600 Index: This is a market-value weighted index consisting of
600 domestic stocks chosen for market size, liquidity and industry group
representation.
Standard & Poor's MidCap 400 Index: This index measures the performance of the
mid-size company segment of the U.S. Market.
Income-Oriented Accounts:
Bond Account
(Scott 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 $10,000 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 Avg
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.
Government Securities Account
(Martin Schafer)
This Account underperformed for the period ended December 31, 1999. A slightly
longer duration and the performance of the noncallable Private Export Funding
Corporation and Student Loan Marketing Association bonds versus mortgage-backed
securities (MBS), led to a modest underperformance for the period ended December
31, 1999.
Over the last year the Federal Reserve has cut interest rates to stabilize the
global financial turmoil, only to reverse course and start raising rates as
markets stabilized and global growth resumed. Account Managers view the Federal
Reserve actions as the equivalent of a doctor prescribing aspirin to treat the
economic patient. These are mild treatments, needed to keep inflation low and
growth reasonable.
On an absolute basis, the return for the Government Securities Account for the
year was poor. Fixed-income securities had no momentum, especially with the
Federal Reserve raising interest rates. This was especially true during December
as investors poured money into "Go-Go" name stocks and away from fixed-income
securities. Their attitude seems to be, "Why buy bonds when a stock will give
you one year's worth of returns in one day!"
Account Managers continue to believe that mortgage-backed securities (MBS) will
do well into the future. The quality, liquidity, lack of credit volatility and
agency participation are cited as the key drivers. The agency participation is a
"Huge" factor. Federal National Mortgage Association (FNMA) and Federal Home
Loan Mortgage Corporation (FHLMC) are stock companies driven by stockholders. In
order to grow earnings in the face of declining new issue MBS (rates have
risen), they are arbitraging more of the outstanding MBS. These agencies issue
debt and buy MBS to earn the "spread" for their stockholders. FNMA and FHLMC
should buy 60% of net MBS issuance in 2000 - keeping spreads very tight!
The Account continues to hold more discount MBS securities than the Lehman MBS
index (this leads to a bias of longer duration) as the Managers believe the
homeowner's propensity to refinance and the mortgage banker's technology driven
inducement to refinance loans puts great risk on securities priced above par.
This is especially true in a market when overall volume is declining as higher
interest rates impact both new and existing home markets.
Account Managers expect to stay close to the duration benchmarks. Currently the
Account is a little long but the Managers expect to be duration neutral soon,
and patiently wait for the opportunity to strategically lengthen.
As we look forward to 2000 keep in mind that a diamond is a lump of coal that
made good under severe pressure.
Comparison of Change in Value of $10,000 Investment in the Government Securities
Account, Lipper U.S. Mortgage Fund Average and Lehman Brothers Mortgage Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
-0.29% 7.96% 7.75%
Government Lehman Lipper
Securities Mortgage U.S. Mortgage
Account Index Index
10,000 10,000 10,000
1990 10,955 11,072 10,938
1991 12,812 12,813 12,556
1992 13,688 13,706 13,323
1993 15,066 14,643 14,316
1994 14,384 14,407 13,719
1995 17,127 16,827 15,946
1996 17,700 17,727 16,563
1997 19,538 19,409 17,984
1998 21,154 20,760 19,077
1999 21,094 21,146 19,201
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.
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 Mortgage Index: This is an unmanaged index of 15- and 30-year
fixed rate securities backed by mortgage pools of the Government National
Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and
Federal National Mortgage Association (FNMA).
Lipper 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 U.S. Mortgage Fund Average: This average consists of mutual funds
investing at least 65% of their assets in mortgages/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average currently contains 62 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 which 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>
AGGRESSIVE GROWTH ACCOUNT(a) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $18.33 $16.30 $14.52 $12.94 $10.11
Income from Investment Operations:
Net Investment Income (Operating Loss)................ (.01) .04 .04 .11 .13
Net Realized and Unrealized Gain on Investments....... 7.17 2.99 4.26 3.38 4.31
Total from Investment Operations 7.16 3.03 4.30 3.49 4.44
Less Dividends and Distributions:
Dividends from Net Investment Income.................. -- (.04) (.04) (.11) (.13)
Distributions from Capital Gains...................... (1.60) (.96) (2.48) (1.80) (1.48)
Total Dividends and Distributions (1.60) (1.00) (2.52) (1.91) (1.61)
Net Asset Value, End of Period........................... $23.89 $18.33 $16.30 $14.52 $12.94
Total Return............................................. 39.50% 18.95% 30.86% 28.05% 44.19%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $379,062 $224,058 $149,182 $90,106 $33,643
Ratio of Expenses to Average Net Assets............... .77% .78% .82% .85% .90%
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets.................................. (.08)% .22% .29% 1.05% 1.34%
Portfolio Turnover Rate............................... 89.6% 155.6% 172.6% 166.9% 172.9%
</TABLE>
<TABLE>
<CAPTION>
ASSET ALLOCATION ACCOUNT(a) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $12.30 $11.94 $11.48 $11.11 $9.79
Income from Investment Operations:
Net Investment Income................................. .35 .31 .30 .36 .40
Net Realized and Unrealized Gain on Investments....... 2.00 .76 1.72 1.06 1.62
Total from Investment Operations 2.35 1.07 2.02 1.42 2.02
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.35) (.31) (.30) (.36) (.40)
Distributions from Capital Gains...................... (1.07) (.40) (1.26) (.69) (.30)
Total Dividends and Distributions (1.42) (.71) (1.56) (1.05) (.70)
Net Asset Value, End of Period........................... $13.23 $12.30 $11.94 $11.48 $11.11
Total Return............................................. 19.49% 9.18% 18.19% 12.92% 20.66%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $89,711 $84,089 $76,804 $61,631 $41,074
Ratio of Expenses to Average Net Assets............... .85% .89% .89% .87% .89%
Ratio of Net Investment Income to Average Net Assets.. 2.50% 2.51% 2.55% 3.45% 4.07%
Portfolio Turnover Rate............................... 86.7% 162.7% 131.6% 108.2% 47.1%
</TABLE>
See accompanying notes.
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%
</TABLE>
<TABLE>
<CAPTION>
BOND ACCOUNT(a) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
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 Investments (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.
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>
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>
GOVERNMENT SECURITIES ACCOUNT(a) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.01 $10.72 $10.31 $10.55 $9.38
Income from Investment Operations:
Net Investment Income................................. .71 .60 .66 .59 .60
Net Realized and Unrealized Gain (Loss) on Investments (.74) .28 .41 (.24) 1.18
Total from Investment Operations (.03) .88 1.07 .35 1.78
Less Dividends from Net Investment Income................ (.72) (.59) (.66) (.59) (.61)
Net Asset Value, End of Period........................... $10.26 $11.01 $10.72 $10.31 $10.55
Total Return............................................. (.29)% 8.27% 10.39% 3.35% 19.07%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $137,787 $141,317 $94,322 $85,100 $50,079
Ratio of Expenses to Average Net Assets............... .50% .50% .52% .52% .55%
Ratio of Net Investment Income to Average Net Assets.. 6.16% 6.15% 6.37% 6.46% 6.73%
Portfolio Turnover Rate............................... 19.7% 11.0% 9.0% 8.4% 9.8%
</TABLE>
See accompanying notes.
Selected data for a share of Capital Stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
GROWTH ACCOUNT(a) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $20.46 $17.21 $13.79 $12.43 $10.10
Income from Investment Operations:
Net Investment Income................................. .14 .21 .18 .16 .17
Net Realized and Unrealized Gain on Investments....... 3.20 3.45 3.53 1.39 2.42
Total from Investment Operations 3.34 3.66 3.71 1.55 2.59
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.14) (.21) (.18) (.16) (.17)
Distributions from Capital Gains...................... (.10) (.20) (.10) (.03) (.09)
Excess Distributions from Capital Gains(b)............ -- -- (.01) -- --
Total Dividends and Distributions (.24) (.41) (.29) (.19) (.26)
Net Asset Value, End of Period........................... $23.56 $20.46 $17.21 $13.79 $12.43
Total Return............................................. 16.44% 21.36% 26.96% 12.51% 25.62%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $345,882 $259,828 $168,160 $99,612 $42,708
Ratio of Expenses to Average Net Assets............... .45% .48% .50% .52% .58%
Ratio of Net Investment Income to Average Net Assets.. .67% 1.25% 1.34% 1.61% 2.08%
Portfolio Turnover Rate............................... 65.7% 9.0% 15.4% 2.0% 6.9%
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL ACCOUNT(a) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $14.51 $13.90 $13.02 $10.72 $9.56
Income from Investment Operations:
Net Investment Income................................. .48 .26 .23 .22 .19
Net Realized and Unrealized Gain on Investments....... 3.14 1.11 1.35 2.46 1.16
Total from Investment Operations 3.62 1.37 1.58 2.68 1.35
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.47) (.25) (.23) (.22) (.18)
Distributions from Capital Gains...................... (1.46) (.51) (.47) (.16) (.01)
Excess Distributions from Capital Gains(b)............ (.25) -- -- -- --
Total Dividends and Distributions (2.18) (.76) (.70) (.38) (.19)
Net Asset Value, End of Period........................... $15.95 $14.51 $13.90 $13.02 $10.72
Total Return............................................. 25.93% 9.98% 12.24% 25.09% 14.17%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $197,235 $153,588 $125,289 $71,682 $30,566
Ratio of Expenses to Average Net Assets............... .78% .77% .87% .90% .95%
Ratio of Net Investment Income to Average Net Assets.. 3.11% 1.80% 1.92% 2.28% 2.26%
</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 (except as noted):
<TABLE>
<CAPTION>
INTERNATIONAL SMALLCAP ACCOUNT 1999 1998(c)
<S> <C> <C>
Net Asset Value, Beginning of Period..................... $9.00 $9.97
Income from Investment Operations:
Net Investment Income (Operating Loss)................ (.02) .01
Net Realized and Unrealized Gain (Loss) on Investments 8.41 (.95)
Total from Investment Operations 8.39 (.94)
Less Dividends and Distributions:
Dividends from Net Investment Income.................. -- (.03)
Distributions from Capital Gains...................... (.73) --
Net Asset Value, End of Period........................... $16.66 $9.00
Total Return............................................. 93.81% (10.37)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $40,040 $13,075
Ratio of Expenses to Average Net Assets............... 1.32% 1.34%(e)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets.................................. (.28)% .24%(e)
Portfolio Turnover Rate............................... 241.2% 60.3%(e)
</TABLE>
<TABLE>
<CAPTION>
MICROCAP ACCOUNT 1999 1998(c)
<S> <C> <C>
Net Asset Value, Beginning of Period..................... $8.17 $10.04
Income from Investment Operations:
Net Investment Income(f).............................. .02 .03
Net Realized and Unrealized Gain (Loss) on Investments (.11) (1.86)
Total from Investment Operations (.09) (1.83)
Less Dividends from Net Investment Income................ (.01) (.04)
Net Asset Value, End of Period........................... $8.07 $8.17
Total Return............................................. (1.07)% (18.42)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $6,418 $5,384
Ratio of Expenses to Average Net Assets(f)............ 1.06% 1.38%(e)
Ratio of Net Investment Income to Average Net Assets.. 0.22% 0.57%(e)
Portfolio Turnover Rate............................... 88.9% 55.3%(e)
</TABLE>
See accompanying notes.
Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):
<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%
</TABLE>
<TABLE>
<CAPTION>
MIDCAP GROWTH ACCOUNT 1999 1998(c)
<S> <C> <C>
Net Asset Value, Beginning of Period..................... $9.65 $9.94
Income from Investment Operations:
Net Investment Income (Operating Loss)(f)............. .02 (.01)
Net Realized and Unrealized Gain (Loss) on Investments 1.01 (.28)
Total from Investment Operations 1.03 (.29)
Less Dividends from Net Investment Income................ (.02) --
Net Asset Value, End of Period........................... $10.66 $9.65
Total Return............................................. 10.67% (3.40%)(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $14,264 $8,534
Ratio of Expenses to Average Net Assets(f)............ .96% 1.27%(e)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets.................................. .26% (.14)%(e)
Portfolio Turnover Rate............................... 74.1% 91.9%(e)
</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 (except as noted):
<TABLE>
<CAPTION>
MONEY MARKET ACCOUNT(a) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
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>
<TABLE>
<CAPTION>
REAL ESTATE ACCOUNT 1999 1998(c)
<S> <C> <C>
Net Asset Value, Beginning of Period..................... $9.07 $10.01
Income from Investment Operations:
Net Investment Income................................. .43 .32
Net Realized and Unrealized Gain (Loss) on Investments (.85) (.97)
Total from Investment Operations (.42) (.65)
Less Dividends from Net Investment Income................ (.45) (.29)
Net Asset Value, End of Period........................... $8.20 $9.07
Total Return............................................. (4.48)% (6.56)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $10,560 $10,909
Ratio of Expenses to Average Net Assets............... .99% 1.00%(e)
Ratio of Net Investment Income to Average Net Assets 4.92% 5.40%(e)
Portfolio Turnover Rate............................... 101.9% 5.6%(e)
</TABLE>
<TABLE>
<CAPTION>
SMALLCAP ACCOUNT 1999 1998(c)
<S> <C> <C>
Net Asset Value, Beginning of Period..................... $8.21 $10.27
Income from Investment Operations:
Net Investment Income................................. -- --
Net Realized and Unrealized Gain (Loss) on Investments 3.52 (2.06)
Total from Investment Operations 3.52 (2.06)
Less Distributions from Capital Gains.................... (.99) --
Net Asset Value, End of Period........................... $10.74 $8.21
Total Return............................................. 43.58% (20.51)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $26,110 $12,094
Ratio of Expenses to Average Net Assets............... .91% .98%(e)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets.................................. .05% (.05)%(e)
Portfolio Turnover Rate............................... 111.1% 45.2%(e)
</TABLE>
See accompanying notes.
Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):
<TABLE>
<CAPTION>
SMALLCAP GROWTH ACCOUNT 1999 1998(c)
<S> <C> <C>
Net Asset Value, Beginning of Period..................... $10.10 $9.84
Income from Investment Operations:
Net Investment Income (Operating Loss)(f)............. (.05) (.04)
Net Realized and Unrealized Gain on Investments....... 9.70 .30
Total from Investment Operations 9.65 .26
Less Distributions from Capital Gains.................... (.19) --
Net Asset Value, End of Period........................... $19.56 $10.10
Total Return............................................. 95.69% 2.96%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $39,675 $8,463
Ratio of Expenses to Average Net Assets(f)............ 1.05% 1.31%(e)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets.................................. (.61)% (.80)%(e)
Portfolio Turnover Rate............................... 98.0% 166.5%(e)
</TABLE>
<TABLE>
<CAPTION>
SMALLCAP VALUE ACCOUNT 1999 1998(c)
<S> <C> <C>
Net Asset Value, Beginning of Period..................... $8.34 $9.84
Income from Investment Operations:
Net Investment Income(f).............................. .06 .03
Net Realized and Unrealized Gain (Loss) on Investments 1.72 (1.50)
Total from Investment Operations 1.78 (1.47)
Less Dividends from Net Investment Income................ (.06) (.03)
Net Asset Value, End of Period........................... $10.06 $8.34
Total Return............................................. 21.45% (15.06)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $11,080 $6,895
Ratio of Expenses to Average Net Assets(f)............ 1.16% 1.56%(e)
Ratio of Net Investment Income to Average Net Assets.. .82% .73%(e)
Portfolio Turnover Rate............................... 89.7% 53.4%(e)
</TABLE>
<TABLE>
<CAPTION>
STOCK INDEX 500 ACCOUNT 1999(g)
<S> <C>
Net Asset Value, Beginning of Period..................... $9.83
Income from Investment Operations:
Net Investment Income(f).............................. .06
Net Realized and Unrealized Gain on Investments....... .97
.. Total from Investment Operations 1.03
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.07)
Distributions from Capital Gains...................... (.08)
Total from Dividends and Distributions (.15)
Net Asset Value, End of Period........................... $10.71
Total Return............................................. 8.93%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. 46,088
Ratio of Expenses to Average Net Assets(f)............ .40%(e)
Ratio of Net Investment Income to Average Net Assets.. 1.41%(e)
Portfolio Turnover Rate............................... 3.8%(e)
</TABLE>
FINANCIAL HIGHLIGHTS (Continued)
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):
<TABLE>
<CAPTION>
UTILITIES ACCOUNT 1999 1998(c)
<S> <C> <C>
Net Asset Value, Beginning of Period..................... $10.93 $9.61
Income from Investment Operations:
Net Investment Income................................. .23 .15
Net Realized and Unrealized Gain on Investments....... .02 1.35
Total from Investment Operations .25 1.50
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.23) (.18)
Distributions from Captial Gains...................... (.05) --
Total Dividends and Distributions (.28) (.18)
Net Asset Value, End of Period........................... $10.90 $10.93
Total Return............................................. 2.29% 15.36%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $30,684 $18,298
Ratio of Expenses to Average Net Assets............... .64% .69%(e)
Ratio of Net Investment Income to Average Net Assets.. 2.52% 2.93%(e)
Portfolio Turnover Rate............................... 23.0% 9.5%(e)
</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
Principal Aggressive Growth Fund, Inc. Aggressive Growth Account
Principal Asset Allocation Fund, Inc. Asset Allocation Account
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal High Yield Fund, Inc. High Yield Account
Principal World Fund, Inc. International 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.
(c) Period from May 1, 1998, date shares first offered to the public, through
December 31, 1998. Per share net investment income and realized and
unrealized gains (losses) for the period from the initial purchase of
shares through April 30, 1998, were recognized as follows, none of which
was distributed to the sole shareholder, Principal Life Insurance Company,
during the period. This represents activities of each Account prior to the
initial public offering.
<TABLE>
<CAPTION>
Date Net Per Share Realized
Operations Investment and Unrealized
Account Commenced Income Gains (Losses)
<S> <C> <C> <C>
International SmallCap Account April 16, 1998 $.02 $(.05)
MicroCap Account April 9, 1998 .01 .03
MidCap Growth Account April 23, 1998 .01 (.07)
Real Estate Account April 23, 1998 .01 --
SmallCap Account April 9, 1998 -- .27
SmallCap Growth Account April 2, 1998 -- (.16)
SmallCap Value Account April 16, 1998 .01 (.17)
Utilities Account April 2, 1998 .04 (.43)
</TABLE>
(d) Total return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods indicated, the following Accounts would have had
per share net investment income and the ratios of expenses to average net
assets as shown:
<TABLE>
<CAPTION>
Per Share Ratio of Expenses
Periods Ended Net Investment to Average Net Amount
Account December 31 Income (Loss) Assets Waived
<S> <C> <C> <C> <C>
MicroCap Account 1999 $(.01) 1.28% $13,239
MidCap Growth Account 1999 .01 1.09 14,359
MidCap Value Account 1999 .01 1.26 2,360
SmallCap Growth Account 1999 (.05) 1.07 3,049
SmallCap Value Account 1999 .04 1.44 23,900
Stock Index 500 Account 1999 .05 .49 15,231
</TABLE>
(g) Period from May 1, 1999, date shares first offered to the public, through
December 31, 1999. Per share net investment income and realized and
unrealized gains (losses) for the period from the initial purchase of
shares through April 30, 1999, were recognized as follows, none of which
was distributed to the sole shareholder, Principal Life Insurance Company,
during the period. This represents activities of each account prior to the
initial public offering.
Date Net Per Share Realized
Operations Investment and Unrealized
Account Commenced Income Gains (Losses)
Stock Index 500 Account April 22, 1999 $.01 $(.18)
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
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
ACCOUNTS OF THE FUND
Blue Chip Account
Bond Account
Capital Value Account
International Account
LargeCap Growth Account
MidCap Account
MidCap Growth Account
MidCap Value Account
Money Market Account
SmallCap Account
SmallCap Growth Account
Stock Index 500 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
Blue Chip Account.................................................. 6
Bond Account....................................................... 8
Capital Value Account.............................................. 10
International Account.............................................. 12
LargeCap Growth Account............................................ 14
MidCap Account..................................................... 16
MidCap Growth Account.............................................. 18
MidCap Value Account............................................... 20
Money Market Account............................................... 22
SmallCap Account................................................... 24
SmallCap Growth Account............................................ 26
Stock Index 500 Account............................................ 28
CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS......................... 30
PRICING OF ACCOUNT SHARES............................................... 34
DIVIDENDS AND DISTRIBUTIONS............................................. 34
MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE.......................... 35
The Manager........................................................ 35
The Sub-Advisors................................................... 35
GENERAL INFORMATION ABOUT AN ACCOUNT.................................... 43
Shareholders Rights................................................ 43
Purchase of Account Shares......................................... 44
Sale of Account Shares............................................. 44
Financial Statements............................................... 45
FINANCIAL HIGHLIGHTS.................................................... 46
Notes to Financial Highlights...................................... 50
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 for certain Accounts (based on
the Sub-Advisor's experience with the investment strategy for which it was
selected). The Manager seeks to provide a full range of investment approaches
through the Fund.
<TABLE>
<CAPTION>
Sub-Advisor Account
----------- -------
<S> <C>
Berger LLC ("Berger") SmallCap Growth
Dreyfus Corporation ("Dreyfus") MidCap Growth
Invista Capital Management, LLC Blue Chip, Capital Value, International,
("Invista") MidCap, SmallCap, and Stock Index 500
Janus Capital Corporation ("Janus") LargeCap Growth
Neuberger Berman Management Inc. MidCap Value
("Neuberger Berman")
</TABLE>
Principal Management Corporation and Invista are members of the Principal
Financial Group.
In the description for each Account, you will find important information about
the Account's:
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 example is intended to help you compare the cost of
investing in a particular Account with the cost of investing in other mutual
funds. The example assumes you invest $10,000 in an Account for the time periods
indicated. The example also assumes 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 (or estimated expenses for a new Account). Although
your actual costs may be higher or lower, based on these assumptions, your costs
would be as shown.
Principal investment strategy
This section summarizes how the Account intends to achieve its investment
objective. It identifies the Account's principal investment strategy (including
the type or types of securities in which the Account invests) and any policy to
concentrate in securities of issuers in a particular industry or group of
industries.
Day-to-day Account management
The people 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. As
certain Accounts have been operating for a limited period of time, complete
historical information is not available for those Accounts. If complete
historical information is available, a 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 the 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
Blue Chip Account
The Account seeks to achieve growth of capital and growth of income.
Main Strategies
The Account invests primarily in common stocks of well-capitalized, established
companies. The Sub-Advisor, Invista, selects the companies it believes to have
the potential for growth of capital, earnings and dividends. Under normal market
conditions, the Account invests at least 65% (and may invest up to 100%) of its
assets in blue chip companies. Blue chip companies are easily identified by:
o size (market capitalization of at least $1 billion)
o good industry position
o established history of earnings and dividends
o superior management structure
o easy access to credit
In addition, the large market of publicly held shares for these companies and
their generally high trading volume results in a relatively high degree of
liquidity for these stocks.
Invista may invest up to 35% of Account assets in equity securities, other than
common stocks, issued by blue chip companies and in equity securities of
companies that do not fit the blue chip definition. It may also invest up to 5%
of Account assets in securities of unseasoned issuers. Unseasoned issuers may be
developing or marketing new products or services for which markets are not yet
established and may never become established. 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.
Up to 20% of Account assets may be invested in foreign securities. The issuers
of the foreign securities do not have to meet the criteria for blue chip
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 securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.
Main Risks
While stocks have historically been a leading choice of long-term investors,
they do fluctuate in price. 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 a result, the
value of your investment in the Account will go up and down. If you sell your
shares when their value is less than the price you paid, you will lose money.
Because different types of stocks tend to shift in and out of favor depending on
market and economic conditions, the Account's performance may sometimes be lower
or higher than that of other types of funds.
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 larger, established companies. Account Performance
Information As the inception date of the Account is May 1, 1999, historical
performance data based on a full calendar year is not available.
Annual Total Returns
The account's highest/lowest quarterly results during this time period were:
Highest 7.60% (12/31/1999)
Lowest -6.44% (9/30/1999)
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 OnePast FivePast Ten
Account Year Year Years Years
<S> <C> <C> <C> <C> <C>
Blue Chip 1.15%* S&P 500 Stock Index 21.04% 28.55% 18.21%
Lipper Large-Cap Value Fund Average 11.23 22.56 15.06
<FN>
* Period from May 1, 1999, date shares first offered to the public,
through December 31, 1999.
</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
------------------------------------------------------
$71 $221 $385 $863
Account Operating Expenses
Management Fees.................. 0.60%
Other Expenses................... 0.09
-----
Total Account Operating Expenses 0.69%
Day-to-day Account Management
Since April 1999 Mark T. Williams, CFA. Mr. Williams joined Invista Capital
Management in 1989. He holds an MBA from (Account's
inception) Drake University and a BA in Finance from the
University of the State of New York. He 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.
GROWTH-ORIENTED ACCOUNT
International Account
The Account seeks long-term growth of capital by investing in a portfolio of
equity securities of companies established outside of the U.S.
Main Strategies
The Account invests in equity securities of:
o companies with their principal place of business or principal office
outside the U.S.;
o companies for which the principal securities trading market is outside the
U.S.; and
o companies, regardless of where their securities are traded, that derive 50%
or more of their total revenue from goods or services produced or sales
made outside the U.S.
The Account has no limitation on the percentage of assets that are invested in
any one country or denominated in any one currency. However under normal market
conditions, the Account intends to have at least 65% of its assets invested in
companies of at least three countries. One of those countries may be the U.S.
though currently the Account does not intend to invest in equity securities of
U.S. companies.
Investments may be made anywhere in the world. Primary consideration is given to
securities of corporations of Western Europe, North America and Australasia
(Australia, Japan and Far East Asia). Changes in investments are made as
prospects change for particular countries, industries or companies.
In choosing investments for the Account, the Sub-Advisor, Invista, pays
particular attention to the long-term earnings prospects of the various
companies under consideration. Invista then weighs those prospects relative to
the price of the security.
Main Risks
The values of the stocks owned by the Account change on a daily basis. Stock
prices reflect the activities of individual companies as well as general market
and economic conditions. In the short term, stock prices and currencies can
fluctuate dramatically in response to these factors. In addition, there are
risks involved with any investment in foreign securities 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.
Because foreign securities generally are denominated in foreign currencies, the
value of the net assets of the Account as measured in U.S. dollars will be
affected by changes in exchange rates. To protect against future uncertainties
in foreign currency exchange rates, the Account is authorized to enter into
certain foreign currency exchange transactions. In addition, the Account's
foreign investments may be less liquid and their price more volatile than
comparable investments in U.S. securities. Settlement periods may be longer for
foreign securities and that may affect portfolio liquidity.
Under unusual market or economic conditions, the Account may invest in
securities issued by domestic or foreign corporations, governments or
governmental agencies, instrumentalities or political subdivisions. The
securities may be denominated in U.S. dollars or other currencies.
As with all mutual funds, the value of the Account's assets may rise or fall. 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 want to invest in non-U.S. companies. This Account is not an
appropriate investment if you are seeking either preservation of capital or high
current income. You must be able to assume the increased risks of higher price
volatility and currency fluctuations associated with investments in
international stocks which trade in non-U.S. currencies.
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
1995 14.17
1996 25.09
1997 12.24
1998 9.98
1999 25.93
The account's highest/lowest quarterly results during this time period were:
Highest 16.60% (12/31/1998)
Lowest -17.11% (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>
International 25.93% 17.29% 14.41%* Morgan Stanley Capital International EAFE
(Europe, Australia and Far East) Index 26.96% 12.83% 7.01%
Lipper International Fund Average 40.80 15.37 10.54
<FN>
* Period from May 1, 1994, date shares first offered to the public,
through December 31, 1999.
</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
-----------------------------------------------------
$80 $249 $433 $966
Account Operating Expenses
Management Fees.................. 0.73%
Other Expenses................... 0.05
-----
Total Account Operating Expenses 0.78%
Day-to-day Account Management
Since March 1994 Co-Manager: 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.
Since March 2000 Co-Manager: Kurtis D. Spieler, CFA. Mr. Spieler joined
Invista Capital Management in 1995. He holds an MBA from
Drake University and a BBA from Iowa State University. He
has earned the right to use the Chartered Financial Analyst
designation.
GROWTH-ORIENTED ACCOUNT
LargeCap Growth Account
The Account seeks long-term growth of capital.
Main Strategies
The Account primarily invests in stocks of growth-oriented companies. Under
normal market conditions, the Account invests at least 65% of its total assets
in common stocks of growth companies with a large market capitalization,
generally greater than $10 billion measured at the time of investment. The
Sub-Advisor, Janus, selects stocks for the Account's portfolio when it believes
that the market environment favors investment in those securities. Common stock
investments are selected in industries and companies that Janus believes are
experiencing favorable demand for their products and services or are operating
in a favorable environment from a competitive and regulatory standpoint.
Janus uses a bottom-up approach in building the portfolio. This approach seeks
to identify individual companies with earnings growth potential that may not be
recognized by the market at large. Although themes may emerge in the Account,
securities are generally selected without regard to any defined industry sector
or other similarly defined selection procedure.
It is the policy of the Account to purchase and hold securities for capital
growth. If Janus is satisfied with the performance of a security and anticipates
continued appreciation, the Account will generally retain the security. However,
changes in the Account are made if Janus believes they are advisable. This may
occur if a security reaches a price objective or if a change is warranted by
developments that were not foreseen at the time of the decision to buy the
security. Since investment decisions generally are made without reference to the
length of time the Account has held a security, a significant number of
short-term transactions may result. To a limited extent, the Account may also
purchase a security in anticipation of relatively short-term price gain. To the
extent that the Account engages in short-term trading, it may have increased
transaction costs.
Although Janus expects that under normal market conditions the assets of the
Account will be invested in common stocks, it may also invest in other
securities when Janus perceives an opportunity for capital growth from such
securities or to receive a return on idle cash. These may include: U.S.
Government obligations, corporate bonds and debentures, high grade commercial
paper, preferred stocks, convertible securities, warrants or other securities of
U.S. issuers. Pursuant to an exemptive order that Janus has received from the
SEC, the Account may also invest in money market funds managed by Janus as a
means of receiving a return on idle cash. The Account's cash position may
increase when Janus is unable to locate investment opportunities that it
believes have desirable risk/reward characteristics.
Main Risks
While stocks have historically been a leading choice of long-term investors,
they do fluctuate in price. 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 a result, the
value of your investment in the Account will go up and down. If you sell your
shares when their value is less than the price you paid, you will lose money.
Because different types of stocks tend to shift in and out of favor depending on
market and economic conditions, the Account's performance may sometimes be lower
or higher than that of other types of funds.
The Account may also invest up to 25% 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 securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.
The Account may invest up to 5% of its assets in high-yield/high-risk bonds.
Such securities are sometimes referred to as "junk bonds" and are considered
speculative. 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.
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 not appropriate if you are seeking income
or conservation of capital.
Account Performance Information
As the inception date of the Account is May 1, 1999, historical performance data
based on a full calendar year is not available.
Annual Total Returns
The account's highest/lowest quarterly results during this time period were:
Highest 29.75% (12/31/1999)
Lowest -3.13% (9/30/1999)
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 OnePast FivePast Ten
Account Year Year Years Years
<S> <C> <C> <C> <C> <C>
LargeCap Growth 32.47%* Russell 1000 Growth Index 33.16% 32.41% 20.32%
Lipper Large-Cap Growth Fund Average 38.09 30.55 19.73
<FN>
* Period from May 1, 1999, date shares first offered to the public,
through December 31, 1999.
</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
-------------------------------------------------------
$125 $390 $674 $1,482
Account Operating Expenses
Management Fees.................... 1.10%
Other Expenses..................... 0.13
-----
Total Account Operating Expenses 1.23%*
* Manager has agreed to reimburse operating expenses so that total
Account operating expenses will not be greater than 1.20% for 2000.
Day-to-day Account Management
Since April 1999 E. Marc Pinto, CFA. Mr. Pinto is a Vice President, Janus
(Account's Capital Corporation and has been with the organization since
inception) 1994. Prior to that, Mr. Pinto was employed by a family firm
and as an Associate in the Investment Banking Division of
Goldman Sachs. He holds a BA in History from Yale University
and an MBA from Harvard. 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.
GROWTH-ORIENTED ACCOUNT
MidCap Growth Account
The Account seeks long-term growth of capital.
Main Strategies
The Account invests primarily in common stocks of medium capitalization
companies, generally firms with a market value between $1 billion and $10
billion. In the view of the Sub-Advisor, Dreyfus, many medium sized companies: o
are in fast growing industries; o offer superior earnings growth potential; and
o are characterized by strong balance sheets and high returns on equity.
The Account may also hold investments in large and small capitalization
companies, including emerging and cyclical growth companies.
Common stocks are selected for the Account so that in the aggregate, the
investment characteristics and risk profile of the Account are similar to the
Standard & Poor's MidCap 400 Index* (S&P MidCap). While it may maintain
investment characteristics similar to the S&P MidCap, the Account seeks to
invest in companies that in the aggregate will provide a higher total return
than the S&P MidCap. The Account is not an index fund and does not limit its
investments to the securities of issuers in the S&P MidCap.
Dreyfus uses valuation models designed to identify common stocks of companies
that have demonstrated consistent earnings momentum and delivered superior
results relative to market analyst expectations. Other considerations include
profit margins, growth in cash flow and other standard balance sheet measures.
The securities held are generally characterized by strong earnings momentum
measures and higher expected earnings per share growth.
Once such common stocks are identified, Dreyfus constructs a portfolio that in
the aggregate breakdown and risk profile resembles the S&P MidCap, but is
weighted toward the most attractive stocks. The valuation model incorporates
information about the relevant criteria as of the most recent period for which
data are available. Once ranked, the securities are categorized under the
headings "buy", "sell" or "hold". The decision to buy, sell or hold is made by
Dreyfus based primarily on output of the valuation model. However, that decision
may be modified due to subsequently available or other specific relevant
information about the security.
Main Risks
Because companies in this market are smaller, prices of their stocks tend to be
more volatile than stocks of companies with larger capitalizations. Smaller
companies may be developing or marketing new products or services for which
markets are not yet established and may never become established. 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.
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. 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. The Account is designed for a portion of your
investments. It is not appropriate if you are seeking income or conservation of
capital.
* "Standard & Poor's MidCap 400 Index" is a trademark of Standard & Poor's
Corporation (S&P). S&P is not affiliated with Principal Variable Contracts
Fund, Inc., Invista Capital Management, LLC or Principal Life Insurance
Company.
Account Performance Information
The Account's past performance is not necessarily an indication of future
performance.
Annual Total Returns
1999 10.67
The account's highest/lowest quarterly results during this time period were:
Highest 22.31% (12/31/1998)
Lowest -16.95% (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 Five Past OnePast FivePast Ten
Account Year Years Year Years Years
<S> <C> <C> <C> <C> <C> <C>
MidCap Growth 10.67% 4.09%* S&P 400 MidCap Index 14.72% 23.05% -- %
Lipper Mid-Cap Core Fund Average(1) 38.27 21.93 16.28
Lipper Mid-Cap Growth Fund Average(1) 72.86 28.03 19.11
<FN>
* Period from May 1, 1998, date first offered to the public, through
December 31, 1999.
(1) 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
-------------------------------------------------------
$111 $347 $601 $1,329
Account Operating Expenses
Management Fees................... 0.90%
Other Expenses.................... 0.19
-----
Total Account Operating Expenses 1.09%*
* Manager has agreed to reimburse operating expenses so that total
Account operating expenses will not be greater than 0.96% for 2000.
Day-to-day Account Management
Since April 1998 John O'Toole, CFA. Portfolio Manager of The Dreyfus
(Account's Corporation and Senior Vice President of Mellon Equity
inception) Associates LLP (an affiliate of The Dreyfus Corporation)
since 1990. He holds an MBA in Finance from the University
of Chicago and a BA in Economics from the University of
Pennsylvania. He has earned the right to use the Chartered
Financial Analyst designation.
GROWTH-ORIENTED ACCOUNT
MidCap Value Account
The Account seeks long-term growth of capital by investing primarily in equity
securities of companies with value characteristics and market capitalizations in
the $1 billion to $10 billion range.
Main Strategies
Under normal market conditions, the Account invests at least 65% of its total
assets in common stocks of companies with a medium market capitalization.
Companies may range from the well established and well known to the new and
unseasoned.
The stocks are selected using a value-oriented investment approach by the
Sub-Advisor, Neuberger Berman Management Inc. Neuberger Berman identifies value
stocks in several ways. One of the most common identifiers is a low
price-to-earnings ratio (stocks selling at multiples of earnings per share that
are lower than that of the market as a whole). Other criteria are high dividend
yield, a strong balance sheet and financial position, a recent company
restructuring with the potential to realize hidden values, strong management and
low price-to-book value (net value of the company's assets). Neuberger Berman
also looks for companies with consistent cash flow, a sound track record through
all phases of the market cycle, a strong position relative to competitors, a
high level of management stock ownership and a recent sharp stock price decline
that appears to result from a short-term market overreaction to negative news.
Neuberger Berman believes that, over time, securities that are undervalued are
more likely to appreciate in price and are subject to less risk of price decline
than securities whose market prices have already reached their perceived
economic value.
This approach also involves selling portfolio securities when Neuberger Berman
believes they have reached their potential, when the securities fail to perform
as expected or when other opportunities appear more attractive. It is
anticipated that the annual portfolio turnover rate may be greater than 100%.
Turnover rates in excess of 100% generally result in higher transaction costs
and a possible increase in short-term capital gains (or losses).
Main Risks
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. Smaller companies may also be developing
or marketing new products or services for which markets are not yet established
and may never become established.
The net asset value of the Account's shares is based on the value of the
securities it holds. The value of the stocks owned by the Account changes on a
daily basis. The current share 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. 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. 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.
Neuberger Berman also may invest in foreign securities. Foreign securities carry
risks that are not generally found in securities 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.
Investor Profile
The Account is generally a suitable investment if you are seeking long-term
growth and are willing to accept short-term fluctuations in the value of your
investments. It is designed for a portion of your investments and not designed
for you if you are seeking income or conservation of capital.
Account Performance Information
As the inception date of the Account is May 1, 1999, historical performance data
based on a full calendar year is not available.
Annual Total Returns
The account's highest/lowest quarterly results during this time period were:
Highest 23.54% (12/31/1999)
Lowest -12.71% (9/30/1999)
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 OnePast FivePast Ten
Account Year Year Years Years
<S> <C> <C> <C> <C>
MidCap Value 10.24%* Russell MidCap Value Index -0.11% 18.01% 13.81%
Lipper Mid-Cap Value Fund Average 9.33 16.55 12.71
<FN>
* Period from May 1, 1999, date shares first offered to the public,
through December 31, 1999.
</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
-------------------------------------------------------
$128 $401 $695 $1,536
Account Operating Expenses
Management Fees................... 1.05%
Other Expenses.................... 0.21
----
Total Account Operating Expenses 1.26%*
* Manager has agreed to reimburse operating expenses so that total
Account operating expenses will not be greater than 1.20% for 2000.)
Day-to-day Account Management
Since April 1999 Co-Manager, Robert I. Gendelman, Portfolio Manager,
(Account's Neuberger Berman Management, Inc., since 1994. He holds a BA
inception) from the University of Michigan as well as a JD and an MBA
from the University of Chicago.
Since April 1999 Co-Manager, S. Basu Mullick, Portfolio Manager, Neuberger
(Account's Berman Management, Inc., since 1998. Prior thereto,
inception) Portfolio Manager, Ark Asset Management Co, Inc. from
1993-1998. He holds a BA from the Presidency College of
India as well as an MA and ABD in Finance from Rutgers
University.
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.
GROWTH-ORIENTED ACCOUNT
SmallCap Account
The Account seeks long-term growth of capital by investing primarily in equity
securities of companies with comparatively small market capitalizations.
Main Strategies
Under normal market conditions, the Account invests at least 65% of its assets
in securities of companies with market capitalizations of $1.5 billion or less
at the time of purchase. Market capitalization is defined as total current
market value of a company's outstanding common stock.
In selecting securities for investment, the Sub-Advisor, Invista, looks at
stocks with value and/or growth characteristics. In managing the assets of the
Account, Invista does not have a policy of preferring one of these categories to
the other. The value orientation emphasizes buying stocks at less than their
investment value and avoiding stocks whose price has been artificially built up.
The growth orientation emphasizes buying stocks of companies whose potential for
growth of capital and earnings is expected to be above average. Selection is
based on fundamental analysis of the company relative to other companies with
the focus being on Invista's estimation of forwarding looking rates of return.
Main Risks
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 developing or marketing
new products or services for which markets are not yet established and may never
become established. 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.
The net asset value of the Account's shares is based on the values of the
securities it holds. The value of the stocks owned by the Account changes on a
daily basis. The current share price reflects the activities of individual
companies as well as general market and economic conditions. In the short term,
stock prices can fluctuate dramatically in response to these factors. The
Account's share price may fluctuate more than that of funds primarily invested
in stocks of mid-sized and large companies and may underperform as compared to
the securities of larger companies. 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 volatile fluctuations in the
value of your investment. This Account is designed for a portion of your
investments.
Account Performance Information
The Account's past performance is not necessarily an indication of future
performance.
Annual Total Returns
1999 43.58
The account's highest/lowest quarterly results during this time period were:
Highest 26.75% (6/30/1999)
Lowest -24.33% (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 Five Past OnePast FivePast Ten
Account Year Years Year Years Years
<S> <C> <C> <C> <C> <C> <C>
SmallCap 43.58% 8.24%* S&P 600 Index 12.40% 17.05% 13.04%
Lipper Small-Cap Core Fund Average(1) 28.43 17.88 13.39
<FN>
* Period from May 1, 1998, date first offered to the public, through
December 31, 1999.
(1) 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
--------------------------------------------------------
$93 $290 $504 $1,120
Account Operating Expenses
Management Fees.................... 0.85%
Other Expenses..................... 0.06
-----
Total Account Operating Expenses 0.91%
Day-to-day Account Management
Since April 1998 Co-Manager: John F. McClain. Mr. McClain joined Invista
(Account's Capital Management as a Portfolio Analyst in 1990. He holds
inception) an undergraduate degree in Economics from the University of
Iowa and an MBA from Indiana University.
Since April 1998 Co-Manager: Mark T. Williams, CFA. Mr. Williams joined
(Account's Invista Capital Management in 1989. He holds an MBA from
inception) Drake University and a BA in Finance from the University of
the State of New York. He has earned the right to use the
Chartered Financial Analyst designation.
GROWTH-ORIENTED ACCOUNT
SmallCap Growth Account
The Account seeks long-term growth of capital.
Main Strategies
The Account invests primarily in a diversified group of equity securities of
small growth companies. Generally, at the time of the Account's initial purchase
of a security, the market capitalization of the issuer is less than $1 billion.
Growth companies are generally those with sales and earnings growth that is
expected to exceed the growth rate of corporate profits of the S&P 500.
Under normal market conditions, the Account invests at least 65% of its assets
in equity securities of small growth companies. The balance of the Account may
include equity securities of companies with market capitalizations in excess of
$1 billion, foreign securities, corporate fixed-income securities, government
securities and short term investments.
In selecting securities for investment, the Sub-Advisor, Berger, places primary
emphasis on companies which it believes have favorable growth prospects. Berger
seeks to identify small growth companies that either:
o occupy a dominant position in an emerging industry; or
o have a growing market share in larger, fragmented industries.
While these companies may present above average risk, Berger believes that they
may have the potential to achieve long-term earnings growth substantially above
the earnings growth of other companies.
Main Risks
Investments in companies with small market capitalizations carry their own
risks. Historically, small company securities have been more volatile in price
than larger company securities, especially over the short-term. Smaller
companies may be developing or marketing new products or services for which
markets are not yet established and may never become established. While small
companies may offer greater opportunities for capital growth than larger, more
established companies, they also involve greater risks and should be considered
speculative.
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.
The net asset value of the Account's shares is based on the values of the
securities it holds. The value of the stocks owned by the Account changes on a
daily basis. The current share 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. 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.
The Account's share price may fluctuate more than that of funds primarily
invested in stocks of mid-sized and large companies and may underperform as
compared to the securities of larger companies. This Account is designed for
long term investors for a portion of their investments. It is not designed for
investors seeking income or conservation of capital.
Investor Profile
The Account is generally a suitable investment if you are seeking long-term
growth and are willing to accept the potential for volatile fluctuations in the
value of your investment.
Account Performance Information
The Account's past performance is not necessarily an indication of future
performance.
Annual Total Returns
1999 95.69
The account's highest/lowest quarterly results during this time period were:
Highest 59.52% (12/31/1999)
Lowest -18.94% (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 Five Past OnePast FivePast Ten
Account Year Years Year Years Years
<S> <C> <C> <C> <C> <C> <C>
SmallCap Growth 95.69% 52.17%* Russell 2000 Growth Index 43.09% 18.99% 13.51%
Lipper Small-Cap Growth Fund Average(1) 62.63 24.05 18.36
<FN>
* Period from May 1, 1998, date first offered to the public, through
December 31, 1999.
(1) 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
-----------------------------------------------------
$109 $340 $590 $1,306
Account Operating Expenses
Management Fees................... 1.00%
Other Expenses.................... 0.07
-----
Total Account Operating Expenses 1.07%*
* Manager has agreed to reimburse operating expenses so that total
Account operating expenses will not be greater than 1.06% for 2000.
Day-to-day Account Management
Since November 1998 Amy K. Selner, Vice President and portfolio manager of
Berger Associates, Inc. since 1997. Senior Research Analyst,
1996-1997. Prior thereto, Assistant Portfolio Manager and
Research Analyst with INVESCO Trust Company, 1991-1996.
GROWTH-ORIENTED ACCOUNT
Stock Index 500 Account
The Account seeks long-term growth of capital.
Main Strategies
Under normal market conditions, the Account invests at least 80% of its assets
in common stocks of companies that compose the Standard & Poor's* ("S&P") 500
Index. The Sub-Advisor, Invista, will attempt to mirror the investment
performance of the index by allocating the Account's assets in approximately the
same weightings as the S&P 500. Over the long-term, Invista seeks a correlation
between the Account, before expenses, and that of the S&P 500. It is unlikely
that a perfect correlation of 1.00 will be achieved.
The Account is not managed according to traditional methods of "active"
investment management. Active management would include buying and selling
securities based on economic, financial and investment judgement. Instead, the
Account uses a passive investment approach. Rather than judging the merits of a
particular stock in selecting investments, Invista focuses on tracking the S&P
500.
Because of the difficulty and expense of executing relatively small stock
trades, the Account may not always be invested in the less heavily weighted S&P
500 stocks. At times, the Account's portfolio may be weighted differently from
the S&P 500, particularly if the Account has a small level of assets to invest.
In addition, the Account's ability to match the performance of the S&P 500 is
effected to some degree by the size and timing of cash flows into and out of the
Account. The Account is managed to attempt to minimize such effects.
Invista reserves the right to omit or remove any of the S&P 500 stocks from the
Account if it determines that the stock is not sufficiently liquid. In addition,
a stock might be excluded or removed from the Account if extraordinary events or
financial conditions lead Invista to believe that it should not be a part of the
Account's assets.
The Account uses an indexing strategy. It does not attempt to manage market
volatility, use defensive strategies or reduce the effects of any long-term
periods of poor stock performance. The correlation between Account and index
performance may be affected by the Account's expenses, changes in securities
markets, changes in the composition of the index and the timing of purchases and
sales of Account shares. The Account may invest in futures and options, which
could carry additional risks such as losses due to unanticipated market price
movements, and could also reduce the opportunity for gain.
Main Risks
While stocks have historically been a leading choice of long-term investors,
they do fluctuate in price. The value of your investment in the Account will go
up and down, which means that you could lose money. Because different types of
stocks tend to shift in and out of favor depending on market and economic
conditions, the Account's performance may sometimes be lower or higher than that
of other types of funds.
Investor Profile
The Account is generally a suitable investment if you are seeking long-term
growth, are willing to accept the risks of investing in common stocks and prefer
a passive rather than active management style.
* "Standard & Poor's 500 Index" is a trademark of Standard & Poor's
Corporation ("S&P"). S&P is not affiliated with Principal Variable
Contracts Fund, Inc., Invista Capital Management, LLC, or with Principal
Life Insurance Company.
Account Performance Information
As the inception date of the Account is May 1, 1999, historical performance data
based on a full calendar year is not available.
Annual Total Returns
The account's highest/lowest quarterly results during this time period were:
Highest 14.68% (12/31/1999)
Lowest -6.24% (9/30/1999)
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 OnePast FivePast Ten
Account Year Year Years Years
<S> <C> <C> <C> <C> <C> <C>
Stock Index 500 8.93%* S&P 500 Stock Index 21.04% 28.55% 18.21%
Lipper S&P 500 Fund Average 20.22 27.96 17.69
<FN>
* Period from May 1, 1999, date shares first offered to the public,
through December 31, 1999.
</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
-----------------------------------------------------
$50 $156 $271 $600
Account Operating Expenses
Management Fees.................... 0.35%
Other Expenses..................... 0.14
-----
Total Account Operating Expenses 0.49%*
* Manager has agreed to reimburse operating expenses so that total
Account operating expenses will not be greater than 0.40% for 2000.
Day-to-day Account Management
Since March 2000 Co-Manager: Robert Baur, Ph.D. Dr. Baur joined Invista
Capital Management in 1995. Prior to joining the firm, he
was a Professor of Finance and Economics at Drake University
and Grand View College. He received his Ph.D. in Economics
from Iowa State University and did post-doctoral study at
the University of Minnesota. He also holds a BS in
Mathematics from Iowa State University.
Since March 2000 Co-Manager: Rhonda VanderBeek. Ms. VanderBeek joined Invista
Capital Management in 1983. She directs trading operations
for the firm and has extensive experience trading both
domestic and international securities.
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.
The Growth-Oriented Accounts invest primarily in common stocks. Under normal
market conditions, the Blue Chip, Capital Value, International, and MidCap
Accounts are fully invested in equity securities. Under unusual circumstances,
each of the Growth-Oriented Accounts may invest without limit in cash for
temporary or defensive purposes. The Accounts also maintain a portion of their
assets in cash while they are making long-term investment decisions and to cover
sell orders from shareholders.
The Bond Account invests primarily in fixed-income securities. 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,
their 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 fixed-income 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.
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. 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 in or exposed to or generally quoted or currently convertible into
the currency).
Hedging is a technique that may be 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.
Risks of High Yield Securities
The Bond Account and MidCap Value Account (up to 15% of its net assets) and the
LargeCap Growth Account may invest in fixed-income 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 or Sub-Advisor. 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.
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.):
International Account - 100%;
LargeCap Growth and SmallCap Growth Accounts - 25%; Blue Chip, Bond,
Capital Value and SmallCap Accounts - 20%; MidCap, MidCap Growth, MidCap
Value and Stock Index 500 Accounts - 10%.
The Money Market Account does not invest in foreign securities other than those
that are United States dollar denominated. All principal and interest payments
for the security are payable in U.S. dollars. The interest rate, the principal
amount to be repaid and the timing of payments related to the securities do not
vary or float with the value of a foreign currency, the rate of interest on
foreign currency borrowings or with any other interest rate or index expressed
in a currency other than U.S. dollars.
For purposes of these restrictions, foreign securities include:
o companies organized under the laws of countries outside of the U.S.;
o companies for which the principal securities trading market is outside of
the U.S.; and
o companies, regardless of where its securities are traded, that derive 50% or
more of their total revenue from either goods or services produced outside
the U.S. or sales made outside of the U.S.
Investment in foreign securities presents certain risks including: fluctuations
in currency exchange rates, revaluation of currencies, the imposition of foreign
taxes, future political and economic developments including war, expropriations,
nationalization, the possible imposition of currency exchange controls and other
foreign governmental laws or restrictions. In addition, there may be reduced
availability of public information concerning issuers compared to domestic
issuers. Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements that apply to domestic issuers. Transactions in foreign securities
may be subject to higher costs. Each Account's investment in foreign securities
may also result in higher custodial costs and the costs associated with currency
conversions.
Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. Foreign securities markets,
particularly those in emerging market countries, are known to experience long
delays between the trade and settlement dates of securities purchased and sold.
Such delays may result in a lack of liquidity and greater volatility in the
price of securities on those markets. As a result of these factors, the Board of
Directors of the Fund has adopted Daily Pricing and Valuation Procedures for the
Fund. These procedures outline the steps to be followed by the Manager and/or
Sub-Advisor to establish a reliable market or fair value if a reliable market
value is not available through normal market quotations. The Executive Committee
of the Board of Directors oversees this process.
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.
Futures
Each Account may buy and sell financial futures contracts and options on those
contracts. Financial futures contracts are commodities contracts based on
financial instruments such as U.S. Treasury bonds or bills, foreign currencies,
or on securities indices such as the S&P 500 Index. Futures contracts, options
on futures contracts and the commodity exchanges on which they are traded are
regulated by the Commodity Futures Trading Commission ("CFTC"). By buying and
selling futures contracts and related options, an Account seeks to hedge against
a decline in securities owned by the Account or an increase in the price of
securities which the Account plans to purchase. An Account may also buy and sell
futures contracts and related options to maintain cash reserves while simulating
full investment in equity securities and to keep substantially all of its assets
exposed to the market.
Securities of Smaller Companies
The MidCap, MidCap Growth, MidCap Value, SmallCap and SmallCap Growth Accounts
invest in securities of companies with small- or mid-sized market
capitalizations. The LargeCap Growth Account may also, to a limited degree,
invest in securities of smaller companies. 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. The LargeCap Growth Account may invest in money market funds
sponsored by Janus.
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, and
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: Blue Chip, Capital Value, International, MidCap, SmallCap and
Stock Index 500
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.
Account: LargeCap Growth
Sub-Advisor: Janus Capital Corporation ("Janus"), 100 Fillmore Street,
Denver CO 80206-4928, was formed in 1969. Kansas City
Southern Industries, Inc. ("KCSI") owns approximately 82%
of the outstanding voting stock of Janus, indirectly
through its subsidiary Stillwell Financial Inc., most of
which it acquired in 1984. KCSI has announced its intention
to spin-off its financial services subsidiaries, which it
expects to complete in the first half of 2000. As of
January 31, 2000, Janus managed or administered over $256
billion in assets.
Account: MidCap Growth
Sub-Advisor: The Dreyfus Corporation ("Dreyfus"), 200 Park Avenue, New York,
NY 10166, was formed in 1947. The Dreyfus Corporation is a
wholly-owned subsidiary of Mellon Bank, N.A., which is a
wholly-owned subsidiary of Mellon Bank Corporation (Mellon). As
of December 31, 1999 the Dreyfus Corporation managed or
administered approximately $119.6 billion in assets for
approximately 1.7 million investor accounts nationwide.
Account: MidCap Value
Sub-Advisor: Neuberger Berman Management Inc. ("Neuberger Berman") is an
affiliate of Neuberger Berman, LLC. Neuberger Berman LLC is
located at 605 Third Avenue, 2nd Floor, New York, NY 10158-0180.
Together with Neuberger Berman, the firms manage more than $54
billion in total assets (as of December 31, 1999) and continue an
asset management history that began in 1939.
Account: SmallCap Growth
Sub-Advisor: Berger LLC ("Berger") 210 University Boulevard, Suite 900, Denver
CO 80206. It serves as investment advisor, sub-advisor,
administrator or sub-administrator to mutual funds and
institutional investors. Berger is a wholly-owned subsidiary of
Kansas City Southern Industries, Inc. (KCSI). KCSI is a publicly
traded holding company with principal operations in rail
transportation, through its subsidiary The Kansas City Southern
Railway Company, and financial asset management businesses.
Assets under management for Berger as of December 31, 1999 were
approximately $7.1 billion.
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
- --------------- ---------- -------- ---------------
Blue Chip 0.60% 0.09% 0.69%
Bond 0.49 0.01 0.50
Capital Value 0.43 0.00 0.43
International 0.73 0.05 0.78
LargeCap Growth 1.10 0.13 1.23*
MidCap 0.61 0.00 0.61
MidCap Growth 0.90 0.19 1.09*
MidCap Value 1.05 0.21 1.26*
Money Market 0.50 0.02 0.52
SmallCap 0.85 0.06 0.91
SmallCap Growth 1.00 0.07 1.07*
Stock Index 500 0.35 0.14 0.49*
* Before waiver
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 all of these
Accounts are available through the Principal FreedomSM Variable Annuity).
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
Blue Chip Account
(Mark Williams)
The Blue Chip Account began operations on April 15 1999.
The objective of the Account is to invest primarily in high quality companies.
In order to do this, emphasis is placed on companies with strong management
teams, powerful competitive positions, demonstrated earnings power, and
significant growth opportunities. Large companies typically have less business
risk, easier access to financing and less volatility in earnings than smaller
companies, and so deserve a place in the portfolios of many investors.
The Lipper Large Cap Value Fund Average had a total return of 3.9% for the
period of May 1, 1999 through December 31, 1999. The Account had a total return
of 1.2% for that period, underperforming its peer group by 2.7%. This was
primarily due to underweighting technology stocks and overweighting consumer
staples and healthcare stocks. The Account did demonstrate superior security
selection throughout the year. Technology stocks soared in the fourth quarter as
investors chased growth, and consumer staples and healthcare underperformed as
investors shed more defensive holdings. The Account was ahead of its benchmark
until October 19, when technology stocks moved sharply upwards, and the
Account's underweighting hurt it even though a demonstration of superior
security selection in this sector was seen. Motorola Inc. was the Account's main
contributor in technology with a return of 84.3%. The Account was helped by its
performance in the consumer cyclical, financial and utility sectors. In
cyclicals, Wal-Mart Stores, Inc. was the best contributor with a return of
41.8%.
The Account has reduced its underweighting in technology stocks, thus reducing
its index risk relative to the technology sector. In general, the Account will
continue to seek performance through security selection rather than
overweighting specific market sectors. This should reduce the risk of the
Account relative to the average large cap core equity fund.
Comparison of Change in Value of $10,000 Investment in the Blue Chip Account,
Lipper Large-Cap Value Fund Average and S&P 500 Stock Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
1.15%** -- --
** Since inception date 5/3/99
Lipper
S&P 500 Large-Cap Value Blue Chip
Stock Index Fund Average Account*
----------- --------------- ---------
10,000 10,000 10,000
"1999" 11,100 10,391 10,115
Note: Past performance is not predictive of future performance
Capital Value Account
(Catherine 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.
International Account
(Scott Opsal and Kurt Spieler)
The International Account's return of 25.93% in 1999 was slightly below the
Morgan Stanley Capital International EAFE (Europe, Australia and Far East) Index
return of 26.96%. Throughout 1999 the world economy continued to strengthen.
Leading economic indicators in Europe, Japan and the emerging markets were all
positive. Recovery of the emerging markets and Japan, as well as an attractively
valued European currency, resulted in an export-led recovery in Europe.
During 1999 merger and acquisition (M&A) activity in Europe doubled, setting a
record, and positively impacting several companies in the Account's portfolio.
Emerging markets exposure added marginally to performance, mainly in the fourth
quarter, as changes made in the emerging holdings in the beginning of the year
performed strongly. The largest move made in the Account during 1999 was the
entry into Japanese equities. As the Japanese market underperformed other
developed markets year after year, the forward-looking return spread relative to
equities in the rest of the world narrowed. As Account Managers monitored
valuation levels, investments were made in companies that were trading at
attractive levels. The Account also benefited from increased exposure to the
"new economy", including telecommunications, technology and media.
The Account continues to invest in companies that have sustainable competitive
advantages that will allow continued growth in earnings and cash flow sufficient
to justify their current trading price. This strategy is consistently applied to
build a diversified portfolio with exposure to both "new" and "old" economy
companies - all with positive forward-looking return profiles. Changes are being
made to the portfolio in media, energy and financials. Media stocks are highly
valued along with other technology and telecom stocks, but possess lower growth
rates, causing a lightening of the Account's weighting in select holdings.
Account Managers have become slightly more positive on the energy sector due to
the disconnect between oil prices and the valuation levels of the energy
companies and have added to the energy weighting. Within the financial sector
the Managers are lightening some banks and adding to diversified financials.
Companies that have ability to gather assets, benefiting from the long-term
savings trends throughout Europe are preferred. The Account has invested in some
brokerage firms in Japan which are expected to benefit from outflows out of the
postal savings system into the equity market.
Comparison of Change in Value of $10,000 Investment in the International
Account, Lipper International Fund Average and MSCI EAFE Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
------------------------
25.93% 17.29% 14.41%**
** Since inception date 5/2/94
Morgan Stanley Lipper
International EAFE International
Account Index Index
10,000 10,000 10,000
1994 9,663 9,990 9,758
1995 11,032 11,110 10,676
1996 13,800 11,781 11,934
1997 15,488 11,991 12,583
1998 17,034 14,389 14,221
1999 21,451 18,268 20,023
Note: Past performance is not predictive of future performance.
LargeCap Growth Account
(E. Marc Pinto)
The LargeCap Growth Account returned 32.47% between its inception on April 15,
1999 and December 31, 1999. This was significantly better than the 10.99% earned
by its benchmark, the S&P 500 Index, over the same period. The Account's success
is owed to the efforts of its research staff, who spent the Account's first year
of operations scouring the market for individual companies believed capable of
performing well in any market.
Fears that economic growth in the U.S. would force the Federal Reserve to
aggressively increase interest rates in a bid to forestall inflation pressured
fast-growing stocks during May. Although the Account held its own during this
difficult period, interest rate uneasiness and a brief rotation into
economically sensitive sectors of the market kept a lid on performance
throughout the spring and into early summer. Growth shares staged a dramatic
mid-summer comeback, however, and eventually finished the year far ahead of
their value-oriented peers.
Despite the market's mixed signals, Account Managers held firm to their belief
that companies are ultimately rewarded for sustainable earnings growth. More
importantly, the Managers successfully anticipated the staying power of the
market's return to growth-oriented stocks and substantially increased the
Account's growth profile during the third quarter. This strategy paid off
handsomely and was largely responsible for the strong performance in 1999.
Looking ahead, interest rate uncertainty seems likely to persist in 2000 and
could keep markets volatile for the foreseeable future. In addition, investors
may begin to question the extremely high valuations placed on several of the
technology sector's most visible companies. However, by focusing on
fast-growing, well-managed and fundamentally sound companies, the Account
Managers believe they have assembled a portfolio capable of performing well
across a range of economic scenarios.
The Managers believe they have developed an information edge that enables them
to invest with confidence by getting to know the details that drive each
individual holding in the portfolio - a process that begins with the development
of extensive, proprietary financial models and often involves meeting a
company's customers, competitors and suppliers. For that reason, many of the
same themes that contributed to performance in 1999 will continue to play a
central role in 2000. These include wireless, telecommunications, media,
semiconductors, and selected technology companies. At the same time, a
deliberate attempt has been made to balance the portfolio between fast-growing
companies and more traditional growth franchises - a strategy that allows
participation in the unbounded upside associated with a number of the New
Economy's most compelling opportunities while simultaneously providing a measure
of downside protection.
Comparison of Change in Value of $10,000 Investment in the LargeCap Growth
Account, Lipper Large-Cap Growth Fund Average and Russell 1000 Growth Index.
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
32.47%** -- --
** Since inception date 5/3/99
Russell Lipper
1000 Growth Large-Cap Growth LargeCap Growth
Index Fund Average Account*
---------- ---------------- ---------------
10,000 10,000 10,000
"1999" 12,504 14,359 13,247
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 Year
------------------------
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.
MidCap Growth Account
(John O'Toole)
For the calendar year 1999, the portfolio return was below the performance
benchmark, and obviously disappointing. The primary causes of the
underperformance relative to the benchmark were individual stock selection along
with a portfolio beta (price volatility) that was modestly below that of the
benchmark.
The quantitative process used in managing this Account performed below its
historical trend in 1999, which implies that individual stock selection had the
greatest negative impact on return. The Account Manager's approach to equity
management continues to focus on determining what types of valuation
characteristics are preferred by the market, and then to select stocks that
exhibit those preferred traits. Though this valuation system uses a number of
fundamental characteristics that are earnings (growth) driven, some factors that
are price (value) sensitive are also included. An economic sector neutral
approach to portfolio construction has also been maintained. During most of 1999
the Account operated in a market environment where investors also had total
focus on growth type valuation factors, and paid little attention to traditional
price sensitive measures of value.
Companies with the highest price multiples and in many cases very modest real
earnings provided the most attractive returns during 1999. Account Managers use
long-term trends to guide stock selection, and thus continue to operate with
some sensitivity to issues such as actual earnings and measures of value. A
review of 1999 seems to indicate that any valuation process that exhibited even
a modest focus on "value" type inputs, was penalized by the strong emphasis on
growth type factors by investors. The Account's management process did not
preclude the portfolio from owning any of these types of issues, and in fact a
number of holdings in a variety of industries owned by the Account had total
returns during the year of over 50%. These issues include Young & Rubicam,
Biogen, Lexmark International, and Kansas City Southern Industries. As for
issues that had a negative impact upon the annual return, Quintiles
Transnational and TJX Companies would be included.
Another factor that had a negative impact upon return was a modestly below
benchmark beta. The beta of the portfolio was within the historical range
(benchmark beta +/- 0.05), but given the positive equity market returns during
1999, this was a negative factor. 1999 was a year during which investors
rewarded volatility, and the portfolio was modestly less volatile than the
general middle capitalization equity market.
Finally, 1999 was also an equity market environment where the Account saw a
concentration of performance in certain sectors (technology). Thus, the
valuation process and the broadly diversified sector neutral portfolio
construction techniques used by Account Managers tended to result, at least in
the period of this report, in a portfolio whose structure did not generate
optimum results.
Comparison of Change in Value of $10,000 Investment in the MidCap Growth
Account, Lipper Mid-Cap Core Fund Average, Lipper Mid-Cap Growth Fund Average
and S&P 400 MidCap Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
10.67% 4.09%** --
** Since inception date 5/1/98
S&P 400 Lipper MidCap Lipper
MidCap Mid-Cap Core Growth Mid-Cap Growth
Index Fund Average Account* Fund Average
------ ------------ -------- --------------
10,000 10,000 10,000 10,000
"1998" 10,538 9,814 9,660 9,814
"1999" 12,089 13,570 10,691 16,964
Note: Past performance is not predictive of future performance.
MidCap Value Account
((Robert Gendelman and S. Basu Mullick)
The MidCap Value Account posted a 12.64% total return for the reporting period
May 1 through December 31, 1999. These results compare favorably with the
Account's benchmark, the Russell Midcap Value Index, which produced a total
return of -5.82%.
The Account Managers were pleased with the Account's overall performance in the
period, despite the fact that investors continued to prefer large-capitalization
growth stocks over the mid-cap value stocks in which the Account primarily
invests. Relative to the Russell Midcap Value Index, the Account's
outperformance was largely the result of successful security selection in a
number of market sectors.
Throughout 1999, investors were concerned about the potentially adverse effects
of global economic weakness on the U.S. economy. As it turned out, fears of
economic slow-down were unfounded. In fact, it soon became apparent that the
opposite was true: international and domestic economies were growing faster than
analysts expected, giving rise to concerns that long-dormant inflationary
pressures might re-emerge. The Federal Reserve Board eventually raised key
short-term interest rates three times during the summer and fall of 1999 in
order to help prevent a reacceleration of inflation.
Stronger than expected economic growth and higher interest rates constrained the
performance of mid-cap stocks for much of the period. Until the fourth quarter,
only a handful of growth-oriented technology and telecommunications stocks drove
the market averages higher. Many of these high-flying stocks were selling at
very high valuations, and some had no earnings at all, making them unsuitable
for a value-oriented portfolio in the Account Managers' opinion. In the fourth
quarter, a more broad-based rally began to emerge, sending most major stock
market averages, including the large-cap S&P 500 and the small-cap Russell 2000,
to new highs on the last trading day of 1999. Value-oriented stocks were the
notable exception to this list of winners, however.
In this environment, the Account's performance was driven primarily by
investments in communications services and technology. Individual holdings such
as satellite television provider GM Hughes and CAD software manufacturer
Parametric Technology rallied strongly after encountering temporary setbacks in
1998, which had enabled the Account Managers to acquire the stock at attractive
prices. Global Crossing, a telecommunications holding, and Comdisco, a
technology holding, also recovered from previous problems and contributed
significantly to the Account's returns.
On the other hand, performance was hurt by declines in the financial sector.
Higher interest rates punished the stocks of fundamentally sound companies such
as Countrywide Credit and the Williams Companies.
Toward the end of the year, the Account Managers began to reposition the fund
for 2000 and beyond. They reduced their exposure to highly-valued technology
stocks and re-deployed those assets to more economically sensitive stocks in
areas such as energy and the basic materials sector. Within these sectors, the
Account Managers focused mainly on out-of-favor companies or those experiencing
temporary problems, with strong fundamentals.
Looking forward, the Account Managers believe that the global economy's
persistent strength may translate into higher earnings for economically
sensitive companies, particularly in industries such as paper and chemical
manufacturing with little new capacity and rising demand. Yet, they remain
cautious regarding the broader U.S. stock market, where concerns about
potentially higher interest rates and deteriorating credit quality could offset
the positive effects of a strong economy.
Comparison of Change in Value of $10,000 Investment in the MidCap Value Account,
Lipper Mid-Cap Value Fund Average and Russell MidCap Value Index.
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
10.24%** -- --
** Since inception date 5/3/99
Russell Lipper
MidCap Value Mid-Cap Value MidCap Value
Index Fund Average Account*
------------ ------------- ------------
10,000 10,000 10,000
"1999" 9,419 10,943 11,024
Note: Past performance is not predictive of future performance.
SmallCap Account
(John McClain and Mark Williams)
The Account's yearly return figure of 43.6% compared favorably to the S&P 600
Index return of 12.4%. The growth segments of the Account and the benchmark
handily beat their value counterparts. The decision by Account Managers to
allocate more of the assets to the growth segment continues to pay dividends.
Because the Account was overweighted in the better performing growth sector, it
realized a positive asset allocation return.
The return and weighting components of certain sectors contributed to the
Account's outperformance relative to its benchmark. The technology sector return
of 68.1% led all sectors in the benchmark. The Account's technology sector
return was an incredible 208.5%. The Account's second best performing sector for
the year was consumer cyclicals. Teen retailing is the main contributor to this
return. Communication services sector's return was substantially higher than
that of the benchmark 179.6% versus 25.9%. The Account's sector weighting of
5.4% was approximately 11 times the benchmark sector weighting of 0.5%.
Comparison of Change in Value of $10,000 Investment in the SmallCap Account,
Lipper Small-Cap Core Fund Average and S&P 600 Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
43.58% 8.24%** --
** Since inception date 5/1/98
Lipper
S&P 600 Small-Cap Core SmallCap
Index Fund Average Account*
------- -------------- --------
10,000 10,000 10,000
"1998" 8,835 8,873 7,949
"1999" 9,931 11,396 11,413
Note: Past performance is not predictive of future performance
SmallCap Growth Account
(Amy Selner)
For the year, the SmallCap Growth Account rose 95.69 % versus the 43.09% rise of
the Russell 2000 Growth Index. The Account outperformed the Russell Growth Index
by 52.60 percentage points.
Small cap stocks began 1999 very weak, as seen in the 10.4% underperformance of
the Russell 2000 versus the S&P500 in the first quarter of 1999. During this
quarter, which signaled the end of the interest rate easing by the Federal
Reserve Bank, the market was fraught with volatility in illiquid stocks. The
second quarter of 1999 marked the best quarterly outperformance for small caps
since the fourth quarter of 1992, as small caps outperformed large caps by
7.93%. Small caps were much cheaper on a valuation basis, after their first
quarter drubbing, and bounced nicely in the second quarter. Also in June, small
cap funds had positive inflows of $1.3 billion, after experiencing large cash
outflows in the first five months of 1999. The general market quickly discounted
the Federal Reserve's .25% rise in interest rates during the second quarter and
continued to rise modestly.
The second half of 1999 was a roller coaster. During the third quarter, both
small and large cap stocks fell close to 6% as interest rate fears crept back
into the marketplace. This volatility was exaggerated by the slowdown in
news-flow over the summer period. The fourth quarter roared as the Russell 2000
rose over 18% and the Russell 2000 Growth rose over 33%. All in all, the Russell
2000 and the S&P 500 ended 1999 up over 21% and 19% respectively, marking a
solid year of gains.
Throughout the year, the U.S. economy has remained undeniably robust while
international economies were picking up. The deflationary boom continued as
labor markets remained tight and inflation remained relatively benign. Operating
profits were quite strong.
Despite this up and down year for small cap stocks, the Account was able to
considerably outperform its benchmarks mainly due to stock selection.
The Account remained heavily weighted in industries where growth prospects are
the most visible and consistent. Technology, the Account's largest sector,
continues to have the greatest long-term growth fundamentals. Account Managers
believe that the growth prospects are explosive for the Internet infrastructure
in particular. Therefore, a focus continues on telecommunication and broadband
companies, which provide the plumbing that enables broad acceptance of Internet
applications and services. Similarly, companies such as Proxim, which
manufactures wireless local-area networking products, contributed to
performance.
The Account lowered its exposure to the healthcare group over this fiscal year.
Uncertainty surrounding prescription drug benefits and the government's impact
on drug pricing kept a lid on these stocks. One bright spot in the sector was
biotechnology stocks. Account Managers believe the biotech industry continues to
acquire critical mass as genomics and combinatorial chemistry lead to an
explosion in new drug targets. Emerging biotechnology companies such as Biocryst
Pharmaceutical and Cephalon boosted Account performance.
An energy weighting contributed to the Account's outperformance in 1999.
Although there are worries that OPEC will irrationally increase oil production,
the Account remains positive on the long-term supply/demand fundamentals within
the sector.
Within the consumer group, radio stocks were solid performers. The environment
for radio advertising was robust in 1999, and we expect this group's strong
fundamentals to carry into next year. Over the short term these stocks may be
prone to profit taking as their valuations are high, but long term the
management team remains comfortable.
The Account Managers remain cautiously optimistic about the market entering
2000. The U.S. economy remains robust and international economies are picking
up. Productivity is expected to continue to grow and to fuel low inflationary
growth into 2000.
Moving through 2000, Account Managers are cautious as to the potential for
profit taking in the technology sector due to tremendous performance in the
fourth quarter of 1999. If economic metrics continue to show an overheating
economy, interest rates will continue to creep up and the market may become
volatile and move sideways as the slower summer period is entered. It is
estimated that a potential correction in technology stocks which, while
uncomfortable, will be healthy for the market over the long-term and may present
an excellent buying opportunity in the strongest growth stocks.
Comparison of Change in Value of $10,000 Investment in the SmallCap Growth
Account, Lipper Small-Cap Growth Fund Average and Russell 2000 Growth Index.
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
95.69% 52.17%** --
** Since inception date 5/1/98
Lipper
Russell 2000 Small-Cap Growth SmallCap Growth
Growth Index Fund Average Account*
10,000 10,000 10,000
"1998" 10,123 8,873 10,296
"1999" 14,485 14,430 20,148
Note: Past performance is not predictive of future performance.
Stock Index 500 Account
(William Baur and Rhonda VanderBeek)
The Stock Index 500 Account seeks investment results that correspond with the
total return performance of the Standard & Poor's 500 Index. The percentage of
total assets of the Account allocated to each of the 500 stocks closely follows
the weighting of each of the stocks in the S&P 500 Index.
The Stock Index 500 Account began May 3, 1999. The total return from inception
through year-end 1999 was 8.93%; during the same period, the total return of the
S&P 500 Index was 11.00%. The difference was attributable to start-up costs and
other variables intrinsic to the creation of a new account.
The performance of the stock market since inception date of the Account was
strong, but there were some rough periods. During the third quarter, investors
had some fears about inflation, disappointing profits and the potential for the
Federal Reserve to raise interest rates. The broad market declined about 12% in
response. Those fears dissipated during the fourth quarter as business profits
perked up, the economy accelerated, and inflation stayed under control. As a
result, the return from the bottom of the correction was spectacular with the
S&P 500 Index up 17.5%.
Comparison of Change in Value of $10,000 Investment in the Stock Index 500
Account, Lipper S&P 500 Fund Average and S&P 500 Stock Index
Total Returns*
as of December 31, 1999
1 Year 5 Year 10 Year
8.93%** -- --
** Since inception date 5/3/99
Standard & Poor's Lipper
500 Stock S&P 500 Stock Index
Index Fund Average 500 Account*
---------------- ------------ ------------
10,000 10,000 10,000
"1999" 11,100 11,615 10,893
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.
Lipper International Fund Average: This average consists of funds which invest
in securities primarily traded in markets outside of the United States. The
one-year average currently contains 618 funds.
Lipper Large-Cap Growth 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 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 364 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.
Lipper Mid-Cap Value 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 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 197 funds.
Lipper S&P 500 Fund Average: This average consists of funds that are passively
managed, have limited expenses (advisor fee no higher than 0.50%), and are
designed to replicate the performance of the Standard & Poor's 500 Index on a
reinvested basis. The one-year average currently contains 107 funds.
Lipper Small-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 250% of the dollar weighted median market capitalization of the S&P
Small-Cap 600 Index. These funds have wide latitude in the companies in which
they invest. The one-year average currently contains 188 funds.
Lipper Small-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 250% of the dollar weighted median market capitalization of the S&P
Small-Cap 600 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 263 funds.
Morgan Stanley EAFE (Europe, Australia and Far East) Index: This average
reflects an arithmetic, market value weighted average of performance of more
than 900 securities which are listed on the stock exchanges of the following
countries: Australia, Austria, Belgium, Denmark, Netherlands, New Zealand,
Norway, Singapore/Malaysia, Spain, Sweden, Switzerland, and the United Kingdom.
Russell 1000 Growth Index: This index measures the performance of those Russell
1000 companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 2000 Growth Index: This index measures the performance of those Russell
2000 companies with higher price-to-book ratios and lower forecasted growth
values.
Russell Midcap Value Index: This index measures the performance of those Russell
Midcap companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
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 600 Index: This is a market-value weighted index consisting of
600 domestic stocks chosen for market size, liquidity and industry group
representation.
Standard & Poor's MidCap 400 Index: This index measures the performance of the
mid-size company segment of the U.S. Market.
Income-Oriented Accounts:
Bond Account
(Scott 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 $10,000 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 Avg
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.
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.
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.
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.
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 no 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 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 (except as noted):
BLUE CHIP ACCOUNT 1999(a)
- ----------------- ----
Net Asset Value, Beginning of Period................... $10.15
Income from Investment Operations:
Net Investment Income............................... .08
Net Realized and Unrealized Gain on Investments..... .24
Total from Investment Operations .32
Less Dividends from Net Investment Income.............. (.09)
Net Asset Value, End of Period......................... $10.38
Total Return........................................... 1.15%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $6,453
Ratio of Expenses to Average Net Assets............. .69%(c)
Ratio of Net Investment Income to Average Net Assets 1.33%(c)
Portfolio Turnover Rate............................. 16.2%(c)
<TABLE>
<CAPTION>
BOND ACCOUNT(d) 1999 1998 1997 1996 1995
- ------------ ------------------------------ ---- ----
<S> <C> <C> <C> <C> <C>
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 Investments (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(e).......... -- (.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%
CAPITAL VALUE ACCOUNT(d) 1999 1998 1997 1996 1995
- --------------------- ------------------------------ ---- ----
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(e).......... (.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>
See accompanying notes.
<TABLE>
Selected data for a share of Capital Stock outstanding throughout each year ended December 31 (except as noted):
<CAPTION>
INTERNATIONAL ACCOUNT(d) 1999 1998 1997 1996 1995
- --------------------- ------------------------------ ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $14.51 $13.90 $13.02 $10.72 $9.56
Income from Investment Operations:
Net Investment Income............................... .48 .26 .23 .22 .19
Net Realized and Unrealized Gain on Investments..... 3.14 1.11 1.35 2.46 1.16
Total from Investment Operations 3.62 1.37 1.58 2.68 1.35
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.47) (.25) (.23) (.22) (.18)
Distributions from Capital Gains.................... (1.46) (.51) (.47) (.16) (.01)
Excess Distributions from Capital Gains(e).......... (.25) -- -- -- --
Total Dividends and Distributions (2.18) (.76) (.70) (.38) (.19)
Net Asset Value, End of Period......................... $15.95 $14.51 $13.90 $13.02 $10.72
Total Return 25.93% 9.98% 12.24% 25.09% 14.17%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $197,235 $153,588 $125,289 $71,682 $30,566
Ratio of Expenses to Average Net Assets............. .78% .77% .87% .90% .95%
Ratio of Net Investment Income to Average Net Assets 3.11% 1.80% 1.92% 2.28% 2.26%
Portfolio Turnover Rate............................. 65.5% 33.9% 22.7% 12.5% 15.6%
LARGECAP GROWTH ACCOUNT 1999(a)
- ----------------------- ----
Net Asset Value, Beginning of Period................... $9.93
Income from Investment Operations:
Net Investment Income (Operating Loss)(f)........... (.03)
Net Realized and Unrealized Gain (Loss) on Investments 3.36
Total from Investment Operations 3.33
Net Asset Value, End of Period......................... $13.26
Total Return........................................... 32.47%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $7,045
Ratio of Expenses to Average Net Assets(f).......... 1.16%(c)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.47)%(c)
Portfolio Turnover Rate............................. 39.6%(c)
MIDCAP ACCOUNT(d) 1999 1998 1997 1996 1995
- -------------- ------------------------------ ---- ----
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%
See accompanying notes.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS (Continued)
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
Selected data for a share of Capital Stock outstanding throughout each year ended December 31 (except as noted):
<CAPTION>
MIDCAP GROWTH ACCOUNT 1999 1998(g)
- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.65 $9.94
Income from Investment Operations:
Net Investment Income (Operating Loss)(f)........... .02 (.01)
Net Realized and Unrealized Gain (Loss) on Investments 1.01 (.28)
Total from Investment Operations 1.03 (.29)
Less Dividends from Net Investment Income.............. (.02) --
Net Asset Value, End of Period......................... $10.66 $9.65
Total Return........................................... 10.67% (3.40%)(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $14,264 $8,534
Ratio of Expenses to Average Net Assets(f).......... .96% 1.27%(c)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ .26% (.14)%(c)
Portfolio Turnover Rate............................. 74.1% 91.9%(c)
MIDCAP VALUE ACCOUNT 1999(a)
- -------------------- ----
Net Asset Value, Beginning of Period................... $10.09
Income from Investment Operations:
Net Investment Income(f)............................ .02
Net Realized and Unrealized Gain on Investments..... 1.24
Total from Investment Operations 1.26
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.02)
Distributions from Capital Gains.................... (.22)
Total from Dividends and Distributions (.24)
Net Asset Value, End of Period......................... $11.11
Total Return........................................... 10.24%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $5,756
Ratio of Expenses to Average Net Assets(f).......... 1.19%(c)
Ratio of Net Investment Income to Average Net Assets .30%(c)
Portfolio Turnover Rate............................. 154.0%(c)
MONEY MARKET ACCOUNT(d) 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%
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Selected data for a share of Capital Stock outstanding throughout the periods ended December 31 (except as noted):
SMALLCAP ACCOUNT 1999 1998(g)
- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $8.21 $10.27
Income from Investment Operations:
Net Investment Income............................... -- --
Net Realized and Unrealized Gain (Loss) on Investments 3.52 (2.06)
Total from Investment Operations 3.52 (2.06)
Less Distributions from Capital Gains.................. (.99) --
Net Asset Value, End of Period......................... $10.74 $8.21
Total Return........................................... 43.58% (20.51)%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $26,110 $12,094
Ratio of Expenses to Average Net Assets............. .91% .98%(c)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ .05% (.05)%(c)
Portfolio Turnover Rate............................. 111.1% 45.2%(c)
SMALLCAP GROWTH ACCOUNT 1999 1998(g)
- ----------------------- -----------------
Net Asset Value, Beginning of Period................... $10.10 $9.84
Income from Investment Operations:
Net Investment Income (Operating Loss)(f)........... (.05) (.04)
Net Realized and Unrealized Gain on Investments..... 9.70 .30
Total from Investment Operations 9.65 .26
Less Distributions from Capital Gains.................. (.19) --
Net Asset Value, End of Period......................... $19.56 $10.10
Total Return........................................... 95.69% 2.96%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $39,675 $8,463
Ratio of Expenses to Average Net Assets(f).......... 1.05% 1.31%(c)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.61)% (.80)%(c)
Portfolio Turnover Rate............................. 98.0% 166.5%(c)
STOCK INDEX 500 ACCOUNT 1999(a)
- ----------------------- ----
Net Asset Value, Beginning of Period................... $9.83
Income from Investment Operations:
Net Investment Income(f)............................ .06
Net Realized and Unrealized Gain on Investments..... .97
Total from Investment Operations 1.03
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.07)
Distributions from Capital Gains.................... (.08)
Total from Dividends and Distributions (.15)
Net Asset Value, End of Period......................... $10.71
Total Return........................................... 8.93%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ 46,088
Ratio of Expenses to Average Net Assets(f).......... .40%(c)
Ratio of Net Investment Income to Average Net Assets 1.41%(c)
Portfolio Turnover Rate............................. 3.8%(c)
</TABLE>
FINANCIAL HIGHLIGHTS (Continued)
Notes to Financial Highlights
(a) Period from May 1, 1999, date shares first offered to the public, through
December 31, 1999. Per share net investment income and realized and
unrealized gains (losses) for the period from the initial purchase of
shares through April 30, 1999, were recognized as follows, none of which
was distributed to the sole shareholder, Principal Life Insurance Company,
during the period. This represents activities of each Account prior to the
initial public offering.
Date Net Per Share Realized
Operations Investment and Unrealized
Account Commenced Income Gains (Losses)
Blue Chip Account April 15, 1999 $.01 $.14
LargeCap Growth Account April 15, 1999 -- (.07)
MidCap Value Account April 22, 1999 -- .09
Stock Index 500 Account April 22, 1999 .01 (.18)
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) 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 Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal World Fund, Inc. International Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Money Market Fund, Inc. Money Market Account
(e) 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.
(f) Without the Managers voluntary waiver of a portion of certain of its
expenses for the periods indicated, the following Accounts would have had
per share net investment income and the ratios of expenses to average net
assets as shown:
(g) Period from May 1, 1998, date shares first offered to the public, through
December 31, 1998. Per share net investment income and realized and
unrealized gains (losses) for the period from the initial purchase of
shares through April 30, 1998, were recognized as follows, none of which
was distributed to the sole shareholder, Principal Life Insurance Company,
during the period. This represents activities of each account prior to the
initial public offering.
Date Net Per Share Realized
Operations Investment and Unrealized
Account Commenced Income Gains (Losses)
MidCap Growth Account April 23, 1998 $.01 $(.07)
SmallCap Account April 9, 1998 -- .27
SmallCap Growth Account April 2, 1998 -- (.16)
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 Funds investments is also available in the Funds annual
and semi-annual reports to shareholders. In the Funds annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Funds 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
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
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
ACCOUNTS OF THE FUND
Balanced Account
Bond Account
Capital Value Account
Government Securities Account
Growth Account
International 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
Government Securities Account...................................... 12
Growth Account..................................................... 14
International Account.............................................. 16
MidCap Account..................................................... 18
Money Market Account............................................... 20
CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS......................... 22
PRICING OF ACCOUNT SHARES............................................... 25
DIVIDENDS AND DISTRIBUTIONS............................................. 26
MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE.......................... 26
The Manager........................................................ 26
The Sub-Advisors................................................... 26
GENERAL INFORMATION ABOUT AN ACCOUNT.................................... 33
Shareholders Rights................................................ 33
Purchase of Account Shares......................................... 34
Sale of Account Shares............................................. 34
Restricted Transfers............................................... 35
Financial Statements............................................... 36
FINANCIAL HIGHLIGHTS.................................................... 37
Notes to Financial Highlights...................................... 41
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 table 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 sectors. 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. He
has earned the right to use the Chartered Financial Analyst
designation.
INCOME-ORIENTED ACCOUNT
Government Securities Account
The Account seeks a high level of current income, liquidity and safety of
principal.
Main Strategies
The Account invests in securities supported by:
o full faith and credit of the U.S. Government (e.g. GNMA certificates); or
o credit of a U.S. Government agency or instrumentality (e.g. bonds issued by
the Federal Home Loan Bank).
In addition, the Account may invest in money market investments.
The Account invests in modified pass-through GNMA Certificates. GNMA
Certificates are mortgage-backed securities representing an interest in a pool
of mortgage loans. Various lenders make loans that are then insured (by the
Federal Housing Administration) or loans that are guaranteed (by Veterans
Administration or Farmers Home Administration). The lender or other security
issuer creates a pool of mortgages that it submits to GNMA for approval.
Owners of modified pass-through Certificates receive all interest and principal
payments owed on the mortgages in the pool, regardless of whether or not the
mortgagor has made the payment. Timely payment of interest and principal is
guaranteed by the full faith and credit of the U.S. Government.
Main Risks
Although some of the securities the Account purchases are backed by the U.S.
government and its agencies, shares of the Account are not guaranteed. When
interest rates fall, the value of the Account's shares rises, and when rates
rise, the value declines. Because of the fluctuation in the value of Account
shares, if you sell your shares when their value is less than the price you
paid, you will lose money.
U.S. Government securities do not involve the degree of credit risk associated
with investments in lower quality fixed-income securities. As a result, the
yields available from U.S. Government securities are generally lower than the
yields available from many other fixed-income securities. Like other
fixed-income securities, the values of U.S. Government securities change as
interest rates fluctuate. Fluctuations in the value of the Account's securities
do not affect interest income on securities already held by the Account, but are
reflected in the Account's price per share. Since the magnitude of these
fluctuations generally is greater at times when the Account's average maturity
is longer, under certain market conditions the Account may invest in short term
investments yielding lower current income rather than investing in higher
yielding longer term securities.
Mortgage-backed securities are subject to prepayment risk. Prepayments,
unscheduled principal payments, may result from voluntary prepayment,
refinancing or foreclosure of the underlying mortgage. When interest rates
decline, significant unscheduled prepayments may result. These prepayments must
then be reinvested at lower rates. Prepayments may also shorten the effective
maturities of these securities, especially during periods of declining interest
rates. On the other hand, during period of rising interest rates, a reduction in
prepayments may increase the effective maturities of these securities,
subjecting them to the risk of decline in market value in response to rising
interest and potentially increasing the volatility of the Account.
In addition, prepayments may cause losses on securities purchased at a premium
(dollar amount by which the price of the bond exceeds its face value). At times,
mortgage-backed securities may have higher than market interest rates and are
purchased at a premium. Unscheduled prepayments are made at par and cause the
Account to experience a loss of some or all of the premium.
Investor Profile
The Account is generally a suitable investment if you want monthly dividends to
provide income or to be reinvested in additional Account shares to produce
growth and prefer to have the repayment of principal and interest on most of the
securities in which the Account invests to be backed by the U.S. Government or
its agencies.
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 9.54
1991 16.95
1992 6.84
1993 10.07
1994 -4.53
1995 19.07
1996 3.35
1997 10.39
1998 8.27
1999 -0.29
The account's highest/lowest quarterly results during this time period were:
Highest 6.17% (6/30/1995)
Lowest -3.94% (3/31/1994)
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>
Government Securities -0.29% 7.96% 7.75% Lehman Brothers Mortgage Index 1.86% 7.98% 7.78%
Lipper U.S. Mortgage Fund Average 0.65 7.00 6.95
</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 May 1987 Martin J. Schafer. Mr. Schafer joined the Principal in 1977
(Account's and has broad experience in residential mortgage related
inception) securities. He served as Director of Investment Securities
at the Principal prior to joining Invista Capital Management
in 1992. He holds a BBA in Accounting and Finance from the
University of Iowa.
GROWTH-ORIENTED ACCOUNT
Growth Account
The Account seeks growth of capital through the purchase primarily of common
stocks, but the Account may invest in other securities.
Main Strategies
The Account seeks to achieve its objective by investing in common stocks and
other equity securities. In selecting securities for investment, the
Sub-Advisor, Invista, looks at stocks it believes have prospects for above
average growth over an extended period of time. Invista uses an approach
described as "fundamental analysis" as it selection process.
The three basic steps of fundamental analysis are:
o Research - consideration of 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 - use of the research to allow Invista to identify segments of
the market for investment. Invista considers various factors including
sustainable, superior earnings growth and above average or accelerating
rates of growth;
o Stock selection - Invista buys and sells stocks using its research and
valuation as the basis. It attempts to identify the individual issuers that
it considers to have high growth potential, that are market share leaders
and/or have high quality management with consistent track records and solid
balance sheets.
Main Risks
Prices of equity securities rise and fall in response to a number of factors
including events that affect entire financial markets or industries (for
example, changes in inflation or consumer demand) as well as events impacting a
particular issuer (for example, news about the success or failure of a new
product). The securities purchased by the Account present greater opportunities
for growth because of high potential earnings growth, but may also involve
greater risks than securities that do not have the same potential. The Account
may invest in companies with limited product lines, markets or financial
resources. As a result, these securities may change in value more than those of
larger, more established companies. As the value of the stocks owned by the
Account changes, the Account share price changes. In the short-term, the price
can fluctuate dramatically.
As with all mutual funds, as the value of the Account's assets rise and fall,
the Account's share price changes. 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. You must be willing to accept the risks of investing in common stocks
that may have greater risks than stocks of companies with lower potential for
earnings growth.
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
1995 25.62
1996 12.51
1997 26.96
1998 21.36
1999 16.44
The account's highest/lowest quarterly results during this time period were:
Highest 21.35% (12/31/1998)
Lowest -14.63% (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> <C>
Growth 16.44% 20.45% 18.94%* S&P 500 Stock Index 21.04% 28.55% 18.21%
Lipper Large-Cap Growth Fund Average(1) 38.09 30.55 19.73
<FN>
* Period from May 1, 1994, date first offered to the public, through
December 31, 1999.
(1) 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
-------------------------------------------------------
$46 $144 $252 $567
Account Operating Expenses
Management Fees................... 0.45%
Other Expenses.................... 0.00
-----
Total Account Operating Expenses 0.45%
Day-to-day Fund Management
Since January 2000 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.
GROWTH-ORIENTED ACCOUNT
International Account
The Account seeks long-term growth of capital by investing in a portfolio of
equity securities of companies established outside of the U.S.
Main Strategies
The Account invests in equity securities of:
o companies with their principal place of business or principal office
outside the U.S.;
o companies for which the principal securities trading market is outside the
U.S.; and
o companies, regardless of where their securities are traded, that derive 50%
or more of their total revenue from goods or services produced or sales
made outside the U.S.
The Account has no limitation on the percentage of assets that are invested in
any one country or denominated in any one currency. However under normal market
conditions, the Account intends to have at least 65% of its assets invested in
companies of at least three countries. One of those countries may be the U.S.
though currently the Account does not intend to invest in equity securities of
U.S. companies.
Investments may be made anywhere in the world. Primary consideration is given to
securities of corporations of Western Europe, North America and Australasia
(Australia, Japan and Far East Asia). Changes in investments are made as
prospects change for particular countries, industries or companies.
In choosing investments for the Account, the Sub-Advisor, Invista, pays
particular attention to the long-term earnings prospects of the various
companies under consideration. Invista then weighs those prospects relative to
the price of the security.
Main Risks
The values of the stocks owned by the Account change on a daily basis. Stock
prices reflect the activities of individual companies as well as general market
and economic conditions. In the short term, stock prices and currencies can
fluctuate dramatically in response to these factors. In addition, there are
risks involved with any investment in foreign securities 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.
Because foreign securities generally are denominated in foreign currencies, the
value of the net assets of the Account as measured in U.S. dollars will be
affected by changes in exchange rates. To protect against future uncertainties
in foreign currency exchange rates, the Account is authorized to enter into
certain foreign currency exchange transactions. In addition, the Account's
foreign investments may be less liquid and their price more volatile than
comparable investments in U.S. securities. Settlement periods may be longer for
foreign securities and that may affect portfolio liquidity.
Under unusual market or economic conditions, the Account may invest in
securities issued by domestic or foreign corporations, governments or
governmental agencies, instrumentalities or political subdivisions. The
securities may be denominated in U.S. dollars or other currencies.
As with all mutual funds, the value of the Account's assets may rise or fall. 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 want to invest in non-U.S. companies. This Account is not an
appropriate investment if you are seeking either preservation of capital or high
current income. You must be able to assume the increased risks of higher price
volatility and currency fluctuations associated with investments in
international stocks which trade in non-U.S. currencies.
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
1995 14.17
1996 25.09
1997 12.24
1998 9.98
1999 25.93
The account's highest/lowest quarterly results during this time period were:
Highest 16.60% (12/31/1998)
Lowest -17.11% (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>
International 25.93% 17.29% 14.41%* Morgan Stanley Capital International EAFE
(Europe, Australia and Far East) Index 26.96% 12.83% 7.01%
Lipper International Fund Average 40.80 15.37 10.54
<FN>
* Period from May 1, 1994, date shares first offered to the public,
through December 31, 1999.
</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
-----------------------------------------------------
$80 $249 $433 $966
Account Operating Expenses
Management Fees.................. 0.73%
Other Expenses................... 0.05
-----
Total Account Operating Expenses 0.78%
Day-to-day Account Management
Since March 1994 Co-Manager: 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.
Since March 2000 Co-Manager: Kurtis D. Spieler, CFA. Mr. Spieler joined
Invista Capital Management in 1995. He holds an MBA from
Drake University and a BBA from Iowa State University. 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 debt 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, Growth, International and MidCap Accounts invest
primarily in equity securities. The Balanced Account invests in a mix
of equity and debt securities. The Bond and Government Securities
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 Government Securities and 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 Government Securities and 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. For the International and International SmallCap
Accounts, the 2% limitation also applies to warrants not listed on the Toronto
Stock Exchange and Chicago Board Options Exchange.
Risks of High Yield Securities
The Balanced and Bond 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 International - 100%;
o Bond and Capital Value Accounts - 20%;
o Balanced, Growth 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.; and
o companies, regardless of where its securities are traded, that derive 50%
or more of their total revenue from either goods or services produced
outside the U.S. or sales made outside of the U.S.
Investment in foreign securities presents certain risks including: fluctuations
in currency exchange rates, revaluation of currencies, the imposition of foreign
taxes, future political and economic developments including war, expropriations,
nationalization, the possible imposition of currency exchange controls and other
foreign governmental laws or restrictions. In addition, there may be reduced
availability of public information concerning issuers compared to domestic
issuers. Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements that apply to domestic issuers. Transactions in foreign securities
may be subject to higher costs. Each Account's investment in foreign securities
may also result in higher custodial costs and the costs associated with currency
conversions.
Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. Foreign securities markets,
particularly those in emerging market countries, are known to experience long
delays between the trade and settlement dates of securities purchased and sold.
Such delays may result in a lack of liquidity and greater volatility in the
price of securities on those markets. As a result of these factors, the Board of
Directors of the Fund has adopted Daily Pricing and Valuation Procedures for the
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 (except Government Securities) 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, Government Securities, Growth,
International 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
Government Securities 0.49 0.01 0.50
Growth 0.45 0.00 0.45
International 0.73 0.05 0.78
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
this variable annuity contract).
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.
Total Returns *
As of December 31, 1998
1 Year 5 Year 10 Year
---------------------
2.40% 13.75% 11.38%
Comparison of Change in Value of $10,000 Investment in the Balanced Account, S&P
500, Lehman Brothers Government/Corporate Bond Index and Lipper Balanced Fund
Average
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 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.
Total Returns *
As of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
-4.29% 17.88% 12.94%
Comparison of Change in Value of $10,000 Investment in the Capital Value
Account, S&P 500, S&P 500 Barra Value Index and Lipper Growth and Income Fund
Average
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.
Growth Account
(Mary Sunderland)
Technology stocks drove the market in 1999. The technology sector of the S&P 500
returned 74% for the year. Coming out of 1998, technology stocks had been down
on concerns of a global economic slowdown. The slowdown did not occur and, in
fact, accelerated as world economic growth picked up. Technology is very
sensitive to global growth since 50% of the S&P 500 technology companies
earnings come from outside the U.S. The other major driver of technology stocks
was the realization that the Internet is for real and that it requires
technology spending to support its growth. The Growth Account trailed the S&P
500 by 4.60% in 1999. Returns were hampered by healthcare overweighting
throughout the year and a technology underweighting over the first nine months
of the year. Healthcare stocks were hurt by fears of further governmental
involvement, patent expirations and moderating earnings growth.
At the beginning of this year, management of the Growth Account was assumed by a
new large cap growth team based in New York City. During the transition, the
Account's exposure to technology and financials was increased and exposure to
healthcare and consumer staples was decreased.
Going forward, the technology sector continues to be seen as the highest growth
area of the economy and Account Managers expect to remain overweighted in
technology. The Internet is still in the early stages of its development.
Companies representing both the "old" and "new" economy must continue their
aggressive spending on infrastructure, irrespective of economic conditions, in
order to remain competitive. This sector is expected to continue to benefit from
increased usage of the World Wide Web for a wide range of purposes including
business-to-business e-commerce, communication, and entertainment.
Account Managers are currently looking to increase exposure to the health care
area. They feel current political concerns are overblown and issues related to
product pipelines are manageable. This sector exhibits superior growth at a
reasonable value.
Account Managers plan to remain neutral-weighted in the financial sector. This
sector offers solid potential based on very favorable demographics; an aging
worldwide population will fuel demand for retirement savings products. There is
a trend globally for increased demand for financial services. Although the
current interest rate environment augurs a short-term period of uncertainty,
Account Managers believe that interest rates are near their top and they are
bullish longer term on the direction of rates.
Consumer cyclical and retail stores focused on the baby boomer offer very good
growth potential. Management plans to be over-weighted in this sector, with
positive contributions to performance likely over the next 6-12 months.
Total Returns *
As of December 31, 1999
1 Year 5 Year 10 Year
--------------------------
16.44% 20.45% 18.94%**
** - Since Inception Date 5/1/94
Comparison of Change in Value of $10,000 Investment in the Growth Account, S&P
500 and Lipper Large-Cap Growth Fund Average
Lipper
Growth S&P 500 Large-Cap Growth
Account Index Fund Avg.
------- ----- ---------
10,000 10,000 10,000
1994 10,542 10,131 10,090
1995 13,243 13,934 13,197
1996 14,899 17,131 15,736
1997 18,916 22,844 19,717
1998 22,956 29,372 24,224
1999 26,729 35,552 33,451
Note: Past performance is not predictive of future performance.
International Account
(Scott D. Opsal and Kurt Spieler)
The International Account's return of 25.93% in 1999 was slightly below the
Morgan Stanley Capital International EAFE (Europe, Australia and Far East) Index
return of 26.96%. Throughout 1999 the world economy continued to strengthen.
Leading economic indicators in Europe, Japan and the emerging markets were all
positive. Recovery of the emerging markets and Japan, as well as an attractively
valued European currency, resulted in an export-led recovery in Europe.
During 1999 merger and acquisition (M&A) activity in Europe doubled, setting a
record, and positively impacting several companies in the Account's portfolio.
Emerging markets exposure added marginally to performance, mainly in the fourth
quarter, as changes made in the emerging holdings in the beginning of the year
performed strongly. The largest move made in the Account during 1999 was the
entry into Japanese equities. As the Japanese market underperformed other
developed markets year after year, the forward-looking return spread relative to
equities in the rest of the world narrowed. As Account Managers monitored
valuation levels, investments were made in companies that were trading at
attractive levels. The Account also benefited from increased exposure to the
"new economy", including telecommunications, technology and media.
The Account continues to invest in companies that have sustainable competitive
advantages that will allow continued growth in earnings and cash flow sufficient
to justify their current trading price. This strategy is consistently applied to
build a diversified portfolio with exposure to both "new" and "old" economy
companies - all with positive forward-looking return profiles. Changes are being
made to the portfolio in media, energy and financials. Media stocks are highly
valued along with other technology and telecom stocks, but possess lower growth
rates, causing a lightening of the Account's weighting in select holdings.
Account Managers have become slightly more positive on the energy sector due to
the disconnect between oil prices and the valuation levels of the energy
companies and have added to the energy weighting. Within the financial sector
the Managers are lightening some banks and adding to diversified financials.
Companies that have ability to gather assets, benefiting from the long-term
savings trends throughout Europe are preferred. The Account has invested in some
brokerage firms in Japan which are expected to benefit from outflows out of the
postal savings system into the equity market.
Total Returns *
As of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
25.93% 17.29% 14.41%*
* - Since Inception Date 5/1/94
Comparison of Change in Value of $10,000 Investment in the International
Account, Morgan Stanley EAFE Index and Lipper International Fund Average
Morgan Stanley Lipper
Intern'l EAFE International
Account Index Index
------- ----- -----
10,000 10,000 10,000
1994 9,663 9,990 9,758
1995 11,032 11,110 10,676
1996 13,800 11,781 11,934
1997 15,488 11,991 12,583
1998 17,034 14,389 14,221
1999 21,451 18,268 20,023
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.
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 International Fund Average: This average consists of funds which invest
in securities primarily traded in markets outside of the United States. The
one-year average currently contains 618 funds.
Lipper Large-Cap Growth 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 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 364 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.
Morgan Stanley EAFE (Europe, Australia and Far East) Index: This average
reflects an arithmetic, market value weighted average of performance of more
than 900 securities which are listed on the stock exchanges of the following
countries: Australia, Austria, Belgium, Denmark, Netherlands, New Zealand,
Norway, Singapore/Malaysia, Spain, Sweden, Switzerland, and the United Kingdom.
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.
Total Returns *
As of December 31, 1999
1 Year 5 Year 10 Years
-----------------------
13.04% 17.59% 15.35%
Comparison of Change in Value of $10,000 Investment in the MidCap Account, S&P
500, S&P 400 MidCap Index and Lipper Mid Cap Core Fund Average
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.
Income-Oriented Accounts:
Bond Account
(Scott 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.
Total Returns *
As of December 31, 1999
------------------------
1 Year 5 Year 10 year
-2.59% 7.73% 7.77%
Comparison of Change in Value of $10,000 Investment in the Bond Account, Lehman
Brothers BAA Corporate Index and Lipper Corporate Debt BBB Rated Fund Average
Lehman Lipper
Bond BAA BBB
Account Index Avg
------- ----- ---
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.
Government Securities Account
(Martin Schafer)
This Account underperformed for the period ended December 31, 1999. A slightly
longer duration and the performance of the noncallable Private Export Funding
Corporation and Student Loan Marketing Association bonds versus mortgage-backed
securities (MBS), led to a modest underperformance for the period ended December
This Account underperformed for the period ended December 31, 1999. A slightly
longer duration and the performance of the noncallable Private Export Funding
Corporation and Student Loan Marketing Association bonds versus mortgage-backed
securities (MBS), led to a modest underperformance for the period ended December
31, 1999.
Over the last year the Federal Reserve has cut interest rates to stabilize the
global financial turmoil, only to reverse course and start raising rates as
markets stabilized and global growth resumed. Account Managers view the Federal
Reserve actions as the equivalent of a doctor prescribing aspirin to treat the
economic patient. These are mild treatments, needed to keep inflation low and
growth reasonable.
On an absolute basis, the return for the Government Securities Account for the
year was poor. Fixed-income securities had no momentum, especially with the
Federal Reserve raising interest rates. This was especially true during December
as investors poured money into "Go-Go" name stocks and away from fixed-income
securities. Their attitude seems to be, "Why buy bonds when a stock will give
you one year's worth of returns in one day!"
Account Managers continue to believe that mortgage-backed securities (MBS) will
do well into the future. The quality, liquidity, lack of credit volatility and
agency participation are cited as the key drivers. The agency participation is a
"Huge" factor. Federal National Mortgage Association (FNMA) and Federal Home
Loan Mortgage Corporation (FHLMC) are stock companies driven by stockholders. In
order to grow earnings in the face of declining new issue MBS (rates have
risen), they are arbitraging more of the outstanding MBS. These agencies issue
debt and buy MBS to earn the "spread" for their stockholders. FNMA and FHLMC
should buy 60% of net MBS issuance in 2000 - keeping spreads very tight!
The Account continues to hold more discount MBS securities than the Lehman MBS
index (this leads to a bias of longer duration) as the Managers believe the
homeowner's propensity to refinance and the mortgage banker's technology driven
inducement to refinance loans puts great risk on securities priced above par.
This is especially true in a market when overall volume is declining as higher
interest rates impact both new and existing home markets.
Account Managers expect to stay close to the duration benchmarks. Currently the
Account is a little long but the Managers expect to be duration neutral soon,
and patiently wait for the opportunity to strategically lengthen.
As we look forward to 2000 keep in mind that a diamond is a lump of coal that
made good under severe pressure.
Total Returns
As of December 31, 1999
-------------------------
1 Year 5 Year 10 Year
-0.29% 7.96% 7.75%
Comparison of Change in Value of $10,000 Investment in the Government Securities
Account, Lehman Brothers Mortgage Index and Lipper U.S. Mortgage Fund Average
Gov't Lehman Lipper
Securities Mortgage U.S. Mortgage
Account Index Index
------- ----- -----
10,000 10,000 10,000
1990 10,955 11,072 10,938
1991 12,812 12,813 12,556
1992 13,688 13,706 13,323
1993 15,066 14,643 14,316
1994 14,384 14,407 13,719
1995 17,127 16,827 15,946
1996 17,700 17,727 16,563
1997 19,538 19,409 17,984
1998 21,154 20,760 19,077
1999 21,094 21,146 19,201
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.
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 Mortgage Index: This is an unmanaged index of 15- and 30-year
fixed rate securities backed by mortgage pools of the Government National
Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and
Federal National Mortgage Association (FNMA).
Lipper 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 U.S. Mortgage Fund Average: This average consists of mutual funds
investing at least 65% of their assets in mortgages/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average currently contains 62 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 Investments (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%
See accompanying notes.
</TABLE>
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%
GOVERNMENT SECURITIES ACCOUNT(a) 1999 1998 1997 1996 1995
- ----------------------------- ------------------------------ ---- ----
Net Asset Value, Beginning of Period................... $11.01 $10.72 $10.31 $10.55 $9.38
Income from Investment Operations:
Net Investment Income............................... .71 .60 .66 .59 .60
Net Realized and Unrealized Gain (Loss) on Investments (.74) .28 .41 (.24) 1.18
Total from Investment Operations (.03) .88 1.07 .35 1.78
Less Dividends from Net Investment Income.............. (.72) (.59) (.66) (.59) (.61)
Net Asset Value, End of Period......................... $10.26 $11.01 $10.72 $10.31 $10.55
Total Return........................................... (.29)% 8.27% 10.39% 3.35% 19.07%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $137,787 $141,317 $94,322 $85,100 $50,079
Ratio of Expenses to Average Net Assets............. .50% .50% .52% .52% .55%
Ratio of Net Investment Income to Average Net Assets 6.16% 6.15% 6.37% 6.46% 6.73%
Portfolio Turnover Rate............................. 19.7% 11.0% 9.0% 8.4% 9.8%
See accompanying notes.
</TABLE>
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>
GROWTH ACCOUNT(a) 1999 1998 1997 1996 1995
- -------------- ------------------------------ ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $20.46 $17.21 $13.79 $12.43 $10.10
Income from Investment Operations:
Net Investment Income............................... .14 .21 .18 .16 .17
Net Realized and Unrealized Gain on Investments..... 3.20 3.45 3.53 1.39 2.42
Total from Investment Operations 3.34 3.66 3.71 1.55 2.59
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.14) (.21) (.18) (.16) (.17)
Distributions from Capital Gains.................... (.10) (.20) (.10) (.03) (.09)
Excess Distributions from Capital Gains(b).......... -- -- (.01) -- --
Total Dividends and Distributions (.24) (.41) (.29) (.19) (.26)
Net Asset Value, End of Period......................... $23.56 $20.46 $17.21 $13.79 $12.43
Total Return........................................... 16.44% 21.36% 26.96% 12.51% 25.62%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $345,882 $259,828 $168,160 $99,612 $42,708
Ratio of Expenses to Average Net Assets............. .45% .48% .50% .52% .58%
Ratio of Net Investment Income to Average Net Assets .67% 1.25% 1.34% 1.61% 2.08%
Portfolio Turnover Rate............................. 65.7% 9.0% 15.4% 2.0% 6.9%
INTERNATIONAL ACCOUNT(a) 1999 1998 1997 1996 1995
- --------------------- ------------------------------ ---- ----
Net Asset Value, Beginning of Period................... $14.51 $13.90 $13.02 $10.72 $9.56
Income from Investment Operations:
Net Investment Income............................... .48 .26 .23 .22 .19
Net Realized and Unrealized Gain on Investments..... 3.14 1.11 1.35 2.46 1.16
Total from Investment Operations 3.62 1.37 1.58 2.68 1.35
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.47) (.25) (.23) (.22) (.18)
Distributions from Capital Gains.................... (1.46) (.51) (.47) (.16) (.01)
Excess Distributions from Capital Gains(b).......... (.25) -- -- -- --
Total Dividends and Distributions (2.18) (.76) (.70) (.38) (.19)
Net Asset Value, End of Period......................... $15.95 $14.51 $13.90 $13.02 $10.72
Total Return........................................... 25.93% 9.98% 12.24% 25.09% 14.17%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $197,235 $153,588 $125,289 $71,682 $30,566
Ratio of Expenses to Average Net Assets............. .78% .77% .87% .90% .95%
Ratio of Net Investment Income to Average Net Assets 3.11% 1.80% 1.92% 2.28% 2.26%
Portfolio Turnover Rate............................. 65.5% 33.9% 22.7% 12.5% 15.6%
See accompanying notes
</TABLE>
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%
See accompanying notes.
</TABLE>
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 Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal World Fund, Inc. International 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
Part B
Part B
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
dated May 1, 2000
This Statement of Additional Information is not a prospectus but is a
part of the prospectus for the Fund. The most recent Fund prospectus,
dated May 1, 2000, and shareholder report are available without charge.
Please call 1-800-247-4123 to request a copy.
Principal Variable Contracts Fund, Inc.
Principal Financial Group
Des Moines, Iowa 50392-0200
Telephone: 1-800-247-4123
TABLE OF CONTENTS
Investment Policies and Restrictions of the Accounts.......... 3
Growth-Oriented Accounts.................................. 4
Income-Oriented Accounts.................................. 13
Money Market Account...................................... 17
Accounts' Investments......................................... 19
Management of the Fund........................................ 30
Manager and Sub-Advisors...................................... 32
Cost of Manager's Service..................................... 34
Brokerage on Purchases and Sales of Securities................ 39
Determination of Net Asset Value of Account Shares............ 46
Performance Calculation....................................... 48
Tax Status.................................................... 50
General Information and History............................... 51
Financial Statements.......................................... 51
Appendix A.................................................... 52
INVESTMENT POLICIES AND RESTRICTIONS OF THE ACCOUNTS
The following information is about the Principal Variable Contracts Fund, Inc.
which is an incorporated, diversified, open-end management investment company,
commonly called a mutual fund. It supplements the information provided in the
Prospectus under the caption CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS.
The Fund offers multiple Accounts.
There are three categories of Accounts: Growth-Oriented Accounts, which include
Accounts seeking:
o primarily capital appreciation through investments in equity securities
(Aggressive Growth, Blue Chip, Capital Value, Growth, LargeCap Growth,
MicroCap, MidCap, MidCap Growth, MidCap Value, SmallCap, SmallCap Growth
and SmallCap Value);
o total investment return including both capital appreciation and income
through investments in equity and debt securities (Asset Allocation and
Balanced);
o long-term growth of capital primarily through investments in equity
securities of corporations located outside of the U.S. (International and
International SmallCap);
o long-term growth of income and capital through investment in equity
securities of real estate companies (Real Estate);
o to approximate the performance of the Standard & Poor's 500 Composite Stock
Price Index (Stock Index 500); and
o current income and long-term growth of income and capital through
investment in equity and fixed-income securities of public utilities
companies (Utilities).
Income-Oriented Accounts, which include Accounts seeking primarily a high level
of income through investments in debt securities (Bond, Government Securities
and High Yield).
Money Market Account, which seeks primarily a high level of income through
investments in short-term debt securities.
In seeking to achieve its investment objective, each Account has adopted as
matters of fundamental policy certain investment restrictions which cannot be
changed without approval by the holders of the lesser of:
o 67% of the Account's shares present or represented at a shareholders'
meeting at which the holders of more than 50% of such shares are present or
represented by proxy; or
o more than 50% of the outstanding shares of the Account.
Similar shareholder approval is required to change the investment objective of
each of the Accounts. The following discussion provides for each Account:
o a statement of its investment objective;
o a description of its investment restrictions that are matters of
fundamental policy; and
o a description of any investment restrictions it may have adopted that are
not matters of fundamental policy and may be changed without shareholder
approval.
For purposes of the investment restrictions, all percentage and rating
limitations apply at the time of acquisition of a security. Any subsequent
change in any applicable percentage resulting from market fluctuations or in a
rating by a rating service does not require elimination of any security from the
portfolio. Unless specifically identified as a matter of fundamental policy,
each investment policy discussed in the Prospectus or the Statement of
Additional Information is not fundamental and may be changed by the Fund's Board
of Directors.
GROWTH-ORIENTED ACCOUNTS
Investment Objectives
o Aggressive Growth Account seeks to achieve long-term capital appreciation
by investing primarily in growth oriented common stocks of medium and large
capitalization U.S. corporations and, to a limited extent, foreign
corporations.
o Asset Allocation Account seeks to generate a total investment return
consistent with the preservation of capital.
o Balanced Account seeks to generate a total investment return consisting of
current income and capital appreciation while assuming reasonable risks in
furtherance of the investment objective.
o Blue Chip Account seeks to achieve growth of capital and income. The
Account attempts to achieve its objective by investing primarily in common
stocks of well capitalized, established companies.
o Capital Value Account seeks to achieve primarily long-term capital
appreciation and secondarily growth of investment income through the
purchase primarily of common stocks, but the Account may invest in other
securities.
o Growth Account seeks growth of capital through the purchase primarily of
common stocks, but the Account may invest in other securities.
o International Account seeks to achieve long-term growth of capital by
investing in a portfolio of equity securities of companies domiciled in any
of the nations of the world.
o International SmallCap Account seeks to achieve long-term growth of
capital. The Account will attempt to achieve its objective by investing
primarily in equity securities of non-United States companies with
comparatively smaller market capitalizations.
o LargeCap Growth Account seeks to achieve long-term growth of capital. The
Account attempts to achieve its objective by investing primarily in growth
stocks of companies with market capitalizations over $10 billion measured
at the time of investment.
o MicroCap Account seeks to achieve long-term growth of capital. The Account
will attempt to achieve its objective by investing primarily in value and
growth oriented companies with small market capitalizations, generally less
than $700 million.
o MidCap Account seeks to achieve capital appreciation by investing primarily
in securities of emerging and other growth-oriented companies.
o MidCap Growth Account seeks to achieve long-term growth of capital. The
Account will attempt to achieve its objective by investing primarily in
growth stocks of companies with market capitalizations in the $1 billion to
$10 billion range.
o MidCap Value Account seeks to achieve long-term growth of capital. The
Account attempts to achieve its objective by investing primarily in equity
securities of companies with value characteristics and market
capitalizations in the $1 billion to $10 billion range.
o Real Estate Account seeks to generate a high total return The Account will
attempt to achieve its objective by investing primarily in equity
securities of companies principally engaged in the real estate industry.
o SmallCap Account seeks to achieve long-term growth of capital. The Account
will attempt to achieve its objective by investing primarily in equity
securities of both growth and value oriented companies with comparatively
smaller market capitalizations.
o SmallCap Growth Account seeks long-term growth of capital. The Account will
attempt to achieve its objective by investing primarily in equity
securities of small growth companies with market capitalization of less
than $1 billion at the time of initial purchase.
o SmallCap Value Account seeks to achieve long-term growth of capital. The
Account will attempt to achieve its objective by investing primarily in
equity securities of small companies with value characteristics and market
capitalizations of less than $1 billion.
o Stock Index 500 Account seeks to achieve long-term growth of capital. The
Account attempts to mirror the investment results of the Standard & Poor's
500 Stock Index.
o Utilities Account seeks to achieve current income and long-term growth of
income and capital. The Account will attempt to achieve its objective by
investing primarily in equity and fixed-income securities of companies in
the public utilities industry.
Investment Restrictions
Aggressive Growth Account, Asset Allocation Account, Balanced Account, Growth
Account, International Account and
MidCap Account.
Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Aggressive Growth,
Asset Allocation, Balanced, Growth, International and MidCap Accounts each may
not:
(1) Issue any senior securities as defined in the Investment Company Act
of 1940. Purchasing and selling securities and futures contracts and
options thereon and borrowing money in accordance with restrictions
described below do not involve the issuance of a senior security.
(2) Purchase or retain in its portfolio securities of any issuer if those
officers or directors of the Account or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of the
issuer together own beneficially more than 5% of such securities.
(3) Invest in commodities or commodity contracts, but it may purchase and
sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities that are
secured by real estate and securities of issuers that invest or deal
in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an amount
not to exceed 5% of the value of the Account's total assets at the
time of the borrowing. The Balanced Account may borrow only from
banks.
(6) Make loans, except that the Account may (i) purchase and hold debt
obligations in accordance with its investment objective and policies,
(ii) enter into repurchase agreements, and (iii) lend its portfolio
securities without limitation against collateral (consisting of cash
or securities issued or guaranteed by the United States Government or
its agencies or instrumentalities) equal at all times to not less than
100% of the value of the securities loaned.
(7) Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities) except that
this limitation shall apply only with respect to 75% of the total
assets of each Account; or purchase more than 10% of the outstanding
voting securities of any one issuer.
(8) Act as an underwriter of securities, except to the extent the Account
may be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(9) Concentrate its investments in any particular industry or industries,
except that the Account may invest not more than 25% of the value of
its total assets in a single industry.
(10) Sell securities short (except where the Account holds or has the right
to obtain at no added cost a long position in the securities sold that
equals or exceeds the securities sold short) or purchase any
securities on margin, except it may obtain such short-term credits as
are necessary for the clearance of transactions. The deposit or
payment of margin in connection with transactions in options and
financial futures contracts is not considered the purchase of
securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Account may invest in securities of
issuers that invest in or sponsor such programs.
Each of these Accounts has also adopted the following restrictions that are not
fundamental policies and may be changed without shareholder approval. It is
contrary to each Account's present policy to:
(1) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market, including all covered spread options and the assets used as
cover for any options written in the Over-the-Counter market are
included as part of this 15% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2% may
be invested in warrants that are not listed on the New York or
American Stock Exchange. The 2% limitation for the International
Account does not apply to warrants listed on the Toronto Stock
Exchange or the Chicago Board Options Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Account's investments in
all such issuers to exceed 5% of the value of its total assets.
(4) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in
escrow and other collateral arrangements in connection with
transactions in put and call options, futures contracts and options on
futures contracts are not deemed to be pledges or other encumbrances.
(5) Invest in companies for the purpose of exercising control or
management.
(6) Invest more than 10% (25% for the Aggressive Growth Account) of its
total assets in securities of foreign issuers. This restriction does
not pertain to the International Account or the Asset Allocation
Account.
(7) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on securities,
securities indices and financial futures contracts. Options on
financial futures contracts and options on securities indices will be
used solely for hedging purposes, not for speculation.
(8) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(9) Invest in arbitrage transactions.
(10) Invest in real estate limited partnership interests.
The Balanced and MidCap Accounts each have also adopted the following
restrictions that are not fundamental policies and may be changed without
shareholder approval. It is contrary to each such Account's present policy to:
(1) Purchase securities of other investment companies except in connection
with a merger, consolidation, or plan of reorganization or by purchase
in the open market of securities of closed-end companies where no
underwriter or dealer's commission or profit, other than a customary
broker's commission, is involved, and if immediately thereafter not
more than 10% of the value of the Account's total assets would be
invested in such securities.
The Aggressive Growth, Asset Allocation, Growth and International Accounts have
also adopted the following restriction that is not a fundamental policy and may
be changed without shareholder approval. It is contrary to each such Account's
present policy to:
(1) Invest its assets in the securities of any investment company except
that the Account may invest not more than 10% of its assets in
securities of other investment companies, invest not more than 5% of
its total assets in the securities of any one investment company, or
acquire not more than 3% of the outstanding voting securities of any
one investment company except in connection with a merger,
consolidation or plan of reorganization, and the Account may purchase
securities of closed-end investment companies in the open market where
no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
Capital Value Account
Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Capital Value Account
may not:
(1) Concentrate its investments in any one industry. No more than 25% of
the value of its total assets will be invested in any one industry.
(2) Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities) or purchase
more than 10% of the outstanding voting securities of any one issuer,
except that these limitations shall apply only with respect to 75% of
the Account's total assets.
(3) Underwrite securities of other issuers, except that the Account may
acquire portfolio securities under circumstances where if sold the
Account might be deemed an underwriter for purposes of the Securities
Act of 1933.
(4) Purchase securities of any company with a record of less than three
years' continuous operation (including that of predecessors) if the
purchase would cause the value of the Account's aggregate investments
in all such companies to exceed 5% of the Account's total assets.
(5) Engage in the purchase and sale of illiquid interests in real estate.
For this purpose, readily marketable interests in real estate
investment trusts are not interests in real estate.
(6) Invest in commodities or commodity contracts, but it may purchase and
sell financial futures contracts and options on such contracts.
(7) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or the Manager owning beneficially
more than one-half of one percent (0.5%) of the securities of the
issuer together own beneficially more than 5% of such securities.
(8) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
deposit or payment of margin in connection with transactions in
options and financial futures contracts is not considered the purchase
of securities on margin.
(9) Invest in companies for the purpose of exercising control or
management.
(10) Invest more than 5% of its assets at the time of purchase in rights
and warrants (other than those that have been acquired in units or
attached to other securities).
(11 Invest more than 20% of its total assets in securities of foreign
issuers.
(12) Sell securities short (except where the Account holds or has the right
to obtain at no added cost a long position in the securities sold that
equals or exceeds the securities sold short).
In addition:
(13) TheAccount may not make loans, except that the Account may (i)
purchase and hold debt obligations in accordance with its investment
objective and policies, (ii) enter into repurchase agreements, and
(iii) lend its portfolio securities without limitation against
collateral (consisting of cash or securities issued or guaranteed by
the United States Government or its agencies or instrumentalities)
equal at all times to not less than 100% of the value of the
securities loaned.
(14) TheAccount does not propose to borrow money except for temporary or
emergency purposes from banks in an amount not to exceed the lesser of
(i) 5% of the value of the Account's assets, less liabilities other
than such borrowings, or (ii) 10% of the Account's assets taken at
cost at the time such borrowing is made. The Account may not pledge,
mortgage, or hypothecate its assets (at value) to an extent greater
than 15% of the gross assets taken at cost. The deposit of underlying
securities and other assets in escrow and other collateral
arrangements in connection with transactions in put and call options,
futures contracts and options on futures contracts are not deemed to
be pledges or other encumbrances.
(15) It is contrary to the Account's present policy to purchase warrants in
excess of 5% of its total assets of which 2% may be invested in
warrants that are not listed on the New York or American Stock
Exchange.
The Account has also adopted the following restrictions that are not fundamental
policies and may be changed without shareholder approval. It is contrary to the
Account's present policy to:
(1) Invest its assets in the securities of any investment company except
that the Account may invest not more than 10% of its assets in
securities of other investment companies, invest not more than 5% of
its total assets in the securities of any one investment company, or
acquire not more than 3% of the outstanding voting securities of any
one investment company except in connection with a merger,
consolidation, or plan of reorganization, and the Account may purchase
securities of closed-end companies in the open market where no
underwriter or dealer's commission or profit, other than a customary
broker's commission, is involved.
(2) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreement maturing in more than seven
days.
(3) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on securities,
securities indices and financial futures contracts. Options on
financial futures contracts and options on securities indices will be
used solely for hedging purposes, not for speculation.
(4) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
Investment Restrictions
International SmallCap Account, MicroCap Account, MidCap Growth Account, Real
Estate Account, SmallCap Account,
SmallCap Growth Account, SmallCap Value Account and Utilities Account.
Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The International SmallCap,
MicroCap, MidCap Growth, Real Estate, SmallCap, SmallCap Growth, SmallCap Value
and Utilities Accounts each may not:
(1) Issue any senior securities as defined in the Investment Company Act
of 1940, as amended. Purchasing and selling securities and futures
contracts and options thereon and borrowing money in accordance with
restrictions described below do not involve the issuance of a senior
security.
(2) Invest in physical commodities or commodity contracts (other than
foreign currencies), but it may purchase and sell financial futures
contracts and options on such contracts.
(3) Invest in real estate, although it may invest in securities that are
secured by real estate and securities of issuers that invest or deal
in real estate.
(4) Borrow money, except it may (a) borrow from banks (as defined in the
Investment Company Act of 1940, as amended) or other financial
institutions or through reverse repurchase agreements in amounts up to
331/3% of its total assets (including the amount borrowed); (b) to the
extent permitted by applicable law, borrow up to an additional 5% of
its total assets for temporary purposes; (c) obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of portfolio securities, and (d) purchase securities on margin to the
extent permitted by applicable law. In addition, the MicroCap Account
may engage in transactions in mortgage dollar rolls which are
accounted for as financings.
(5) Make loans, except that the Account may (i) purchase and hold debt
obligations in accordance with its investment objective and policies,
(ii) enter into repurchase agreements, and (iii) lend its portfolio
securities without limitation against collateral (consisting of cash
or securities issued or guaranteed by the United States Government or
its agencies or instrumentalities) equal at all times to not less than
100% of the value of the securities loaned.
(6) Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities) or purchase
more than 10% of the outstanding voting securities of any one issuer,
except that this limitation shall apply only with respect to 75% of
the total assets of each Account.
(7) Act as an underwriter of securities, except to the extent the Account
may be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(8) Concentrate its investments in any particular industry, except that
the Account may invest not more than 25% of the value of its total
assets in a single industry.
The Real Estate Account may not invest less than 25% of its total assets in
securities of companies in the real estate industry, and the Utilities Account
may not invest less than 25% of its total assets in securities of companies in
the public utilities industry except that each may, for temporary defensive
purposes, place all of its assets in cash, cash equivalents, bank certificates
of deposit, bankers acceptances, repurchase agreements, commercial paper,
commercial paper master notes, United States government securities, and
preferred stocks and debt securities, whether or not convertible into or
carrying rights for common stock.
(9) Sell securities short (except where the Account holds or has the right
to obtain at no added cost a long position in the securities sold that
equals or exceeds the securities sold short) or purchase any
securities on margin, except to the extent permitted by applicable law
and except that the Account may obtain such short-term credits as are
necessary for the clearance of transactions. The deposit or payment of
margin in connection with transactions in options and financial
futures contracts is not considered the purchase of securities on
margin.
Each of these Accounts has also adopted the following restrictions that are not
fundamental policies and may be changed without shareholder approval. It is
contrary to each Account's present policy to:
(1) Invest more than 15% of its total assets in illiquid securities and in
repurchase agreements maturing in more than seven days.
(2) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in
escrow and other collateral arrangements in connection with
transactions in put and call options, futures contracts and options on
futures contracts are not deemed to be pledges or other encumbrances.
(3) Invest in companies for the purpose of exercising control or
management.
(4) Invest more than 25% (20% for each of the SmallCap and Utilities
Accounts, 10% for each of the MidCap Growth and SmallCap Value
Accounts) of its total assets in securities of foreign issuers. This
restriction does not apply to the International SmallCap Account.
(5) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(6) Invest in real estate limited partnership interests or real estate
investment trusts except that this restriction shall not apply to
either the MicroCap or Real Estate Accounts.
(7) Acquire securities of other investment companies, except as permitted
by the Investment Company Act of 1940, as amended or any rule, order
or interpretation thereunder, or in connection with a merger,
consolidation, reorganization, acquisition of assets or an offer of
exchange. The Account may purchase securities of closed-end investment
companies in the open market where no underwriter or dealer's
commission or profit, other than a customary broker's commission, is
involved.
Blue Chip Account, LargeCap Growth Account, MidCap Value Account and Stock Index
500 Account
Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Blue Chip, Large Cap
Growth, MidCap Value and Stock Index 500 Accounts each may not:
(1) Issue any senior securities as defined in the Investment Company Act
of 1940, as amended. Purchasing and selling securities and futures
contracts and options thereon and borrowing money in accordance with
restrictions described below do not involve the issuance of a senior
security.
(2) Invest in physical commodities or commodity contracts (other than
foreign currencies), but it may purchase and sell financial futures
contracts and options on such contracts, swaps and securities backed
by physical commodities.
(3) Invest in real estate, although it may invest in securities that are
secured by real estate and securities of issuers that invest or deal
in real estate.
(4) Borrow money, except it may (a) borrow from banks (as defined in the
Investment Company Act of 1940, as amended) or other financial
institutions or through reverse repurchase agreements in amounts up to
331/3% of its total assets (including the amount borrowed); (b) to the
extent permitted by applicable law, borrow up to an additional 5% of
its total assets for temporary purposes; (c) obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of portfolio securities, and (d) purchase securities on margin to the
extent permitted by applicable law.
(5) Make loans, except that the Account may (i) purchase and hold debt
obligations in accordance with its investment objective and policies,
(ii) enter into repurchase agreements, and (iii) lend its portfolio
securities without limitation against collateral (consisting of cash
or securities issued or guaranteed by the United States Government or
its agencies or instrumentalities) equal at all times to not less than
100% of the value of the securities loaned. This limit does not apply
to purchases of debt securities or commercial paper.
(6) Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities) or purchase
more than 10% of the outstanding voting securities of any one issuer,
except that this limitation shall apply only with respect to 75% of
the total assets of each Account.
(7) Act as an underwriter of securities, except to the extent the Account
may be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(8) Concentrate its investments in any particular industry, except that
the Account may invest not more than 25% of the value of its total
assets in a single industry, provided that, when the Account has
adopted a temporary defensive posture, there shall be no limitation on
the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. This restriction
applies to the Stock Index 500 Account except to the extent that the
Standard & Poor's 500 Stock Index also is so concentrated.
(9) Sell securities short (except where the Account holds or has the right
to obtain at no added cost a long position in the securities sold that
equals or exceeds the securities sold short) or purchase any
securities on margin, except to the extent permitted by applicable law
and except that the Account may obtain such short-term credits as are
necessary for the clearance of transactions. The deposit or payment of
margin in connection with transactions in options and financial
futures contracts is not considered the purchase of securities on
margin.
Each of these Accounts has also adopted the following restrictions that are not
fundamental policies and may be changed without shareholder approval. It is
contrary to each Account's present policy to:
(1) Invest more than 15% of its total assets in illiquid securities and in
repurchase agreements maturing in more than seven days.
(2) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in
escrow and other collateral arrangements in connection with
transactions in put and call options, futures contracts and options on
futures contracts are not deemed to be pledges or other encumbrances.
(3) Invest in companies for the purpose of exercising control or
management.
(4) Invest more than 25% (20% for the Blue Chip Account, 10% for the Stock
Index 500 Account) of its total assets in securities of foreign
issuers.
(5) enter into (i) any futures contracts and related options for purposes
other than bona fide hedging transactions within the meaning of
Commodity Futures Trading Commission ("CFTC") regulations if the
aggregate initial margin and premiums required to establish positions
in futures contracts and related options that do not fall within the
definition of bona fide hedging transactions will exceed 5% of the
fair market value of an Account's net assets, after taking into
account unrealized profits and unrealized losses on any such contracts
it has entered into; and (ii) any futures contracts if the aggregate
amount of such Account's commitments under outstanding futures
contracts positions would exceed the market value of its total assets.
(6) Invest in real estate limited partnership interests or real estate
investment trusts except that this restriction shall not apply to the
LargeCap Growth Account.
(7) Acquire securities of other investment companies, except as permitted
by the Investment Company Act of 1940, as amended or any rule, order
or interpretation thereunder, or in connection with a merger,
consolidation, reorganization, acquisition of assets or an offer of
exchange. The Account may purchase securities of closed-end investment
companies in the open market where no underwriter or dealer's
commission or profit, other than a customary broker's commission, is
involved.
INCOME-ORIENTED ACCOUNTS
Investment Objectives
o Bond Account seeks to provide as high a level of income as is consistent
with preservation of capital and prudent investment risk.
o Government Securities Account seeks a high level of current income,
liquidity and safety of principal by purchasing obligations issued or
guaranteed by the United States Government or its agencies, with emphasis
on Government National Mortgage Association Certificates ("GNMA
Certificates"). The guarantee by the United States Government extends only
to principal and interest; Account shares are not guaranteed by the United
States Government. There are certain risks unique to GNMA Certificates.
o High Yield Account seeks high current income primarily by purchasing high
yielding, lower or non-rated fixed income securities which are believed to
not involve undue risk to income or principal. Capital growth is a
secondary objective when consistent with the objective of high current
income.
Investment Restrictions
Bond Account and High Yield Account
Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Bond Account and High
Yield Account each may not:
(1) Issue any senior securities as defined in the Investment Company Act
of 1940. Purchasing and selling securities and futures contracts and
options thereon and borrowing money in accordance with restrictions
described below do not involve the issuance of a senior security.
(2) Purchase or retain in its portfolio securities of any issuer if those
officers or directors of the Account or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of the
issuer together own beneficially more than 5% of such securities.
(3) Invest in commodities or commodity contracts, but it may purchase and
sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal
in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an amount
not to exceed 5% of the value of the Account's total assets at the
time of the borrowing. The Bond Account and High Yield Account may
borrow only from banks.
(6) Make loans, except that the Account may (i) purchase and hold debt
obligations in accordance with its investment objective and policies,
(ii) enter into repurchase agreements, and (iii) lend its portfolio
securities without limitation against collateral (consisting of cash
or securities issued or guaranteed by the United States Government or
its agencies or instrumentalities) equal at all times to not less than
100% of the value of the securities loaned.
(7) Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities) or purchase
more than 10% of the outstanding voting securities of any one issuer,
except that these limitations shall apply only with respect to 75% of
the total assets of each Account.
(8) Act as an underwriter of securities, except to the extent the Account
may be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(9) Concentrate its investments in any particular industry or industries,
except that the Bond Account and High Yield Account each may invest
not more than 25% of the value of its total assets in a single
industry.
(10) Sell securities short (except where the Account holds or has the right
to obtain at no added cost a long position in the securities sold that
equals or exceeds the securities sold short) or purchase any
securities on margin, except it may obtain such short-term credits as
are necessary for the clearance of transactions. The deposit or
payment of margin in connection with transactions in options and
financial futures contracts is not considered the purchase of
securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Account may invest in securities of
issuers which invest in or sponsor such programs.
Each of these Accounts has also adopted the following restrictions that are not
fundamental policies and may be changed without shareholder approval. It is
contrary to each Account's present policy to:
(1) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market, including all covered spread options and the assets used as
cover for any options written in the Over-the-Counter market are
included as part of this 15% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2% may
be invested in warrants that are not listed on the New York or
American Stock Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Account's investments in
all such issuers to exceed 5% of the value of its total assets.
(4) Purchase securities of other investment companies except in connection
with a merger, consolidation, or plan of reorganization or by purchase
in the open market of securities of closed-end companies where no
underwriter or dealer's commission or profit, other than a customary
broker's commission, is involved, and if immediately thereafter not
more than 10% of the value of the Account's total assets would be
invested in such securities.
(5) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in
escrow and other collateral arrangements in connection with
transactions in put and call options, futures contracts and options on
futures contracts are not deemed to be pledges or other encumbrances.
(6) Invest in companies for the purpose of exercising control or
management.
(7) Invest more than 20% of its total assets in securities of foreign
issuers.
(8) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on securities,
securities indices and financial futures contracts. Options on
financial futures contracts and options on securities indices will be
used solely for hedging purposes; not for speculation.
(9) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(10) Invest in arbitrage transactions.
(11) Invest in real estate limited partnership interests.
Government Securities Account
Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Government Securities
Account may not:
(1) Issue any senior securities as defined in the Act except insofar as
the Account may be deemed to have issued a senior security by reason
of (a) purchasing any securities on a standby, when-issued or delayed
delivery basis; or (b) borrowing money in accordance with restrictions
described below.
(2) Purchase any securities other than obligations issued or guaranteed by
the U.S. Government or its agencies or instrumentalities, except that
the Account may maintain reasonable amounts in cash or commercial
paper or purchase short-term debt securities not issued or guaranteed
by the U.S. Government or its agencies or instrumentalities for daily
cash management purposes or pending selection of particular long-term
investments.
(3) Act as an underwriter of securities, except to the extent the Account
may be deemed to be an underwriter in connection with the sale of GNMA
certificates held in its portfolio.
(4) Engage in the purchase and sale of interests in real estate, including
interests in real estate investment trusts (although it will invest in
securities secured by real estate or interests therein, such as
mortgage-backed securities) or invest in commodities or commodity
contracts, oil and gas interests, or mineral exploration or
development programs.
(5) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or the Manager owning beneficially
more than one-half of 1% (0.5%) of the securities of the issuer
together own beneficially more than 5% of such securities.
(6) Sell securities short or purchase any securities on margin, except it
may obtain such short-term credits as are necessary for the clearance
of transactions. The deposit or payment of margin in connection with
transactions in options and financial futures contracts is not
considered the purchase of securities on margin.
(7) Invest in companies for the purpose of exercising control or
management.
(8) Make loans, except that the Account may purchase or hold debt
obligations in accordance with the investment restrictions set forth
in paragraph (2) and may enter into repurchase agreements for such
securities, and may lend its portfolio securities without limitation
against collateral consisting of cash, or securities issued or
guaranteed by the United States Government or its agencies or
instrumentalities, which is equal at all times to 100% of the value of
the securities loaned.
(9) Borrow money, except for temporary or emergency purposes, in an amount
not to exceed 5% of the value of the Account's total assets at the
time of the borrowing.
(10) Enter into repurchase agreements maturing in more than seven days if,
as a result thereof, more than 10% of the value of the Account's total
assets would be invested in such repurchase agreements and other
assets without readily available market quotations.
(11) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on securities,
securities indices and financial futures contracts.
(12) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
The Government Securities Account has also adopted the following restrictions
that are not a fundamental policy and may be changed without shareholder
approval. It is contrary to the Government Securities Account's present policy
to:
(1) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in
escrow and other collateral arrangements in connection with
transactions in put and call options, futures contracts and options on
future contracts are not deemed to be pledges or other encumbrances.
(2) Invest its assets in the securities of any investment company except
that the Account may invest not more than 10% of its assets in
securities of other investment companies, invest not more than 5% of
its total assets in the securities of any one investment company, or
acquire not more than 3% of the outstanding voting securities of any
one investment company except in connection with a merger,
consolidation, or plan of reorganization, and the Account may purchase
securities of closed-end companies in the open market where no
underwriter or dealer's commission or profit, other than a customary
broker's commission, is involved.
MONEY MARKET ACCOUNT
Investment Objective
o Money Market Account seeks as high a level of income available from
short-term securities as is considered consistent with preservation of
principal and maintenance of liquidity by investing in a portfolio of money
market instruments.
Investment Restrictions
Money Market Account
Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Money Market Account
may not:
(1) Concentrate its investments in any one industry. No more than 25% of
the value of its total assets will be invested in securities of
issuers having their principal activities in any one industry, other
than securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, or obligations of domestic branches of
U.S. banks and savings institutions. (See "Bank Obligations").
(2) Purchase the securities of any issuer if the purchase will cause more
than 25% of the value of its total assets to be invested in the
securities of any one issuer (except securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities).
(3) Purchase the securities of any issuer if the purchase will cause more
than 10% of the outstanding voting securities of the issuer to be held
by the Account (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities).
(4) Invest a greater percentage of its total assets in securities not
readily marketable than is allowed by federal securities rules or
interpretations.
(5) Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an
underwriter under the federal securities laws.
(6) Purchase securities of any company with a record of less than 3 years
continuous operation (including that of predecessors) if the purchase
would cause the value of the Account's aggregate investments in all
such companies to exceed 5% of the value of the Account's total
assets.
(7) Engage in the purchase and sale of illiquid interests in real estate,
including interests in real estate investment trusts (although it may
invest in securities secured by real estate or interests therein) or
invest in commodities or commodity contracts, oil and gas interests,
or mineral exploration or development programs.
(8) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or the Manager owning beneficially
more than one-half of 1% (0.5%) of the securities of the issuer
together own beneficially more than 5% of such securities.
(9) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
Account will not issue or acquire put and call options, straddles or
spreads or any combination thereof.
(10) Invest in companies for the purpose of exercising control or
management.
(11) Make loans, except that the Account may (i) purchase and hold debt
obligations in accordance with its investment objective and policies,
(ii) enter into repurchase agreements, and (iii) lend its portfolio
securities without limitation against collateral (consisting of cash
or securities issued or guaranteed by the United States Government or
its agencies or instrumentalities) equal at all times to not less than
100% of the value of the securities loaned.
(12) Borrow money, except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an amount not to
exceed the lesser of (i) 5% of the value of the Account's assets, or
(ii) 10% of the value of the Account's net assets taken at cost at the
time such borrowing is made. The Account will not issue senior
securities except in connection with such borrowings. The Account may
not pledge, mortgage, or hypothecate its assets (at value) to an
extent greater than 10% of the net assets.
(13) Invest in uncertificated time deposits maturing in more than seven
days; uncertificated time deposits maturing from two business days
through seven calendar days may not exceed 10% of the value of the
Account's total assets.
(14) Enter into repurchase agreements maturing in more than seven days if,
as a result thereof, more than 10% of the value of the Account's total
assets would be invested in such repurchase agreements and other
assets (excluding time deposits) without readily available market
quotations.
The Money Market Account has also adopted the following restriction that is not
a fundamental policy and may be changed without shareholder approval. It is
contrary to the Money Market Account's present policy to: invest its assets in
the securities of any investment company except that the Account may invest not
more than 10% of its assets in securities of other investment companies, invest
not more than 5% of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting securities of any
one investment company except in connection with a merger, consolidation, or
plan of reorganization, and the Account may purchase securities of closed-end
companies in the open market where no underwriter or dealer's commission or
profit, other than a customary broker's commission, is involved.
ACCOUNTS' INVESTMENTS
The following information supplements the discussion of the Accounts investment
objectives and policies in the Prospectus under the caption "CERTAIN INVESTMENT
STRATEGIES AND RELATED RISKS."
Fundamental Analysis
Selections of equity securities for the Accounts, except the Aggressive Growth,
Asset Allocation, LargeCap Growth, MicroCap, MidCap Growth , MidCap Value and
SmallCap Value Accounts, are made based upon an approach described broadly as
that of fundamental analysis. Three basic steps are involved in this analysis:
o First is the continuing study of basic economic factors in an effort to
conclude what the future general economic climate is likely to be over the
next one to two years.
o Second, given some conviction as to the likely economic climate, the
Sub-Advisor attempts to identify the prospects for the major industrial,
commercial and financial segments of the economy. By looking at such
factors as demand for products, capacity to produce, operating costs,
pricing structure, marketing techniques, adequacy of raw materials and
components, domestic and foreign competition, and research productivity,
the Sub-Advisor evaluates the prospects for each industry for the near and
intermediate term.
o Finally, determinations are made regarding earnings prospects for
individual companies within each industry by considering the same types of
factors described above. These earnings prospects are then evaluated in
relation to the current price of the securities of each company.
This analysis process is often referred to as "company-by-company" fundamental
analysis.
In selecting equity securities for the SmallCap Growth Account, these same three
basic steps are followed, but in the reverse order. This process is often
referred to as "bottom-up" fundamental analysis. The Sub-Advisor primarily uses
a bottom-up approach in selecting securities for the MidCap Value Account,
although a limited top-down analysis will be used as well.
The LargeCap Growth Account uses a bottom-up approach in building its portfolio
that seeks to identify individual companies with earnings growth potential that
may not be recognized by the market at large. Although themes may emerge in the
Account, securities are generally selected without regard to any defined
industry sector or other similarly defined selection procedure.
Restricted Securities
Each of the Accounts (except Government Securities and Money Market) has adopted
investment restrictions that limit its investments in illiquid securities to 15%
of its net assets. The Board of Directors has adopted procedures to determine
the liquidity of Rule 4(2) short-term paper and of restricted securities under
Rule 144A. Securities determined to be liquid under these procedures are
excluded from this limit when applying the preceding investment restrictions.
Generally, restricted securities are not readily marketable because they are
subject to legal or contractual restrictions upon resale. They are sold only in
a public offering with an effective registration statement or in a transaction
that is exempt from the registration requirements of the Securities Act of 1933.
When registration is required, an Account may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Account may be permitted to sell a
security. If, during such a period, adverse market conditions were to develop,
the Account might obtain a less favorable price than existed when it decided to
sell. Restricted securities and other securities not readily marketable are
priced at fair value as determined in good faith by or under the direction of
the Board of Directors.
Foreign Securities
Each of the following Accounts may invest in foreign securities to the indicated
percentage of its assets (debt securities issued in the United States pursuant
to a registration statement filed with the Securities and Exchange Commission
are not treated as foreign securities for purposes of these limitations.):
o Asset Allocation, International and International SmallCap Accounts - 100%;
o Aggressive Growth, LargeCap Growth, MicroCap, Real Estate and SmallCap
Growth Accounts - 25%;
o Bond, Capital Value, High Yield, SmallCap and Utilities Accounts - 20%.
o Balanced, Growth, MidCap, MidCap Growth, MidCap Value, SmallCap Value and
Stock Index 500 Accounts - 10%.
The Money Market Account does not invest in foreign securities other than those
that are United States dollar denominated. All principal and interest payments
for the security are payable in U.S. dollars. The interest rate, the principal
amount to be repaid and the timing of payments related to the securities do not
vary or float with the value of a foreign currency, the rate of interest on
foreign currency borrowings or with any other interest rate or index expressed
in a currency other than U.S. dollars.
For purposes of these restrictions, foreign securities include:
o companies organized under the laws of countries outside of the U.S.;
o companies for which the principal securities trading market is outside of
the U.S.; and
o companies, regardless of where its securities are traded, that derive 50%
or more of their total revenue from either goods or services produced
outside the U.S. or sales made outside of the U.S.
Investment in foreign securities presents certain risks including: fluctuations
in currency exchange rates, revaluation of currencies, the imposition of foreign
taxes, future political and economic developments including war, expropriations,
nationalization, the possible imposition of currency exchange controls and other
foreign governmental laws or restrictions. In addition, there may be reduced
availability of public information concerning issuers compared to domestic
issuers. Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements that apply to domestic issuers. Transactions in foreign securities
may be subject to higher costs. Each Account's investment in foreign securities
may also result in higher custodial costs and the costs associated with currency
conversions.
Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. Foreign securities markets,
particularly those in emerging market countries, are known to experience long
delays between the trade and settlement dates of securities purchased and sold.
Such delays may result in a lack of liquidity and greater volatility in the
price of securities on those markets. As a result of these factors, the Board of
Directors of the Fund has adopted Daily Pricing and Valuation Procedures for the
Accounts that set forth the steps to be followed by the Manager and/or
Sub-Advisor to establish a reliable market or fair value if a reliable market
value is not available through normal market quotations. Oversight of this
process is provided by the Executive Committee of the Board of Directors.
Securities of Smaller Companies
The Accounts may invest in securities of companies with small- or mid-sized
market capitalizations. Market capitalization is defined as total current market
value of a company's outstanding common stock. Investments in companies with
smaller market capitalizations may involve greater risks and price volatility
(wide, rapid fluctuations) than investments in larger, more mature companies.
Smaller companies may be less mature than older companies. At this earlier stage
of development, the companies may have limited product lines, reduced market
liquidity for their shares, limited financial resources or less depth in
management than larger or more established companies. Small companies also may
be less significant factors within their industries and may be at a competitive
disadvantage relative to their larger competitors. While smaller companies may
be subject to these additional risks, they may also realize more substantial
growth than larger or more established companies.
Unseasoned Issuers
Each of the Accounts (except Government Securities Account) may invest in the
securities of unseasoned issuers. Unseasoned issuers are companies with a record
of less than three years continuous operation, including the operation of
predecessors and parents. Unseasoned issuers by their nature have only a limited
operating history that can be used for evaluating the company's growth
prospects. As a result, investment decisions for these securities may place a
greater emphasis on current or planned product lines and the reputation and
experience of the company's management and less emphasis on fundamental
valuation factors than would be the case for more mature growth companies. In
addition, many unseasoned issuers also may be small companies and involve the
risks and price volatility associated with smaller companies.
Spread Transactions, Options on Securities and Securities Indices, and Futures
Contracts and Options on Futures Contracts
Each of the Accounts may engage in the practices described under this heading.
In the following discussion, the terms "the Account," "each Account" or "the
Accounts" refer to each of the Accounts that may engage in these transactions.
Spread Transactions
Each Account may purchase covered spread options. Such covered spread options
are not presently exchange listed or traded. The purchase of a spread option
gives the Account the right to put, or sell, a security that it owns at a fixed
dollar spread or fixed yield spread in relation to another security that the
Account does not own, but which is used as a benchmark. The risk to the Account
in purchasing covered spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition, there is no assurance that
closing transactions will be available. The purchase of spread options can be
used to protect each Account against adverse changes in prevailing credit
quality spreads, i.e., the yield spread between high quality and lower quality
securities. The security covering the spread option is maintained in a
segregated account by each Account's custodian. The Accounts do not consider a
security covered by a spread option to be "pledged" as that term is used in the
Accounts' policy limiting the pledging or mortgaging of assets.
Options on Securities and Securities Indices
Each Account may write (sell) and purchase call and put options on securities in
which it invests and on securities indices based on securities in which the
Account invests. The Accounts may write call and put options to generate
additional revenue, and may write and purchase call and put options in seeking
to hedge against a decline in the value of securities owned or an increase in
the price of securities which the Account plans to purchase.
Writing Covered Call and Put Options
When an Account writes a call option, it gives the purchaser of the option the
right to buy a specific security at a specified price at any time before the
option expires. When an Account writes a put option, it gives the purchaser of
the option the right to sell to the Account a specific security at a specified
price at any time before the option expires. In both situations, the Account
receives a premium from the purchaser of the option.
The premium received by an Account reflects, among other factors, the current
market price of the underlying security, the relationship of the exercise price
to the market price, the time period until the expiration of the option and
interest rates. The premium generates additional income for the Account if the
option expires unexercised or is closed out at a profit. By writing a call, an
Account limits its opportunity to profit from any increase in the market value
of the underlying security above the exercise price of the option, but it
retains the risk of loss if the price of the security should decline. By writing
a put, an Account assumes the risk that it may have to purchase the underlying
security at a price that may be higher than its market value at time of
exercise.
The Accounts write only covered options and comply with applicable regulatory
and exchange cover requirements. The Accounts usually own the underlying
security covered by any outstanding call option. With respect to an outstanding
put option, each Account deposits and maintains with its custodian cash, U.S.
Government securities or other liquid assets with a value at least equal to the
exercise price of the option.
Once an Account has written an option, it may terminate its obligation, before
the option is exercised. The Account executes a closing transaction by
purchasing an option of the same series as the option previously written. The
Account has a gain or loss depending on whether the premium received when the
option was written exceeds the closing purchase price plus related transaction
costs.
Purchasing Call and Put Options
When an Account purchases a call option, it receives, in return for the premium
it pays, the right to buy from the writer of the option the underlying security
at a specified price at any time before the option expires. An Account purchases
call options in anticipation of an increase in the market value of securities
that it ultimately intends to buy. During the life of the call option, the
Account is able to buy the underlying security at the exercise price regardless
of any increase in the market price of the underlying security. In order for a
call option to result in a gain, the market price of the underlying security
must exceed the sum of the exercise price, the premium paid and transaction
costs.
When an Account purchases a put option, it receives, in return for the premium
it pays, the right to sell to the writer of the option the underlying security
at a specified price at any time before the option expires. An Account purchases
put options in anticipation of a decline in the market value of the underlying
security. During the life of the put option, the Account is able to sell the
underlying security at the exercise price regardless of any decline in the
market price of the underlying security. In order for a put option to result in
a gain, the market price of the underlying security must decline, during the
option period, below the exercise price enough to cover the premium and
transaction costs.
Once an Account purchases an option, it may close out its position by selling an
option of the same series as the option previously purchased. The Account has a
gain or loss depending on whether the closing sale price exceeds the initial
purchase price plus related transaction costs.
Options on Securities Indices
Each Account may purchase and sell put and call options on any securities index
based on securities in which the Account may invest. Securities index options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single security.
Options on securities indices are similar to options on securities, except that
the exercise of securities index options requires cash payments and does not
involve the actual purchase or sale of securities. The Accounts engage in
transactions in put and call options on securities indices for the same purposes
as they engage in transactions in options on securities. When an Account writes
call options on securities indices, it holds in its portfolio underlying
securities which, in the judgment of the Manager or the Sub-Advisor, correlate
closely with the securities index and which have a value at least equal to the
aggregate amount of the securities index options.
Risks Associated with Options Transactions
An options position may be closed out only on an exchange that provides a
secondary market for an option of the same series. The Accounts generally
purchase or write only those options for which there appears to be an active
secondary market. However, there is no assurance that a liquid secondary market
on an exchange exists for any particular option, or at any particular time. If
an Account is unable to effect closing sale transactions in options it has
purchased, it has to exercise its options in order to realize any profit and may
incur transaction costs upon the purchase or sale of underlying securities. If
an Account is unable to effect a closing purchase transaction for a covered
option that it has written, it is not able to sell the underlying securities, or
dispose of the assets held in a segregated account, until the option expires or
is exercised. An Account's ability to terminate option positions established in
the over-the-counter market may be more limited than for exchange-traded options
and may also involve the risk that broker-dealers participating in such
transactions might fail to meet their obligations.
Futures Contracts and Options on Futures
Each Account may purchase and sell financial futures contracts and options on
those contracts. Financial futures contracts are commodities contracts based on
financial instruments such as U.S. Treasury bonds or bills or on securities
indices such as the S&P 500 Index. Futures contracts, options on futures
contracts and the commodity exchanges on which they are traded are regulated by
the Commodity Futures Trading Commission ("CFTC"). Through the purchase and sale
of futures contracts and related options, an Account seeks to hedge against a
decline in securities owned by the Account or an increase in the price of
securities that the Account plans to purchase. An Account may also purchase and
sell futures contracts and related options to maintain cash reserves while
stimulating full investment in equity securities and to keep substantially all
of its assets exposed to the market.
Futures Contracts
When an Account sells a futures contract based on a financial instrument, the
Account is obligated to deliver that kind of instrument at a specified future
time for a specified price. When an Account purchases that kind of contract, it
is obligated to take delivery of the instrument at a specified time and to pay
the specified price. In most instances, these contracts are closed out by
entering into an offsetting transaction before the settlement date. The Account
realizes a gain or loss depending on whether the price of an offsetting purchase
plus transaction costs are less or more than the price of the initial sale or on
whether the price of an offsetting sale is more or less than the price of the
initial purchase plus transaction costs. Although the Accounts usually liquidate
futures contracts on financial instruments in this manner, they may make or take
delivery of the underlying securities when it appears economically advantageous
to do so.
A futures contract based on a securities index provides for the purchase or sale
of a group of securities at a specified future time for a specified price. These
contracts do not require actual delivery of securities but result in a cash
settlement. The amount of the settlement is based on the difference in value of
the index between the time the contract was entered into and the time it is
liquidated (at its expiration or earlier if it is closed out by entering into an
offsetting transaction).
When a futures contract is purchased or sold, a brokerage commission is paid.
Unlike the purchase or sale of a security or option, no price or premium is paid
or received. Instead, an amount of cash or other liquid assets (generally about
5% of the contract amount) is deposited by the Account with its custodian for
the benefit of the futures commission merchant through which the Account engages
in the transaction. This amount is known as "initial margin." It does not
involve the borrowing of funds by the Account to finance the transaction. It
instead represents a "good faith" deposit assuring the performance of both the
purchaser and the seller under the futures contract. It is returned to the
Account upon termination of the futures contract if all the Account's
contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin," are
required to be made on a daily basis as the price of the futures contract
fluctuates, a process known as "marking to market." The fluctuations make the
long or short positions in the futures contract more or less valuable. If the
position is closed out by taking an opposite position prior to the settlement
date of the futures contract, a final determination of variation margin is made.
Any additional cash is required to be paid to or released by the broker and the
Account realizes a loss or gain.
In using futures contracts, the Account seeks to establish more accurately than
would otherwise be possible the effective price of or rate of return on
portfolio securities or securities that the Account proposes to acquire. An
Account, for example, sells futures contracts in anticipation of a rise in
interest rates that would cause a decline in the value of its debt investments.
When this kind of hedging is successful, the futures contract increases in value
when the Account's debt securities decline in value and thereby keep the
Account's net asset value from declining as much as it otherwise would. An
Account also sells futures contracts on securities indices in anticipation of or
during a stock market decline in an endeavor to offset a decrease in the market
value of its equity investments. When an Account is not fully invested and
anticipates an increase in the cost of securities it intends to purchase, it may
purchase financial futures contracts. When increases in the prices of equities
are expected, an Account purchases futures contracts on securities indices in
order to gain rapid market exposure that may partially or entirely offset
increases in the cost of the equity securities it intends to purchase.
Options on Futures.
The Accounts may also purchase and write call and put options on futures
contracts. A call option on a futures contract gives the purchaser the right, in
return for the premium paid, to purchase a futures contract (assume a long
position) at a specified exercise price at any time before the option expires. A
put option gives the purchaser the right, in return for the premium paid, to
sell a futures contract (assume a short position), for a specified exercise
price, at any time before the option expires.
Upon the exercise of a call, the writer of the option is obligated to sell the
futures contract (to deliver a long position to the option holder) at the option
exercise price, which will presumably be lower than the current market price of
the contract in the futures market. Upon exercise of a put, the writer of the
option is obligated to purchase the futures contract (deliver a short position
to the option holder) at the option exercise price, which will presumably be
higher than the current market price of the contract in the futures market.
However, as with the trading of futures, most options are closed out prior to
their expiration by the purchase or sale of an offsetting option at a market
price that reflects an increase or a decrease from the premium originally paid.
Options on futures can be used to hedge substantially the same risks addressed
by the direct purchase or sale of the underlying futures contracts. For example,
if an Account anticipates a rise in interest rates and a decline in the market
value of the debt securities in its portfolio, it might purchase put options or
write call options on futures contracts instead of selling futures contracts.
If an Account purchases an option on a futures contract, it may obtain benefits
similar to those that would result if it held the futures position itself. But
in contrast to a futures transaction, the purchase of an option involves the
payment of a premium in addition to transaction costs. In the event of an
adverse market movement, however, the Account is not subject to a risk of loss
on the option transaction beyond the price of the premium it paid plus its
transaction costs.
When an Account writes an option on a futures contract, the premium paid by the
purchaser is deposited with the Account's custodian. The Account must maintain
with its custodian all or a portion of the initial margin requirement on the
underlying futures contract. It assumes a risk of adverse movement in the price
of the underlying futures contract comparable to that involved in holding a
futures position. Subsequent payments to and from the broker, similar to
variation margin payments, are made as the premium and the initial margin
requirement are marked to market daily. The premium may partially offset an
unfavorable change in the value of portfolio securities, if the option is not
exercised, or it may reduce the amount of any loss incurred by the Account if
the option is exercised.
Risks Associated with Futures Transactions.
There are a number of risks associated with transactions in futures contracts
and related options. An Account's successful use of futures contracts is subject
to the Manager and Sub-Advisor's ability to predict correctly the factors
affecting the market values of the Account's portfolio securities. For example,
if an Account is hedged against the possibility of an increase in interest rates
that would adversely affect debt securities held by the Account and the prices
of those debt securities instead increases, the Account loses part or all of the
benefit of the increased value of its securities it hedged because it has
offsetting losses in its futures positions. Other risks include imperfect
correlation between price movements in the financial instrument or securities
index underlying the futures contract, on the one hand, and the price movements
of either the futures contract itself or the securities held by the Account, on
the other hand. If the prices do not move in the same direction or to the same
extent, the transaction may result in trading losses.
Prior to exercise or expiration, a position in futures may be terminated only by
entering into a closing purchase or sale transaction. This requires a secondary
market on the relevant contract market. The Account enters into a futures
contract or related option only if there appears to be a liquid secondary
market. There can be no assurance, however, that such a liquid secondary market
exists for any particular futures contract or related option at any specific
time. Thus, it may not be possible to close out a futures position once it has
been established. Under such circumstances, the Account continues to be required
to make daily cash payments of variation margin in the event of adverse price
movements. In such situations, if the Account has insufficient cash, it may be
required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition, the
Account may be required to perform under the terms of the futures contracts it
holds. The inability to close out futures positions also could have an adverse
impact on the Account's ability effectively to hedge its portfolio.
Most United States futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. This daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
Limitations on the Use of Futures and Options on Futures.
Each Account intends to come within an exclusion from the definition of
"commodity pool operator" provided by CFTC regulations by complying with certain
limitations on the use of futures and related options prescribed by those
regulations.
The Accounts are required to operate within certain guidelines and restrictions
with respect to their use of futures and options thereon which have been
established by the CFTC. In particular, an Account is excluded from registration
as a "commodity pool operator" if it complies with Rule 4.5 adopted by the CFTC.
This Rule does not limit the percentage of an Account's assets that may be used
for futures margin and related options premiums for a bona fide hedging
position. However, under the Rule each Account must limit its aggregate initial
futures margin and related option premiums to no more than 5% of the Account's
net assets for strategies that are not considered bona fide hedging strategies
under the Rule.
The Accounts may enter into futures contracts and related options transactions
only for bona fide hedging purposes as permitted by the CFTC. Each Account
determines that the price fluctuations in the futures contracts and options on
futures used for hedging or risk management purposes are substantially related
to price fluctuations in securities held by the Account or which it expects to
purchase. In pursuing traditional hedging activities, each Account may sell
futures contracts or acquire puts to protect against a decline in the price of
securities that the Account owns. Each Account may purchase futures contracts or
calls on futures contracts to protect the Account against an increase in the
price of securities the Account intends to purchase before it is in a position
to do so.
When an Account purchases a futures contract, or purchases a call option on a
futures contract, it places any asset, including equity securities and
non-investment grade debt, in a segregated account, so long as the asset is
liquid and marked to the market daily. The amount so segregated plus the amount
of initial margin held for the account of its broker equals the market value of
the futures contract.
Forward Foreign Currency Exchange Contracts
The Accounts (except the Government Securities and Money Market Accounts) may,
but are not obligated to, enter into forward foreign currency exchange contracts
with securities dealers, financial institutions or other parties deemed credit
worthy by the Account's Sub-Advisor to hedge the value of portfolio securities
denominated in or exposed to foreign currencies. MidCap Value can also engage in
foreign currency exchange transactions on a spot basis. Currency transactions
include forward currency contracts, exchange listed currency futures contracts
and options thereon, and exchange listed or over-the-counter options on
currencies. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a specified future date at a price set at the time of the contract.
The Accounts enter into forward foreign currency exchange contracts only for the
purpose of "hedging," that is limiting the risks associated with changes in the
relative rates of exchange between the U.S. dollar and foreign currencies in
which securities owned by an Account are denominated or exposed. It should be
noted that the use of forward foreign currency exchange contracts does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange between the currencies that can be achieved at
some future point in time. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they also tend to limit any potential gain that might result if the value of the
currency increases.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to an Account if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, the risk exists that
the perceived linkage between various currencies may not be present or may not
be present during the particular time that an Account is engaging in proxy
hedging. Currency transactions are also subject to risks different from those of
other portfolio transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and policy, purchases
and sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to an Account if it is
unable to deliver or receive currency or monies in settlement of obligations.
They could also cause hedges the Account has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Currency exchange rates may also fluctuate based on factors extrinsic to
a country's economy. Buyers and sellers of currency futures contracts are
subject to the same risks that apply to the use of futures contracts generally.
Further, settlement of a currency futures contract for the purchase of most
currencies must occur at a bank based in the issuing nation. Trading options on
currency futures contracts is relative new, and the ability to establish and
close out positions on these options is subject to the maintenance of a liquid
market that may not always be available.
Repurchase Agreements
All of the Accounts may invest in repurchase agreements. None of the Accounts
may enter into repurchase agreements that do not mature within seven days if any
such investment, together with other illiquid securities held by the Account,
amount to more than 15% of its total assets. The MicroCap Account (together with
other registered investment companies having management agreements with Goldman
or its affiliates) may transfer uninvested cash balances into a single joint
account, the daily aggregate balance of which will be invested in one or more
repurchase agreements. The LargeCap Growth Account (together with other
registered investment companies having management agreements with Janus or its
affiliates) may transfer uninvested cash balances into a single joint account,
the daily aggregate balance of which will be invested in one or more repurchase
agreements. Repurchase agreements typically involve the acquisition by the
Account of debt securities from a selling financial institution such as a bank,
savings and loan association or broker-dealer. A repurchase agreement provides
that the Account sells back to the seller and that the seller repurchases the
underlying securities at a specified price and at a fixed time in the future.
Repurchase agreements may be viewed as loans by an Account collateralized by the
underlying securities. This arrangement results in a fixed rate of return that
is not subject to market fluctuation during the Account's holding period.
Although repurchase agreements involve certain risks not associated with direct
investments in debt securities, each of the Accounts follows procedures
established by the Board of Directors that are designed to minimize such risks.
These procedures include entering into repurchase agreements only with large,
well-capitalized and well-established financial institutions that the Account's
Manager or Sub-Advisor believes present minimum credit risks. In addition, the
value of the collateral underlying the repurchase agreement is always at least
equal to the repurchase price, including accrued interest. In the event of a
default or bankruptcy by a selling financial institution, the affected Account
bears a risk of loss. In seeking to liquidate the collateral, an Account may be
delayed in or prevented from exercising its rights and may incur certain costs.
Further, to the extent that proceeds from any sale upon default of the
obligation to repurchase are less than the repurchase price, the Account could
suffer a loss.
Lending of Portfolio Securities
All of the Accounts may lend their portfolio securities. None of the Accounts
will lend its portfolio securities if, as a result, the aggregate of such loans
made by the Account would exceed the limits established by the Investment
Company Act. Portfolio securities may be lent to unaffiliated broker-dealers and
other unaffiliated qualified financial institutions provided that such loans are
callable at any time on not more than five business days' notice and that cash
or other liquid assets equal to at least 100% of the market value of the
securities loaned, determined daily, is deposited by the borrower with the
Account and is maintained each business day. While such securities are on loan,
the borrower pays the Account any income accruing thereon. The Account may
invest any cash collateral, thereby earning additional income, or may receive an
agreed-upon fee from the borrower. Borrowed securities must be returned when the
loan terminates. Any gain or loss in the market value of the borrowed securities
that occurs during the term of the loan belongs to the Account and its
shareholders. An Account pays reasonable administrative, custodial and other
fees in connection with such loans and may pay a negotiated portion of the
interest earned on the cash or liquid assets pledged as collateral to the
borrower or placing broker. An Account does not normally retain voting rights
attendant to securities it has lent, but it will call a loan of securities in
anticipation of an important vote.
When-Issued and Delayed Delivery Securities
Each of the Accounts may from time to time purchase securities on a when-issued
basis and may purchase or sell securities on a delayed delivery basis. The price
of such a transaction is fixed at the time of the commitment, but delivery and
payment take place on a later settlement date, which may be a month or more
after the date of the commitment. No interest accrues to the purchaser during
this period. The securities are subject to market fluctuations that involve the
risk for the purchaser that yields available in the market at the time of
delivery are higher than those obtained in the transaction. Each Account only
purchases securities on a when-issued or delayed delivery basis with the
intention of acquiring the securities. However, an Account may sell the
securities before the settlement date, if such action is deemed advisable. At
the time an Account commits to purchase securities on a when-issued or delayed
delivery basis, it records the transaction and reflects the value of the
securities in determining its net asset value. Each Account also establishes a
segregated account with its custodian bank in which it maintains cash or liquid
assets equal in value to the Account's commitments for when-issued or delayed
delivery securities. The availability of liquid assets for this purpose and the
effect of asset segregation on an Account's ability to meet its current
obligations, to honor requests for redemption and to have its investment
portfolio managed properly limit the extent to which the Account may engage in
forward commitment agreements. Except as may be imposed by these factors, there
is no limit on the percent of an Account's total assets that may be committed to
transactions in such agreements.
Industry Concentrations
Each of the Accounts, except the Real Estate and Utilities Accounts, may not
concentrate its investments in any particular industry. The Stock Index 500
Account may concentrate its investments in a particular industry only to the
extent that the S&P 500 Stock Index is concentrated. For purposes of applying
the SmallCap Growth Account's industry concentration restriction, the Account
uses the industry groups used in the Data Monitor Portfolio Monitoring System of
William O'Neill & Co., Incorporated. The LargeCap Growth Account uses Bloomberg
L.P. industry classifications. The other Accounts use industry classifications
based on the "Directory of Companies Filing Annual Reports with the Securities
and Exchange Commission."
Money Market Instruments
The Money Market Account invests all of its available assets in money market
instruments maturing in 397 days or less.
The types of money market instruments that the Accounts may purchase are
described below.
(1) U.S. Government Securities -- Securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
(2) U.S. Government Agency Securities -- Obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government.
o U.S. agency obligations include, but are not limited to, the Bank for
co-operatives, Federal Home Loan Banks, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association.
o U.S. instrumentality obligations include, but are not limited to, the
Export-Import Bank and Farmers Home Administration.
Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities are supported by the full faith and credit of the U.S.
Treasury. Others, such as those issued by the Federal National Mortgage
Association, are supported by discretionary authority of the U.S.
Government to purchase certain obligations of the agency or
instrumentality. Still others, such as those issued by the Student Loan
Marketing Association, are supported only by the credit of the agency or
instrumentality.
(3) Bank Obligations -- Certificates of deposit, time deposits and bankers'
acceptances of U.S. commercial banks having total assets of at least one
billion dollars and overseas branches of U.S. commercial banks and foreign
banks, which in the Manager's opinion, are of comparable quality. However,
each such bank with its branches has total assets of at least five billion
dollars, and certificates, including time deposits of domestic savings and
loan associations having at least one billion dollars in assets that are
insured by the Federal Savings and Loan Insurance Corporation. The Account
may acquire obligations of U.S. banks that are not members of the Federal
Reserve System or of the Federal Deposit Insurance Corporation.
Any obligations of foreign banks must be denominated in U.S. dollars.
Obligations of foreign banks and obligations of overseas branches of U.S.
banks are subject to somewhat different regulations and risks than those of
U.S. domestic banks. For example, an issuing bank may be able to maintain
that the liability for an investment is solely that of the overseas branch
which could expose the Account to a greater risk of loss. In addition,
obligations of foreign banks or of overseas branches of U.S. banks may be
affected by governmental action in the country of domicile of the branch or
parent bank. Examples of adverse foreign governmental actions include the
imposition of currency controls, the imposition of withholding taxes on
interest income payable on such obligations, interest limitations, seizure
or nationalization of assets, or the declaration of a moratorium. Deposits
in foreign banks or foreign branches of U.S. banks are not covered by the
Federal Deposit Insurance Corporation. The Account only buys short-term
instruments where the risks of adverse governmental action are believed by
the Manager to be minimal. The Account considers these factors along with
other appropriate factors in making an investment decision to acquire such
obligations. It only acquires those which, in the opinion of management,
are of an investment quality comparable to other debt securities bought by
the Account. The Account invests in certificates of deposit of selected
banks having less than one billion dollars of assets providing the
certificates do not exceed the level of insurance (currently $100,000)
provided by the applicable government agency.
A certificate of deposit is issued against funds deposited in a bank or
savings and loan association for a definite period of time, at a specified
rate of return. Normally they are negotiable. However, the Account
occasionally invests in certificates of deposit that are not negotiable.
Such certificates may provide for interest penalties in the event of
withdrawal prior to their maturity. A bankers' acceptance is a short-term
credit instrument issued by corporations to finance the import, export,
transfer or storage of goods. They are termed "accepted" when a bank
guarantees their payment at maturity and reflect the obligation of both the
bank and drawer to pay the face amount of the instrument at maturity.
(4) Commercial Paper -- Short-term promissory notes issued by U.S. or foreign
corporations.
(5) Short-term Corporate Debt -- Corporate notes, bonds and debentures that at
the time of purchase have 397 days or less remaining to maturity.
(6) Repurchase Agreements -- Instruments under which securities are purchased
from a bank or securities dealer with an agreement by the seller to
repurchase the securities at the same price plus interest at a specified
rate. (See "ACCOUNTS' INVESTMENTS - Repurchase Agreements.")
The ratings of nationally recognized statistical rating organization (NRSRO),
such as Moody's Investor Services, Inc. ("Moody's") and Standard and Poor's
("S&P"), which are described in Appendix A, represent their opinions as to the
quality of the money market instruments which they undertake to rate. It should
be emphasized, however, that ratings are general and are not absolute standards
of quality. These ratings, including ratings of NRSROs other than Moody's and
S&P, are the initial criteria for selection of portfolio investments, but the
Manager further evaluates these securities.
Portfolio Turnover
Portfolio turnover normally differs for each Account, varies from year to year
(as well as within a year) and is affected by portfolio security sales necessary
to meet cash requirements for redemptions of Account shares. This need to redeem
may in some cases limit the ability of an Account to effect certain portfolio
transactions. The portfolio turnover rate for an Account is calculated by
dividing the lesser of purchases or sales of its portfolio securities during the
fiscal year by the monthly average of the value of its portfolio securities
(excluding from the computation all securities, including options, with
maturities at the time of acquisition of one year or less). A high rate of
portfolio turnover generally involves correspondingly greater brokerage
commission expenses that are paid by the Account.
No portfolio turnover rate can be calculated for the Money Market Account
because of the short maturities of the securities in which it invests. The
portfolio turnover rates for each of the other Accounts for its most recent and
immediately preceding fiscal periods were as follows (annualized when reporting
period is less than one year):
1999 1998
Aggressive Growth 89.6% 155.6%
Asset Allocation 86.7% 162.7%
Balanced 21.7% 24.2%
Blue Chip 16.2% N/A
Bond 40.1% 26.7%
Capital Value 43.4% 22.0%
Government Securities 19.7% 11.0%
Growth 65.7% 9.0%
High Yield 93.8% 87.8%
International 65.5% 33.9%
International SmallCap 241.2% 60.3%
LargeCap Growth 39.6% N/A
MicroCap 88.9% 55.3%
MidCap 79.6% 26.9%
MidCap Growth 74.1% 91.9%
MidCap Value 154.0% N/A
Real Estate 101.9% 5.6%
SmallCap 111.1% 45.2%
SmallCap Growth 98.0% 166.5%
SmallCap Value 89.7% 53.4%
Stock Index 500 3.8% N/A
Utilities 23.0% 9.5%
Fund History
Organization and Share Ownership: Effective January 1, 1998, certain Funds
sponsored by Principal Life Insurance Company were reorganized into a series of
the Principal Variable Contracts Fund, Inc., a corporation incorporated in the
State of Maryland on May 27, 1997. Each of the Accounts of the new series
adopted the assets and liabilities of the corresponding Fund. Those Funds were
incorporated in the state of Maryland on the following dates: Aggressive Growth
Fund - August 20, 1993; Asset Allocation Fund - August 20, 1993; Balanced Fund -
November 26, 1986; Bond Fund - November 26, 1986; Capital Accumulation Fund -
May 26, 1989 (effective November 1, 1989 succeeded to the business of a
predecessor Fund that had been incorporated in Delaware on February 6, 1969);
Emerging Growth Fund - February 20, 1987; Government Securities Fund - June 7,
1985; Growth Fund - August 20, 1993; Money Market Fund - June 10, 1982; and
World Fund - August 20, 1993. The Articles of Incorporation for the Principal
Variable Contracts Fund, Inc. were amended on February 13, 1998 to reflect the
addition of the following new Accounts: International SmallCap; MicroCap; MidCap
Growth; Real Estate; SmallCap; SmallCap Growth; SmallCap Value; and Utilities.
The Articles of Incorporation were also amended on February 1, 1999 to reflect
the addition of the Blue Chip, LargeCap Growth, MidCap Value and Stock Index 500
Accounts. Principal Life Insurance Company owns 100% of each Account's
outstanding shares.
MANAGEMENT OF THE FUND
Under Maryland law, a Board of Directors oversees the Fund. The Directors have
financial or other relevant experience and meet several times during the year to
review contracts, Fund activities and the quality of services provided to the
Fund. Other than serving as Directors, most of the Board members have no
affiliation with the Fund or service providers.
The current Directors and Officers are shown below. Each person (except
Aschenbrenner, Gilbert and Kimball who do not serve as directors of Principal
Special Markets Fund, Inc.) also has the same position with other mutual funds
that are also sponsored by Principal Life Insurance Company. Unless an address
is shown, the mailing address for the Directors and Officers is Principal
Financial Group, Des Moines, Iowa 50392.
* John E. Aschenbrenner, 50, Director. Executive Vice President, Principal
Life Insurance Company since 2000; Senior Vice President, 1996-2000; Vice
President - Individual Markets 1990-1996. Director, Principal Management
Corporation and Princor Financial Services Corporation.
@ James D. Davis, 66, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.
*# Ralph C. Eucher, 47, Director and President. Vice President, Principal Life
Insurance Company since 1999. Director and Executive Vice President,
Princor Financial Services Corporation and Director and President,
Principal Management Corporation.
@ Pamela A. Ferguson, 56, Director. 4112 River Oaks Drive, Des Moines, Iowa.
Professor of Mathematics, Grinnell College since 1998. Prior thereto,
President, Grinnell College.
Richard W. Gilbert, 59, Director. Gilbert Communications, 5040 Arbor Lane,
#302, Northfield, Illinois 60093. President, Gilbert Communications, Inc.
since 1993. Prior thereto, President and Publisher, Pioneer Press.
*# J. Barry Griswell, 51, Director and Chairman of the Board. Chief Executive
Officer & President, Principal Life Insurance Company since 2000;
President, 1998-2000. Executive Vice President, 1996-1998; Senior Vice
President, 1991-1996. Director and Chairman of the Board, Principal
Management Corporation and Princor Financial Services Corporation.
@ William C. Kimball, 52, Director. 4700 Westown Parkway, Suite 300, West Des
Moines, Iowa 50266-6730. Chairman and CEO, Medicap Pharmacies, Inc. since
1998. Prior thereto, President and CEO.
# Barbara A. Lukavsky, 59, Director. 13731 Bay Hill Court, Clive, Iowa.
President and CEO, Barbican Enterprises, Inc. since 1997. President and
CEO, Lu San ELITE USA, L.C. 1985-1998.
* Craig L. Bassett, 48, Treasurer. Second Vice President and Treasurer,
Principal Life Insurance Company since 1998. Director - Treasury 1996-1998.
Prior thereto, Associate Treasurer.
* Michael J. Beer , 39, Financial Officer. Senior Vice President and Chief
Operating Officer, Princor Financial Services Corporation and Principal
Management Corporation, since 1997. Prior thereto, Vice President and Chief
Operating Officer, 1995-1997. Prior thereto, Financial Officer.
* Arthur S. Filean, 61, Vice President and Secretary. Senior Vice President,
Princor Financial Services Corporation and Principal Management
Corporation, since 2000. Vice President, Princor Financial Services
Corporation, 1990-2000. Vice President, Principal Management Corporation,
1996-2000.
* Ernest H. Gillum, 44, Vice President and Assistant Secretary. Vice
President - Product Development, Princor Financial Services Corporation and
Principal Management Corporation, since 2000. Vice President - Compliance
and Product Development, Princor Financial Services Corporation and
Principal Management Corporation, 1998-2000. Prior thereto, Assistant Vice
President, Registered Products, 1995-1998. Prior thereto, Product
Development and Compliance Officer.
* Jane E. Karli, 43, Assistant Treasurer. Assistant Treasurer, Principal Life
Insurance Company since 1998; Senior Accounting and Custody Administrator
1994-1998; Prior thereto, Senior Investment Cost Accountant.
* Layne A. Rasmussen, Controller. Controller - Mutual Funds, Princor
Financial Services Corporation since 1995.
* Michael D. Roughton, 48, Counsel. Vice President and Senior Securities
Counsel, Principal Life Insurance Company since 1999. Counsel 1994-1999.
Counsel, Invista Capital Management, Inc., Princor Financial Services
Corporation, Principal Investors Corporation and Principal Management
Corporation.
* Jean B. Schustek, 48, Assistant Vice President and Assistant Secretary.
Assistant Vice President - Registered Products, Princor Financial Services
Corporation since 2000. Prior thereto, Compliance Officer - Registered
Products.
* Traci L. Weldon, 34, Assistant Counsel. Counsel, Principal Life Insurance
Company since 1999. Assistant Counsel 1998-1999. Assistant State Attorney
General, Iowa Attorney General's Office, 1994-1998. Prior thereto,
Investment Banker, Kirkpatrick Pettis.
* Considered to be "Interested Persons" as defined in the Investment
Company Act of 1940, as amended, because of current or former
affiliation with the Manager or Principal Life.
@ Member of Audit and Nominating Committee
# Member of Executive Committee (which is selected by the Board and which
may exercise all the powers of the Board, with certain exceptions, when
the Board is not in session. The Committee must report its actions to
the Board.)
COMPENSATION TABLE
fiscal year ended December 31, 1999
Compensation from Compensation from
Director the Fund Fund Complex*
James D. Davis $28,050 $55,050
Pamela A. Ferguson $24,600 $50,850
Richard W. Gilbert $28,050 $50,100
William C. Kimball** $3,450 $19,500
Barbara A. Lukavsky $26,250 $50,250
The Fund did not provide retirement benefits for any of the directors.
* Total compensation from the 20 investment companies included in the fund
complex for the fiscal year ended December 31, 1999.
** Elected to the Board on November 2, 1999.
MANAGER AND SUB-ADVISORS
The Manager of each of the Accounts is Principal Management Corporation (the
"Manager"), a wholly-owned subsidiary of Princor Financial Services Corporation
which is a wholly-owned subsidiary of Principal Financial Services, Inc. The
Manager is an affiliate of Principal Life Insurance Company, a mutual life
insurance company organized in 1879 under the laws of the state of Iowa. The
address of the Manager is The Principal Financial Group, Des Moines, Iowa 50392.
The Manager was organized on January 10, 1969 and since that time has managed
various mutual funds sponsored by Principal Life Insurance Company.
The Manager has executed agreements with various Sub-Advisors. Under those
Sub-Advisory agreements, the Sub-Advisor agrees to assume the obligations of the
Manager to provide investment advisory services for a specific Account. For
these services, each Sub-Advisor is paid a fee by the Manager.
Accounts: Balanced, Blue Chip, Capital Value, Government Securities,
Growth, International, International SmallCap, MidCap,
SmallCap, Stock Index 500 and Utilities
Sub-Advisor: Invista Capital Management, LLC ("Invista"). Invista, an
indirectly wholly-owned subsidiary of Principal Life
Insurance Company and an affiliate of the Manager, was
founded in 1985. It manages investments for institutional
investors, including Principal Life Insurance Company.
Assets under management as of December 31, 1999 were
approximately $35.3 billion. Invista's address is 1800 Hub
Tower, 699 Walnut, Des Moines, Iowa 50309.
Accounts: Aggressive Growth and Asset Allocation
Sub-Advisor: Morgan Stanley Asset Management Inc. ("Morgan Stanley").
Morgan Stanley, with principal offices at 1221 Avenue of the
Americas, New York, NY 10020, provides a broad range of
portfolio management services to customers in the U.S. and
abroad. As of December 31, 1999, Morgan Stanley, together
with its affiliated institutional asset management
companies, managed investments totaling approximately $184.9
billion as named fiduciary or fiduciary adviser. On December
1, 1998 Morgan Stanley Asset Management Inc. changed its
name to Morgan Stanley Dean Witter Investment Management
Inc. but continues to do business in certain instances using
the name Morgan Stanley Asset Management.
Account: LargeCap Growth
Sub-Advisor: Janus Capital Corporation ("Janus"), 100 Fillmore Street,
Denver CO 80206-4928, was formed in 1969. Kansas City
Southern Industries, Inc. ("KCSI") owns approximately 82% of
the outstanding voting stock of Janus, indirectly through
its subsidiary Stillwell Financial Inc., most of which it
acquired in 1984. KCSI has announced its intention to
spin-off its financial services subsidiaries, which it
expects to complete in the first half of 2000. As of January
31, 2000, Janus managed or administered over $256 billion in
assets.
Account: MicroCap
Sub-Advisor: Goldman Sachs Assets Management ("GSAM"), 32 Old Slip, 17th
Floor, New York, NY 10005. As of September 1, 1999, the
Investment Division ("IMD") was established as a new
operating division of Goldman, Sachs & Co. ("Goldman
Sachs"). This newly created entity includes GSAM. GSAM
provides a wide range of discretionary investment advisory
services, quantitatively driven and actively managed to U.S.
and international equity portfolios, U.S. and global
fixed-income portfolios, commodity and currency products and
money market accounts. As of December 31, 1999, GSAM, along
with other units of IMD, had assets under management of
$258.5 billion.
Account: MidCap Growth
Sub-Advisor: The Dreyfus Corporation ("Dreyfus"), located at 200 Park
Avenue, New York, New York 10166, was formed in 1947. The
Dreyfus Corporation is a wholly-owned subsidiary of Mellon
Bank, N.A., which is a wholly-owned subsidiary of Mellon
Bank Corporation ("Mellon"). As of December 31, 1999, The
Dreyfus Corporation managed or administered approximately
$119.6 billion in assets for approximately 1.7 million
investor accounts nationwide.
Account: MidCap Value
Sub-Advisor: Neuberger Berman Management, Inc. ("Neuberger Berman") is an
affiliate of Neuberger Berman LLC. Neuberger Berman is
located at 605 Third Avenue, 2nd Floor, New York, NY
10158-0180. Together with Neuberger Berman, the firms manage
more than $54 billion in total assets (as of December 31,
1999) and continue an asset management history that began in
1939.
Account: SmallCap Growth
Sub-Advisor: Berger LLC ("Berger"). Berger's address is 210 University
Boulevard, Suite 900, Denver, CO 80206. It serves as
investment advisor, sub-advisor, administrator or
sub-administrator to mutual funds and institutional
investors. Berger is a wholly-owned subsidiary of Berger
Associates, Inc. which is a wholly-owned subsidiary of
Kansas City Southern Industries, Inc. ("KCSI"). KCSI is a
publicly traded holding company with principal operations in
rail transportation, through its subsidiary The Kansas City
Southern Railway Company, and financial asset management
businesses. Assets under management for Berger as of
December 31, 1999 were approximately $7.1 billion.
Account: SmallCap Value
Sub-Advisor: J.P. Morgan Investment Management, Inc. ("J.P. Morgan
Investment"). J.P. Morgan Investment, with principal offices
at 522 Fifth Avenue, New York, NY 10036 is a wholly-owned
subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan")
a bank holding company. J.P. Morgan, through J.P. Morgan
Investment and other subsidiaries, offers a wide range of
services to governmental, institutional, corporate and
individual customers and acts as investment adviser to
individual and institutional clients. As of December 31,
1999, J.P. Morgan and its subsidiaries had total combined
assets under management of approximately $349 billion.
Each of the persons affiliated with the Fund who is also an affiliated person of
the Manager or a Sub-Advisor is named below, together with the capacities in
which such person is affiliated:
<TABLE>
<CAPTION>
Office Held With Office Held With
Name The Fund The Manager/Invista
<S> <C> <C> <C>
John E. Aschenbrenner Director Director (Manager)
Craig BassettTreasurer Treasurer (Manager)
Michael J. Beer Financial Officer Executive Vice President
& Chief Operating Officer (Manager)
Ralph C. Eucher Director and Director and President
President (Manager)
Arthur S. Filean Vice President and Secretary Senior Vice President (Manager)
Ernest H. Gillum Vice President and Vice President - Product
Assistant Secretary Development (Manager)
J. Barry Griswell Director and Chairman Director and Chairman of
of the Board the Board (Manager)
Layne A. Rasmussen Controller Controller - Mutual Funds (Manager)
Michael D. Roughton Counsel Counsel (Manager; Invista)
Jean B. Schustek Assistant Vice President and Assistant Vice President (Manager)
</TABLE>
Assistant Secretary
COST OF MANAGER'S SERVICES
For providing the investment advisory services, and specified other services,
the Manager, under the terms of the Management Agreement for the Fund, is
entitled to receive a fee computed and accrued daily and payable monthly, at the
following annual rates:
<TABLE>
<CAPTION>
Net Asset Value of Account
First Next Next Next
Account $250 million $250 million $250 million $250 million Thereafter
<S> <C> <C> <C> <C> <C>
Blue Chip, Capital Value and Growth 0.60% 0.55% 0.50% 0.45% 0.40%
International 0.85 0.80 0.75 0.70 0.65
LargeCap Growth 1.10 1.05 1.00 0.95 0.90
MidCap Value 1.05 1.00 0.95 0.90 0.85
Overall Fee
Stock Index 500 0.35%
</TABLE>
<TABLE>
<CAPTION>
First Next Next Next Over
Account $100 million $100 million $100 million $100 million $400 million
<S> <C> <C> <C> <C> <C>
Aggressive Growth and Asset Allocation 0.80% 0.75% 0.70% 0.65% 0.60%
Balanced, High Yield and Utilities 0.60 0.55 0.50 0.45 0.40
International SmallCap 1.20 1.15 1.10 1.05 1.00
MicroCap and SmallCap Growth 1.00 0.95 0.90 0.85 0.80
MidCap 0.65 0.60 0.55 0.50 0.45
MidCap Growth and Real Estate 0.90 0.85 0.80 0.75 0.70
Small Cap 0.85 0.80 0.75 0.70 0.65
Small Cap Value 1.10 1.05 1.00 0.95 0.90
All Other 0.50 0.45 0.40 0.35 0.30
</TABLE>
Management Fee
Net Assets as of For Year Ended
Account December 31, 1999 December 31, 1999
Aggressive Growth $379,062,318 0.75%
Asset Allocation 89,710,561 0.80
Balanced 209,747,312 0.57
Blue Chip 6,453,467 0.60
Bond 125,066,660 0.49
Capital Value 367,926,766 0.43
Government Securities 137,787,470 0.49
Growth 345,881,593 0.45
High Yield 13,677,725 0.60
International 197,235,476 0.73
International SmallCap 40,039,774 1.20
LargeCap Growth 7,044,631 1.10
MicroCap 6,417,668 1.00
MidCap 262,349,825 0.61
MidCap Growth 14,264,295 0.90
MidCap Value 5,755,642 1.05
Money Market 120,923,710 0.50
Real Estate 10,560,284 0.90
SmallCap 26,109,643 0.85
SmallCap Growth 39,675,181 1.00
SmallCap Value 11,080,457 1.10
Stock Index 500 46,088,322 0.35
Utilities 30,684,146 0.60
Under a Sub-Advisory Agreement between Invista and the Manager, Invista performs
all the investment advisory responsibilities of the Manager under the Management
Agreement for the Balanced, Blue Chip, Capital Value, Government Securities,
Growth, International, International SmallCap, MidCap, SmallCap, Stock Index 500
and Utilities Accounts. The Manager compensates Invista for its sub-advisory
services as provided in the Sub-Advisory Agreement. The Manager may periodically
reallocate management fees between itself and Invista.
Under a Sub-Advisory Agreement between Morgan Stanley and the Manager, Morgan
Stanley performs all the investment advisory responsibilities of the Manager
under the Management Agreement for the Aggressive Growth and Asset Allocation
Accounts. The Manager pays Morgan Stanley a fee that is accrued daily and
payable monthly. The fee is based on the net asset value of each Account as
follows: first $40 million of net assets - the fee is 0.45%; next $160 million -
0.30%; next $100 million - 0.25%; and net assets over $300 million - 0.20%.
Under a Sub-Advisory Agreement between Berger and the Manager, Berger performs
all the investment advisory responsibilities of the Manager under the Management
Agreement for the SmallCap Growth Account. The Manager pays Berger a fee that is
accrued daily and payable monthly. The fee is based on the net asset value of
the Account as follows: first $100 million of net assets - the fee is 0.50%;
next $200 million - 0.45%; and net assets over $300 million - 0.40%.
Under a Sub-Advisory Agreement between Dreyfus and the Manager, Dreyfus performs
all the investment advisory responsibilities of the Manager under the Management
Agreement for the MidCap Growth Account. The Manager pays Dreyfus a fee that is
accrued daily and payable monthly. The fee is based on the net asset value of
the Account as follows: first $50 million of net assets - the fee is 0.40%; and
net assets over $50 million - 0.35%.
Under a Sub-Advisory Agreement between Goldman and the Manager, Goldman performs
all the investment advisory responsibilities of the Manager under the Management
Agreement for the MicroCap Account. The Manager pays Goldman a fee that is
accrued daily and payable monthly. The fee is based on the net asset value of
the Account as follows: first $50 million of net assets - the fee is 0.50%; next
$150 million - 0.45%; and net assets over $200 million - 0.40%.
Under a Sub-Advisory Agreement between Janus and the Manager, Janus performs all
the investment advisory responsibilities of the Manager under the Management
Agreement for the LargeCap Growth Account. The Manager pays Janus a fee that is
accrued daily and payable monthly. The fee is based on the net asset value of
the Account as follows: first $250 million of net assets - the fee is 1.10%;
next $250 million - 1.05%; next $250 million - 1.00%; next $250 million - 0.95%;
and thereafter - 0.90%.
Under a Sub-Advisory Agreement between J.P. Morgan Investment and the Manager,
J.P. Morgan Investment performs all the investment advisory responsibilities of
the Manager under the Management Agreement for the SmallCap Value Account. The
Manager pays J.P. Morgan Investment a fee that is accrued daily and payable
monthly. The fee is based on the net asset value of the Account as follows:
first $50 million of net assets - the fee is 0.60%; next $250 million - 0.55%;
and net assets over $300 million - 0.50%.
Under a Sub-Advisory Agreement between Neuberger Berman and the Manager,
Neuberger Berman performs all the investment advisory responsibilities of the
Manager under the Management Agreement for the MidCap Value Account. The Manager
pays Neuberger Berman a fee that is accrued daily and payable monthly. The fee
is based on the net asset value of the Account as follows: first $250 million of
net assets - the fee is 1.05%; next $250 million - 1.00%; next $250 million -
0.95%; next $250 million - 0.90%; and thereafter - 0.85%.
Except for certain Fund expenses set out below, the Manager is responsible for
expenses, administrative duties and services including the following: expenses
incurred in connection with the registration of the Fund and Fund shares with
the Securities and Exchange Commission and state regulatory agencies; office
space, facilities and costs of keeping the books of the Fund; compensation of
personnel and officers and any directors who are also affiliated with the
Manager; fees for auditors and legal counsel; preparing and printing Fund
prospectuses; administration of shareholder accounts, including issuance,
maintenance of open account system, dividend disbursement, reports to
shareholders, and redemption. However, some or all of these expenses may be
assumed by Principal Life Insurance Company and some or all of the
administrative duties and services may be delegated by the Manager to Principal
Life Insurance Company or affiliate thereof.
Each Account pays for certain corporate expenses incurred in its operation.
Among such expenses, the Account pays brokerage commissions on portfolio
transactions, transfer taxes and other charges and fees attributable to
investment transactions, any other local, state or federal taxes, fees and
expenses of all directors of the Fund who are not persons affiliated with the
Manager, interest, fees for Custodian of the Account, and the cost of meetings
of shareholders.
Fees paid for investment management services during the periods indicated were
as follows:
Management Fees For Years Ended December 31,
1999 1998 1997
Aggressive Growth $2,148,624 $1,436,590 $907,800
Asset Allocation 688,699 650,963 566,727
Balanced 1,218,845 958,526 665,902
Blue Chip 24,000
Bond 619,181 488,898 358,818
Capital Value 1,708,021 1,480,275 1,124,855
Government Securities 692,022 576,926 426,977
Growth 1,366,818 989,512 650,659
High Yield 84,208 87,806 87,845
International 1,225,255 1,045,627 768,332
International SmallCap 250,499 94,388
LargeCap Growth 43,238*
MicroCap 59,482* 36,591
MidCap 1,522,214 1,504,567 1,145,372
MidCap Growth 95,048* 36,858
MidCap Value 37,469*
Money Market 440,147 306,233 224,424
Real Estate 99,831 64,493
SmallCap 149,481 60,975
SmallCap Growth 153,958* 42,319
SmallCap Value 94,464* 42,234
Stock Index 500 61,479*
Utilities 150,219 56,185
* before waiver
The Management Fees shown above include the fee paid to the Account's
Sub-Advisor, if any. Fees paid to each Sub-Advisor for the most recent and
immediately preceding fiscal periods were as follows:
Sub-Advisor Fees For Years Ended December 31,
1999 1998 1997
Aggressive Growth $865,212 $534,127 $403,710
Asset Allocation 289,465 375,391 272,596
Balanced 317,009 154,678 65,013
Blue Chip 2,581
Bond 156,996
Capital Value 300,404 189,590 138,908
Government Securities 85,485 30,334 23,421
Growth 228,539 111,780 84,191
High Yield 48,910
International 163,906 68,263 91,476
International SmallCap 98,129 21,431
LargeCap Growth 21,715
MicroCap 29,765 18,365
MidCap 186,260 134,225 112,374
MidCap Growth 42,338 16,479
MidCap Value 17,849
Money Market 43,383
Real Estate 55,330
SmallCap 64,460 16,533
SmallCap Growth 77,425 21,273
SmallCap Value 51,599 23,146
Stock Index 500 8,861
Utilities 26,410 7,405
For the period ended December 31, 1999, the Manager waived a portion of its fee
as follows:
LargeCap Growth $ 2,452 SmallCap Growth $ 3,049
MicroCap 13,239 SmallCap Value 23,900
MidCap Growth 14,359 Stock Index 500 15,995
MidCap Value 2,400
The Manager intends to continue the waivers and, if necessary, pay expenses
normally payable by the Accounts through December 31, 2000 in an amount that
will maintain total operating expenses as follows:
LargeCap Growth 1.20% SmallCap Growth 1.06%
MicroCap 1.06% SmallCap Value 1.16%
MidCap Growth 0.96% Stock Index 500 0.40%
MidCap Value 1.20%
The Management Agreement and Investment Service Agreement under which Principal
Capital Management, a subsidiary of Principal Life Insurance Company, has agreed
to furnish certain personnel, services and facilities required by the Manager to
enable it to fulfill its responsibilities for the Accounts were last approved by
the Fund's Board of Directors on September 13, 1999. The Management Agreement
was last approved by shareholders on November 2, 1999. The Sub-Advisory
Agreements between the Manager and Berger, the Manager and Dreyfus, the Manager
and Goldman, the Manager and Invista, the Manager and Janus, the Manager and
J.P. Morgan Investment, the Manager and Morgan Stanley, and the Manager and
Neuberger Berman were also approved by the Fund's Board of Directors on
September 13, 1999.
Each of these agreements provides for continuation in effect from year to year
only so long as such continuation is specifically approved at least annually
either by the Board of Directors of the Fund or by vote of a majority of the
outstanding voting securities of an Account of the Fund. In either event
continuation shall be approved by vote of a majority of the Directors who are
not "interested persons" (as defined in the Investment Company Act of 1940) of
the Manager, Principal Life Insurance Company or its subsidiaries, the Fund and
1) in the case of the Sub-Advisory Agreement for each of the Balanced,
Blue Chip, Capital Value, Government Securities, Growth,
International, International SmallCap, MidCap, SmallCap, Stock Index
500, and Utilities Accounts, Invista;
2) in the case of the Sub-Advisory Agreement for each of Aggressive
Growth and Asset Allocation, Morgan Stanley;
3) for the Sub-Advisory Agreement for LargeCap Growth, Janus;
4) for the Sub-Advisory Agreement for MicroCap, Goldman;
5) for the Sub-Advisory Agreement for MidCap Growth, Dreyfus;
6) for the Sub-Advisory Agreement for MidCap Value, Neuberger Berman;
7) for the Sub-Advisory Agreement for SmallCap Growth, Berger; and
8) for the Sub-Advisory Agreement for SmallCap Value, J.P. Morgan
Investment.
The Agreements may be terminated at any time on 60 days written notice to the
applicable Sub-Advisor either by vote of the Board of Directors of the Fund or
by a vote of a majority of the outstanding securities of the applicable Account
and by the Manager, Berger, Dreyfus, Goldman, Invista, J.P. Morgan Investment,
Janus, Morgan Stanley, Neuberger Berman or Principal Life Insurance Company, as
the case may be, on 60 days written notice to the Fund and/or applicable
Sub-Advisor. The Agreements will automatically terminate in the event of their
assignment.
BROKERAGE ON PURCHASES AND SALES OF SECURITIES
In distributing brokerage business arising out of the placement of orders for
the purchase and sale of securities for any Account, the objective of the
Accounts' Manager or Sub-Advisor is to obtain the best overall terms. In
pursuing this objective, the Manager, or Sub-Advisor, considers all matters it
deems relevant, including the breadth of the market in the security, the price
of the security, the financial condition and executing capability of the broker
or dealer and the reasonableness of the commission, if any (for the specific
transaction and on a continuing basis). This may mean in some instances that the
Manager, or Sub-Advisor, will pay a broker commissions that are in excess of the
amount of commission another broker might have charged for executing the same
transaction when the Manager, or Sub-Advisor, believes that such commissions are
reasonable in light of (a) the size and difficulty of transactions (b) the
quality of the execution provided and (c) the level of commissions paid relative
to commissions paid by other institutional investors. (Such factors are viewed
both in terms of that particular transaction and in terms of all transactions
that broker executes for accounts over which the Manager, or Sub-Advisor,
exercises investment discretion. The Manager, or Sub-Advisor, may purchase
securities in the over-the-counter market, utilizing the services of principal
market matters, unless better terms can be obtained by purchases through brokers
or dealers, and may purchase securities listed on the New York Stock Exchange
from non-Exchange members in transactions off the Exchange.) The Manager, or
Sub-Advisor, may give consideration in the allocation of business to services
performed by a broker (e.g. the furnishing of statistical data and research
generally consisting of information of the following types: analyses and reports
concerning issuers, industries, economic factors and trends, portfolio strategy
and performance of client accounts). If any such allocation is made, the primary
criteria used will be to obtain the best overall terms for such transactions.
The Manager, or Sub-Advisor, may also pay additional commission amounts for
research services but generally does not do so. Such statistical data and
research information received from brokers or dealers as described above may be
useful in varying degrees and the Manager, or Sub-Advisor, may use it in
servicing some or all of the accounts it manages. Some statistical data and
research information may not be useful to the Manager, or Sub-Advisor, in
managing the client account that generated the brokerage which resulted in the
Manager's, or Sub-Advisor's, receipt of the statistical data and research
information. However, in the Manager's, or Sub-Advisor's, opinion, the value
thereof is not determinable and it is not expected that the Manager's, or
Sub-Advisor's, expenses will be significantly reduced since the receipt of such
statistical data and research information is only supplementary to the
Manager's, or Sub-Advisor's, own research efforts. The Manager, or Sub-Advisor,
of certain accounts allocated portfolio transactions to certain brokers during
the fiscal year ended December 31, 1999 due to research services provided by
such brokers. These portfolio transactions resulted in commissions paid as
follows:
Amount Paid for
Account Research Services
Aggressive Growth $36,363
Asset Allocation 1,923
Balanced 22,617
Capital Value 7,570
Growth 89,872
International SmallCap 538
International 43,263
LargeCap Growth 462
MidCap Growth 2,555
MicroCap 1,756
MidCap 72,499
SmallCap Growth 3,500
Utilities 1,140
Subject to the rules promulgated by the SEC, as well as other regulatory
requirements, a Sub-Advisor also may allocate orders on behalf of an Account to
broker-dealers affiliated with the Sub-Advisor. The Sub-Advisor shall determine
the amounts and proportions of orders allocated to the Sub-Advisor or affiliate.
The Board of Directors of the Fund will receive quarterly reports on these
transactions.
Purchases and sales of debt securities and money market instruments usually will
be principal transactions; portfolio securities will normally be purchased
directly from the issuer or from an underwriter or marketmaker for the
securities. Such transactions are usually conducted on a net basis with the
Account paying no brokerage commissions. Purchases from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
the purchases from dealers serving as marketmakers will include the spread
between the bid and asked prices.
The following table shows the brokerage commissions paid during the periods
indicated. In each year, 100% of the commissions paid by each Account went to
broker-dealers that provided research, statistical or other factual information.
Total Brokerage Commissions Paid
Fiscal Year Ended December 31,
Account 1999 1998 1997
Aggressive Growth $383,741 $606,022 $418,468
Asset Allocation 82,189 214,204 164,992
Balanced 72,544 80,504 58,053
Blue Chip 7,147
Capital Value 386,580 237,630 135,417
Growth 351,610 101,607 33,836
International 582,113 303,293 230,351
International SmallCap 286,006 52,240
LargeCap Growth 5,446
MicroCap 28,837 21,437
MidCap 348,022 137,283 54,019
MidCap Growth 18,685 12,242
MidCap Value 19,510
Real Estate 51,993 24,283
SmallCap 48,350 33,400
SmallCap Growth 15,710 8,899
SmallCap Value 13,044 8,292
Stock Index 500 20,618
Utilities 27,922 23,668
Brokerage commissions paid to affiliates during the periods indicated were as
follows:
<TABLE>
<CAPTION>
Commissions Paid to Goldman Sachs
Total Dollar As Percent of As Percent of Dollar Amount
Account Year Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C> <C>
Aggressive Growth 1999 $21,137 5.51% 5.17%
1998 30,744 5.07 4.97
Asset Allocation 1999 2,759 3.36 3.41
1998 11,868 5.54 4.62
Balanced 1999 2,110 2.91 1.44
1998 3,630 4.51 1.72
Blue Chip 1999 10 0.14 0.30
Capital Value 1999 42,634 11.03 8.40
Growth 1999 8,500 2.42 2.80
1998 4,620 4.55 5.03
International 1999 30,962 5.32 4.69
1998 25,436 8.39 14.38
International SmallCap 1999 20,328 7.11 7.41
1998 1,424 2.73 3.32
LargeCap Growth 1999 299 5.49 3.60
MicroCap 1999 1,813 6.29 6.05
1998 2,737 12.77 17.07
MidCap 1999 8,258 2.37 1.74
1998 640 0.47 0.59
MidCap Growth 1999 401 2.15 1.36
1998 3,853 31.47 36.02
MidCap Value 1999 145 0.74 1.16
Real Estate 1999 895 1.72 1.92
SmallCap 1999 990 2.05 3.06
1998 300 0.90 1.44
SmallCap Growth 1999 120 0.76 1.78
1998 325 3.65 5.03
SmallCap Value 1999 771 5.91 3.53
Utilities 1999 1,345 4.82 3.38
</TABLE>
<TABLE>
<CAPTION>
Commissions Paid to J. P. Morgan Securities
Total Dollar As Percent of As Percent of Dollar Amount
Account Year Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C> <C>
Aggressive Growth 1999 $15,755 4.11% 3.78%
1998 34,133 5.63 6.32
Asset Allocation 1999 1,551 1.89 1.65
1998 10,678 4.98 5.47
Balanced 1999 11,821 16.29 18.28
1998 1,330 1.65 2.41
Blue Chip 1999 4,845 67.79 70.20
Capital Value 1999 11,210 2.90 3.77
1998 4,375 1.84 1.95
Growth 1999 15,652 4.45 4.88
1998 3,496 3.44 2.41
International 1999 12,629 2.17 2.17
1998 1,261 0.42 0.73
International SmallCap 1999 478 0.17 0.19
LargeCap Growth 1999 127 2.33 1.15
MicroCap 1999 785 2.72 1.69
1998 827 3.86 2.29
MidCap 1999 11,203 3.22 3.17
1998 1,040 0.76 0.62
MidCap Growth 1999 264 1.41 0.85
1998 78 0.64 0.31
MidCap Value 1999 22 0.11 0.12
Real Estate 1999 6,400 12.31 11.93
1998 2,355 9.70 8.86
SmallCap 1999 2,055 4.25 5.29
1998 120 0.36 0.91
SmallCap Growth 1999 420 2.67 3.39
Utilities 1999 1,290 4.62 5.23
</TABLE>
<TABLE>
<CAPTION>
Commissions Paid to Morgan Stanley and Co.
Total Dollar As Percent of As Percent of Dollar Amount
Account Year Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C> <C>
Aggressive Growth 1999 $41,604 10.84% 12.29%
Asset Allocation 1999 11,734 14.28 18.67
1998 751 0.35 0.27
1997 2,974 1.80 1.29
Balanced 1999 3,890 5.36 5.21
1998 3,155 3.92 2.11
1996 1,300 2.80 1.82
Blue Chip 1999 155 2.17 2.40
Capital Value 1999 8,075 2.09 2.81
1998 4,620 1.94 1.77
1997 7,155 5.28 6.12
1996 3,650 1.99 1.48
Growth 1999 16,129 4.59 3.43
1998 6,598 6.49 5.30
1997 1,250 3.69 3.83
International 1999 51,822 8.90 9.14
1998 25,872 8.53 8.46
1997 10,411 4.37 4.20
1996 3,176 2.02 1.78
International SmallCap 1999 17,293 6.05 7.44
1998 5,697 10.91 15.49
Large Cap Growth 1999 276 5.07 2.43
MicroCap 1999 800 2.77 3.10
1998 30 0.14 0.14
MidCap 1999 17,020 4.89 4.21
1998 2,248 1.64 2.19
1997 2,250 4.17 2.54
MidCap Growth 1999 2,067 11.06 12.50
1998 210 1.72 1.15
MidCap Value 1999 185 0.95 1.25
Real Estate 1999 1,945 3.74 3.68
1998 4,600 18.94 15.04
SmallCap 1999 385 0.80 1.32
1998 220 0.66 0.86
SmallCap Growth 1999 162 1.03 1.33
SmallCap Value 1999 535 4.10 3.47
1998 158 1.90 0.75
Stock Index 500 1999 23 0.11 1.41
Utilities 1999 500 1.79 1.61
</TABLE>
<TABLE>
<CAPTION>
Commissions Paid to Neuberger Berman
Total Dollar As Percent of As Percent of Dollar Amount
Account Year Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C> <C>
Aggressive Growth 1999 $1,040 0.27% 0.28%
Asset Allocation 1999 116 0.14 0.15
MicroCap 1999 83 0.29 0.50
MidCap Value 1999 12,220 62.63 64.65
</TABLE>
Goldman Sachs Asset Management, a separate operating division of Goldman Sachs &
Co., acts as sub-advisor for an account of Principal Variable Contracts Fund,
Inc. J.P. Morgan Investment Management Inc., an affiliate of J.P. Morgan
Securities, acts as a sub-advisor of an account of Principal Variable Contracts
Fund, Inc. In addition, Neuberger Berman Management, Inc., an affiliate of
Neuberger Berman LLC, acts as a sub-advisor of an account of Principal Variable
Contracts Fund, Inc.
Morgan Stanley and Co. is affiliated with Morgan Stanley Asset Management, which
acts as sub-advisor to two accounts of the Principal Variable Contracts Fund and
one fund included in the Fund Complex. On December 1, 1998 Morgan Stanley Asset
Management Inc. changed its name to Morgan Stanley Dean Witter Investment
Management, Inc. but continues to do business in certain instances using the
name Morgan Stanley Asset Management.
The Manager acts as investment advisor for each of the funds sponsored by
Principal Life Insurance Company and places orders to trade portfolio securities
for the funds and the Bond, High Yield, Money Market and Real Estate Accounts.
Orders to trade portfolio securities for the other Accounts are placed by the
sub-advisor for the specific Account. If, in carrying out the investment
objectives of the Accounts, occasions arise when purchases or sales of the same
equity securities are to be made for two or more of the Accounts or Funds at the
same time (or, in the case of Accounts managed by Invista, for two or more Funds
and any other accounts managed by Invista), the Manager or Invista may submit
the orders to purchase or, whenever possible, to sell, to a broker/dealer for
execution on an aggregate or "bunched" basis. The Manager (or, in the case of
Accounts managed by Invista, Invista) may create several aggregate or "bunched"
orders relating to a single security at different times during the same day. On
such occasion, the Manager (or, in the case of Accounts managed by Invista,
Invista) will employ a computer program to randomly order the Accounts whose
individual orders for purchase or sale make up each aggregate or "bunched"
order. Securities purchased or proceeds of sales received on each trading day
with respect to each such aggregate or "bunched" orders shall be allocated to
the various Accounts (or, in the case of Invista, the various Accounts or Funds
and other client accounts) whose individual orders for purchase or sale make up
the aggregate or "bunched" order by filling each Account's or Fund's (or, in the
case of Invista, each Account's or Fund's or other client account's) order, in
the sequence arrived at by the random ordering. Securities purchased for funds
(or, in the case of Invista, Accounts, Funds and other clients accounts)
participating in an aggregate or "bunched" order are placed into those Accounts
and, where applicable, other client accounts at a price equal to the average of
the prices achieved in the course of filling that aggregate or "bunched" order.
If purchases or sales of the same debt securities are to be made for two or more
of the Accounts or Funds at the same time, the securities are purchased or sold
proportionately in accordance with the amount of such security sought to be
purchased or sold at that time for each Account or Fund. If the purchase or sale
of securities consistent with the investment objectives of the Accounts or one
or more of the other clients for which Berger, Dreyfus, Goldman, J.P. Morgan
Investment, Janus, or Neuberger Berman acts as investment sub-advisor or advisor
is to be made at the same time, the securities are purchased or sold
proportionately in accordance with the amount of such security sought to be
purchased or sold at that time for each Account or client.
The following describes the allocation process utilized by the Sub-Advisor for
the Aggressive Growth and Asset Allocation Accounts:
Transactions for each portfolio account advised by Morgan Stanley generally are
completed independently. Morgan Stanley, however, may purchase or sell the same
securities or instruments for a number of portfolio accounts, including
portfolios of its affiliates, simultaneously. These accounts will include pooled
vehicles, including partnerships and investment companies for which Morgan
Stanley and related persons of Morgan Stanley act as investment manager and
administrator, and in which Morgan Stanley, its officers, employees and its
related persons have a financial interest, and accounts of pension plans
covering employees of Morgan Stanley and its affiliates ("Proprietary
Accounts"). When possible, orders for the same security are combined or
"batched" to facilitate test execution and to reduce brokerage commissions or
other costs. Morgan Stanley effects batched transactions in a manner designed to
ensure that no participating portfolio, including any Proprietary Account, is
favored over any other portfolio. Specifically, each portfolio (including the
Aggressive Growth and Asset Allocation Accounts) that participates in a batched
transaction will participate at the average share price for all of Morgan
Stanley `s transactions in that security on that business day, with respect to
that batched order. Securities purchased or sold in a batched transaction are
allocated pro-rata, when possible, to the participating portfolio accounts in
proportion to the size of the order placed for each account. Morgan Stanley may,
however, increase or decrease the amount of securities allocated to each account
if necessary to avoid holding odd-lot or small numbers of shares for particular
portfolios. Additionally, if Morgan Stanley is unable to fully execute a batched
transaction and Morgan Stanley determines that it would be impractical to
allocate a small number of securities among the accounts participating in the
transaction on a pro-rata basis, Morgan Stanley may allocate such securities in
a manner determined in good faith to be a fair allocation.
DETERMINATION OF NET ASSET VALUE OF ACCOUNT SHARES
Growth-Oriented and Income-Oriented Accounts
The net asset values of the shares of each of the Growth-Oriented and
Income-Oriented Accounts are determined daily, Monday through Friday, as of the
close of trading on the New York Stock Exchange, except on days on which changes
in the value of an Account's portfolio securities do not materially affect the
current net asset value of that Account's redeemable securities, on days during
which an Account receives no order for the purchase or sale of its redeemable
securities and no tender of such a security for redemption, and on customary
national business holidays. The Accounts treat as customary national business
holidays those days on which the New York Stock Exchange is closed for New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net
asset value per share for each Account is determined by dividing the value of
securities in the Account's investment portfolio plus all other assets, less all
liabilities, by the number of Account shares outstanding. Securities for which
market quotations are readily available, including options and futures traded on
an exchange, are valued at market value, which is currently determined using the
last reported sale price or, if no sales are reported, as is regularly the case
for some securities traded over-the-counter, the last reported bid price. When
reliable market quotations are not considered to be readily available, which may
be the case, for example, with respect to certain debt securities, preferred
stocks, foreign securities and over-the-counter options, the investments are
valued by using market quotations considered reliable, prices provided by market
makers, that may include dealers with which the Account has executed
transactions, or estimates of market values obtained from yield data and other
factors relating to instruments or securities with similar characteristics in
accordance with procedures established in good faith by the Board of Directors.
Securities with remaining maturities of 60 days or less are valued at amortized
cost. Other assets are valued at fair value as determined in good faith by the
Board of Directors.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of the New York Stock Exchange. The values of
such securities used in computing net asset value per share are usually
determined as of such times. Occasionally, events which affect the values of
such securities and foreign currency exchange rates may occur between the times
at which they are generally determined and the close of the New York Stock
Exchange and would therefore not be reflected in the computation of the
Account's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Manager under procedures
established and regularly reviewed by the Board of Directors. To the extent the
Account invests in foreign securities listed on foreign exchanges that trade on
days on which the Account does not determine its net asset value, for example
Saturdays and other customary national U.S. holidays, the Account's net asset
value could be significantly affected on days when shareholders have no access
to the Account.
Certain securities issued by companies in emerging market countries may have
more than one quoted valuation at any given point in time, sometimes referred to
as a "local" price and a "premium" price. The premium price is often a
negotiated price that may not consistently represent a price at which a specific
transaction can be effected. It is the policy of International Account to value
such securities at prices at which it is expected those shares may be sold, and
the Manager or any Sub-Advisor, is authorized to make such determinations
subject to such oversight by the Fund's Board of Directors as may from time to
time be necessary.
Money Market Account
The net asset value of shares of the Money Market Account is determined at the
same time and on the same days as each of the Growth-Oriented Accounts and
Income-Oriented Accounts as described above. The net asset value per share for
the Account is computed by dividing the total value of the Account's securities
and other assets, less liabilities, by the number of Account shares outstanding.
All securities held by the Money Market Account are valued on an amortized cost
basis. Under this method of valuation, a security is initially valued at cost;
thereafter, the Account assumes a constant proportionate amortization in value
until maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price that
would be received upon sale of the security. Use of the amortized cost valuation
method by the Money Market Account requires the Account to maintain a dollar
weighted average maturity of 90 days or less and to purchase only obligations
that have remaining maturities of 397 days or less or have a variable or
floating rate of interest. In addition, the Account can invest only in "Eligible
Securities" as that term is defined in Regulations issued under the Investment
Company Act of 1940 (see the Fund's Prospectus for a more complete description)
determined by the Board of Directors to present minimal credit risks.
The Board of Directors has established procedures designed to stabilize, to the
extent reasonably possible, the Account's price per share as computed for the
purpose of sales and redemptions at $1.00. Such procedures include a directive
to the Manager to test price the portfolio or specific securities thereof upon
certain changes in the Treasury Bill auction interest rate for the purpose of
identifying possible deviations in the net asset value per share calculated by
using available market quotations or equivalents from $1.00 per share. If such
deviation exceeds 1/2 of 1%, the Board of Directors will promptly consider what
action, if any, will be initiated. In the event the Board of Directors
determines that a deviation exists which may result in material dilution or
other unfair results to shareholders, the Board will take such corrective action
as it regards as appropriate, including: the sale of portfolio instruments prior
to maturity; the withholding of dividends; redemptions of shares in kind; the
establishment of a net asset value per share based upon available market
quotations; or splitting, combining or otherwise recapitalizing outstanding
shares. The Account may also reduce the number of shares outstanding by
redeeming proportionately from shareholders, without the payment of any monetary
compensation, such value at $1.00 per share.
PERFORMANCE CALCULATION
Each of the Accounts may from time to time advertise its performance in terms of
total return. The figures used for total return and yield are based on the
historical performance of an Account, or its corresponding, predecessor mutual
fund, show the performance of a hypothetical investment and are not intended to
indicate future performance. Total return and yield will vary from time to time
depending upon market conditions, the composition of an Account's portfolio and
operating expenses. These factors and possible differences in the methods used
in calculating performance figures should be considered when comparing an
Account's performance to the performance of some other kind of investment. The
calculations of total return and yield for the Accounts do not include the fees
and charges of the separate accounts that invest in the Accounts and, therefore,
do not reflect the investment performance of those separate accounts.
Each Account may also include in its advertisements performance rankings and
other performance-related information published by independent statistical
services or publishers, such as Lipper Analytical Services, Weisenberger
Investment Companies Services, Money Magazine, Forbes, The Wall Street Journal,
Barron's and Changing Times, and comparisons of the performance of an Account to
that of various market indices, such as the S&P 500 Index, Lehman Brothers GNMA
Index, Dow Jones Industrials Index, and the Salomon Brothers Investment Grade
Bond Index.
Total Return
When advertising total return figures, each of the Growth-Oriented Accounts and
Income-Oriented Accounts will include its average annual total return for each
of the one, five and ten year periods (or if shorter, the period during which
its corresponding predecessor fund's registration statement has been in effect)
that end on the last day of the most recent calendar quarter. Average annual
total return is computed by calculating the average annual compounded rate of
return over the stated period that would equate an initial $1,000 investment to
the ending redeemable value assuming the reinvestment of all dividends and
capital gains distributions at net asset value. In its advertising, an Account
may also include average annual total return for some other period or cumulative
total return for a specified period. Cumulative total return is computed by
dividing the ending redeemable value (assuming the reinvestment of all dividends
and capital gains distributions at net asset value) by the initial investment.
The following table shows as of December 31, 1999 average annual total return
for each of the Accounts for the periods indicated:
<TABLE>
<CAPTION>
Account 1-Year 5-Year 10-Year
<S> <C> <C> <C> <C>
Aggressive Growth 39.50% 32.01% 28.82%(1)
Asset Allocation 19.49% 16.01% 14.32%(1)
Balanced 2.40% 13.75% 11.38%
Blue Chip 1.15%(2)
Bond -2.59% 7.73% 7.77%
Capital Value -4.29% 17.88% 12.94%
Government Securities -0.29% 7.96% 7.75%
Growth 16.44% 20.45% 18.94%(3)
High Yield 1.76% 8.03% 8.39%
International 25.93% 17.29% 14.41%(3)
International SmallCap 93.81% 39.24%(4)
LargeCap Growth 32.47%(2)
MicroCap -1.07% -12.05%(4)
MidCap 13.04% 17.59% 15.35%
MidCap Growth 10.67% 4.09%(4)
MidCap Value 10.24%(2)
Real Estate -4.48% -6.58%(4)
SmallCap 43.58% 8.24%(4)
SmallCap Growth 95.69% 52.17%(4)
SmallCap Value 21.45% 1.88%(4)
Stock Index 500 8.93%(2)
Utilities 2.29% 10.43%(4)
<FN>
(1) Period beginning June 1, 1994 and ending December 31, 1999.
(2) Period beginning May 1, 1999 and ending December 31, 1999.
(3) Period beginning May 1, 1994 and ending December 31, 1999.
(4) Period beginning May 1, 1998 and ending December 31, 1999.
</FN>
</TABLE>
Yield
Money Market Account
The Money Market Account may advertise its yield and its effective yield.
Yield is computed by determining the net change, exclusive of capital changes,
in the value of a hypothetical pre-existing account having a balance of one
share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by (365/7) with the
resulting yield figure carried to at least the nearest hundredth of one percent.
As of December 31, 1999, the Money Market Account's yield was 5.47%. Because
realized capital gains or losses in an Account's portfolio are not included in
the calculation, the Account's net investment income per share for yield
purposes may be different from the net investment income per share for dividend
purposes, that includes net short-term realized gains or losses on the Account's
portfolio.
Effective yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then compounding the base period return by adding 1, raising
the sum to a power equal to 365 divided by 7, and subtracting 1 from the result.
The resulting effective yield figure is carried to at least the nearest
hundredth of one percent. As of December 31, 1999, the Money Market Account's
effective yield was 5.62%.
The yield quoted at any time for the Money Market Account represents the amount
that was earned during a specific, recent seven-day period and is a function of
the quality, types and length of maturity of instruments in the Account's
portfolio and the Account's operating expenses. The length of maturity for the
portfolio is the average dollar weighted maturity of the portfolio. This means
that the portfolio has an average maturity of a stated number of days for its
issues. The calculation is weighted by the relative value of each investment.
The yield for the Money Market Account fluctuates daily as the income earned on
the investments of the Account fluctuates. Accordingly, there is no assurance
that the yield quoted on any given occasion will remain in effect for any period
of time. There is no guarantee that the net asset value or any stated rate of
return will remain constant. A shareholder's investment in the Account is not
insured. Investors comparing results of the Money Market Account with investment
results and yields from other sources such as banks or savings and loan
associations should understand these distinctions. Historical and comparative
yield information may, from time to time, be presented by the Account.
TAX STATUS
It is the policy of each Account to distribute substantially all net investment
income and net realized gains. Through such distributions, and by satisfying
certain other requirements, the Fund intends to qualify for the tax treatment
accorded to regulated investment companies under the applicable provisions of
the Internal Revenue Code. This means that in each year in which the Fund so
qualifies, it is exempt from federal income tax upon the amount so distributed
to investors.
For federal income tax purposes, capital gains and losses on futures contracts
or options thereon, index options or options traded on qualified exchanges are
generally treated at 60% long-term and 40% short-term. In addition, an Account
must recognize any unrealized gains and losses on such positions held at the end
of the fiscal year. An Account may elect out of such tax treatment, however, for
a futures or options position that is part of an "identified mixed straddle"
such as a put option purchased by the Account with respect to a portfolio
security. Gains and losses on figures and options included in an identified
mixed straddle will be considered 100% short-term and unrealized gain or loss on
such positions will not be realized at year end. The straddle provisions of the
Code may require the deferral of realized losses to the extent that the Account
has unrealized gains in certain offsetting positions at the end of the fiscal
year, and may also require recharacterization of all or a part of losses on
certain offsetting positions from short-term to long-term, as well as adjustment
of the holding periods of straddle positions.
The 1986 Tax Reform Act imposes an excise tax on mutual funds that fail to
distribute net investment income and capital gains by the end of the calendar
year in accordance with the provisions of the Act. The Fund intends to comply
with the Act's requirements and to avoid this excise tax.
GENERAL INFORMATION AND HISTORY
On December 31, 1997, certain Funds sponsored by Principal Life Insurance
Company were reorganized into Accounts of the Principal Variable Contracts Fund,
Inc., a corporation incorporated in the State of Maryland. The new series
adopted the assets and liabilities of the corresponding Fund. The old Fund names
and the corresponding Account are shown below:
Fund Account
Principal Aggressive Growth Fund, Inc. Aggressive Growth Account
Principal Asset Allocation Fund, Inc. Asset Allocation Account
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal High Yield Fund, Inc. High Yield Account
Principal Money Market Fund, Inc. Money Market Account
Principal World Fund, Inc. International Account
The Articles of Incorporation for the Principal Variable Contracts Fund, Inc.
were amended on February 13, 1998 to reflect the addition of the following new
Accounts:
International SmallCap Account SmallCap Account
MicroCap Account SmallCap Growth Account
MidCap Growth Account SmallCap Value Account
Real Estate Account Utilities Account
The Articles of Incorporation for the Principal Variable Contracts Fund, Inc.
were amended on February 1, 1999 to reflect the addition of the following new
Accounts:
Blue Chip Account MidCap Value Account
LargeCap Growth Account Stock Index 500 Account
FINANCIAL STATEMENTS
The financial statements for the Accounts for the fiscal period ended December
31, 1999 appearing in the Annual Report to Shareholders and the report thereon
of Ernst and Young LLP, independent auditors, 801 Grand Avenue, Des Moines, Iowa
50309, appearing therein are incorporated by reference in this Statement of
Additional Information. The Annual Report will be furnished, without charge, to
investors who request copies of the Statement of Additional Information.
APPENDIX A
Description of Bond Ratings:
Moody's Investors Service, Inc. Bond Ratings
Aaa: Bondsthat are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa: Bondsthat are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba: Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of
time may be small.
Caa: Bondsthat are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds that are rated Ca represent obligations that are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds that are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
CONDITIONAL RATING: Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
SHORT-TERM NOTES: The four ratings of Moody's for short-term notes are MIG 1,
MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong protection
from established cash flows"; MIG 2 denotes "high quality" with "ample margins
of protection"; MIG 3 notes are of "favorable quality...but lacking the
undeniable strength of the preceding grades"; MIG 4 notes are of "adequate
quality, carrying specific risk for having protection...and not distinctly or
predominantly speculative."
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability to repay punctually
promissory obligations not having an original maturity in excess of nine months.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's Corporation's Debt Ratings
A Standard & Poor's debt rating is a current assessment of the creditworthiness
of an obligor with respect to a specific obligation. This assessment may take
into consideration obligors such as guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources Standard & Poor's considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditor's rights.
AAA: Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A: Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.
BB, B, CCC, CC:
Debt rated "BB", "B", "CCC" and "CC" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "CC" the highest degree
of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C: The rating "C" is reserved for income bonds on which no interest is
being paid.
D: Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of
the project being financed by the bonds being rated and indicates that
payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of
the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise
his own judgment with respect to such likelihood and risk.
NR: Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Standard & Poor's, Commercial Paper Ratings
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Ratings are applicable to
both taxable and tax-exempt commercial paper. The four categories are as
follows:
A: Issues assigned the highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Issues that
possess overwhelming safety characteristics will be given a "+"
designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to
the adverse effects of changes in circumstances than obligations
carrying the highest designations.
B: Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: This rating indicates that the issue is either in default or is
expected to be in default upon maturity.
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in or unavailability of, such information.
Standard & Poor's rates notes with a maturity of less than three years as
follows:
SP-1 Avery strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given
a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits.
- -------- ---------
(a) Amendment and Restatement of the Articles
of Incorporation**
(b) By-laws**
(c) Specimen Share Certificate N/A
(d) Investment Advisory Agreement**
(e) Distribution Agreement**
(f) N/A
(g) Custodian Agreement**
(h) Other Material Contracts**
(i) Legal Opinion**
(j) Consent of Independent Auditors*
(k) Financial Statements included in this Registration
Statement:
(1) Part A:
Financial Highlights for each of the five
years in the period ended December 31, 1999.*
(2) Part B:
None
(3) Annual Report to Shareholders filed under Rule
N-30D-1 on February 28, 2000***
(m) Rule 12b-1 Plan N/A
(n) Financial Data Schedule*
(o) Rule 18f-3 Plan N/A
(p) Code of Ethics
(1)
(2)
(3)
(4)
* Filed herein.
** To be filed by amendment.
*** Incorporated herein by reference.
Item 24. Persons Controlled by or Under Common Control with Registrant
Principal Financial Services, Inc. (an Iowa corporation) an
intermediate holding company organized pursuant to Section 512A.14 of
the Iowa Code.
Subsidiaries wholly-owned by Principal Financial Services, Inc.
a. Principal Life Insurance Company (an Iowa corporation) a life
group, pension and individual insurance company.
b. Princor Financial Services Corporation (an Iowa Corporation) a
registered broker-dealer.
c. PFG Do Brasil LTDA (Brazil) a Brazilian holding company.
d. Principal Financial Services (Australia), Inc. (an Iowa holding
company) formed to facilitate the acquisition of the Australian
business of BT Australia.
e. Principal Financial Services (NZ), Inc. (an Iowa holding company)
formed to facilitate the acquisition of the New Zealand business
of BT Australia.
f. Principal Capital Management (Singapore) Limited (a Singapore
asset management company).
g. Principal Capital Management (Europe) Limited a fund management
company.
h. Principal Capital Management (Ireland) Limited a fund management
company.
i. Principal Financial Group Investments (Australia) Pty Limited.
Subsidiary wholly-owned by Princor Financial Services Corporation:
a. Principal Management Corporation (an Iowa Corporation) a
registered investment advisor.
Subsidiary wholly-owned by PFG Do Brasil LTDA
a. Brasilprev Previdencia Privada S.A.(Brazil) a pension
administration company.
Subsidiary wholly-owned by Principal Financial Services (Australia),
Inc.:
a. Principal Financial Group (Australia) Holdings Pty Ltd. an
Australian holding company organized in connection with the
contemplated acquisition of BT Australia Funds Management.
Subsidiary wholly-owned by Principal Financial Group (Australia)
Holdings Pty Ltd:
a. Principal Financial Group (Australia) Pty Ltd. an Australia
holding company organized on connection the contemplated
acquisition of BT Australia Funds Management.
Subsidiary wholly-owned by Principal Financial Group (Australia) Pty
Ltd:
a. BT International (Australia) Limited (an Australian holding
company).
Subsidiary wholly-owned by BT Investment (Australia) Limited:
a. Bankers Trust Australia Limited (an Australian holding company).
Subsidiary wholly-owned by Bankers Trust Australia Limited:
a. BT Financial Group Limited an asset management company.
Subsidiaries wholly-owned by BT Financial Group Limited:
a. BT Life Limited a commercial and investment linked life insurance
company.
b. BT Funds Management Limited (an Australian financial services
company).
c. BT Funds Management (International) Limited (an Australian
financial services company).
d. BT Securities Limited (an Australian financial services
company).
e. BT (Queensland) Pty Limited (an Australian financial services
company).
f. BT Portfolio Services Pty Limited (an Australian financial
services company).
g. BT Australia Corporate Services Pty Limited a holding
company.
h. Oniston Pty Ltd (an Australian financial services company).
i. QV1 Pty Limited
Subsidiaries wholly-owned by BT Portfolio Services Limited:
a. BT Custodial Services Pty Ltd (an Australian financial services
company).
b. National Registry Services Pty Ltd. (an Australian financial
services company).
c. National Registry Services (WA) Pty Limited (an Australian
financial services company).
d. BT Finance & Investments Pty Ltd (an Australian financial
services company).
Subsidiaries organized and wholly-owned by BT Australia Corporate
Services Pty Limited:
a. BT Finance Pty Limited (an Australian financial services
company).
b. Chifley Services Pty Limited (an Australian financial services
company).
c. BT Nominees Pty Limited (an Australian financial services
company).
Subsidiary organized and wholly-owned by BT Funds Management Limited:
a. BT Tactical Asset Management Limited (an Australian financial
services company).
Subsidiary organized and wholly-owned by Principal Financial Services
(NZ), Inc.
a. BT Financial Group (NZ) Limited (a New Zealand holding company).
b. BT Hotel Group Pty Limited
c. BT Custodians Limited a manager and trustee of various unit
trusts.
d. Dellarak Pty Limited a trustee company.
Subsidiary organized and wholly-owned by BT Financial Group (NZ)
Limited:
a. BT Portfolio Service (NZ) Limited (a New Zealand financial
services company).
b. BT New Zealand Nominees Limited (a New Zealand financial services
company).
c. BT Funds Management (NZ) Limited (a New Zealand financial
services company).
Subsidiary organized and wholly-owned by Principal Financial Group
Investments (Australia) Pty Limited:
a. Principal Hotels Holdings Pty Ltd. a holding company.
Subsidiary organized and wholly-owned by Principal Hotels Holdings
Pty Ltd.:
a. Principal Hotels Australia Pty Ltd. a holding company.
Subsidiary organized and wholly-owned by Principal Hotels Australia
Pty Ltd.:
a. BT Hotel Limited
Principal Life Insurance Company sponsored the organization of the
following mutual funds, some of which it controls by virtue of owning
voting securities:
Principal Balanced Fund, Inc.(a Maryland Corporation) 0.15% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000.
Principal Blue Chip Fund, Inc.(a Maryland Corporation) 0.80% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000.
Principal Bond Fund, Inc.(a Maryland Corporation) 0.67% of shares
outstanding owned by Principal Life Insurance Company (including
subsidiaries and affiliates) on January 31, 2000.
Principal Capital Value Fund, Inc. (a Maryland Corporation)
24.72% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates)on January 31,
2000.
Principal Cash Management Fund, Inc. (a Maryland Corporation)
5.73% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on January 31,
2000.
Principal Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.03% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
January 31, 2000.
Principal Growth Fund, Inc. (a Maryland Corporation) 0.37% of
outstanding shares owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000.
Principal High Yield Fund, Inc. (a Maryland Corporation) 7.80%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000.
Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 34.31% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
January 31, 2000.
Principal International Fund, Inc. (a Maryland Corporation)
24.74% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on January 31,
2000.
Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 31.00% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
January 31, 2000.
Principal Limited Term Bond Fund, Inc. (a Maryland Corporation)
21.85% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on January 31,
2000.
Principal LargeCap Stock Index Fund, Inc. (a Maryland
Corporation) 100.00% of shares outstanding owned by Principal
Life Insurance Company (including subsidiaries and affiliates) on
February 24, 2000.
Principal MidCap Fund, Inc. (a Maryland Corporation) 0.79% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000
Principal Partners Aggressive Growth Fund, Inc.(a Maryland
Corporation) 12.91% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
January 31, 2000
Principal Partners LargeCap Growth Fund, Inc.(a Maryland
Corporation) 100.00% of shares outstanding owned by Principal
Life Insurance Company (including subsidiaries and affiliates) on
February 24, 2000
Principal Partners MidCap Growth Fund, Inc.(a Maryland
Corporation) 100.00% of shares outstanding owned by Principal
Life Insurance Company (including subsidiaries and affiliates) on
February 24, 2000
Principal Real Estate Fund, Inc. (a Maryland Corporation) 62.40%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000
Principal SmallCap Fund, Inc.(a Maryland Corporation) 13.73% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000.
Principal Special Markets Fund, Inc. (a Maryland Corporation)
83.47% of shares outstanding of the International Emerging
Markets Portfolio, 43.49% of the shares outstanding of the
International Securities Portfolio, 98.66% of shares outstanding
of the International SmallCap Portfolio and 100% of the shares
outstanding of the Mortgage-Backed Securities Portfolio were
owned by Principal Life Insurance Company (including subsidiaries
and affiliates) on January 31, 2000
Principal Tax-Exempt Bond Fund, Inc. (a Maryland Corporation)
0.05% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on January 31,
2000.
Principal Utilities Fund, Inc. (a Maryland Corporation) 0.27% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on January 31, 2000.
Principal Variable Contracts Fund, Inc. (a Maryland Corporation)
100% of shares outstanding of the following Accounts owned by
Principal Life Insurance Company and its Separate Accounts on
January 31, 2000: Aggressive Growth, Asset Allocation, Balanced,
Blue Chip, Bond, Capital Value, Government Securities, Growth,
High Yield, International, International SmallCap, LargeCap
Growth, MicroCap, MidCap, MidCap Growth, MidCap Value, Money
Market, Real Estate, SmallCap, SmallCap Growth, SmallCap Value
Stock Index 500, and Utilities.
Subsidiaries organized and wholly-owned by Principal Life Insurance
Company:
a. Principal Holding Company (an Iowa Corporation) a holding company
wholly-owned by Principal Life Insurance Company.
b. PT Asuransi Jiwa Principal Indonesia (an Indonesia Corporation) a
life insuranced corporation which offers group and individual
products.
c. Principal Development Investors, LLC (a Delaware Corporation) a
limited liability company engaged in acquiring and improving real
property through development and redevelopment.
d. Principal Capital Management, LLC (a Delaware Corporation) a
limited liability company that provides investment management
services.
e. Principal Net Lease Investors, LLC (a Delaware Corporation) a
limited liability company which operates as a buyer and seller of
net leased investments.
Subsidiaries wholly-owned by Principal Capital Management, LLC:
a. Principal Structured Investments, LLC (a Delaware Corporation) a
limited liability company that provides product development
administration, marketing and asset management services
associated with stable value products together with other related
institutional financial services including derivatives,
asset-liability management, fixed income investment management
and ancillary money management products.
b. Principal Enterprise Capital, LLC (a Delaware Corporation) a
company engaged in the operation of nonresidential buildings.
c. Principal Commercial Acceptance, LLC (a Delaware Corporation) a
limited liability company involved in purchasing, managing and
selling commercial real estate assets in the secondary market.
d. Principal Real Estate Investors, LLC (a Delaware Corporation) a
registered investment advisor.
e. Principal Commercial Funding, LLC (a Delaware Corporation) a
correspondent lender and service provider for loans.
f. Principal Real Estate Services, LLC (a Delaware Corporation) a
limited liability company which acts as a property manager and
real estate service provider.
Subsidiaries wholly-owned by Principal Holding Company:
a. Principal Bank (a Federal Corporation) a Federally chartered
direct delivery savings bank.
b. Patrician Associates, Inc. (a California Corporation) a real
estate development company.
c. Petula Associates, Ltd. (an Iowa Corporation) a real estate
development company.
d. Principal Development Associates, Inc. (a California Corporation)
a real estate development company.
e. Principal Spectrum Associates, Inc. (a California Corporation) a
real estate development company.
f. Principal FC, Ltd. (an Iowa Corporation) a limited purpose
investment corporation.
g. Equity FC, Ltd. (an Iowa Corporation) engaged in investment
transactions including limited partnership and limited liability
companies.
h. HealthRisk Resource Group, Inc. (an Iowa Corporation) a
management services organization.
i. Invista Capital Management, LLC (an Iowa Corporation) a
registered investment adviser.
j. Principal Residential Mortgage, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
k. Principal Asset Markets, Inc. (an Iowa Corporation) a residential
mortgage loan broker.
l. Principal Portfolio Services, Inc. (an Iowa Corporation) a
mortgage due diligence company.
m. The Admar Group, Inc. (a Florida Corporation) a national managed
care service organization that develops and manages preferred
provider organizations.
n. The Principal Financial Group, Inc. (a Delaware corporation) a
general business corporation established in connection with the
new corporate identity. It is not currently active.
o. Principal Product Network, Inc. (a Delaware corporation) an
insurance broker.
p. Principal Health Care, Inc. (an Iowa Corporation) a developer and
administrator of managed care systems.
q. Dental-Net, Inc. (an Arizona Corporation) holding company of
Employers Dental Services; a managed dental care services
organization. HMO and dental group practice.
r. Principal Financial Advisors, Inc. (an Iowa Corporation) a
registered investment advisor.
s. Delaware Charter Guarantee & Trust Company, d/b/a Trustar
Retirement Services (a Delaware Corporation) a nondepository
trust company.
t. Professional Pensions, Inc. (a Connecticut Corporation) a
corporation engaged in sales, marketing and administration of
group insurance plans and serves as a record keeper and third
party administrator for various clients' defined contribution
plans.
u. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange Commission.
It is not currently active.
v. Principal International, Inc. (an Iowa Corporation) a company
formed for the purpose of international business development.
Subsidiaries organized and wholly-owned by PT Asuransi Jiwa
Principal Indonesia:
a. PT Jasa Principal Indonesia a defined benefit pension company.
b. PT Principal Capital Management Indonesia a fund management
company.
Subsidiary wholly-owned by Invista Capital Management, LLC:
a. Principal Capital - Invista Trust. (a Delaware Corporation) a
business trust and private investment company offering
non-registered units, initially, to tax-exempt entities.
Subsidiary wholly-owned by Principal Residential Mortgage, Inc.:
a. Principal Wholesale Mortgage, Inc. (an Iowa Corporation) a
brokerage and servicer of residential mortgages.
b. Principal Mortgage Reinsurance Company (a Vermont corporation)
a mortgage reinsurance company.
Subsidiaries wholly-owned by The Admar Group, Inc.:
a. Admar Corporation (a California Corporation) a managed care
services organization.
Subsidiaries wholly-owned by Dental-Net, Inc.
a. Employers Dental Services, Inc. (an Arizona corporation) a
prepaid dental plan organization.
Subsidiaries wholly-owned by Professional Pensions, Inc.:
a. Benefit Fiduciary Corporation (a Rhode Island corporation) serves
as a corporate trustee for retirement trusts.
b. PPI Employee Benefits Corporation (a Connecticut corporation) a
registered broker-dealer pursuant to Section 15(b) of the
Securities Exchange Act an a member of the National Association
of Securities Dealers (NASD), limited to the sale of open-end
mutual funds and variable insurance products.
c. Boston Insurance Trust, Inc. (a Massachusetts corporation)
authorized by charter to serve as a trustee in connection with
multiple-employer group life insurance trusts or arrangements,
and to generally participate in the administration of insurance
trusts.
Subsidiaries wholly-owned by Principal International, Inc.:
a. Principal International Espana, S.A. de Seguros de Vida (a Spain
Corporation) a life insurance company (individual group),
annuities and pension.
b. Zao Principal International (a Russia Corporation) inactive.
c. Principal International Argentina, S.A. (an Argentina services
corporation).
d. Principal Asset Management Company (Asia) Ltd. (Hong Kong) a
corporation which manages pension funds.
e. Principal International Asia Limited (a Hong Kong Corporation) a
corporation operating as a regional headquarters for Asia.
f. Principal Insurance Company (Hong Kong) Limited (a Hong Kong
Corporation) group life and group pension products.
g. Principal Trust Company (Asia) Limited (an Asia trust company).
h. Principal International de Chile, S.A. (a Chile Corporation) a
holding company.
i. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation) a life insurance company (individual and group),
personal accidents.
j. Principal Pensiones, S.A. de C.V. (a Mexico Corporation) a single
premium annuity.
k. Principal Afore, S.A. de C.V. (a Mexico Corporation), a pension
administration company.
l. Principal Consulting (India) Private Limited (an India
corporation) an India consulting company.
Subsidiary wholly-owned by Principal International Espana, S.A. de
Seguros de Vida:
a. Princor International Espana Sociedad Anonima de Agencia de
Seguros (a Spain Corporation) an insurance agency.
Subsidiary wholly-owned by Principal International (Asia) Limited
(Hong Kong):
a. BT Funds Management (Asia) Limited (Hong Kong)(a Hong Kong
Corporation) an asset management company.
Subsidiaries wholly-owned by Principal International Argentina, S.A.:
a. Principal Retiro Compania de Seguros de Retiro, S.A. (an
Argentina Corporation) an individual annuity/employee benefit
company.
b. Principal Life Compania de Seguros, S.A. (an Argentina
Corporation) a life insurance company.
Subsidiary wholly-owned by Principal International de Chile, S.A.:
a. Principal Compania de Seguros de Vida Chile S.A. (a Chile
Corporation) life insurance and annuity company.
Subsidiary wholly-owned by Principal Compania de Seguros de Vida Chile
S.A.:
a. Andueza & Principal Creditos Hipotecarios S.A. (a Chile
Corporation) a residential mortgage company.
Subsidiary wholly-owned by Principal Afore, S.A. de C.V.:
a. Siefore Principal, S.A. de C.V. (a Mexico Corporation) an
investment fund company.
Item 25. Indemnification
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, the Registrant may
indemnify the corporate representative against judgments, fines, penalties, and
amounts paid in settlement, and against expenses, including attorneys' fees, if
such expenses were actually incurred by the corporate representative in
connection with the proceeding, unless it is established that:
(i) The act or omission of the corporate representative was
material to the matter giving rise to the proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate dishonesty; or
(ii) The corporate representative actually received an improper
personal benefit in money, property, or services; or
(iii) In the case of any criminal proceeding, the corporate
representative had reasonable cause to believe that the act or
omission was unlawful.
If a proceeding is brought by or on behalf of the Registrant, however, the
Registrant may not indemnify a corporate representative who has been adjudged to
be liable to the Registrant. Under the Registrant's Articles of Incorporation
and Bylaws, directors and officers of Registrant are entitled to indemnification
by the Registrant to the fullest extent permitted under Maryland law and the
Investment Company Act of 1940. Reference is made to Article VI, Section 7 of
the Registrant's Articles of Incorporation, Article 12 of Registrant's Bylaws
and Section 2-418 of the Maryland General Corporation Law.
The Registrant has agreed to indemnify, defend and hold the Distributor,
its officers and directors, and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act of 1933, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act of 1933, or under common law or otherwise, arising out of or
based upon any untrue statement of a material fact contained in the Registrant's
registration statement or prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission made in conformity with
information furnished in writing by the Distributor to the Registrant for use in
the Registrant's registration statement or prospectus: provided, however, that
this indemnity agreement, to the extent that it might require indemnity of any
person who is also an officer or director of the Registrant or who controls the
Registrant within the meaning of Section 15 of the Securities Act of 1933, shall
not inure to the benefit of such officer, director or controlling person unless
a court of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent that such result would not be against public
policy as expressed in the Securities Act of 1933, and further provided, that in
no event shall anything contained herein be so construed as to protect the
Distributor against any liability to the Registrant or to its security holders
to which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of its duties,
or by reason of its reckless disregard of its obligations under this Agreement.
The Registrant's agreement to indemnify the Distributor, its officers and
directors and any such controlling person as aforesaid is expressly conditioned
upon the Registrant being promptly notified of any action brought against the
Distributor, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Registrant.
Item 26. Business or Other Connection of Investment Adviser
A complete list of the officers and directors of the investment adviser,
Principal Management Corporation, are set out below. This list includes some of
the same people (designated by an *), who are serving as officers and directors
of the Registrant. For these people the information as set out in the Statement
of Additional Information (See Part B) under the caption "Directors and Officers
of the Fund" is incorporated by reference.
John E. Aschenbrenner Principal Executive Vice President
Director Financial Group Principal Life Insurance
Company
Craig R. Barnes Same President & Chief Executive
Vice President Officer, Invista Capital
Management LLC
*Craig L. Bassett Same See Part B
Treasurer
*Michael J. Beer Same See Part B
Executive Vice President
David J. Drury Same Chairman of the Board
Director Principal Life
Insurance Company
*Ralph C. Eucher Same See Part B
President and Director
*Arthur S. Filean Same See Part B
Vice President
Dennis P. Francis Same Senior Vice President
Director Principal Life
Insurance Company
Paul N. Germain Same Vice President -
Vice President - Mutual Fund Operations
Mutual Fund Operations Princor Financial Services
Corporation
*Ernest H. Gillum Same See Part B
Vice President - Compliance
& Product Development
Thomas J. Graf Same Senior Vice President
Director Principal Life
Insurance Company
*J. Barry Griswell Same See Part B
Chairman of the Board
and Director
Joyce N. Hoffman Same Vice President and
Vice President and Corporate Secretary
Corporate Secretary Principal Life
Insurance Company
Ellen Z. Lamale Same Senior Vice President &
Director Chief Actuary Principal Life
Insurance Company
Julia M. Lawler Same Vice President
Director Principal Life Insurance
Company
Richard L. Prey Same Senior Vice President
Director Principal Life Insurance
Company
Layne A. Rasmussen Same Controller
Controller - Princor Financial Services
Mutual Funds Corporation
Elizabeth R. Ring Same Controller- Broker Dealer
Controller Operations
Princor Financial Services
Corporation
*Michael D. Roughton Same See Part B
Counsel
Jean B. Schustek Same Product Compliance Officer -
Product Compliance Officer - Princor Financial Services
Registered Products Corporation
Principal Management Corporation serves as investment adviser and dividend
disbursing and transfer agent for, Principal Balanced Fund, Inc., Principal Blue
Chip Fund, Inc., Principal Bond Fund, Inc., Principal Capital Value Fund, Inc.,
Principal Cash Management Fund, Inc., Principal Government Securities Income
Fund, Inc., Principal Growth Fund, Inc., Principal High Yield Fund, Inc.,
Principal International Emerging Markets Fund, Inc., Principal European Equity
Fund, Inc., Principal International Fund, Inc., Principal International SmallCap
Fund, Inc., Principal LargeCap Stock Index Fund, Inc., Principal Limited Term
Bond Fund, Inc., Principal Pacific Basin Fund, Inc., Principal MidCap Fund,
Inc., Principal Partners Aggressive Growth Fund, Inc., Principal Partners
LargeCap Growth Fund, Inc., Principal Partners MidCap Growth Fund, Inc.,
Principal Real Estate Fund, Inc., Principal SmallCap Fund, Inc., Principal
Special Markets Fund, Inc., Principal Tax-Exempt Bond Fund, Inc., Principal
Utilities Fund, Inc., Principal Variable Contracts Fund, Inc. - funds sponsored
by Principal Life Insurance Company.
Item 27. Principal Underwriters
(a) Princor Financial Services Corporation, principal underwriter for
Registrant, acts as principal underwriter for, Principal Balanced Fund, Inc.,
Principal Blue Chip Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Value Fund, Inc., Principal Cash Management Fund, Inc., Principal European
Equity Fund, Inc., Principal Government Securities Income Fund, Inc., Principal
Growth Fund, Inc., Principal High Yield Fund, Inc., Principal International
Emerging Markets Fund, Inc., Principal International Fund, Inc., Principal
International SmallCap Fund, Inc., Principal LargeCap Stock Index Fund, Inc.,
Principal Limited Term Bond Fund, Inc., Principal Pacific Basin Fund, Inc.,
Principal MidCap Fund, Inc., Principal Partners Aggressive Growth Fund, Inc.,
Principal Partners LargeCap Growth Fund, Inc., Principal Partners MidCap Growth
Fund, Inc., Principal Real Estate Fund, Inc., Principal SmallCap Fund, Inc.,
Principal Special Markets Fund, Inc., Principal Tax-Exempt Bond Fund, Inc.,
Principal Utilities Fund, Inc., Principal Variable Contracts Fund, Inc. and for
variable annuity contracts participating in Principal Life Insurance Company
Separate Account B, a registered unit investment trust for retirement plans
adopted by public school systems or certain tax-exempt organizations pursuant to
Section 403(b) of the Internal Revenue Code, Section 457 retirement plans,
Section 401(a) retirement plans, certain non- qualified deferred compensation
plans and Individual Retirement Annuity Plans adopted pursuant to Section 408 of
the Internal Revenue Code, and for variable life insurance contracts issued by
Principal Life Insurance Company Variable Life Separate Account, a registered
unit investment trust.
(b) (1) (2) (3)
Positions
and offices Positions and
Name and principal with principal offices with
business address underwriter registrant
John E. Aschenbrenner Director Director
Principal
Financial Group
Des Moines, IA 50392
Robert W. Baehr Marketing Services None
Principal Officer
Financial Group
Des Moines, IA 50392
Craig L. Bassett Treasurer Treasurer
Principal
Financial Group
Des Moines, IA 50392
Michael J. Beer Executive Vice President Financial Officer
Principal
Financial Group
Des Moines, IA 50392
Jerald L. Bogart Insurance License Officer None
Principal
Financial Group
Des Moines, IA 50392
David J. Drury Director None
Principal
Financial Group
Des Moines, IA 50392
Ralph C. Eucher Director and President and
Principal President Director
Financial Group
Des Moines, IA 50392
Arthur S. Filean Vice President Vice President and
Principal Secretary
Financial Group
Des Moines, IA 50392
Dennis P. Francis Director None
Principal
Financial Group
Des Moines, IA 50392
Paul N. Germain Vice President- None
Principal Mutual Fund Operations
Financial Group
Des Moines, IA 50392
Ernest H. Gillum Vice President- Assistant Vice
Principal Compliance and Product President
Financial Group Development
Des Moines, IA 50392
Thomas J. Graf Director None
Principal
Financial Group
Des Moines, IA 50392
J. Barry Griswell Director and Director and
Principal Chairman of the Chairman of the
Financial Group Board Board
Des Moines, IA 50392
Susan R. Haupts Marketing Officer None
Principal
Financial Group
Des Moines, IA 50392
Joyce N. Hoffman Vice President and None
Principal Corporate Secretary
Financial Group
Des Moines, IA 50392
Kraig L. Kuhlers Marketing Officer None
Principal
Financial Group
Des Moines, IA 50392
Ellen Z. Lamale Director None
Principal
Financial Group
Des Moines, IA 50392
Julia M. Lawler Director None
Principal
Financial Group
Des Moines, IA 50392
John R. Lepley Senior Vice None
Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392
Gregg R. Narber Director None
Principal
Financial Group
Des Moines, IA 50392
Kelly A. Paul Systems & Technology None
Principal Officer
Financial Group
Des Moines, IA 50392
Elise M. Pilkington Assistant Director - None
Principal Retirement Consulting
Financial Group
Des Moines, IA 50392
Richard L. Prey Director None
Principal
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller-Mutual Funds None
Principal
Financial Group
Des Moines, IA 50392
Martin R. Richardson Operations Officer- None
Principal Broker/Dealer Services
Financial Group
Des Moines, IA 50392
Elizabeth R. Ring Controller None
Principal
Financial Group
Des Moines, IA 50392
Michael D. Roughton Counsel Counsel
Principal
Financial Group
Des Moines, IA 50392
Jean B. Schustek Product Compliance Officer- None
Principal Registered Products
Financial Group
Des Moines, IA 50392
Kyle R. Selberg Vice President- None
Principal Marketing
Financial Group
Des Moines, IA 50392
Minoo Spellerberg Compliance Officer None
Principal
Financial Group
Des Moines, IA 50392
(c) Inapplicable.
Item 28. Location of Accounts and Records
All accounts, books or other documents of the Registrant are located at the
offices of the Registrant and its Investment Adviser in the Principal Life
Insurance Company home office building, The Principal Financial Group, Des
Moines, Iowa 50392.
Item 29. Management Services
Inapplicable.
Item 30. Undertakings
Indemnification
Reference is made to Item 27 above, which discusses circumstances under
which directors and officers of the Registrant shall be indemnified by the
Registrant against certain liabilities and expenses incurred by them by reason
of being a director or officer of the Registrant.
Notwithstanding the provisions of Registrant's Articles of Incorporation
and Bylaws, the Registrant hereby makes the following undertaking:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant, in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person of the Registrant, in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue
Shareholder Communications
Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a director or directors when
requested in writing to do so by the holders of at least 10% of the Registrant's
outstanding shares of common stock and in connection with such meeting to comply
with the provisions of Section 16(c) of the Investment Company Act of 1940
relating to shareholder communications
Delivery of Annual Report to Shareholders
The registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant certifies that it meets all of the
requirments for effectiveness of this Registration Statement and has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Des Moines and State of
Iowa, on the 20th day of April, 2000.
Principal Variable Contracts Fund, Inc.
(Registrant)
By /s/ R. C. Eucher
______________________________________
R. C. Eucher
President and Director
Attest:
/s/ A. S. Filean
______________________________________
A. S. Filean
Vice President and Secretary
Pursuant to the requirement of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
/s/ R. C. Eucher
_____________________________ President and Director April 20, 2000
R. C. Eucher (Principal Executive _________________
Officer)
(J. B. Griswell)*
_____________________________ Director and April 20, 2000
J. B. Griswell Chairman of the Board _________________
/s/ M. J. Beer
_____________________________ Financial Officer April 20, 2000
M. J. Beer (Principal Financial _________________
and Accounting Officer)
(J. D. Davis)*
_____________________________ Director April 20, 2000
J. D. Davis _________________
(P. A. Ferguson)*
_____________________________ Director April 20, 2000
P. A. Ferguson _________________
(R. W. Gilbert)*
_____________________________ Director April 20, 2000
R. W. Gilbert _________________
(W. C. Kimball)*
_____________________________ Director April 20, 2000
W. C. Kimball _________________
(B. A. Lukavsky)*
_____________________________ Director April 20, 2000
B. A. Lukavsky _________________
*By /s/ R. C. Eucher
_____________________________________
R. C. Eucher
President and Director
Pursuant to Powers of Attorney
Previously Filed or Included
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints R. C. Eucher, J. B. Griswell, M.
D. Roughton, E. H. Gillum and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open-end management investment companies currently
organized or to be organized in the future which are sponsored by Principal Life
Insurance Company, and any and all amendments thereto and reports thereunder
with all exhibits and all instruments necessary or appropriate in connection
therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 28th day of
February, 2000.
/s/ W. C. Kimball
____________________________
W. C. Kimball
ERNST & YOUNG LLP Suite 3400 Phone: 515 243 2727
801 Grand Avenue
Des Moines, Iowa 50309-2764
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Statements" in each of the Prospectuses in Part A and in Part B and to the
incorporation by reference in Part B of our report dated January 21, 2000 on the
financial statements and the financial highlights of Principal Variable
Contracts Fund, Inc. in this Post Effective Amendment No. 45 to form N-1A
Registration Statement under the Securities Act of 1933 (No. 02-35570) and
related Prospectuses of Variable Contracts Fund, Inc.
/s/ Ernst & Young LLP
Des Moines, Iowa
April 24, 2000
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> Aggressive Growth Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 262,924,417
<INVESTMENTS-AT-VALUE> 369,176,544
<RECEIVABLES> 420,049
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 19,194,838
<TOTAL-ASSETS> 388,791,431
<PAYABLE-FOR-SECURITIES> 9,670,166
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 58,947
<TOTAL-LIABILITIES> 9,729,113
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 259,618,365
<SHARES-COMMON-STOCK> 15,865,566
<SHARES-COMMON-PRIOR> 12,224,216
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 13,191,826
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 106,252,127
<NET-ASSETS> 379,062,318
<DIVIDEND-INCOME> 1,599,331
<INTEREST-INCOME> 364,863
<OTHER-INCOME> 0
<EXPENSES-NET> (2,188,494)
<NET-INVESTMENT-INCOME> (224,300)
<REALIZED-GAINS-CURRENT> 35,928,978
<APPREC-INCREASE-CURRENT> 65,213,176
<NET-CHANGE-FROM-OPS> 100,917,854
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (23,403,393)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,425,846
<NUMBER-OF-SHARES-REDEEMED> (810,972)
<SHARES-REINVESTED> 1,026,476
<NET-CHANGE-IN-ASSETS> 155,004,252
<ACCUMULATED-NII-PRIOR> 11,545
<ACCUMULATED-GAINS-PRIOR> 891,919
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,148,624
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,188,494
<AVERAGE-NET-ASSETS> 284,927,035
<PER-SHARE-NAV-BEGIN> 18.33
<PER-SHARE-NII> (.01)
<PER-SHARE-GAIN-APPREC> 7.17
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.60)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.89
<EXPENSE-RATIO> .77
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> Asset Allocation Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 72,498,612
<INVESTMENTS-AT-VALUE> 86,737,115
<RECEIVABLES> 548,592
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2,473,046
<TOTAL-ASSETS> 89,758,753
<PAYABLE-FOR-SECURITIES> 17,099
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 31,093
<TOTAL-LIABILITIES> 48,192
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 73,947,020
<SHARES-COMMON-STOCK> 6,780,598
<SHARES-COMMON-PRIOR> 6,836,518
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,525,038
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,238,503
<NET-ASSETS> 89,710,561
<DIVIDEND-INCOME> 755,927
<INTEREST-INCOME> 2,128,866
<OTHER-INCOME> 0
<EXPENSES-NET> (735,154)
<NET-INVESTMENT-INCOME> 2,149,639
<REALIZED-GAINS-CURRENT> 7,774,018
<APPREC-INCREASE-CURRENT> 5,375,693
<NET-CHANGE-FROM-OPS> 15,299,350
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,154,921)
<DISTRIBUTIONS-OF-GAINS> (6,653,505)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 636,822
<NUMBER-OF-SHARES-REDEEMED> (1,296,076)
<SHARES-REINVESTED> 603,334
<NET-CHANGE-IN-ASSETS> 5,621,276
<ACCUMULATED-NII-PRIOR> 43,376
<ACCUMULATED-GAINS-PRIOR> 413,318
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 688,699
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 735,154
<AVERAGE-NET-ASSETS> 85,638,170
<PER-SHARE-NAV-BEGIN> 12.30
<PER-SHARE-NII> .35
<PER-SHARE-GAIN-APPREC> 2.00
<PER-SHARE-DIVIDEND> (.35)
<PER-SHARE-DISTRIBUTIONS> (1.07)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.23
<EXPENSE-RATIO> .85
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> Balanced Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 195,896,045
<INVESTMENTS-AT-VALUE> 207,993,875
<RECEIVABLES> 1,632,137
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 220,252
<TOTAL-ASSETS> 209,846,264
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 98,952
<TOTAL-LIABILITIES> 98,952
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 197,906,144
<SHARES-COMMON-STOCK> 13,607,193
<SHARES-COMMON-PRIOR> 12,221,316
<ACCUMULATED-NII-CURRENT> (11,210)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (245,452)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,097,830
<NET-ASSETS> 209,747,312
<DIVIDEND-INCOME> 2,245,311
<INTEREST-INCOME> 6,161,464
<OTHER-INCOME> 0
<EXPENSES-NET> (1,233,489)
<NET-INVESTMENT-INCOME> 7,173,286
<REALIZED-GAINS-CURRENT> 6,137,003
<APPREC-INCREASE-CURRENT> (8,446,637)
<NET-CHANGE-FROM-OPS> 4,863,652
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,256,246)
<DISTRIBUTIONS-OF-GAINS> (8,104,680)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,878,284
<NUMBER-OF-SHARES-REDEEMED> (1,497,438)
<SHARES-REINVESTED> 1,005,031
<NET-CHANGE-IN-ASSETS> 11,144,018
<ACCUMULATED-NII-PRIOR> 72,566
<ACCUMULATED-GAINS-PRIOR> 1,724,217
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,218,845
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,233,489
<AVERAGE-NET-ASSETS> 212,507,995
<PER-SHARE-NAV-BEGIN> 16.25
<PER-SHARE-NII> .56
<PER-SHARE-GAIN-APPREC> (.19)
<PER-SHARE-DIVIDEND> (.57)
<PER-SHARE-DISTRIBUTIONS> (.64)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.41
<EXPENSE-RATIO> .58
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> Blue Chip Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 6,037,922
<INVESTMENTS-AT-VALUE> 6,316,492
<RECEIVABLES> 36,421
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 102,857
<TOTAL-ASSETS> 6,455,770
<PAYABLE-FOR-SECURITIES> 0
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<OTHER-ITEMS-LIABILITIES> 2,303
<TOTAL-LIABILITIES> 2,303
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,206,644
<SHARES-COMMON-STOCK> 621,699
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (31,747)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 278,570
<NET-ASSETS> 6,453,467
<DIVIDEND-INCOME> 71,788
<INTEREST-INCOME> 9,495
<OTHER-INCOME> 0
<EXPENSES-NET> (27,929)
<NET-INVESTMENT-INCOME> 53,354
<REALIZED-GAINS-CURRENT> (31,747)
<APPREC-INCREASE-CURRENT> 278,570
<NET-CHANGE-FROM-OPS> 300,177
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (53,354)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (492)
<NUMBER-OF-SHARES-SOLD> 629,250
<NUMBER-OF-SHARES-REDEEMED> (8,548)
<SHARES-REINVESTED> 997
<NET-CHANGE-IN-ASSETS> 6,453,467
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 24,000
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 27,929
<AVERAGE-NET-ASSETS> 5,576,090
<PER-SHARE-NAV-BEGIN> 10.15
<PER-SHARE-NII> .08
<PER-SHARE-GAIN-APPREC> .24
<PER-SHARE-DIVIDEND> (.09)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.38
<EXPENSE-RATIO> .69
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 005
<NAME> Bond Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 129,082,982
<INVESTMENTS-AT-VALUE> 121,844,959
<RECEIVABLES> 2,842,215
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 393,450
<TOTAL-ASSETS> 125,080,624
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13,964
<TOTAL-LIABILITIES> 13,964
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 132,795,130
<SHARES-COMMON-STOCK> 11,487,829
<SHARES-COMMON-PRIOR> 10,145,370
<ACCUMULATED-NII-CURRENT> 435
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (490,882)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7,238,023)
<NET-ASSETS> 125,066,660
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9,206,654
<OTHER-INCOME> 0
<EXPENSES-NET> (630,257)
<NET-INVESTMENT-INCOME> 8,576,397
<REALIZED-GAINS-CURRENT> (389,028)
<APPREC-INCREASE-CURRENT> (11,581,812)
<NET-CHANGE-FROM-OPS> (3,394,443)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,702,169)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,888,601
<NUMBER-OF-SHARES-REDEEMED> (1,344,800)
<SHARES-REINVESTED> 798,658
<NET-CHANGE-IN-ASSETS> 3,093,885
<ACCUMULATED-NII-PRIOR> 132,464
<ACCUMULATED-GAINS-PRIOR> (100,803)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 619,181
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 630,257
<AVERAGE-NET-ASSETS> 125,747
<PER-SHARE-NAV-BEGIN> 12.02
<PER-SHARE-NII> .81
<PER-SHARE-GAIN-APPREC> (1.12)
<PER-SHARE-DIVIDEND> (.82)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.89
<EXPENSE-RATIO> .5
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 006
<NAME> Capital Value Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 328,747,255
<INVESTMENTS-AT-VALUE> 367,061,175
<RECEIVABLES> 793,346
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 350,760
<TOTAL-ASSETS> 368,205,281
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 278,515
<TOTAL-LIABILITIES> 278,515
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 338,905,110
<SHARES-COMMON-STOCK> 11,967,856
<SHARES-COMMON-PRIOR> 10,372,811
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9,292,264)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 38,313,920
<NET-ASSETS> 367,926,766
<DIVIDEND-INCOME> 9,534,852
<INTEREST-INCOME> 428,311
<OTHER-INCOME> 0
<EXPENSES-NET> (1,722,531)
<NET-INVESTMENT-INCOME> 8,240,632
<REALIZED-GAINS-CURRENT> 28,203,265
<APPREC-INCREASE-CURRENT> (53,910,054)
<NET-CHANGE-FROM-OPS> (17,466,157)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,380,269)
<DISTRIBUTIONS-OF-GAINS> (42,170,001)
<DISTRIBUTIONS-OTHER> (3,567)
<NUMBER-OF-SHARES-SOLD> 1,114,820
<NUMBER-OF-SHARES-REDEEMED> (1,153,770)
<SHARES-REINVESTED> 1,633,995
<NET-CHANGE-IN-ASSETS> (17,797,027)
<ACCUMULATED-NII-PRIOR> 151,505
<ACCUMULATED-GAINS-PRIOR> 4,675,987
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,708,021
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,722,531
<AVERAGE-NET-ASSETS> 400,011,855
<PER-SHARE-NAV-BEGIN> 37.19
<PER-SHARE-NII> .78
<PER-SHARE-GAIN-APPREC> (2.41)
<PER-SHARE-DIVIDEND> (.80)
<PER-SHARE-DISTRIBUTIONS> (4.02)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 30.74
<EXPENSE-RATIO> .43
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 007
<NAME> Government Securities Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 139,610,762
<INVESTMENTS-AT-VALUE> 136,109,698
<RECEIVABLES> 1,496,559
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 199,224
<TOTAL-ASSETS> 137,805,481
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 18,011
<TOTAL-LIABILITIES> 18,011
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 141,603,594
<SHARES-COMMON-STOCK> 13,434,322
<SHARES-COMMON-PRIOR> 12,837,749
<ACCUMULATED-NII-CURRENT> 13,699
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (328,759)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,501,064)
<NET-ASSETS> 137,787,470
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9,495,370
<OTHER-INCOME> 0
<EXPENSES-NET> (713,579)
<NET-INVESTMENT-INCOME> 8,781,791
<REALIZED-GAINS-CURRENT> 56,873
<APPREC-INCREASE-CURRENT> (9,257,079)
<NET-CHANGE-FROM-OPS> (418,415)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,912,447)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,222,644
<NUMBER-OF-SHARES-REDEEMED> (2,494,519)
<SHARES-REINVESTED> 868,448
<NET-CHANGE-IN-ASSETS> (3,529,756)
<ACCUMULATED-NII-PRIOR> 156,200
<ACCUMULATED-GAINS-PRIOR> (385,632)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 692,022
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 713,579
<AVERAGE-NET-ASSETS> 141,826,929
<PER-SHARE-NAV-BEGIN> 11.01
<PER-SHARE-NII> .71
<PER-SHARE-GAIN-APPREC> (.74)
<PER-SHARE-DIVIDEND> (.72)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.26
<EXPENSE-RATIO> .50
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 008
<NAME> Growth Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 263,482,501
<INVESTMENTS-AT-VALUE> 345,416,272
<RECEIVABLES> 473,059
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 229,559
<TOTAL-ASSETS> 346,118,890
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 237,297
<TOTAL-LIABILITIES> 237,297
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 226,232,935
<SHARES-COMMON-STOCK> 14,681,173
<SHARES-COMMON-PRIOR> 12,700,511
<ACCUMULATED-NII-CURRENT> 20,316
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 37,694,571
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 81,933,771
<NET-ASSETS> 345,881,593
<DIVIDEND-INCOME> 2,958,449
<INTEREST-INCOME> 462,397
<OTHER-INCOME> 0
<EXPENSES-NET> (1,380,794)
<NET-INVESTMENT-INCOME> 2,040,052
<REALIZED-GAINS-CURRENT> 37,694,571
<APPREC-INCREASE-CURRENT> 7,380,568
<NET-CHANGE-FROM-OPS> 47,115,191
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,019,736)
<DISTRIBUTIONS-OF-GAINS> (1,365,000)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,609,763
<NUMBER-OF-SHARES-REDEEMED> (782,721)
<SHARES-REINVESTED> 153,620
<NET-CHANGE-IN-ASSETS> 86,053,980
<ACCUMULATED-NII-PRIOR> 45,662
<ACCUMULATED-GAINS-PRIOR> 1,320,223
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,366,818
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,380,794
<AVERAGE-NET-ASSETS> 305,008,913
<PER-SHARE-NAV-BEGIN> 20.46
<PER-SHARE-NII> .14
<PER-SHARE-GAIN-APPREC> 3.20
<PER-SHARE-DIVIDEND> (.14)
<PER-SHARE-DISTRIBUTIONS> (.10)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.56
<EXPENSE-RATIO> .45
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 009
<NAME> High Yield Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 14,377,050
<INVESTMENTS-AT-VALUE> 13,223,507
<RECEIVABLES> 246,343
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 211,390
<TOTAL-ASSETS> 13,681,240
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,515
<TOTAL-LIABILITIES> 3,515
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,174,228
<SHARES-COMMON-STOCK> 1,838,368
<SHARES-COMMON-PRIOR> 1,743,204
<ACCUMULATED-NII-CURRENT> (84,053)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,258,907)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,153,543)
<NET-ASSETS> 13,677,725
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,290,881
<OTHER-INCOME> 0
<EXPENSES-NET> (93,579)
<NET-INVESTMENT-INCOME> 1,197,302
<REALIZED-GAINS-CURRENT> (593,513)
<APPREC-INCREASE-CURRENT> (350,732)
<NET-CHANGE-FROM-OPS> 253,057
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,270,032)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 46,183
<NUMBER-OF-SHARES-REDEEMED> (121,722)
<SHARES-REINVESTED> 170,703
<NET-CHANGE-IN-ASSETS> (364,907)
<ACCUMULATED-NII-PRIOR> 24,710
<ACCUMULATED-GAINS-PRIOR> (788,536)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 84,208
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 93,579
<AVERAGE-NET-ASSETS> 13,969,461
<PER-SHARE-NAV-BEGIN> 8.06
<PER-SHARE-NII> .72
<PER-SHARE-GAIN-APPREC> (.58)
<PER-SHARE-DIVIDEND> (.72)
<PER-SHARE-DISTRIBUTIONS> (.04)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.44
<EXPENSE-RATIO> .67
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 010
<NAME> International Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 157,794,402
<INVESTMENTS-AT-VALUE> 196,499,892
<RECEIVABLES> 535,542
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 285,185
<TOTAL-ASSETS> 197,320,619
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 85,143
<TOTAL-LIABILITIES> 85,143
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 161,158,666
<SHARES-COMMON-STOCK> 12,364,108
<SHARES-COMMON-PRIOR> 10,585,657
<ACCUMULATED-NII-CURRENT> (68,786)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,549,970)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 38,695,566
<NET-ASSETS> 197,235,476
<DIVIDEND-INCOME> 6,185,339
<INTEREST-INCOME> 346,744
<OTHER-INCOME> 0
<EXPENSES-NET> (1,314,709)
<NET-INVESTMENT-INCOME> 5,217,374
<REALIZED-GAINS-CURRENT> 12,581,615
<APPREC-INCREASE-CURRENT> 22,634,156
<NET-CHANGE-FROM-OPS> 40,433,145
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,097,167)
<DISTRIBUTIONS-OF-GAINS> (18,651,634)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,134,348
<NUMBER-OF-SHARES-REDEEMED> (910,209)
<SHARES-REINVESTED> 1,554,312
<NET-CHANGE-IN-ASSETS> 43,647,561
<ACCUMULATED-NII-PRIOR> 98,613
<ACCUMULATED-GAINS-PRIOR> 3,286,505
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,225,255
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,314,709
<AVERAGE-NET-ASSETS> 166,871,187
<PER-SHARE-NAV-BEGIN> 14.51
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> 3.14
<PER-SHARE-DIVIDEND> (.47)
<PER-SHARE-DISTRIBUTIONS> (1.71)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.95
<EXPENSE-RATIO> .78
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> International SmallCap Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 28,818,369
<INVESTMENTS-AT-VALUE> 39,599,410
<RECEIVABLES> 115,466
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 595,521
<TOTAL-ASSETS> 40,310,397
<PAYABLE-FOR-SECURITIES> 188,722
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 81,901
<TOTAL-LIABILITIES> 270,623
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26,340,866
<SHARES-COMMON-STOCK> 2,402,990
<SHARES-COMMON-PRIOR> 1,452,751
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,918,545
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,781,041
<NET-ASSETS> 40,039,774
<DIVIDEND-INCOME> 162,042
<INTEREST-INCOME> 54,720
<OTHER-INCOME> 0
<EXPENSES-NET> (275,533)
<NET-INVESTMENT-INCOME> (58,771)
<REALIZED-GAINS-CURRENT> 4,970,503
<APPREC-INCREASE-CURRENT> 11,523,072
<NET-CHANGE-FROM-OPS> 16,434,804
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (1,673,285)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 974,795
<NUMBER-OF-SHARES-REDEEMED> (84,837)
<SHARES-REINVESTED> 60,281
<NET-CHANGE-IN-ASSETS> 26,964,622
<ACCUMULATED-NII-PRIOR> 1,409
<ACCUMULATED-GAINS-PRIOR> (321,166)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 250,499
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 275,533
<AVERAGE-NET-ASSETS> 20,833,505
<PER-SHARE-NAV-BEGIN> 9.00
<PER-SHARE-NII> (.02)
<PER-SHARE-GAIN-APPREC> 8.41
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.73)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.66
<EXPENSE-RATIO> 1.32
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> LargeCap Growth Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 4,908,923
<INVESTMENTS-AT-VALUE> 6,832,783
<RECEIVABLES> 24,703
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 190,662
<TOTAL-ASSETS> 7,048,148
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,517
<TOTAL-LIABILITIES> 3,517
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,333,257
<SHARES-COMMON-STOCK> 531,316
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (212,486)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,923,860
<NET-ASSETS> 7,044,631
<DIVIDEND-INCOME> 16,418
<INTEREST-INCOME> 14,325
<OTHER-INCOME> 0
<EXPENSES-NET> (45,762)
<NET-INVESTMENT-INCOME> (15,019)
<REALIZED-GAINS-CURRENT> (212,486)
<APPREC-INCREASE-CURRENT> 1,923,860
<NET-CHANGE-FROM-OPS> 1,696,355
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 532,362
<NUMBER-OF-SHARES-REDEEMED> (1,046)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 7,044,631
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 43,238
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 48,214
<AVERAGE-NET-ASSETS> 5,482,158
<PER-SHARE-NAV-BEGIN> 9.93
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> 3.36
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.26
<EXPENSE-RATIO> 1.16<F1>
<FN>
<F1>
Without the Manager's voluntary waiver of a portion of certain expenses for
this period, this account would have had per share net investment income of
$(.04) and a ratio of expenses to average net assets of 1.23%. The amount
waived was $2,261.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 013
<NAME> MicroCap Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 6,175,975
<INVESTMENTS-AT-VALUE> 5,868,814
<RECEIVABLES> 33,177
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 519,491
<TOTAL-ASSETS> 6,421,482
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,814
<TOTAL-LIABILITIES> 3,814
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,534,848
<SHARES-COMMON-STOCK> 795,241
<SHARES-COMMON-PRIOR> 658,550
<ACCUMULATED-NII-CURRENT> 3,558
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (813,577)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (307,161)
<NET-ASSETS> 6,417,668
<DIVIDEND-INCOME> 57,589
<INTEREST-INCOME> 18,362
<OTHER-INCOME> 0
<EXPENSES-NET> (63,066)
<NET-INVESTMENT-INCOME> 12,885
<REALIZED-GAINS-CURRENT> (531,506)
<APPREC-INCREASE-CURRENT> 432,502
<NET-CHANGE-FROM-OPS> (86,119)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,327)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 178,154
<NUMBER-OF-SHARES-REDEEMED> (41,910)
<SHARES-REINVESTED> 447
<NET-CHANGE-IN-ASSETS> 1,034,069
<ACCUMULATED-NII-PRIOR> 254
<ACCUMULATED-GAINS-PRIOR> (282,071)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 59,482
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 76,305
<AVERAGE-NET-ASSETS> 5,918,677
<PER-SHARE-NAV-BEGIN> 8.17
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> (.11)
<PER-SHARE-DIVIDEND> (.01)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.07
<EXPENSE-RATIO> 1.06<F1>
<FN>
<F1>
Without the Manager's voluntary waiver of a portion of certain expenses for
this period, this account would have had per share net investment income of
$(.01) and a ratio of expenses to average net assets of 1.28%. The amount
waived was $13,239.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 014
<NAME> MidCap Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 207,142,516
<INVESTMENTS-AT-VALUE> 260,730,131
<RECEIVABLES> 1,734,223
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 199,663
<TOTAL-ASSETS> 262,664,017
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 314,192
<TOTAL-LIABILITIES> 314,192
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 195,890,440
<SHARES-COMMON-STOCK> 7,108,966
<SHARES-COMMON-PRIOR> 7,548,803
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 12,871,770
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 53,587,615
<NET-ASSETS> 262,349,825
<DIVIDEND-INCOME> 1,930,560
<INTEREST-INCOME> 395,999
<OTHER-INCOME> 0
<EXPENSES-NET> (1,533,300)
<NET-INVESTMENT-INCOME> 793,259
<REALIZED-GAINS-CURRENT> 19,365,345
<APPREC-INCREASE-CURRENT> 9,954,987
<NET-CHANGE-FROM-OPS> 30,113,591
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (800,858)
<DISTRIBUTIONS-OF-GAINS> (12,036,219)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 421,789
<NUMBER-OF-SHARES-REDEEMED> (1,235,799)
<SHARES-REINVESTED> 374,173
<NET-CHANGE-IN-ASSETS> 2,879,617
<ACCUMULATED-NII-PRIOR> 54,439
<ACCUMULATED-GAINS-PRIOR> 5,551,388
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,522,214
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,533,300
<AVERAGE-NET-ASSETS> 248,199,823
<PER-SHARE-NAV-BEGIN> 34.37
<PER-SHARE-NII> .12
<PER-SHARE-GAIN-APPREC> 4.20
<PER-SHARE-DIVIDEND> (.12)
<PER-SHARE-DISTRIBUTIONS> (1.67)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 36.90
<EXPENSE-RATIO> .61
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 015
<NAME> MidCap Growth Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 12,240,325
<INVESTMENTS-AT-VALUE> 13,707,406
<RECEIVABLES> 101,321
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 464,849
<TOTAL-ASSETS> 14,273,576
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,281
<TOTAL-LIABILITIES> 9,281
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,797,041
<SHARES-COMMON-STOCK> 1,337,875
<SHARES-COMMON-PRIOR> 883,925
<ACCUMULATED-NII-CURRENT> 3,224
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,051)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,467,081
<NET-ASSETS> 14,264,295
<DIVIDEND-INCOME> 115,886
<INTEREST-INCOME> 13,388
<OTHER-INCOME> 0
<EXPENSES-NET> (101,498)
<NET-INVESTMENT-INCOME> 27,776
<REALIZED-GAINS-CURRENT> 731,050
<APPREC-INCREASE-CURRENT> 597,863
<NET-CHANGE-FROM-OPS> 1,356,689
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (24,552)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 532,104
<NUMBER-OF-SHARES-REDEEMED> (79,631)
<SHARES-REINVESTED> 1,477
<NET-CHANGE-IN-ASSETS> 5,730,784
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (734,101)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 95,048
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 115,857
<AVERAGE-NET-ASSETS> 10,525,481
<PER-SHARE-NAV-BEGIN> 9.65
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> 1.01
<PER-SHARE-DIVIDEND> (.02)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.66
<EXPENSE-RATIO> .96<F1>
<FN>
<F1>
Without the Manager's voluntary waiver of a portion of certain expenses for
this period, this account would have had per share net investment income of
$.01 and a ratio of expenses to average net assets of 1.09%. The amount waived
was $14,359.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 016
<NAME> MidCap Value Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 5,179,117
<INVESTMENTS-AT-VALUE> 5,366,586
<RECEIVABLES> 13,942
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 460,250
<TOTAL-ASSETS> 5,840,778
<PAYABLE-FOR-SECURITIES> 81,106
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,030
<TOTAL-LIABILITIES> 85,136
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,182,517
<SHARES-COMMON-STOCK> 518,033
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 385,656
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 187,469
<NET-ASSETS> 5,755,642
<DIVIDEND-INCOME> 44,312
<INTEREST-INCOME> 7,648
<OTHER-INCOME> 0
<EXPENSES-NET> (42,456)
<NET-INVESTMENT-INCOME> 9,504
<REALIZED-GAINS-CURRENT> 502,244
<APPREC-INCREASE-CURRENT> 187,469
<NET-CHANGE-FROM-OPS> 699,217
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,704)
<DISTRIBUTIONS-OF-GAINS> (116,388)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 517,750
<NUMBER-OF-SHARES-REDEEMED> (88)
<SHARES-REINVESTED> 371
<NET-CHANGE-IN-ASSETS> 5,755,642
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 37,469
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 44,856
<AVERAGE-NET-ASSETS> 5,110,453
<PER-SHARE-NAV-BEGIN> 10.09
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> 1.24
<PER-SHARE-DIVIDEND> (.02)
<PER-SHARE-DISTRIBUTIONS> (.22)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.11
<EXPENSE-RATIO> 1.19<F1>
<FN>
<F1>
Without the Manager's voluntary waiver of a portion of certain expenses for
this period, this account would have had per share net investment income of
$.01 and a ratio of expenses to average net assets of 1.26%. The amount waived
was $2,360.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 017
<NAME> Money Market Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 120,443,588
<INVESTMENTS-AT-VALUE> 120,443,588
<RECEIVABLES> 874,072
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 46,451
<TOTAL-ASSETS> 121,364,111
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 440,401
<TOTAL-LIABILITIES> 440,401
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 120,923,710
<SHARES-COMMON-STOCK> 120,923,710
<SHARES-COMMON-PRIOR> 83,262,822
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 120,923,710
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,687,277
<OTHER-INCOME> 0
<EXPENSES-NET> (456,273)
<NET-INVESTMENT-INCOME> 4,231,004
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4,231,004
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,231,004)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 119,049,917
<NUMBER-OF-SHARES-REDEEMED> (85,617,203)
<SHARES-REINVESTED> 4,228,174
<NET-CHANGE-IN-ASSETS> 37,660,888
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 440,147
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 456,273
<AVERAGE-NET-ASSETS> 87,899,113
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> .048
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.048)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> .52
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 018
<NAME> Real Estate Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 10,895,712
<INVESTMENTS-AT-VALUE> 10,428,737
<RECEIVABLES> 69,732
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 65,000
<TOTAL-ASSETS> 10,563,469
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,185
<TOTAL-LIABILITIES> 3,185
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,636,493
<SHARES-COMMON-STOCK> 1,287,623
<SHARES-COMMON-PRIOR> 1,203,354
<ACCUMULATED-NII-CURRENT> 21,800
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,631,034)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (466,975)
<NET-ASSETS> 10,560,284
<DIVIDEND-INCOME> 635,714
<INTEREST-INCOME> 19,634
<OTHER-INCOME> 0
<EXPENSES-NET> (110,064)
<NET-INVESTMENT-INCOME> 545,284
<REALIZED-GAINS-CURRENT> (1,459,133)
<APPREC-INCREASE-CURRENT> 390,875
<NET-CHANGE-FROM-OPS> (522,974)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (571,628)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 122,880
<NUMBER-OF-SHARES-REDEEMED> (53,710)
<SHARES-REINVESTED> 15,099
<NET-CHANGE-IN-ASSETS> (348,472)
<ACCUMULATED-NII-PRIOR> 46,645
<ACCUMULATED-GAINS-PRIOR> (171,901)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 99,831
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 110,064
<AVERAGE-NET-ASSETS> 11,030,955
<PER-SHARE-NAV-BEGIN> 9.07
<PER-SHARE-NII> .43
<PER-SHARE-GAIN-APPREC> (.85)
<PER-SHARE-DIVIDEND> (.45)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.20
<EXPENSE-RATIO> .99
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 019
<NAME> SmallCap Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 24,141,741
<INVESTMENTS-AT-VALUE> 25,200,898
<RECEIVABLES> 715,338
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 199,897
<TOTAL-ASSETS> 26,116,133
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,490
<TOTAL-LIABILITIES> 6,490
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22,841,902
<SHARES-COMMON-STOCK> 2,430,372
<SHARES-COMMON-PRIOR> 1,473,324
<ACCUMULATED-NII-CURRENT> 91
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,208,493
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,059,157
<NET-ASSETS> 26,109,643
<DIVIDEND-INCOME> 122,050
<INTEREST-INCOME> 47,347
<OTHER-INCOME> 0
<EXPENSES-NET> (161,161)
<NET-INVESTMENT-INCOME> 8,236
<REALIZED-GAINS-CURRENT> 4,522,953
<APPREC-INCREASE-CURRENT> 2,652,903
<NET-CHANGE-FROM-OPS> 7,184,092
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,617)
<DISTRIBUTIONS-OF-GAINS> (2,243,300)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 981,514
<NUMBER-OF-SHARES-REDEEMED> (147,886)
<SHARES-REINVESTED> 123,420
<NET-CHANGE-IN-ASSETS> 14,015,338
<ACCUMULATED-NII-PRIOR> 455
<ACCUMULATED-GAINS-PRIOR> (71,160)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 149,481
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 161,161
<AVERAGE-NET-ASSETS> 17,528,717
<PER-SHARE-NAV-BEGIN> 8.21
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 3.52
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.99)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.74
<EXPENSE-RATIO> .91
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 020
<NAME> SmallCap Growth Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 21,231,414
<INVESTMENTS-AT-VALUE> 35,373,279
<RECEIVABLES> 1,083,254
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 4,395,008
<TOTAL-ASSETS> 40,851,541
<PAYABLE-FOR-SECURITIES> 1,170,590
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,770
<TOTAL-LIABILITIES> 1,176,360
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 24,601,096
<SHARES-COMMON-STOCK> 2,028,072
<SHARES-COMMON-PRIOR> 837,627
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 932,220
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,141,865
<NET-ASSETS> 39,675,181
<DIVIDEND-INCOME> 64,780
<INTEREST-INCOME> 4,086
<OTHER-INCOME> 0
<EXPENSES-NET> (163,238)
<NET-INVESTMENT-INCOME> (94,372)
<REALIZED-GAINS-CURRENT> 2,142,989
<APPREC-INCREASE-CURRENT> 12,830,588
<NET-CHANGE-FROM-OPS> 14,879,205
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (377,219)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,237,096
<NUMBER-OF-SHARES-REDEEMED> (61,655)
<SHARES-REINVESTED> 15,004
<NET-CHANGE-IN-ASSETS> 31,212,553
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (739,178)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 153,958
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 166,287
<AVERAGE-NET-ASSETS> 15,398,342
<PER-SHARE-NAV-BEGIN> 10.10
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 9.70
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.19)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.56
<EXPENSE-RATIO> 1.05<F1>
<FN>
<F1>
Without the Manager's voluntary waiver of a portion of certain expenses for
this period, this account would have had per share net investment income of
$(.05) and a ratio of expenses to average net assets of 1.07%. The amount
waived was $3,049.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> SmallCap Value Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 9,208,129
<INVESTMENTS-AT-VALUE> 10,201,523
<RECEIVABLES> 67,616
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 821,851
<TOTAL-ASSETS> 11,090,990
<PAYABLE-FOR-SECURITIES> 2,850
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,683
<TOTAL-LIABILITIES> 10,533
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,093,877
<SHARES-COMMON-STOCK> 1,101,640
<SHARES-COMMON-PRIOR> 826,513
<ACCUMULATED-NII-CURRENT> 1,583
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8,397)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 993,394
<NET-ASSETS> 11,080,457
<DIVIDEND-INCOME> 146,431
<INTEREST-INCOME> 23,772
<OTHER-INCOME> 0
<EXPENSES-NET> (99,665)
<NET-INVESTMENT-INCOME> 70,538
<REALIZED-GAINS-CURRENT> 490,603
<APPREC-INCREASE-CURRENT> 1,306,560
<NET-CHANGE-FROM-OPS> 1,867,701
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (70,821)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 326,674
<NUMBER-OF-SHARES-REDEEMED> (55,528)
<SHARES-REINVESTED> 3,981
<NET-CHANGE-IN-ASSETS> 4,185,071
<ACCUMULATED-NII-PRIOR> 2,269
<ACCUMULATED-GAINS-PRIOR> (499,000)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 94,464
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 123,565
<AVERAGE-NET-ASSETS> 8,552,078
<PER-SHARE-NAV-BEGIN> 8.34
<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> 1.72
<PER-SHARE-DIVIDEND> (.06)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.06
<EXPENSE-RATIO> 1.16
<F1>
Without the Manager's voluntary waiver of a portion of certain expenses for this
period, this account would have had per share net investment income of $.04 and
a ratio of expenses to average net assets of 1.44%. The amount waived was
$23,900.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> Stock Index 500 Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 42,895,988
<INVESTMENTS-AT-VALUE> 45,633,273
<RECEIVABLES> 249,384
<ASSETS-OTHER> 18,775
<OTHER-ITEMS-ASSETS> 211,567
<TOTAL-ASSETS> 46,112,999
<PAYABLE-FOR-SECURITIES> 11,535
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13,142
<TOTAL-LIABILITIES> 24,677
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43,069,720
<SHARES-COMMON-STOCK> 4,302,824
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 459
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 55,246
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,962,897
<NET-ASSETS> 46,088,322
<DIVIDEND-INCOME> 193,726
<INTEREST-INCOME> 128,847
<OTHER-INCOME> 0
<EXPENSES-NET> (70,275)
<NET-INVESTMENT-INCOME> 252,298
<REALIZED-GAINS-CURRENT> 381,179
<APPREC-INCREASE-CURRENT> 2,962,897
<NET-CHANGE-FROM-OPS> 3,596,374
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (251,839)
<DISTRIBUTIONS-OF-GAINS> (325,933)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,332,359
<NUMBER-OF-SHARES-REDEEMED> (70,795)
<SHARES-REINVESTED> 41,260
<NET-CHANGE-IN-ASSETS> 46,088,322
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 61,479
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 86,270
<AVERAGE-NET-ASSETS> 25,221,739
<PER-SHARE-NAV-BEGIN> 9.83
<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> .97
<PER-SHARE-DIVIDEND> (.07)
<PER-SHARE-DISTRIBUTIONS> (.08)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.71
<EXPENSE-RATIO> .40
<F1>
Without the Manager's voluntary waiver of a portion of certain epenses for this
period, this account would have had per share net investment income of $.05 and
a ratio of expenses to average net assets of .49%. The amount waived was
$15,231.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 023
<NAME> Utilities Account
[ARTICLE] 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 29,387,051
<INVESTMENTS-AT-VALUE> 30,393,843
<RECEIVABLES> 79,641
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 215,954
<TOTAL-ASSETS> 30,689,438
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,292
<TOTAL-LIABILITIES> 5,292
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 29,288,756
<SHARES-COMMON-STOCK> 2,815,009
<SHARES-COMMON-PRIOR> 1,674,705
<ACCUMULATED-NII-CURRENT> 1,506
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 387,092
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,006,792
<NET-ASSETS> 30,684,146
<DIVIDEND-INCOME> 713,054
<INTEREST-INCOME> 79,044
<OTHER-INCOME> 0
<EXPENSES-NET> (159,560)
<NET-INVESTMENT-INCOME> 632,538
<REALIZED-GAINS-CURRENT> 539,988
<APPREC-INCREASE-CURRENT> (571,384)
<NET-CHANGE-FROM-OPS> 601,142
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (631,032)
<DISTRIBUTIONS-OF-GAINS> (137,455)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,173,600
<NUMBER-OF-SHARES-REDEEMED> (78,185)
<SHARES-REINVESTED> 44,889
<NET-CHANGE-IN-ASSETS> 12,386,072
<ACCUMULATED-NII-PRIOR> 5,402
<ACCUMULATED-GAINS-PRIOR> (15,441)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 150,219
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 159,560
<AVERAGE-NET-ASSETS> 24,936,092
<PER-SHARE-NAV-BEGIN> 10.93
<PER-SHARE-NII> .23
<PER-SHARE-GAIN-APPREC> .02
<PER-SHARE-DIVIDEND> (.23)
<PER-SHARE-DISTRIBUTIONS> (.05)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.90
<EXPENSE-RATIO> .64
</TABLE>
9/99
CODE OF ETHICS FOR PRINCIPAL MANAGEMENT CORPORATION
I. Statement of Purpose and General Principles
The purpose of this Code of Ethics ("Code") is to prevent conflicts of
interest which may exist, or appear to exist, when persons associated
with Principal Management Corporation ("Principal Management") own or
engage in transactions involving securities that are owned or are being
purchased or sold or are being considered for purchase or sale by the
Funds. Central to this Code are the following fiduciary principles:
A. The duty at all times to place the interests of customers first.
B. The requirement that all personal securities transactions be
conducted consistent with this Code, and in such a manner as to
avoid any actual or potential conflict of interest or abuse of
an individual's position of trust and responsibility.
C. The fundamental standard that persons associated with Principal
Management should not take inappropriate advantage of their
positions.
II. Definitions:
A. SECURITY: Shall have the meaning set forth in Section 2(a)(36)
of the Investment Company Act, except it shall not include
securities issued by the Government of the United States,
bankers' acceptances, certificates of deposit, commercial paper,
and shares of open-end management investment companies (i.e.
mutual funds).
B. ACCESS PERSON: "Access person" means any (1) director or officer
of Principal Management or (2) employee of Principal Management
who in the regular course of his or her duties makes,
participates in or obtains information regarding the purchase or
sale of securities by the Funds or whose functions relate to the
making of any recommendations with respect to such purchases and
sales.
Access Persons consist of these sub-categories: (1) Portfolio
Managers (individuals entrusted with the direct responsibility
and authority to make investment decisions affecting The Funds),
(2) Investment Personnel (which include Portfolio Managers as
well as portfolio strategists, analysts and traders), and (3)
Other Access Persons (all persons who are not included in the
sub-categories 1 or 2).
C. PURCHASE OR SALE: A security is being considered for purchase or
sale when a Portfolio Manager views the purchase or sale of the
security for a Fund as probable. The phrase "purchase or sale of
a security" includes the writing of an option to purchase or
sell a security or the purchase of an option to purchase or sell
a security.
D. BENEFICIAL OWNERSHIP: "Beneficial ownership" shall be interpreted
in the same manner as in determining whether a person is subject
to the provisions of Section 16 of the Securities Exchange Act of
1934 and the rules and regulations thereunder, except that the
determination of direct and indirect beneficial ownership shall
apply to all securities which a person owns. For example, the
term "Beneficial Ownership" encompasses (i) in addition to
securities in a person's own account(s), securities owned by
members of the person's immediate family sharing the same
household, and (ii) securities a person might acquire or dispose
of through the exercise or conversion of any derivative security,
whether presently exercisable or not.
E. RESTRICTED LISTS: Two records known as the "Restricted Debt
Securities List" and the "Restricted Equity Securities List"
shall be maintained by the securities trading area. The Lists
shall include the names of all securities the Funds (1) are
currently buying or which the Funds expect to buy, and (2)
currently hold; provided however that any security an Index Fund
is currently buying or which such Fund currently holds shall not
be included on the Restricted Equity Securities List.
The reference date for determining when a Fund "expects to buy"
is the date on which a Portfolio Manager views the purchase of
the security for a Fund as probable. Names of securities shall
be removed from the Restricted List 15 days after a Fund has (1)
ceased considering the security for purchase or (2) entirely
liquidated its position in such security.
F. THE FUNDS: The mutual funds for which Principal Management
serves as investment advisor. In the case of a series Fund,
"Fund" shall mean a series of The Fund.
III. Exempted Transactions. This Code shall not apply to:
A. Sales made pursuant to a general public tender offer.
B. The acceptance of stock dividends of securities already owned;
the reinvestment of cash dividends of securities already owned
under a dividend reinvestment program or the participation in a
monthly investment plan for the purchase of a security already
owned (Note: The initial purchase or establishment of a dividend
reinvestment program or automatic investment plan must be
precleared).
C. Purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of securities, to the
extent such rights are acquired directly from the issuers
thereof, and sales of such rights.
D. Exercising or selling options or rights to exchange or convert
securities but only when those instruments have been acquired or
disposed of in accordance with the Code.
E. Purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control.
F. Purchases or sales which are non-volitional on the part of
either the Access Person or one of the Funds.
IV. Restricted and Prohibited Transactions
A. No Investment Personnel may acquire, directly or indirectly,
beneficial ownership in any security that is part of an initial
public offering.
B. No Investment Personnel may acquire, directly or indirectly,
beneficial ownership in any security in a private placement
transaction without prior approval.
Investment Personnel who have acquired securities in a private
placement transaction must disclose that investment when they
play a part in any consideration by one of The Funds of an
investment in the issuer of the privately placed security. In
such circumstances a decision to purchase securities on behalf
of one of The Funds must be subject to an independent review by
Investment Personnel with no personal interest in the issuer.
C. No Access Person may purchase or sell a security in which he or
she has, or by reason of such transaction acquires, any direct
or indirect beneficial ownership while that security is listed
on a Restricted List, except as provided elsewhere in this Code.
See V. Preclearance.
No Portfolio Manager may purchase or sell a security in which he
or she has, or by reason of such transaction acquires, any
direct or indirect beneficial interest within 7 days before and
after a Fund that he or she manages trades in that security.
D. Investment Personnel may not profit directly or indirectly from
the acquisition and disposition (or disposition and acquisition)
of beneficial ownership of the same (or equivalent) securities
within 60 calendar days. Any profits realized on such short-term
trades must be disgorged to a charitable organization determined
by Principal Management.
Investment Personnel may request exceptions to this prohibition
prior to realizing the profit. Such exceptions will be
considered on a case-by-case basis, taking into consideration
the facts and circumstances of each situation.
V. Preclearance
A. Portfolio Managers (Refer also to Section IV. C.)
Portfolio Managers may request permission to trade any security
on the Restricted Debt Securities List. Portfolio Managers may
also request permission to trade securities on the Restricted
Equity Securities List in an amount each calendar quarter that
is the greater of 500 shares or 1% of the daily average trading
volume during the 90 days prior to the date the Portfolio
Manager makes the request; provided however Portfolio Managers
may not purchase or sell any security within seven (7) days
before or after a Fund the Portfolio Manager manages purchased
or sold the security.
Requests for approval may be made by contacting the person
responsible for maintaining the Restricted Debt Securities List
or the Restricted Equity Securities List.
Approvals to trade are valid for 24 hours after given. Portfolio
Managers who desire an approval that is valid for a longer
period may make such a request when seeking approval to trade.
B. Access Persons Other Than Portfolio Managers
Access Persons other than Portfolio Managers may request
permission to trade any security on the Restricted Debt
Securities List. Access Persons may also request permission to
trade securities on the Restricted Equity Securities List in an
amount each calendar quarter that is the greater of 500 shares
or 1% of the daily average trading volume during the 90 days
prior to the date the Access Person makes the request.
Requests for approval may be made by contacting the person
responsible for maintaining the Restricted Debt Securities List
or the Restricted Equity Securities List.
Approvals to trade are valid for 24 hours after given. Access
Persons who desire an approval that is valid for a longer period
may make such a request when seeking approval to trade.
VI. Disclosure of Securities Ownership and Securities Transactions
A. When recommending the purchase or sale of securities for one of
the Funds in accordance with portfolio management procedures,
Investment Personnel must disclose any direct or indirect
beneficial ownership in any security of the issuer whose
securities are under consideration.
B. All Access Persons shall file a report with Principal Management
listing all their personal securities transactions during the
previous calendar quarter in any security (as defined in Section
II, A.) in which such person has acquired or sold any direct or
indirect beneficial ownership including transactions exempt from
this Code under Section III. The report shall be made on a form
provided by Principal Management within 10 days following the
end of such calendar quarter. The report shall contain the
following information:
(1) The date of the transaction, the name and the number of
shares or the principal amount of each security involved;
(2) The nature of the transactions (e.g., purchase or sale);
(3) The price at which the transaction was effected;
(4) The name of the broker, dealer or bank with or through which
the transaction was effected; and
(5) If a sale transaction, the date on which the security was
acquired and the cost basis of the security.
C. Access Persons must direct brokerage and other firms with which
they have securities accounts to furnish Principal Management on
a timely basis duplicate copies of confirmations of all personal
securities transactions.
D. Access Persons must direct brokerage and other firms with which
they have securities accounts to furnish Principal Management on
a timely basis a duplicate copy of the Access Person's December
31 account statement.
E. Access Persons who are Portfolio Managers must furnish Principal
Management a listing of all securities in which they have a
direct or indirect beneficial ownership at the time of their
appointment as a Portfolio Manager, and thereafter on an annual
basis as of December 31 of each year.
VII. Certification of Compliance
All Access Persons will be required to certify annually that they have
read and understand the Code and its applicability to them, and that
they have complied with the requirements of the Code and that they have
disclosed or reported all personal securities transactions as required
by the Code.
VIII. Gifts
Investment Personnel are prohibited from receiving any gift or other
thing having a value of more than $100 in the aggregate in any calendar
year from any person or entity that does business with or on behalf of
the Funds. Gifts do not include occasional dinners, sporting events or
other entertainment that Investment Personnel attend with their host.
IX. Service as a Corporate Director
Investment Personnel are prohibited from serving on the board of
directors of a publicly traded company, absent prior authorization
based on a determination that board service would be consistent with
the interests of the Funds and their shareholders.
X. Administration and Sanctions
A. Responsibility for this Code is vested in the Chairman of the
Boards of Directors of Principal Management. (Administrative
responsibility has been delegated to A. S. Filean and E. H.
Gillum. Requests for interpretation of this Code or for
preclearance of purchase or sales that are not clearly addressed
by this Code should be directed (in the order to be contacted)
to: J. B. Schustek, E. H. Gillum, A. S. Filean, M. D. Roughton,
R.C. Eucher).
B. Upon discovering a violation of this Code, the Chairman of
Principal Management may impose such sanctions as the Chairman
deems appropriate.
C. Annually, those individuals charged with the responsibility for
carrying out this Code shall prepare a report to the Boards of
Directors of Principal Management and of the Funds that, as a
minimum, will include:
(1) A summary of existing procedures concerning personal
investing and any procedural changes made during the
past year;
(2) Identification of violations requiring significant
remedial action during the past year; and
(3) Recommendations, if any, as to changes in existing
restrictions or procedures based on experience with this
Code, evolving industry practices or developments in
applicable laws or regulations.
I. Statement of Purpose and General Principles
The purpose of this Code of Ethics ("Code") is to prevent conflicts of
interest which may exist, or appear to exist, when persons associated
with Invista Capital Management ("Invista") own or engage in
transactions involving securities that are owned or are being purchased
or sold or are being considered for purchase or sale for the accounts
of clients of Invista. Central to this Code are the following fiduciary
principles:
A. The duty at all times to place the interests of clients first.
B. The requirement that all personal securities transactions be
conducted consistent with this Code, and in such a manner as to
avoid any actual or potential conflict of interest or abuse of an
individual's position of trust and responsibility.
C. The fundamental standard that persons associated with Invista
should not take inappropriate advantage of their positions.
II. Definitions:
A.SECURITY: Shall have the meaning set forth in Section 202(a)(18) of
the Investment Advisers Act, except it shall not include
securities issued by the Government of the United States,
bankers' acceptances, certificates of deposit, commercial
paper, or shares of open-end management investment companies
(i.e. mutual funds).
B.ACCESS PERSON: "Access person" means any (1) director or officer of
Invista or (2) employee of Invista who in the regular course
of his or her duties makes, participates in or obtains
information regarding the purchase or sale of securities for
the accounts of clients of Invista or whose functions relate
to the making of any recommendations with respect to such
purchases and sales.
Access Persons consist of these sub-categories: (1) Portfolio
Managers (individuals entrusted with the direct responsibility
and authority to make investment decisions affecting the
accounts of clients of Invista), (2) Investment Personnel
(which include Portfolio Managers as well as portfolio
strategists, analysts and traders), and (3) Other Access
Persons (all persons who are not included in sub- categories 1
or 2).
C.PURCHASE OR SALE: A security is being considered for purchase or sale
when a Portfolio Manager views the purchase or sale of the
security for a client account as probable. The phrase
"purchase or sale of a security" includes the writing of an
option to purchase or sell a security or the purchase of an
option to purchase or sell a security.
D.BENEFICIAL OWNERSHIP: "Beneficial ownership" shall be interpreted in
the same manner as in determining whether a person is subject
to the provisions of Section 16 of the Securities Exchange Act
of 1934 and the rules and regulations thereunder, except that
the determination of direct and indirect beneficial ownership
shall apply to all securities which a person owns. For
example, the term "Beneficial Ownership" encompasses (i) in
addition to securities in a person's own account(s),
securities owned by members of the person's immediate family
sharing the same household, and (ii) securities a person might
acquire or dispose of through the exercise or conversion of
any derivative security, whether presently exercisable or not.
E.RESTRICTED LISTS: A record known as the "Restricted Equity Securities
List" shall be maintained by the securities trading area. The
List shall include the names of all securities that are (1)
currently being bought, or which Invista expects to buy, for
client accounts, and (2) currently held in client accounts;
provided however that any security an index account is
currently buying or which such account currently holds shall
not be included on the Restricted Equity Securities List.
The reference date for determining when Invista "expects to
buy" is the date on which a Portfolio Manager views the
purchase of the security for a client account as probable.
Names of securities shall be removed from the Restricted List
15 days after Invista has (1) ceased considering the security
for purchase or (2) entirely liquidated its position in such
security.
A record known as the "Restricted Debt Securities List" shall
be maintained by Invista's affiliate, Principal Capital
Management, LLC.
III. Exempted Transactions. This Code shall not apply to:
A. Sales made pursuant to a general public tender offer.
B. The acceptance of stock dividends of securities already owned;
the reinvestment of cash dividends of securities already owned
under a dividend reinvestment program or the participation in a
monthly investment plan for the purchase of a security already
owned (Note: The initial purchase or establishment of a dividend
reinvestment program or automatic investment plan must be
precleared).
C. Purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of securities, to the
extent such rights are acquired directly from the issuers
thereof, and sales of such rights.
D. Exercising or selling options or rights to exchange or convert
securities, but only when those instruments have been acquired or
disposed of in accordance with the Code.
E. Purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control.
F. Purchases or sales which are non-volitional on the part of either
the Access Person or one of the client accounts.
IV. Restricted and Prohibited Transactions
A. No Investment Personnel may acquire, directly or indirectly,
beneficial ownership in any security that is part of an initial
public offering.
B. No Investment Personnel may acquire, directly or indirectly,
beneficial ownership in any security in a private placement
transaction without prior approval.
Investment Personnel who have acquired securities in a private
placement transaction must disclose that investment when they
play a part in any consideration of an investment in the issuer
of the privately placed security for a client account. In such
circumstances a decision to purchase securities of the issuer for
a client account must be subject to an independent review by
Investment Personnel with no personal interest in the issuer.
C. No Access Person may purchase or sell a security in which he or
she has, or by reason of such transaction acquires, any direct or
indirect beneficial ownership while that security is listed on a
Restricted List, except as provided elsewhere in this Code. See
V. Preclearance.
No Portfolio Manager may purchase or sell a security in which he
or she has, or by reason of such transaction acquires, any direct
or indirect beneficial interest within 7 days before and after a
client account that he or she manages trades in that security.
D. Investment Personnel may not profit directly or indirectly from
the acquisition and disposition (or disposition and acquisition
of beneficial ownership) of the same (or equivalent) securities
within 60 calendar days. Any profits realized on such short-term
trades must be disgorged to a charitable organization determined
by management of Invista.
Investment Personnel may request exceptions to this prohibition
prior to realizing the profit. Such exceptions will be considered
on a case-by-case basis, taking into consideration the facts and
circumstances of each situation.
V. Preclearance
A. Portfolio Managers (Refer also to Section IV. C.)
Portfolio Managers may request permission to trade any security
on the Restricted Debt Securities List. Portfolio Managers may
also request permission to trade securities on the Restricted
Equity Securities List in an amount each calendar quarter that is
the greater of 500 shares or 1% of the daily average trading
volume during the 90 days prior to the date the Portfolio Manager
makes the request; provided however Portfolio Managers may not
purchase or sell any security within seven (7) days before and
after a client account the Portfolio Manager manages purchased or
sold the security.
Requests for approval may be made by contacting the person
responsible for maintaining the Restricted Debt Securities List
or the Restricted Equity Securities List.
Approvals to trade are valid for 24 hours after given. Portfolio
Managers who desire an approval that is valid for a longer period
may make such a request when seeking approval to trade.
B. Access Persons Other Than Portfolio Managers
Access Persons other than Portfolio Managers may request
permission to trade any security on the Restricted Debt
Securities List. Access Persons may also request permission to
trade securities on the Restricted Equity Securities List in an
amount each calendar quarter that is the greater of 500 shares or
1% of the daily average trading volume during the 90 days prior
to the date the Access Person makes the request.
Requests for approval may be made by contacting the person
responsible for maintaining the Restricted Debt Securities List
or the Restricted Equity Securities List.
Approvals to trade are valid for 24 hours after given. Access
Persons who desire an approval that is valid for a longer period
may make such a request when seeking approval to trade.
VI. Disclosure of Securities Ownership and Securities Transactions
A. When recommending the purchase or sale of securities for a client
account in accordance with portfolio management procedures,
Investment Personnel must disclose any direct or indirect
beneficial ownership in any security of the issuer whose
securities are under consideration.
B. All Access Persons shall file a report listing all their personal
securities transactions during the previous calendar quarter in
any security (as defined in Section II, A.) in which such person
has acquired or sold any direct or indirect beneficial ownership
including transactions exempt from this Code under Section III.
The report shall be made on a form provided by Invista within 10
days following the end of such calendar quarter. The report shall
contain the following information:
1. The date of the transaction, the title and the number of
shares or the principal amount of each security involved;
2. The nature of the transactions (e.g., purchase or sale);
3. The price at which the transaction was effected;
4. The name of the broker, dealer or bank with or through which
the transaction was effected; and
5. If a sale transaction, the date on which the security was
acquired and the cost basis of the security.
C. Access Persons must direct brokerage and other firms with which
they have securities accounts to furnish Invista on a timely
basis duplicate copies of confirmations of all personal
securities transactions.
D. Access Persons must direct brokerage and other firms with which
they have securities accounts to furnish Invista on a timely
basis a duplicate copy of the Access Person's December 31 account
statement.
E. Access Persons who are Portfolio Managers must give Invista a
listing of all securities in which they have a direct or indirect
beneficial ownership at the time of their appointment as a
Portfolio Manager, and thereafter on an annual basis as of
December 31 of each year.
VII. Certification of Compliance
All Access Persons will be required to certify annually that they have
read and understand the Code and its applicability to them, and that
they have complied with the requirements of the Code and that they have
disclosed or reported all personal securities transactions as required
by the Code.
VIII. Gifts
Investment Personnel are prohibited from receiving any gift or other
thing having a value of more than $100 in the aggregate in any calendar
year from any person or entity that does business with or on behalf of
Invista. Gifts do not include occasional dinners, sporting events or
other entertainment that Investment Personnel attend with their host.
IX. Service as a Corporate Director
Investment Personnel are prohibited from serving on the board of
directors of a publicly traded company, absent prior authorization
based on a determination that board service would be consistent with
the interest of Invista clients.
X. Administration and Sanctions
A. Responsibility for this Code is vested in the Chairman of the
Board of Directors of Invista. (Administrative responsibility has
been delegated to Dennis Cameron. Requests for interpretation of
this Code or for preclearance of purchase or sales that are not
clearly addressed by this
Code should be directed (in order to be contacted) to: J. B.
Schustek, E. H. Gillum, A. S. Filean, M. D. Roughton, R. C.
Eucher).
B. Upon discovering a violation of this Code, the Chairman of
Invista shall impose such sanctions as the Chairman deems
appropriate.
C. Annually, those individuals charged with the responsibility for
carrying out this Code shall prepare a report to the Board of
Directors of Invista that, as a minimum, will include:
1. A summary of existing procedures concerning personal
investing, and any procedural changes made during the past
year.
2. Identification of violations requiring significant remedial
action during the past year.
3. Recommendations, if any, as to changes in existing
restrictions or procedures based on experience with this
Code, evolving industry practices or developments in
applicable laws or regulations
CONFIDENTIAL INFORMATION AND
SECURITIES TRADING POLICY
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
CONTENTS
Page
- ------------------------------
INTRODUCTION .................................................... 1
PART I
APPLICABLE TO ALL ASSOCIATES
SECTION ONE
CONFIDENTIAL INFORMATION............................ 2
-Types of Confidential Information.................. 2
-Rules for Protecting Confidential Information...... 3
-Supplemental Procedures............................ 4
SECTION TWO
INSIDER TRADING AND TIPPING......................... 5
-Legal Prohibitions................................. 5
-Mellon's Policy.................................... 6
SECTION THREE
RESTRICTIONS ON THE FLOW OF INFORMATION
WITHIN MELLON (THE "CHINESE WALL").................. 7
-Rules for Maintaining the Chinese Wall............. 7
-Reporting Receipt of Material Nonpublic
Information........................................ 8
-Functions "Above the Wall"......................... 9
-Supplemental Procedures............................ 9
SECTION FOUR
RESTRICTIONS ON TRANSACTIONS IN MELLON
SECURITIES..........................................10
-Beneficial Ownership...............................11
SECTION FIVE
RESTRICTIONS ON TRANSACTIONS IN OTHER
SECURITIES..........................................12
SECTION SIX
CLASSIFICATION OF ASSOCIATES........................14
-Insider Risk Associate.............................14
-Investment Associate...............................15
-Other Associate....................................15
PART II
APPLICABLE TO INSIDER
RISK ASSOCIATES ONLY ....................................................16
-Prohibition on Investments in Securities of
Financial Services Organizations...................16
-Conflict of Interest...............................17
-Preclearance for Personal Securities
Transactions.......................................17
-Personal Securities Transactions Reports...........19
-Confidential Treatment.............................19
PART III
APPLICABLE TO INVESTMENT
ASSOCIATES ONLY ....................................................20
-Special Standards of Conduct for
Investment Associates..............................20
-Preclearance for Personal Securities
Transactions.......................................21
-Personal Securities Transactions Reports...........23
-Confidential Treatment.............................24
PART IV
APPLICABLE TO OTHER
ASSOCIATES ONLY ....................................................25
-Preclearance for Personal Securities
Transactions.......................................25
-Personal Securities Transactions Reports...........25
-Restrictions on Transactions in Other
Securities.........................................25
-Confidential Treatment.............................26
PART V
APPLICABLE TO NONMANAGEMENT
BOARD MEMBERS ....................................................27
-Nonmanagement Board Member.........................27
-Standards of Conduct for Nonmanagement
Board Member.......................................27
-Preclearance for Personal Securities
Transactions.......................................28
-Personal Securities Transactions Reports...........29
-Confidential Treatment.............................29
GLOSSARY Definitions.........................................30
INDEX OF EXHIBITS ....................................................33
</TABLE>
<PAGE>
INTRODUCTION
- ------------------------------
Mellon Bank Corporation ("Mellon") and its associates, and
the registered investment companies for which The Dreyfus
Corporation ("Dreyfus") and/or Mellon serves as investment
adviser, sub-investment adviser or administrator, are
subject to certain laws and regulations governing the use
of confidential information and personal securities
trading. Mellon has developed this Confidential Information
and Securities Trading Policy (the "Policy") to establish
specific standards to promote compliance with applicable
laws. Further, the Policy is intended to protect Mellon's
business secrets and proprietary information as well as
that of its customers and any entity for which it acts in a
fiduciary capacity.
The Policy set forth procedures and limitations which
govern the personal securities transactions of every Mellon
associate and certain other individuals associated with the
registered investment companies for which Dreyfus and/or
Mellon serves as investment adviser, sub-investment adviser
or administrator. The Policy is designed to reinforce
Mellon's reputation for integrity by avoiding even the
appearance of impropriety in the conduct of Mellon's
business.
Associates should be aware that they may be held personally
liable for any improper or illegal acts committed during
the course of their employment, and that "ignorance of the
law" is not a defense. Associates may be subject to civil
penalties such as fines, regulatory sanctions including
suspensions, as well as criminal penalties.
Associates outside the United States are also subject to
applicable laws of foreign jurisdictions, which may differ
substantially from U.S. law and which may subject such
associates to additional requirements. Such associates must
comply with applicable requirements of pertinent foreign
laws as well as with the provisions of the Policy. To the
extent any particular portion of the Policy is inconsistent
with foreign law, associates should consult the General
Counsel or the Manager of Corporate Compliance.
Any provision of this Policy may be waived or exempted at
the discretion of the Manager of Corporate Compliance. Any
such waiver or exemption will be evidenced in writing and
maintained in the Risk Management and Compliance
Department.
Associates must read the Policies and MUST COMPLY
with them. Failure to comply with the provisions
of the Policies may result in the imposition of
serious sanctions, including but not limited to
disgorgement of profits, dismissal, substantial
personal liability and referral to law enforcement
agencies or other regulatory agencies. Associates
should retain the Policies in their records for
future reference. Any questions regarding the
Policies should be referred to the Manager of
Corporate Compliance or his/her designee.
<PAGE>
PART I - APPLICABLE TO ALL ASSOCIATES
- ------------------------------
SECTION ONE
CONFIDENTIAL INFORMATION
As an associate you may receive information about Mellon,
its customers and other parties that, for various reasons,
should be treated as confidential. All associates are
expected to strictly comply with measures necessary to
preserve the confidentiality of information.
TYPES OF CONFIDENTIAL INFORMATION - Although it is
impossible to provide an exhaustive list of information
that should remain confidential, the following are examples
of the general types of confidential information that
associates might receive in the ordinary course of carrying
out their job responsibilities.
o Information Obtained from Business Relations - An associate
might receive confidential information regarding customers
or other parties with whom Mellon has business
relationships. If released, such information could have a
significant effect on their operations, their business
reputations or the market price of their securities.
Disclosing such information could expose both the associate
and Mellon to liability for damages.
o Mellon Financial Information - An associate might receive
financial information regarding Mellon before such
information has been disclosed to the public. It is the
policy of Mellon to disclose all material corporate
information to the public in such a manner that all those
who are interested in Mellon and its securities have equal
access to the information. Disclosing such information to
unauthorized persons could subject both the associate and
Mellon to liability under the federal securities laws.
o Mellon Proprietary Information - Certain nonfinancial
information developed by Mellon - such as business plans,
customer lists, methods of doing business, computer
software, source codes, databases and related documentation
- constitutes valuable Mellon proprietary information.
Disclosure of such information to unauthorized persons
could harm, or reduce a benefit to, Mellon and could result
in liability for both the associate and Mellon.
o Mellon Examination Information - Banks and certain other
Mellon subsidiaries are periodically examined by regulatory
agencies. Certain reports made by those regulatory agencies
are the property of those agencies and are strictly
confidential. Giving information from these reports to
anyone not officially connected with Mellon is a criminal
offense.
o Portfolio Management Information - Portfolio management
information relating to investment accounts or funds
managed by Mellon or Dreyfus, including investment
decisions or strategies developed for the benefit of
investment companies advised by Dreyfus, is for the benefit
of such account or fund. Disclosure or exploitation of such
information by an associate in an unauthorized manner may
cause detriment to such accounts or funds and may subject
the associate to liability under the federal securities
laws.
<PAGE>
RULES FOR PROTECTING CONFIDENTIAL INFORMATION - The
following are some basic rules to follow to protect
confidential information.
o Limited Communication to Outsiders - Confidential
information should not be communicated to anyone outside
Mellon, except to the extent they need to know the
information in order to provide necessary services to
Mellon.
o Limited Communication to Insiders - Confidential
information should not be communicated to other associates,
except to the extent they need to know the information to
fulfill their job responsibilities and their knowledge of
the information is not likely to result in misuse or a
conflict of interest. In this regard, Mellon has
established specific restrictions with respect to material
nonpublic information in order to separate and insulate
different functional areas and personnel within Mellon.
Please refer to Section Three, "Restrictions on The Flow of
Information Within Mellon" (The "Chinese Wall").
o Corporate Use Only - Confidential information should be
used only for Corporate purposes. Under no circumstances
may an associate use it, directly or indirectly, for
personal gain or for the benefit of any outside party who
is not entitled to such information.
o Other Customers - Where appropriate, customers should be
made aware that associates will not disclose to them other
customers' confidential information or use the confidential
information of one customer for the benefit of another.
o Notification of Confidentiality - When confidential
information is communicated to any person, either inside or
outside Mellon, they should be informed of the
information's confidential nature and the limitations on
its further communication.
o Prevention of Eavesdropping - Confidential matters should
not be discussed in public or in places, such as in
building lobbies, restaurants or elevators, where
unauthorized persons may overhear. Precautions, such as
locking materials in desk drawers overnight, stamping
material "Confidential" and delivering materials in sealed
envelopes, should be taken with written materials to ensure
they are not read by unauthorized persons.
o Data Protection - Data stored on personal computers and
diskettes should be properly secured to ensure they are not
accessed by unauthorized persons. Access to computer files
should be granted only on a need-to-know basis. At a
minimum, associates should comply with applicable Mellon
policies on electronic data security.
<PAGE>
o Confidentiality Agreements - Confidentiality agreements to
which Mellon is a party must be complied with in addition
to, but not in lieu of, this Policy. Confidentiality
agreements that deviate from commonly used forms should be
reviewed in advance by the Legal Department.
o Contact with the Public - All contacts with institutional
shareholders or securities analysts about Mellon must be
made through the Investor Relations Division of the Finance
Department. All contacts with the media and all speeches or
other public statements made on behalf of Mellon or about
Mellon's businesses must be cleared in advance by Corporate
Affairs. In speeches and statements not made on behalf of
Mellon, care should be taken to avoid any implication that
Mellon endorses the views expressed.
SUPPLEMENTAL PROCEDURES - Mellon entities, departments,
divisions and groups should establish their own
supplemental procedures for protecting confidential
information, as appropriate. These procedures may include:
o establishing records retention and destruction policies;
o using code names;
o limiting the staffing of confidential matters (for example,
limiting the size of working groups and the use of
temporary employees, messengers and word processors); and
o requiring written confidentiality agreements from certain
associates.
Any supplemental procedures should be used only to protect
confidential information and not to circumvent appropriate
reporting and recordkeeping requirements.
<PAGE>
SECTION TWO
INSIDER TRADING AND TIPPING
LEGAL PROHIBITIONS - Federal securities laws generally
prohibit the trading of securities while in possession of
"material nonpublic" information regarding the issuer of
those securities (insider trading). Any person who passes
along the material nonpublic information upon which a trade
is based (tipping) may also be liable.
"Material" - Information is material if there is a
substantial likelihood that a reasonable investor would
consider it important in deciding whether to buy, sell or
hold securities. Obviously, information that would affect
the market price of a security would be material. Examples
of information that might be material include:
o a proposal or agreement for a merger, acquisition or
divestiture, or for the sale or purchase of substantial
assets;
o tender offers, which are often material for the party
making the tender offer as well as for the issuer of the
securities for which the tender offer is made;
o dividend declarations or changes;
o extraordinary borrowings or liquidity problems;
o defaults under agreements or actions by creditors,
customers or suppliers relating to a company's credit
standing;
o earnings and other financial information, such as large
or unusual write-offs, write-downs, profits or losses;
o pending discoveries or developments, such as new products,
sources of materials, patents, processes, inventions or
discoveries of mineral deposits;
o a proposal or agreement concerning a financial
restructuring;
o a proposal to issue or redeem securities, or a
development with respect to a pending issuance or
redemption of securities;
o a significant expansion or contraction of operations;
o information about major contracts or increases or
decreases in orders;
o the institution of, or a development in, litigation or a
regulatory proceeding;
o developments regarding a company's senior management;
o information about a company received from a director of
that company; and
o information regarding a company's possible noncompliance
with environmental protection laws.
This list is not exhaustive. All relevant circumstances
must be considered when determining whether an item of
information is material.
<PAGE>
"Nonpublic" - Information about a company is nonpublic if
it is not generally available to the investing public.
Information received under circumstances indicating that it
is not yet in general circulation and which may be
attributable, directly or indirectly, to the company or its
insiders is likely to be deemed nonpublic information.
If an associate can refer to some public source to show
that the information is generally available (that is,
available not from inside sources only) and that enough
time has passed to allow wide dissemination of the
information, the information is likely to be deemed public.
While information appearing in widely accessible sources -
such as newspapers - becomes public very soon after
publication, information appearing in less accessible
sources - such as regulatory filings - may take up to
several days to be deemed public. Similarly, highly complex
information might take longer to become public than would
information that is easily understood by the average
investor.
MELLON'S POLICY - Associates who possess material nonpublic
information about a company - whether that company is
Mellon, another Mellon entity, a Mellon customer or
supplier, or other company - may not trade in that
company's securities, either for their own accounts or for
any account over which they exercise investment discretion.
In addition, associates may not recommend trading in those
securities and may not pass the information along to
others, except to associates who need to know the
information in order to perform their job responsibilities
with Mellon. These prohibitions remain in effect until the
information has become public.
Associates who have investment responsibilities should take
appropriate steps to avoid receiving material nonpublic
information. Receiving such information could create severe
limitations on their ability to carry out their
responsibilities to Mellon's fiduciary customers.
Associates managing the work of consultants and temporary
employees who have access to the types of confidential
information described in this Policy are responsible for
ensuring that consultants and temporary employees are aware
of Mellon's policy and the consequences of noncompliance.
Questions regarding Mellon's policy on material nonpublic
information, or specific information that might be subject
to it, should be referred to the General Counsel.
<PAGE>
SECTION THREE
RESTRICTIONS ON THE FLOW OF
INFORMATION WITHIN MELLON
(THE "CHINESE WALL")
As a diversified financial services organization, Mellon
faces unique challenges in complying with the prohibitions
on insider trading and tipping of material nonpublic
information and misuse of confidential information. This is
because one Mellon unit might have material nonpublic
information about a company while other Mellon units may
have a desire, or even a fiduciary duty, to buy or sell
that company's securities or recommend such purchases or
sales to customers. To engage in such broad-ranging
financial services activities without violating laws or
breaching Mellon's fiduciary duties, Mellon has established
a "Chinese Wall" policy applicable to all associates. The
"Chinese Wall" separates the Mellon units or individuals
that are likely to receive material nonpublic information
(Potential Insider Functions) from the Mellon units or
individuals that either trade in securities - for Mellon's
account or for the accounts of others - or provide
investment advice (Investment Functions).
Examples of Potential Insider Functions - Potential Insider
Functions include, among others, certain commercial
lending, corporate finance, and credit policy areas.
Insider Risk Associates (see Section Six, "Insider Risk
Associates") should consider themselves to be in Potential
Insider Functions unless their particular job
responsibilities clearly indicate otherwise.
Examples of Investment Functions - Investment Functions
include, among others, securities sales and trading,
investment management and advisory services, investment
research and various trust or fiduciary functions.
RULES FOR MAINTAINING THE "CHINESE WALL" - Without the
prior approval of the General Counsel, material nonpublic
information obtained by anyone in a Potential Insider
Function should not be communicated to anyone in an
Investment Function. To reduce the risk of material
nonpublic information being communicated, communications
between these associates in these functions must be limited
to the maximum extent consistent with valid business needs.
Particular rules -
o File Restrictions - Associates in Investment Functions must
not have access to commercial credit files, corporate
finance files, or any other Potential Insider Function
files that might contain material nonpublic information.
All such files that contain material nonpublic information
should be marked as "Confidential" and, if feasible,
segregated from nonconfidential files.
o Electronic Data - Associates in Investment Functions must
not have access to personal computer or word processing
files of associates in Potential Insider Functions.
o Meetings - Associates in Investment Functions must not
attend meetings between customers and associates in
Potential Insider Functions unless appropriate steps have
been taken to ensure that material nonpublic information
will not be disclosed or discussed.
o Committee Service - Without the prior approval of the
General Counsel, associates other than those "Above the
Wall" (see page 9) must not serve simultaneously on a
committee having responsibility for any Investment Function
and a committee having responsibility for any Potential
Insider Function.
o Information Requests - Requests for nonmaterial information
or public information across the "Chinese Wall" should be
made in writing to an appropriate associate in the
applicable area. Associates sending or receiving such a
request should resolve any questions regarding the
materiality or nonpublic nature of the requested
information by consulting their department head, who will
contact the General Counsel, as appropriate.
o Information Backflow - Associates should take care to avoid
inadvertent backflow of information that may be interpreted
as the prohibited communication of material nonpublic
information. For example, the mere fact that someone in a
Potential Insider Function, such as a mergers and
acquisitions specialist, requests information from an
associate in an Investment Function could give the latter
person a clue as to possible material developments
affecting a customer.
o Customers - Associates in Investment Functions must not
state or imply to customers that associates making
decisions or recommendations will have the benefit of
information from Mellon's Potential Insider Functions. When
appropriate, associates should inform customers of Mellon's
"Chinese Wall" policy.
o Conflicts of Interest - Associates should not receive or
pass on any information that would create an undue risk of
Mellon or any associate having a conflict of interest or
breaching a fiduciary obligation.
REPORTING RECEIPT OF MATERIAL NONPUBLIC INFORMATION -
Associates in Investment Functions who receive any
suspected material nonpublic information must report such
receipt promptly to their department or entity head. A
department or entity head who receives information believed
to be material and nonpublic should report the matter
promptly to the General Counsel. If the General Counsel
determines that the information is material and nonpublic,
the affected department or entity will:
o immediately suspend all trading in the securities of the
issuer to which the information applies, as well as all
recommendations with respect to such securities. The
suspension will remain in effect as long as the information
remains both material and nonpublic.
O notify the General Counsel before resuming transactions or
recommendations in the affected securities. The General
Counsel will advise as to possible further steps, including
ascertaining the validity and nonpublic nature of the
information with the issuer of the securities; requesting
the issuer of the securities, or other appropriate parties,
to disseminate the information promptly to the public if
the information is valid and nonpublic; and publishing the
information.
In certain circumstances, the department or entity head may
be able to demonstrate conclusively that the receipt of the
material nonpublic information has been confined to an
individual or small group of individuals and that measures
other than those described above will comparably reduce the
likelihood of trading on the basis of the information.
These measures might include temporarily relieving
individuals of responsibility for any Investment Functions
and preventing any contact between those individuals and
associates in Investment Functions. In these circumstances,
the department head, with the approval of the General
Counsel, may take those measures rather than the measures
described above.
<PAGE>
FUNCTIONS "ABOVE THE WALL" - Some functions at Mellon are
deemed to be "Above the Wall." For example, members of
senior management, Auditing, Risk Management and
Compliance, and the Legal Department will typically need to
have access to information on both sides of the "Chinese
Wall" to carry out their job responsibilities. These
individuals cannot rely on the procedural safeguards of the
"Chinese Wall" and, therefore, need to be particularly
careful to avoid any improper use or dissemination of
material nonpublic information.
SUPPLEMENTAL PROCEDURES - As appropriate, certain Mellon
departments or areas, such as Mellon Trust, should
establish their own procedures to reduce the possibility of
information being communicated to associates who should not
have access to that information.
<PAGE>
SECTION FOUR
RESTRICTIONS ON TRANSACTIONS
IN MELLON SECURITIES
Associates who engage in transactions involving Mellon
securities should be aware of their unique responsibilities
with respect to such transactions arising from the
employment relationship and should be sensitive to even the
appearance of impropriety.
The following restrictions apply to all transactions in
Mellon's publicly traded securities occurring in the
associate's own account and in all other accounts over
which the associate could be expected to exercise influence
or control (see provisions under "Beneficial Ownership"
below for a more complete discussion of the accounts to
which these restrictions apply). These restrictions are to
be followed in addition to any restrictions that apply to
particular officers or directors (such as restrictions
under Section 16 of the Securities Exchange Act of 1934).
o Short Sales - Short sales of Mellon securities by
associates are prohibited.
o Sales Within 60 Days of Purchase - Sales of Mellon
securities within 60 days of acquisition are prohibited.
For purposes of the 60-day holding period, securities will
be deemed to be equivalent if one is convertible into the
other, if one entails a right to purchase or sell the
other, or if the value of one is expressly dependent on the
value of the other (e.g., derivative securities).
In cases of extreme hardship, associates (other than senior
management) may obtain permission to dispose of Mellon
securities acquired within 60 days of the proposed
transaction, provided the transaction is pre-cleared with
the Manager of Corporate Compliance and any profits earned
are disgorged in accordance with procedures established by
senior management. The Manager of Corporate Compliance
reserves the right to suspend the 60-day holding period
restriction in the event of severe market disruption.
o Margin Transactions - Purchases on margin of Mellon's
publicly traded securities by associates is prohibited.
Margining Mellon securities in connection with a cashless
exercise of an employee stock option through the Human
Resources Department is exempt from this restriction.
Further, Mellon securities may be used to collateralize
loans or the acquisition of securities other than those
issued by Mellon.
o Option Transactions - Option transactions involving
Mellon's publicly traded securities are prohibited.
Transactions under Mellon's Long-Term Incentive Plan or
other associate option plans are exempt from this
restriction.
o Major Mellon Events - Associates who have knowledge of
major Mellon events that have not yet been announced are
prohibited from buying and selling Mellon's publicly traded
securities before such public announcements, even if the
associate believes the event does not constitute material
nonpublic information.
o Mellon Blackout Period - Associates are prohibited from
buying or selling Mellon's publicly traded securities
during a blackout period, which begins the 16th day of the
last month of each calendar quarter and ends three business
days after Mellon publicly announces the financial results
for that quarter. In cases of extreme hardship, associates
(other than senior management) may request permission from
the Manager of Corporate Compliance to dispose of Mellon
securities during the blackout period.
<PAGE>
BENEFICIAL OWNERSHIP - The provisions discussed above apply
to transactions in the associate's own name and to all
other accounts over which the associate could be expected
to exercise influence or control, including:
o accounts of a spouse, minor children or relatives to whom
substantial support is contributed;
o accounts of any other member of the associate's household
(e.g., a relative living in the same home);
o trust accounts for which the associate acts as trustee or
otherwise exercises any type of guidance or influence;
o Corporate accounts controlled, directly or indirectly, by
the associate;
o arrangements similar to trust accounts that are established
for bona fide financial purposes and benefit the associate;
and
o any other account for which the associate is the beneficial
owner (see Glossary for a more complete legal definition of
"beneficial owner").
<PAGE>
SECTION FIVE
RESTRICTIONS ON TRANSACTIONS
IN OTHER SECURITIES
Purchases or sales by an associate of the securities of
issuers with which Mellon does business, or other third
party issuers, could result in liability on the part of
such associate. Associates should be sensitive to even the
appearance of impropriety in connection with their personal
securities transactions. Associates should refer to the
provisions under "Beneficial Ownership" (Section Four,
"Restrictions on Transactions in Mellon Securities"), which
are equally applicable to the following provisions.
The Mellon Code of Conduct contains certain restrictions on
investments in parties that do business with Mellon.
Associates should refer to the Code of Conduct and comply
with such restrictions in addition to the restrictions and
reporting requirements set forth below.
The following restrictions apply to all securities
transactions by associates:
o Credit or Advisory Relationship - Associate may not buy or
sell securities of a company if they are considering
granting, renewing or denying any credit facility to that
company or acting as an adviser to that company with
respect to its securities. In addition, lending associates
who have assigned responsibilities in a specific industry
group are not permitted to trade securities in that
industry. This prohibition does not apply to transactions
in securities issued by open-end investment companies.
o Customer Transactions - Trading for customers and Mellon
accounts should always take precedence over associates'
transactions for their own or related accounts.
o Front Running - Associates may not engage in "front
running," that is, the purchase or sale of securities for
their own accounts on the basis of their knowledge of
Mellon's trading positions or plans.
o Initial Public Offerings - Mellon prohibits its associates
from acquiring any securities in an initial public offering
("IPO").
o Margin Transactions - Margin trading is a highly leveraged
and relatively risky method of investing that can create
particular problems for financial services employees. For
this reason, all associates are urged to avoid margin
trading.
Prior to establishing a margin account, the associate must
obtain the written permission of the Manager of Corporate
Compliance. Any associate having a margin account prior to
the effective date of this Policy must notify the Manager
of Corporate Compliance of the existence of such account.
<PAGE>
All associates having margin accounts, other than described
below, must designate the Manager of Corporate Compliance
as an interested party on that account. Associates must
ensure that the Manager of Corporate Compliance promptly
receives copies of all trade confirmations and statements
relating to the account directly from the broker. If
requested by a brokerage firm, please contact the Manager
of Corporate Compliance to obtain a letter (sometimes
referred to as a "407 letter") granting permission to
maintain a margin account. Trade confirmations and
statements are not required on margin accounts established
at Dreyfus Investment Services Corporation for the sole
purpose of cashless exercises of employee stock options. In
addition, products may be offered by a broker/dealer that,
because of their characteristics, are considered margin
accounts but have been determined by the Manager of
Corporate Compliance to be outside the scope of this Policy
(e.g., a Cash Management Account which provides overdraft
protection for the customer). Any questions regarding the
establishment, use and reporting of margin accounts should
be directed to the Manager of Corporate Compliance.
Examples of an instruction letter to a broker are shown in
Exhibits B1 and B2.
o Material Nonpublic Information - Associates possessing
material nonpublic information regarding any issuer of
securities must refrain from purchasing or selling
securities of that issuer until the information becomes
public or is no longer considered material.
o Naked Options, Excessive Trading - Mellon discourages all
associates from engaging in short-term or speculative
trading, in trading naked options, in trading that could be
deemed excessive or in trading that could interfere with an
associate's job responsibilities.
o Private Placements - Associates are prohibited from
acquiring any security in a private placement unless they
obtain the prior written approval of the Preclearance
Compliance Officer (applicable only to Investment
Associates), the Manager of Corporate Compliance and the
associate's department head. Approval must be given by all
appropriate aforementioned persons for the acquisition to
be considered approved. After receipt of the necessary
approvals and the acquisition, associates are required to
disclose that investment when they participate in any
subsequent consideration of an investment in the issuer for
an advised account. Final decision to acquire such
securities for an advised account will be subject to
independent review.
o Scalping - Associates may not engage in "scalping," that
is, the purchase or sale of securities for their own or
Mellon's accounts on the basis of knowledge of customers'
trading positions or plans or Mellon's forthcoming
investment recommendations.
o Short-Term Trading - Associates are discouraged from
purchasing and selling, or from selling and purchasing, the
same (or equivalent) securities within 60 calendar days.
With respect to Investment Associates only, any profits
realized on such short-term trades must be disgorged in
accordance with procedures established by senior
management.
<PAGE>
SECTION SIX
CLASSIFICATION OF ASSOCIATES
Associates are engaged in a wide variety of activities for
Mellon. In light of the nature of their activities and the
impact of federal and state laws and the regulations
thereunder, the Policy imposes different requirements and
limitations on associates based on the nature of their
activities for Mellon. To assist the associates in
complying with the requirements and limitations imposed on
them in light of their activities, associates are
classified into one of three categories: Insider Risk
Associate, Investment Associate and Other Associate.
Appropriate requirements and limitations are specified in
the Policy based upon the associate's classification.
INSIDER RISK ASSOCIATE -
You are considered to be an Insider Risk Associate if you
are:
o employed in any of the following departments or functional
areas, however named, of a Mellon entity other than Dreyfus
(see Glossary for definition of "Dreyfus"):
<TABLE>
<CAPTION>
<S> <C>
- Auditing - International
- Capital Markets - Leasing
- Corporate Affairs - Legal
- Credit Policy - Mellon Business Credit
- Credit Recovery - Middle Market
- Credit Review - Portfolio and Funds Management
- Domestic Corporate Banking - Risk Management and Compliance
- Finance - Strategic Planning
- Institutional Banking - Wholesale, Administration and
Operations
</TABLE>
O a member of the Mellon Senior Management Committee,
provided that those members of the Mellon Senior Management
Committee who have management responsibility for fiduciary
activities or who routinely have access to information
about customers' securities transactions are considered to
be Investment Associates and are subject to those
provisions of the Policy pertaining to Investment
Associates;
o employed by a broker/dealer subsidiary of a Mellon
entity other than Dreyfus;
o an associate in the Stock Transfer business unit and have
been specifically designated as an Insider Risk Associate
by the Manager of Corporate Compliance; or
o an associate specifically designated as an Insider Risk
Associate by the Manager of Corporate Compliance.
<PAGE>
INVESTMENT ASSOCIATE -
You are considered to be an Investment Associate if you
are:
o a member of Mellon's Senior Management Committee who, as
part of his/her usual duties, has management responsibility
for fiduciary activities or routinely has access to
information about customers' securities transactions;
o a Dreyfus associate;
o an associate of a Mellon entity registered under the
Investment Advisers Act of 1940;
o employed in the trust area of Mellon and:
- have the title of Vice President, First Vice President
or Senior Vice President; or
- have access to material, confidential information
regarding securities transactions by or on behalf of
Mellon customers; or
o an associate specifically designated as an Investment
Associate by the Manager of Corporate Compliance.
OTHER ASSOCIATE -
You are considered to be an Other Associate if you are an
associate of Mellon Bank Corporation or any of its direct
or indirect subsidiaries who is not either an Insider Risk
Associate or an Investment Associate.
<PAGE>
PART II - APPLICABLE TO INSIDER
RISK ASSOCIATES ONLY
- ------------------------------
PROHIBITION ON INVESTMENTS IN SECURITIES OF FINANCIAL
SERVICES ORGANIZATIONS
You are prohibited from acquiring any security issued by a
financial services organization if you are:
o a member of the Mellon Senior Management Committee. For
purposes of this restriction only, this prohibition also
applies to those members of the Mellon Senior Management
Committee who are considered Investment Associates.
o employed in any of the following departments of a Mellon
entity other than Dreyfus (see Glossary for definition of
"Dreyfus"):
- Strategic Planning - Finance
- Institutional Banking - Legal
o an associate specifically designated by the Manager of
Corporate Compliance and informed that this prohibition is
applicable to you.
Financial Services Organizations - The term "security
issued by a financial services organization" includes any
security issued by:
<TABLE>
<CAPTION>
<S> <C>
- Commercial Banks - Bank Holding Companies
(other than Mellon) (other than Mellon)
- Thrifts - Savings and Loan Associations
- Insurance Companies - Broker/Dealers
- Investment Advisory Companies - Transfer Agents
- Shareholder Servicing - Other Depository
Companies Institutions
</TABLE>
The term "securities issued by a financial services
organization" DOES NOT INCLUDE securities issued by mutual
funds, variable annuities or insurance policies. Further,
for purposes of determining whether a company is a
financial services organization, subsidiaries and parent
companies are treated as separate issuers.
Effective Date - The foregoing restrictions will be
effective upon adoption of this Policy. Securities of
financial services organizations properly acquired before
the later of the effective date of this Policy or the date
of hire may be maintained or disposed of at the owner's
discretion.
Additional securities of a financial services organization
acquired through the reinvestment of the dividends paid by
such financial services organization through a dividend
reinvestment program (DRIP) are not subject to this
prohibition, provided your election to participate in the
DRIP predates the later of the effective date of this
Policy or date of hire. Optional cash purchases through a
DRIP are subject to this prohibition.
Within 30 days of the later of the effective date of this
Policy or date of becoming subject to this prohibition, all
holdings of securities of financial services organizations
must be disclosed in writing to the Manager of Corporate
Compliance. Periodically, you will be asked to file an
updated disclosure of all your holdings of securities of
financial services organizations.
<PAGE>
CONFLICT OF INTEREST - No Insider Risk Associate may engage
in or recommend any securities transaction that places, or
appears to place, his or her own interests above those of
any customer to whom investment services are rendered,
including mutual funds and managed accounts, or above the
interests of Mellon.
PRECLEARANCE FOR PERSONAL SECURITIES TRANSACTIONS - All
Insider Risk Associates must notify the Manager of
Corporate Compliance in writing and receive preclearance
before they engage in any purchase or sale of a security.
Insider Risk Associates should refer to the provisions
under "Beneficial Ownership" (Section Four, "Restrictions
on Transactions in Mellon Securities"), which are equally
applicable to these provisions.
Exemptions from Requirement to Preclear - Preclearance is
not required for the following transactions:
O purchases or sales of Exempt Securities (see Glossary);
o purchases or sales of municipal bonds;
o purchases or sales effected in any account over which an
associate has no direct or indirect control over the
investment decision-making process (e.g., nondiscretionary
trading accounts). Nondiscretionary trading accounts may
only be maintained, without being subject to preclearance
procedures, when the Manager of Corporate Compliance, after
a thorough review, is satisfied that the account is truly
nondiscretionary;
o transactions that are non-volitional on the part of an
associate (such as stock dividends);
o the sale of stock received upon the exercise of an
associate stock option if the sale is part of a "netting of
shares" or "cashless exercise" administered by the Human
Resources Department (for which the Human Resources
Department will forward information to the Manager of
Corporate Compliance);
o the automatic reinvestment of dividends under a DRIP
(preclearance is required for optional cash purchases under
a DRIP);
o purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of securities, to
the extent such rights were acquired from such issuer;
o sales of rights acquired from an issuer, as described
above; and/or
O those situations where the Manager of Corporate Compliance
determines, after taking into consideration the particular
facts and circumstances, that prior approval is not
necessary.
Requests for Preclearance - All requests for preclearance
for a securities transaction shall be submitted to the
Manager of Corporate Compliance by completing a
Preclearance Request Form (see Exhibit C1).
The Manager of Corporate Compliance will notify the Insider
Risk Associate whether the request is approved or denied,
without disclosing the reason for such approval or denial.
<PAGE>
Notifications may be given in writing or verbally by the
Manager of Corporate Compliance to the Insider Risk
Associate. A record of such notification will be maintained
by the Manager of Corporate Compliance. However, it shall
be the responsibility of the Insider Risk Associate to
obtain a written record of the Manager of Corporate
Compliance's notification within 24 hours of such
notification. The Insider Risk Associate should retain a
copy of this written record.
As there could be many reasons for preclearance being
granted or denied, Insider Risk Associates should not infer
from the preclearance response anything regarding the
security for which preclearance was requested.
Although making a preclearance request does not obligate an
Insider Risk Associate to do the transaction, it should be
noted that:
o preclearance authorization will expire at the end of the
third business day after it is received (the day
authorization is granted is considered the first business
day);
O preclearance requests should not be made for a
transaction that the Insider Risk Associate does not
intend to make; and
o Insider Risk Associates should not discuss with anyone
else, inside or outside Mellon, the response they received
to a preclearance request.
Every Insider Risk Associate must follow these procedures
or risk serious sanctions, including dismissal. If you have
any questions about these procedures you should consult the
Manager of Corporate Compliance. Interpretive issues that
arise under these procedures shall be decided by, and are
subject to the discretion of, the Manager of Corporate
Compliance.
Restricted List - The Manager of Corporate Compliance will
maintain a list (the "Restricted List") of companies whose
securities are deemed appropriate for implementation of
trading restrictions for Insider Risk Associates.
Restricted List(s) will not be distributed outside of the
Risk Management and Compliance Department. From time to
time, such trading restrictions may be appropriate to
protect Mellon and its Insider Risk Associates from
potential violations, or the appearance of violations, of
securities laws. The inclusion of a company on the
Restricted List provides no indication of the advisability
of an investment in the company's securities or the
existence of material nonpublic information on the company.
Nevertheless, the contents of the Restricted List will be
treated as confidential information to avoid unwarranted
inferences.
To assist the Manager of Corporate Compliance in
identifying companies that may be appropriate for inclusion
on the Restricted List, the department heads of sections in
which Insider Risk Associates are employed will inform the
Manager of Corporate Compliance in writing of any companies
they believe should be included on the Restricted List,
based upon facts known or readily available to such
department heads. Although the reasons for inclusion on the
Restricted List may vary, they could typically include the
following:
o Mellon is involved as a lender, investor or adviser in a
merger, acquisition or financial restructuring involving
the company;
o Mellon is involved as a selling shareholder in a public
distribution of the company's securities;
<PAGE>
o Mellon is involved as an agent in the distribution of the
company's securities;
o Mellon has received material nonpublic information on the
company;
o Mellon is considering the exercise of significant
creditors' rights against the company; or
o The company is a Mellon borrower in Credit Recovery.
Department heads of sections in which Insider Risk
Associates are employed are also responsible for notifying
the Manager of Corporate Compliance in writing of any
change in circumstances making it appropriate to remove a
company from the Restricted List.
PERSONAL SECURITIES TRANSACTIONS REPORTS
o Brokerage Accounts - All Insider Risk Associates are
required to instruct their brokers to submit directly to
the Manager of Corporate Compliance copies of all trade
confirmations and statements relating to their account. An
example of an instruction letter to a broker is contained
in Exhibit B1.
o Report of Transactions in Mellon Securities - Insider Risk
Associates must also report in writing to the Manager of
Corporate Compliance within ten calendar days whenever they
purchase or sell Mellon securities if the transaction was
not through a brokerage account as described above.
Purchases and sales of Mellon securities include the
following:
DRIP Optional Cash Purchases - Optional cash purchases
under Mellon's Dividend Reinvestment and Common Stock
Purchase Plan (the "Mellon DRIP").
Stock Options - The sale of stock received upon the
exercise of an associate stock option unless the sale is
part of a "netting of shares" or "cashless exercise"
administered by the Human Resources Department (for which
the Human Resources Department will forward information to
the Manager of Corporate Compliance).
It should be noted that the reinvestment of dividends under
the DRIP, changes in elections under Mellon's Retirement
Savings Plan, the receipt of stock under Mellon's
Restricted Stock Award Plan and the receipt or exercise of
options under Mellon's Long-Term Profit Incentive Plan are
not considered purchases or sales for the purpose of this
reporting requirement.
An example of a written report to the Manager of Corporate
Compliance is contained in Exhibit A.
CONFIDENTIAL TREATMENT
THE MANAGER OF CORPORATE COMPLIANCE WILL USE HIS OR HER
BEST EFFORTS TO ASSURE THAT ALL REQUESTS FOR PRECLEARANCE,
ALL PERSONAL SECURITIES TRANSACTION REPORTS AND ALL REPORTS
OF SECURITIES HOLDINGS ARE TREATED AS "PERSONAL AND
CONFIDENTIAL." HOWEVER, SUCH DOCUMENTS WILL BE AVAILABLE
FOR INSPECTION BY APPROPRIATE REGULATORY AGENCIES AND BY
OTHER PARTIES WITHIN AND OUTSIDE MELLON AS ARE NECESSARY TO
EVALUATE COMPLIANCE WITH OR SANCTIONS UNDER THIS POLICY.
<PAGE>
PART III - APPLICABLE TO
INVESTMENT ASSOCIATES ONLY
- ------------------------------
Because of their particular responsibilities, Investment
Associates are subject to different preclearance and
personal securities reporting requirements as discussed
below.
SPECIAL STANDARDS OF CONDUCT FOR INVESTMENT ASSOCIATES
Conflict of Interest - No Investment Associate may
recommend a securities transaction for a Mellon customer to
whom a fiduciary duty is owed, or for Mellon, without
disclosing any interest he or she has in such securities or
issuer (other than an interest in publicly traded
securities where the total investment is equal to or less
than $25,000), including:
o any direct or indirect beneficial ownership of any
securities of such issuer;
o any contemplated transaction by the Investment Associate in
such securities;
o any position with such issuer or its affiliates; and
o any present or proposed business relationship between such
issuer or its affiliates and the Investment Associate or
any party in which the Investment Associate has a
beneficial ownership interest (see "Beneficial Ownership"
in Section Four, "Restrictions On Transactions in Mellon
Securities").
Portfolio Information - No Investment Associate may divulge
the current portfolio positions, or current or anticipated
portfolio transactions, programs or studies, of Mellon or
any Mellon customer to anyone unless it is properly within
his or her job responsibilities to do so.
Material Nonpublic Information - No Investment Associate
may engage in or recommend a securities transaction, for
his or her own benefit or for the benefit of others,
including Mellon or its customers, while in possession of
material nonpublic information regarding such securities.
No Investment Associate may communicate material nonpublic
information to others unless it is properly within his or
her job responsibilities to do so.
Short-Term Trading - Any Investment Associate who purchases
and sells, or sells and purchases, the same (or equivalent)
securities within any 60-calendar-day period is required to
disgorge all profits realized on such transaction in
accordance with procedures established by senior
management. For this purpose, securities will be deemed to
be equivalent if one is convertible into the other, if one
entails a right to purchase or sell the other, or if the
value of one is expressly dependent on the value of the
other (e.g., derivative securities).
Additional Restrictions For Dreyfus Associates and
Associates of Mellon Entities Registered Under The
Investment Advisers Act of 1940 ONLY ("40 Act
Associates")
o Outside Activities - No 40 Act associate may serve on the
board of directors/trustees or as a general partner of any
publicly traded company (other than Mellon) without the
prior approval of the Manager of Corporate Compliance.
<PAGE>
o Gifts - All 40 Act associates are prohibited from accepting
gifts from outside companies, or their representatives,
with an exception for gifts of (1) a de minimis value and
(2) an occasional meal, a ticket to a sporting event or the
theater, or comparable entertainment for the 40 Act
associate and, if appropriate, a guest, which is neither so
frequent nor extensive as to raise any question of
impropriety. A gift shall be considered de minimis if it
does not exceed an annual amount per person fixed
periodically by the National Association of Securities
Dealers, which is currently $100 per person.
o Blackout Period - 40 Act associates will not be given
clearance to execute a transaction in any security that is
being considered for purchase or sale by an affiliated
investment company, managed account or trust, for which a
pending buy or sell order for such affiliated account is
pending, and for two business days after the transaction in
such security for such affiliated account has been
effected. This provision does not apply to transactions
effected or contemplated by index funds.
In addition, portfolio managers for the investment
companies are prohibited from buying or selling a security
within seven calendar days before and after such investment
company trades in that security. Any violation of the
foregoing will require the violator to disgorge all profit
realized with respect to such transaction.
PRECLEARANCE FOR PERSONAL SECURITIES TRANSACTIONS - All
Investment Associates must notify the Preclearance
Compliance Officer (see Glossary) in writing and receive
preclearance before they engage in any purchase or sale of
a security.
Exemptions from Requirement to Preclear - Preclearance is
not required for the following transactions:
o purchases or sales of "Exempt Securities" (see Glossary);
o purchases or sales effected in any account over which an
associate has no direct or indirect control over the
investment decision-making process (i.e., nondiscretionary
trading accounts). Nondiscretionary trading accounts may
only be maintained, without being subject to preclearance
procedures, when the Preclearance Compliance Officer, after
a thorough review, is satisfied that the account is truly
nondiscretionary;
O transactions which are non-volitional on the part of an
associate (such as stock dividends);
o the sale of stock received upon the exercise of an
associate stock option if the sale is part of a "netting of
shares" or "cashless exercise" administered by the Human
Resources Department (for which the Human Resources
Department will forward information to the manager of
Corporate Compliance);
o purchases which are part of an automatic reinvestment of
dividends under a DRIP (Preclearance is required for
optional cash purchases under a DRIP);
o purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of securities, to
the extent such rights were acquired from such issuer;
o sales of rights acquired from an issuer, as described
above; and/or
o those situations where the Preclearance Compliance Officer
determines, after taking into consideration the particular
facts and circumstances, that prior approval is not
necessary.
<PAGE>
Requests for Preclearance - All requests for preclearance
for a securities transaction shall be submitted to the
Preclearance Compliance Officer by completing a
Preclearance Request Form. (Investment Associates other
than Dreyfus associates are to use the Preclearance Request
Form shown as Exhibit C1. Dreyfus associates are to use the
Preclearance Request Form shown as Exhibit C2.)
The Preclearance Compliance Officer will notify the
Investment Associate whether the request is approved or
denied without disclosing the reason for such approval or
denial.
Notifications may be given in writing or verbally by the
Preclearance Compliance Officer to the Investment
Associate. A record of such notification will be maintained
by the Preclearance Compliance Officer. However, it shall
be the responsibility of the Investment Associate to obtain
a written record of the Preclearance Compliance Officer's
notification within 24 hours of such notification. The
Investment Associate should retain a copy of this written
record.
As there could be many reasons for preclearance being
granted or denied, Investment Associates should not infer
from the preclearance response anything regarding the
security for which preclearance was requested.
Although making a preclearance request does not obligate an
Investment Associate to do the transaction, it should be
noted that:
o preclearance authorization will expire at the end of the
day on which preclearance is given;
o preclearance requests should not be made for a transaction
that the Investment Associate does not intend to make; and
o Investment Associates should not discuss with anyone else,
inside or outside Mellon, the response the Investment
Associate received to a preclearance request.
Every Investment Associate must follow these procedures or
risk serious sanctions, including dismissal. If you have
any questions about these procedures, consult the
Preclearance Compliance Officer. Interpretive issues that
arise under these procedures shall be decided by, and are
subject to the discretion of, the Manager of Corporate
Compliance.
Restricted List - Each Preclearance Compliance Officer will
maintain a list (the "Restricted List") of companies whose
securities are deemed appropriate for implementation of
trading restrictions for Investment Associates in their
area. From time to time, such trading restrictions may be
appropriate to protect Mellon and its Investment Associates
from potential violations, or the appearance of violations,
of securities laws. The inclusion of a company on the
Restricted List provides no indication of the advisability
of an investment in the company's securities or the
existence of material nonpublic information on the company.
Nevertheless, the contents of the Restricted List will be
treated as confidential information in order to avoid
unwarranted inferences.
In order to assist the Preclearance Compliance Officer in
identifying companies that may be appropriate for inclusion
on the Restricted List, the head of the
entity/department/area in which Investment Associates are
employed will inform the appropriate Preclearance
Compliance Officer in writing of any companies that they
believe should be included on the Restricted List based
upon facts known or readily available to such department
heads.
<PAGE>
PERSONAL SECURITIES TRANSACTIONS REPORTS
o Brokerage Accounts - All Investment Associates are required
to instruct their brokers to submit directly to the Manager
of Corporate Compliance copies of all trade confirmations
and statements relating to their account. Examples of
instruction letters to a broker are contained in Exhibits
B1 and B2.
o Report of Transactions in Mellon Securities - Investment
Associates must also report in writing to the Manager of
Corporate Compliance within ten calendar days whenever they
purchase or sell Mellon securities if the transaction was
not through a brokerage account as described above.
Purchases and sales of Mellon securities include the
following:
DRIP Optional Cash Purchases - Optional cash purchases
under Mellon's Dividend Reinvestment and Common Stock
Purchase Plan (the "Mellon DRIP").
Stock Options - The sale of stock received upon the
exercise of an associate stock option unless the sale is
part of a "netting of shares" or "cashless exercise"
administered by the Human Resources Department (for which
the Human Resources Department will forward information to
the Manager of Corporate Compliance).
It should be noted that the reinvestment of dividends under
the DRIP, changes in elections under Mellon's Retirement
Savings Plan, the receipt of stock under Mellon's
Restricted Stock Award Plan, and the receipt or exercise of
options under Mellon's Long-Term Profit Incentive Plan are
not considered purchases or sales for the purpose of this
reporting requirement.
An example of a written report to the Manager of Corporate
Compliance is contained in Exhibit A.
o Statement of Securities Holdings - Within ten days of
receiving this Policy and on an annual basis thereafter,
all Investment Associates must submit to the Manager of
Corporate Compliance a statement of all securities in which
they presently have any direct or indirect beneficial
ownership other than Exempt Securities, as defined in the
Glossary. Investment Associates should refer to "Beneficial
Ownership" in Section Four, "Restrictions on Transactions
in Mellon Securities," which is also applicable to
Investment Associates. Such statements should be in the
format shown in Exhibit D. The annual report must be
submitted by January 31 and must report all securities
holdings other than Exempt Securities. The annual statement
of securities holdings contains an acknowledgment that the
Investment Associate has read and complied with this
Policy.
o Special Requirement with Respect to Affiliated Investment
Companies - The portfolio managers, research analysts and
other Investment Associates specifically designated by the
Manager of Corporate Compliance are required within ten
calendar days of receiving this Policy (and by no later
than ten calendar days after the end of each calendar
quarter) to report every transaction in the securities
issued by an affiliated investment company occurring in an
account in which the Investment Associate has a beneficial
ownership interest. The quarterly reporting requirement may
be satisfied by notifying the Manager of Corporate
Compliance of the name of the investment company, account
name and account number for which such quarterly reports
must be submitted.
<PAGE>
CONFIDENTIAL TREATMENT
THE PRECLEARANCE COMPLIANCE OFFICER WILL USE HIS OR HER
BEST EFFORTS TO ASSURE THAT ALL REQUESTS FOR PRECLEARANCE,
ALL PERSONAL SECURITIES TRANSACTION REPORTS AND ALL REPORTS
OF SECURITIES HOLDINGS ARE TREATED AS "PERSONAL AND
CONFIDENTIAL." HOWEVER, SUCH DOCUMENTS WILL BE AVAILABLE
FOR INSPECTION BY APPROPRIATE REGULATORY AGENCIES, AND BY
OTHER PARTIES WITHIN AND OUTSIDE MELLON AS ARE NECESSARY TO
EVALUATE COMPLIANCE WITH OR SANCTIONS UNDER THIS POLICY.
DOCUMENTS RECEIVED FROM DREYFUS ASSOCIATES ARE ALSO
AVAILABLE FOR INSPECTION BY THE BOARDS OF DIRECTORS OF
DREYFUS AND BY THE BOARDS OF DIRECTORS (OR TRUSTEES OR
MANAGING GENERAL PARTNERS, AS APPLICABLE) OF THE INVESTMENT
COMPANIES MANAGED OR ADMINISTERED BY DREYFUS.
<PAGE>
PART IV - APPLICABLE TO
OTHER ASSOCIATES ONLY
- ------------------------------
PRECLEARANCE FOR PERSONAL SECURITIES TRANSACTIONS - Except
for private placements, Other Associates are permitted to
engage in personal securities transactions without
obtaining prior approval from the Manager of Corporate
Compliance (for preclearance of private placements, use the
Preclearance Request Form shown as Exhibit C1.)
PERSONAL SECURITIES TRANSACTIONS REPORTS - Other Associates
are not required to report their personal securities
transactions other than margin transactions and
transactions involving Mellon securities as discussed
below. Other Associates are required to instruct their
brokers to submit directly to the Manager of Corporate
Compliance copies of all confirmations and statements
pertaining to margin accounts. Examples of an instruction
letter to a broker are shown in Exhibit B1.
Report of Transactions in Mellon Securities - Other
Associates must report in writing to the Manager of
Corporate Compliance within ten calendar days whenever they
purchase or sell Mellon securities. Purchases and sales of
Mellon securities include the following:
o DRIP Optional Cash Purchases - Optional cash purchases
under Mellon's Dividend Reinvestment and Common Stock
Purchase Plan (the "Mellon DRIP").
o Stock Options - The sale of stock received upon the
exercise of an associate stock option unless the sale is
part of a "netting of shares" or "cashless exercise"
administered by the Human Resources Department (for which
the Human Resources Department will forward information to
the Manager of Corporate Compliance).
It should be noted that the reinvestment of dividends under
the DRIP, changes in elections under Mellon's Retirement
Savings Plan, the receipt of stock under Mellon's
Restricted Stock Award Plan and the receipt or exercise of
options under Mellon's Long-Term Profit Incentive Plan are
not considered purchases or sales for the purpose of this
reporting requirement.
An example of a written report to the Manager of Corporate
Compliance is contained in Exhibit A.
RESTRICTIONS ON TRANSACTIONS IN OTHER SECURITIES
Margin Transactions - Prior to establishing a margin
account, Other Associates must obtain the written
permission of the Manager of Corporate Compliance. Other
Associates having a margin account prior to the effective
date of this Policy must notify the Manager of Corporate
Compliance of the existence of such account.
<PAGE>
All associates having margin accounts, other than described
below, must designate the Manager of Corporate Compliance
as an interested party on each account. Associates must
ensure that the Manager of Corporate Compliance promptly
receives copies of all trade confirmations and statements
relating to the accounts directly from the broker. If
requested by a brokerage firm, please contact the Manager
of Corporate Compliance to obtain a letter (sometimes
referred to as a "407 letter") granting permission to
maintain a margin account. Trade confirmations and
statements are not required on margin accounts established
at Dreyfus Investment Services Corporation for the sole
purpose of cashless exercises of Mellon employee stock
options. In addition, products may be offered by a
broker/dealer that, because of their characteristics, are
considered margin accounts but have been determined by the
Manager of Corporate Compliance to be outside the scope of
this Policy (e.g., a Cash Management account which provides
overdraft protection for the customer). Any questions
regarding the establishment, use and reporting of margin
accounts should be directed to the Manager of Corporate
Compliance. An example of an instruction letter to a broker
is shown in Exhibit B1.
Private Placements - Other Associates are prohibited from
acquiring any security in a private placement unless they
obtain the prior written approval of the Manager of
Corporate Compliance and the Associate's department head.
Approval must be given by both of the aforementioned
persons for the acquisition to be considered approved.
As there could be many reasons for preclearance being
granted or denied, Other Associates should not infer from
the preclearance response anything regarding the security
for which preclearance was requested.
Although making a preclearance request does not obligate an
Other Associate to do the transaction, it should be noted
that:
o preclearance authorization will expire at the end of the
third business day after it is received (the day
authorization is granted is considered the first business
day);
o preclearance requests should not be made for a transaction
that the Other Associate does not intend to make; and
o Other Associates should not discuss with anyone else,
inside or outside Mellon, the response they received to a
preclearance request.
Every Other Associate must follow these procedures or risk
serious sanctions, including dismissal. If you have any
questions about these procedures you should consult the
Manager of Corporate Compliance. Interpretive issues that
arise under these procedures shall be decided by, and are
subject to the discretion of, the Manager of Corporate
Compliance.
CONFIDENTIAL TREATMENT
THE MANAGER OF CORPORATE COMPLIANCE WILL USE HIS OR HER
BEST EFFORTS TO ASSURE THAT ALL REQUESTS FOR PRECLEARANCE,
ALL PERSONAL SECURITIES TRANSACTION REPORTS AND ALL REPORTS
OF SECURITIES HOLDINGS ARE TREATED AS "PERSONAL AND
CONFIDENTIAL." HOWEVER, SUCH DOCUMENTS WILL BE AVAILABLE
FOR INSPECTION BY APPROPRIATE REGULATORY AGENCIES AND OTHER
PARTIES WITHIN AND OUTSIDE MELLON AS ARE NECESSARY TO
EVALUATE COMPLIANCE WITH OR SANCTIONS UNDER THIS POLICY.
<PAGE>
PART V - APPLICABLE TO
NONMANAGEMENT BOARD MEMBER
- ------------------------------
NONMANAGEMENT BOARD MEMBER -
You are considered to be a Nonmanagement Board Member if
you are:
o a director of Dreyfus who is not also an officer or
employee of Dreyfus ("Dreyfus Board Member"); or
o a director, trustee or managing general partner of any
investment company who is not also an officer or employee
of Dreyfus ("Mutual Fund Board Member").
The term "Independent" Mutual Fund Board Member means those
Mutual Fund Board Members who are not deemed "interested
persons" of an investment company, as defined by the
Investment Company Act of 1940, as amended.
STANDARDS OF CONDUCT FOR NONMANAGEMENT BOARD MEMBER
Outside Activities - Nonmanagement Board Members are
prohibited from:
o accepting nomination or serving as a director, trustee or
managing general partner of an investment company not
advised by Dreyfus, without the express prior approval of
the board of directors of Dreyfus and the board of
directors/trustees or managing general partners of the
pertinent Dreyfus-managed fund(s) for which a Nonmanagement
Board Member serves as a director, trustee or managing
general partner;
o accepting employment with or acting as a consultant to any
person acting as a registered investment adviser to an
investment company without the express prior approval of
the board of directors of Dreyfus;
o owning Mellon securities if the Nonmanagement Board Member
is an "Independent" Mutual Fund Board Member, (since that
would destroy his or her "independent" status); and/or
o buying or selling Mellon's publicly traded securities
during a blackout period, which begins the 16th day of the
last month of each calendar quarter and ends three business
days after Mellon publicly announces the financial results
for that quarter.
Insider Trading and Tipping - The provisions set forth in
Section Two, "Insider Trading and Tipping," are applicable
to Nonmanagement Board Members.
<PAGE>
Conflict of Interest - No Nonmanagement Board Member may
recommend a securities transaction for Mellon, Dreyfus or
any Dreyfus-managed fund without disclosing any interest he
or she has in such securities or issuer thereof (other than
an interest in publicly traded securities where the total
investment is less than or equal to $25,000), including:
o any direct or indirect beneficial ownership of any
securities of such issuer;
o any contemplated transaction by the Nonmanagement Board
Member in such securities;
o any position with such issuer or its affiliates; and
o any present or proposed business relationship between such
issuer or its affiliates and the Nonmanagement Board Member
or any party in which the Nonmanagement Board Member has a
beneficial ownership interest (see "Beneficial Ownership",
Section Four, "Restrictions on Transaction in Mellon
Securities").
Portfolio Information - No Nonmanagement Board Member may
divulge the current portfolio positions, or current or
anticipated portfolio transactions, programs or studies, of
Mellon, Dreyfus or any Dreyfus-managed fund, to anyone
unless it is properly within his or her responsibilities as
a Nonmanagement Board Member to do so.
Material Nonpublic Information - No Nonmanagement Board
Member may engage in or recommend any securities
transaction, for his or her own benefit or for the benefit
of others, including Mellon, Dreyfus or any Dreyfus-managed
fund, while in possession of material nonpublic
information. No Nonmanagement Board Member may communicate
material nonpublic information to others unless it is
properly within his or her responsibilities as a
Nonmanagement Board Member to do so.
PRECLEARANCE FOR PERSONAL SECURITIES TRANSACTIONS -
Nonmanagement Board Members are permitted to engage in
personal securities transactions without obtaining prior
approval from the Preclearance Compliance Officer.
<PAGE>
PERSONAL SECURITY TRANSACTIONS REPORTS -
o "Independent" Mutual Fund Board Members - Any "Independent"
Mutual Fund Board Members, as defined above, who effects a
securities transaction where he or she knew, or in the
ordinary course of fulfilling his or her official duties
should have known, that during the 15-day period
immediately preceding or after the date of such
transaction, the same security was purchased or sold, or
was being considered for purchase or sale by Dreyfus
(including any investment company or other account managed
by Dreyfus), are required to report such personal
securities transaction. In the event a personal securities
transaction report is required, it must be submitted to the
Preclearance Compliance Officer not later than ten days
after the end of the calendar quarter in which the
transaction to which the report relates was effected. The
report must include the date of the transaction, the title
and number of shares or principal amount of the security,
the nature of the transaction (e.g., purchase, sale or any
other type of acquisition or disposition), the price at
which the transaction was effected and the name of the
broker or other entity with or through whom the transaction
was effected. This reporting requirement can be satisfied
by sending a copy of the confirmation statement regarding
such transactions to the Preclearance Compliance Officer
within the time period specified. Notwithstanding the
foregoing, personal securities transaction reports are not
required with respect to any securities transaction
described in "Exemption from the Requirement to Preclear"
in Part III.
o Dreyfus Board Members and "Interested" Mutual Fund Board
Members - Dreyfus Board Members and Mutual Fund Board
Members who are "interested persons" of an investment
company, as defined by the Investment Company Act of 1940,
are required to report their personal securities
transactions. Personal securities transaction reports are
required with respect to any securities transaction other
than those described in "Exemptions from Requirement to
Preclear" on Page 21. Personal securities transaction
reports are required to be submitted to the Preclearance
Compliance Officer not later than ten days after the end of
the calendar quarter in which the transaction to which the
report relates was effected. The report must include the
date of the transaction, the title and number of shares or
principal amount of the security, the nature of the
transaction (e.g., purchase, sale or any other type of
acquisition or disposition), the price at which the
transaction was effected and the name of the broker or
other entity with or through whom the transaction was
effected. This reporting requirement can be satisfied by
sending a copy of the confirmation statement regarding such
transactions to the Preclearance Compliance Officer within
the time period specified.
CONFIDENTIAL TREATMENT
THE PRECLEARANCE COMPLIANCE OFFICER WILL USE HIS OR HER
BEST EFFORTS TO ASSURE THAT ALL PERSONAL SECURITIES
TRANSACTION REPORTS ARE TREATED AS "PERSONAL AND
CONFIDENTIAL." HOWEVER, SUCH DOCUMENTS WILL BE AVAILABLE
FOR INSPECTION BY APPROPRIATE REGULATORY AGENCIES AND OTHER
PARTIES WITHIN AND OUTSIDE MELLON AS ARE NECESSARY TO
EVALUATE COMPLIANCE WITH OR SANCTIONS UNDER THIS POLICY.
<PAGE>
GLOSSARY
- ------------------------------
DEFINITIONS
o APPROVAL - written consent or written notice of
nonobjection.
o ASSOCIATE - any employee of Mellon Bank Corporation or its
direct or indirect subsidiaries; does not include outside
consultants or temporary help.
o BENEFICIAL OWNERSHIP - securities owned of record or held
in the associate's name are generally considered to be
beneficially owned by the associate.
Securities held in the name of any other person are deemed
to be beneficially owned by the associate if by reason of
any contract, understanding, relationship, agreement or
other arrangement, the associate obtains therefrom benefits
substantially equivalent to those of ownership, including
the power to vote, or to direct the disposition of, such
securities. Beneficial ownership includes securities held
by others for the associate's benefit (regardless of record
ownership), e.g. securities held for the associate or
members of the associate's immediate family, defined below,
by agents, custodians, brokers, trustees, executors or
other administrators; securities owned by the associate,
but which have not been transferred into the associate's
name on the books of the company; securities which the
associate has pledged; or securities owned by a corporation
that should be regarded as the associate's personal holding
corporation. As a natural person, beneficial ownership is
deemed to include securities held in the name or for the
benefit of the associate's immediate family, which includes
the associate's spouse, the associate's minor children and
stepchildren and the associate's relatives or the relatives
of the associate's spouse who are sharing the associate's
home, unless because of countervailing circumstances, the
associate does not enjoy benefits substantially equivalent
to those of ownership. Benefits substantially equivalent to
ownership include, for example, application of the income
derived from such securities to maintain a common home,
meeting expenses that such person otherwise would meet from
other sources, and the ability to exercise a controlling
influence over the purchase, sale or voting of such
securities. An associate is also deemed the beneficial
owner of securities held in the name of some other person,
even though the associate does not obtain benefits of
ownership, if the associate can vest or revest title in
himself at once, or at some future time.
In addition, a person will be deemed the beneficial owner
of a security if he has the right to acquire beneficial
ownership of such security at any time (within 60 days)
including but not limited to any right to acquire: (1)
through the exercise of any option, warrant or right; (2)
through the conversion of a security; or (3) pursuant to
the power to revoke a trust, nondiscretionary account or
similar arrangement.
<PAGE>
With respect to ownership of securities held in trust,
beneficial ownership includes ownership of securities as a
trustee in instances where either the associate as trustee
or a member of the associate's "immediate family" has a
vested interest in the income or corpus of the trust, the
ownership by the associate of a vested beneficial interest
in the trust and the ownership of securities as a settlor
of a trust in which the associate as the settlor has the
power to revoke the trust without obtaining the consent of
the beneficiaries. Certain exemptions to these trust
beneficial ownership rules exist, including an exemption
for instances where beneficial ownership is imposed solely
by reason of the associate being settlor or beneficiary of
the securities held in trust and the ownership, acquisition
and disposition of such securities by the trust is made
without the associate's prior approval as settlor or
beneficiary. "Immediate family" of an associate as trustee
means the associate's son or daughter (including any
legally adopted children) or any descendant of either, the
associate's stepson or stepdaughter, the associate's father
or mother or any ancestor of either, the associate's
stepfather or stepmother and his spouse.
To the extent that stockholders of a company use it as a
personal trading or investment medium and the company has
no other substantial business, stockholders are regarded as
beneficial owners, to the extent of their respective
interests, of the stock thus invested or traded in. A
general partner in a partnership is considered to have
indirect beneficial ownership in the securities held by the
partnership to the extent of his pro rata interest in the
partnership. Indirect beneficial ownership is not, however,
considered to exist solely by reason of an indirect
interest in portfolio securities held by any holding
company registered under the Public Utility Holding Company
Act of 1935, a pension or retirement plan holding
securities of an issuer whose employees generally are
beneficiaries of the plan and a business trust with over 25
beneficiaries.
Any person who, directly or indirectly, creates or uses a
trust, proxy, power of attorney, pooling arrangement or any
other contract, arrangement or device with the purpose or
effect of divesting such person of beneficial ownership as
part of a plan or scheme to evade the reporting
requirements of the Securities Exchange Act of 1934 shall
be deemed the beneficial owner of such security.
The final determination of beneficial ownership is a
question to be determined in light of the facts of a
particular case. Thus, while the associate may include
security holdings of other members of his family, the
associate may nonetheless disclaim beneficial ownership of
such securities.
o "CHINESE WALL" POLICY - procedures designed to restrict the
flow of information within Mellon from units or individuals
who are likely to receive material nonpublic information to
units or individuals who trade in securities or provide
investment advice. (see pages 12-14).
o CORPORATION - Mellon Bank Corporation.
o DREYFUS - The Dreyfus Corporation and its subsidiaries.
o DREYFUS ASSOCIATE - any employee of Dreyfus; does not
include outside consultants or temporary help.
<PAGE>
o EXEMPT SECURITIES - Exempt Securities are defined as:
- securities issued or guaranteed by the United States
government or agencies or instrumentalities;
- bankers' acceptances;
- bank certificates of deposit and time deposits;
- commercial paper;
- repurchase agreements; and
- securities issued by open-end investment companies.
o GENERAL COUNSEL - General Counsel of Mellon Bank
Corporation or any person to whom relevant authority is
delegated by the General Counsel.
o INDEX FUND - an investment company which seeks to mirror
the performance of the general market by investing in the
same stocks (and in the same proportion) as a broad-based
market index.
o INITIAL PUBLIC OFFERING (IPO) - the first offering of a
company's securities to the public.
o INVESTMENT COMPANY - a company that issues securities that
represent an undivided interest in the net assets held by
the company. Mutual funds are investment companies that
issue and sell redeemable securities representing an
undivided interest in the net assets of the company.
o MANAGER OF CORPORATE COMPLIANCE - - the associate within
the Risk Management and Compliance Department of Mellon
Bank Corporation who is responsible for administering the
Confidential Information and Securities Trading Policy, or
any person to whom relevant authority is delegated by the
Manager of Corporate Compliance.
o MELLON - Mellon Bank Corporation and all of its direct and
indirect subsidiaries.
o NAKED OPTION - an option sold by the investor which
obligates him or her to sell a security which he or she
does not own.
o NONDISCRETIONARY TRADING ACCOUNT - an account over which
the associated person has no direct or indirect control
over the investment decision-making process.
o OPTION - a security which gives the investor the right but
not the obligation to buy or sell a specific security at a
specified price within a specified time.
o PRECLEARANCE COMPLIANCE OFFICER - a person designated by
the Manager of Corporate Compliance, to administer, among
other things, associates' preclearance request for a
specific business unit.
o PRIVATE PLACEMENT - an offering of securities that is
exempt from registration under the Securities Act of 1933
because it does not constitute a public offering.
o SENIOR MANAGEMENT COMMITTEE - the Senior Management
Committee of Mellon Bank Corporation.
o SHORT SALE - the sale of a security that is not owned by
the seller at the time of the trade.
<PAGE>
INDEX OF EXHIBITS
- ------------------------------
EXHIBIT A SAMPLE REPORT TO MANAGER OF CORPORATE COMPLIANCE
EXHIBIT B SAMPLE INSTRUCTION LETTER TO BROKER
EXHIBIT C PRECLEARANCE REQUEST FORM
EXHIBIT D PERSONAL SECURITIES HOLDINGS FORM
<PAGE>
EXHIBIT A
- ------------------------------
SAMPLE REPORT TO MANAGER OF CORPORATE COMPLIANCE
- --------------------------------------------------------------------------------
MELLON INTEROFFICE
MEMORANDUM
Date: From: Associate
To: Manager, Corporate Compliance Dept:
Aim #:
Aim #: 151-4342 Phone:
Fax:
- --------------------------------------------------------------------------------
RE: REPORT OF SECURITIES TRADE
Type of Associate: ____________ Insider Risk
____________ Investment
____________ Other
Type of Security: ____________ Mellon Bank Corporation
____________ Mellon Bank Corporation - optional
cash purchases under Dividend
Reinvestment and Common Stock
Purchase Plan
____________ Mellon Bank Corporation - exercise
of an employee stock option
Attached is a copy of the confirmation slip for a securities trade I
engaged in on _____________________, 19xx.
or
On _____________________, 19xx, I (purchased/sold)__________________
shares of ___________________________ through (broker). I will
arrange to have a copy of the confirmation slip for this trade
delivered to you as soon as possible.
<PAGE>
EXHIBIT B1
- ------------------------------
FOR NON-DREYFUS ASSOCIATES
Date
Broker ABC
Street Address
City, State ZIP
Re: John Smith & Mary Smith
Account No. xxxxxxxxxxxxx
In connection with my existing brokerage accounts at your firm
noted above, please be advised that the Risk Management and
Compliance Department of Mellon Bank should be noted as an
"Interested Party" with respect to my accounts. They should,
therefore, be sent copies of all trade confirmations and account
statements relating to my account.
Please send the requested documentation ensuring the account
holder's name appears on all correspondence to:
Manager, Corporate Compliance
Mellon Bank
P.O. Box 3130
Pittsburgh, PA 15230-3130
Thank you for your cooperation in this request.
Sincerely yours,
Associate
cc: Manager, Corporate Compliance (151-4342)
<PAGE>
EXHIBIT B2
- ------------------------------
FOR DREYFUS ASSOCIATES
Date
Broker ABC
Street Address
City, State ZIP
Re: John Smith & Mary Smith
Account No. xxxxxxxxxxxxx
In connection with my existing brokerage accounts at your firm
noted above, please be advised that the Risk Management and
Compliance Department of Dreyfus Corporation should be noted as an
"Interested Party" with respect to my accounts. They should,
therefore, be sent copies of all trade confirmations and account
statements relating to my account.
Please send the requested documentation ensuring the account
holder's name appears on all correspondence to:
Compliance Officer at The Dreyfus Corporation
200 Park Avenue
Legal Department
New York, NY 10166
Thank you for your cooperation in this request.
Sincerely yours,
Associate
cc: Dreyfus Compliance
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
EXHIBIT C1
- ------------------------------
PRECLEARANCE REQUEST FORM Non Dreyfus Associates
====================================================================================================
To: Manager, Corporate Compliance 151-4342 (All Insider and Other Associates)
Designated Preclearance Compliance Officer (All Investment Associates excluding Dreyfus)
- ----------------------------------------------------------------------------------------------------
Associate Name: Title: Date:
- ----------------------------------------------------------------------------------------------------
Phone #: AIM #: Social Security #: Department:
- ----------------------------------------------------------------------------------------------------
====================================================================================================
ACCOUNT INFORMATION
- ----------------------------------------------------------------------------------------------------
Account Name: Account Number: Name of Broker/Bank:
- ----------------------------------------------------------------------------------------------------
Relationship to registered owner(s) (if other than associate)
- ----------------------------------------------------------------------------------------------------
I hereby request approval to execute the following trade in the above account:
====================================================================================================
TRANSACTION DETAIL
- ----------------------------------------------------------------------------------------------------
Buy: Sell: Security/Contract: No. of Shares:
- ----------------------------------------------------------------------------------------------------
If sale, date acquired: Margin Transaction: Initial Public Offering: Private Placement:
/ / Yes / / Yes / / Yes
- ----------------------------------------------------------------------------------------------------
====================================================================================================
DISCLOSURE STATEMENT
- ----------------------------------------------------------------------------------------------------
I hereby represent that, to the best of my knowledge, neither I nor the registered account holder is
(1) attempting to benefit personally from any existing business relationship between the issuer and
Mellon or any Mellon-related fund or affiliate; (2) engaging in any manipulative or deceptive
trading activity; (3) in possession of any material non-public information concerning the security
to which is request relates.
- ----------------------------------------------------------------------------------------------------
Associate Signature: Date:
- ----------------------------------------------------------------------------------------------------
====================================================================================================
COMPLIANCE OFFICER USE ONLY
- ----------------------------------------------------------------------------------------------------
Approved: Disapproved: Authorized Signatory: Date:
- ----------------------------------------------------------------------------------------------------
Comments:
- ----------------------------------------------------------------------------------------------------
Note: This preclearance will lapse at the end of the day on __________________, 19__.
If you decide not to effect the trade, please notify me.
- ----------------------------------------------------------------------------------------------------
Date: By:
- ----------------------------------------------------------------------------------------------------
<PAGE>
EXHIBIT C2
- ------------------------------
PRECLEARANCE REQUEST FORM Dreyfus Associates Only
====================================================================================================
To: Dreyfus Compliance Officer
- ----------------------------------------------------------------------------------------------------
Associate Name: Title: Date:
- ----------------------------------------------------------------------------------------------------
Phone #: AIM #: Social Security #: Department:
- ----------------------------------------------------------------------------------------------------
====================================================================================================
ACCOUNT INFORMATION
- ----------------------------------------------------------------------------------------------------
Account Name: Account Number: Name of Broker/Bank:
- ----------------------------------------------------------------------------------------------------
Relationship to registered owner(s) (if other than associate)
- ----------------------------------------------------------------------------------------------------
I hereby request approval to execute the following trade in the above account:
====================================================================================================
TRANSACTION DETAIL
- ----------------------------------------------------------------------------------------------------
Buy: Sell: Security/Contract: Symbol:
- ----------------------------------------------------------------------------------------------------
Amount: Current Market Price: If sale, date acquired: Margin Transaction:
- ----------------------------------------------------------------------------------------------------
Is this a New Issue? Is this a Private Placement?
/ / Yes / / No / / Yes / / No
- ----------------------------------------------------------------------------------------------------
Reason for Transaction, identify source:
- ----------------------------------------------------------------------------------------------------
====================================================================================================
DISCLOSURE STATEMENT
- ----------------------------------------------------------------------------------------------------
I hereby represent that, to the best of my knowledge, neither I nor the registered account holder is
(1) attempting to benefit personally from any existing business relationship between the issuer and
Mellon or any Mellon-related fund or affiliate; (2) engaging in any manipulative or deceptive
trading activity; (3) in possession of any material non-public information concerning the security
to which is request relates.
- ----------------------------------------------------------------------------------------------------
Associate Signature: Date:
- ----------------------------------------------------------------------------------------------------
====================================================================================================
COMPLIANCE OFFICER USE ONLY
- ----------------------------------------------------------------------------------------------------
Approved: Disapproved: Authorized Signatory: Date:
- ----------------------------------------------------------------------------------------------------
Comments:
- ----------------------------------------------------------------------------------------------------
Note: This preclearance will lapse at the end of the day on __________________, 19__.
If you decide not to effect the trade, please notify me.
- ----------------------------------------------------------------------------------------------------
Date: By:
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT D1
- ------------------------------
Return to: Manager, Corporate Compliance
Mellon Bank
P.O. Box 3130
Pittsburgh, PA 15230-3130
STATEMENT OF SECURITY HOLDINGS
As of
1. List of all securities in which you, your immediate family, any other
member of your immediate household, or any trust or estate of which you
or your spouse is a trustee or fiduciary or beneficiary, or of which your
minor child is a beneficiary, or any person for whom you direct or effect
transactions under a power of attorney or otherwise, maintain a
beneficial ownership - (see Glossary in Policy). If none, write NONE.
Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities, bankers' acceptances, bank certificates of deposit and
time deposits, commercial paper, repurchase agreements and shares of
registered investment companies need not be listed. IF YOUR LIST IS
EXTENSIVE, PLEASE ATTACH A COPY OF THE MOST RECENT STATEMENT FROM YOUR
BROKER(S), RATHER THAN LIST THEM ON THIS FORM.
-----------------------------------------------------------------------------
NAME OF SECURITY TYPE OF SECURITY AMOUNT OF SHARES
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
2. List the names and addresses of any broker/dealers holding accounts in
which you have a beneficial interest, including the name of your
registered representative (if applicable), the account registration and
the relevant account numbers. If none, write NONE.
-----------------------------------------------------------------------------
BROKER/ ADDRESS NAME OF ACCOUNT ACCOUNT
DEALER REGISTERED REGISTRATION NUMBER(S)
REPRESENTATIVE
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
I certify that the statements made by me on this form are true, complete and
correct to the best of my knowledge and belief, and are made in good faith. I
acknowledge I have read, understood and complied with the Confidential
Information and Securities Trading Policy.
-----------------------------------------------------------------------------
Date: Printed Name:
-----------------------------------------------------------------------------
Signature:
-----------------------------------------------------------------------------
<PAGE>
EXHIBIT D2
- ------------------------------
Return to: Compliance Officer at the Dreyfus Corporation
200 Park Avenue
Legal Department
New York, NY 10166
STATEMENT OF SECURITY HOLDINGS
As of
1. List of all securities in which you, your immediate family, any other
member of your immediate household, or any trust or estate of which you
or your spouse is a trustee or fiduciary or beneficiary, or of which your
minor child is a beneficiary, or any person for whom you direct or effect
transactions under a power of attorney or otherwise, maintain a
beneficial interest. If none, write NONE. Securities issued or guaranteed
by the U.S. government or its agencies or instrumentalities, bankers'
acceptances, bank certificates of deposit and time deposits, commercial
paper, repurchase agreements and shares of registered investment
companies need not be listed. IF YOUR LIST IS EXTENSIVE, PLEASE ATTACH A
COPY OF THE MOST RECENT STATEMENT FROM YOUR BROKER(S), RATHER THAN LIST
THEM ON THIS FORM.
-----------------------------------------------------------------------------
NAME OF SECURITY TYPE OF SECURITY AMOUNT OF SHARES
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
2. List the names and addresses of any broker/dealers holding accounts in
which you have a beneficial interest, including the name of your
registered representative (if applicable), the account registration and
the relevant account numbers. If none, write NONE.
-----------------------------------------------------------------------------
BROKER/ ADDRESS NAME OF ACCOUNT ACCOUNT
DEALER REGISTERED REGISTRATION NUMBER(S)
REPRESENTATIVE
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
I certify that the statements made by me on this form are true, complete and
correct to the best of my knowledge and belief, and are made in good faith. I
acknowledge I have read, understood and complied with the Confidential
Information and Securities Trading Policy.
-----------------------------------------------------------------------------
Date: Printed Name:
-----------------------------------------------------------------------------
Signature:
-----------------------------------------------------------------------------
GOLDMAN SACHS ASSET MANAGEMENT
GOLDMAN SACHS FUNDS MANAGEMENT, L.P.
GOLDMAN SACHS ASSET MANAGEMENT INTERNATIONAL
CODE OF ETHICS
Effective January 23, 1991
(as revised October 1, 1995)
I. DEFINITIONS
A. "Access person" with respect to Goldman Sachs Asset Management
("GSAM") means (because GSAM is primarily engaged in a business other
than advising registered investment companies or other advisory
clients) only those officers, general partners or advisory persons of
GSAM who, with respect to any investment company, make recommendations
or participate in the determination of which recommendation shall be
made to any investment company, or whose principal function or duties
relate to the determination of which recommendation shall be made to
any investment company, or who, in connection with their duties,
obtain any information concerning such recommendations which are being
made to the investment company. "Access person" with respect to
Goldman Sachs Asset Management International ("GSAMI") and Goldman
Sachs Funds Management, L.P. ("GSFM") shall mean any director,
officer, general partner or advisory person of GSAMI or GSFM, as the
case may be.
B. "Adviser" means each of GSAM, GSAMI and GSFM.
C. "Advisory person" means (i) any officer or employee of the Adviser or
any company in a control relationship to the Adviser, who in
connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase or sale
of a security by an investment company, or whose functions relate to
the making of any recommendations with respect to such purchases or
sales; and (ii) any natural person in a control relationship to the
Adviser who obtains information concerning the recommendations made to
an investment company with regard to the purchase or sale of a
security.
D. A security is "being considered for purchase or sale" when a
recommendation to purchase or sell a security has been made and
communicated and, with respect to the person making the
recommendation, when such person seriously considers making such a
recommendation. With respect to an analyst of the Adviser, the
foregoing period shall commence on the day that he or she decides to
recommend the purchase or sale of the security to the Adviser for an
investment company.
E. "Beneficial ownership" of a security shall be interpreted to include
any person who, directly or indirectly, through any contract,
arrangement, understanding, relationship, or otherwise has or shares a
direct or indirect pecuniary interest in the security. The term
"pecuniary interest" with respect to any security shall mean the
opportunity, directly or indirectly, to profit or share in any profit
derived from a transaction in the subject securities.
F. "Control" shall have the same meaning as that set forth in Section
2(a)(9) of the Investment Company Act. Section 2(a)(9) generally
provides that "control" means the power to exercise a controlling
influence over the management or policies of a company, unless such
power is solely the result of an official position with such company.
G. "Investment company" means a company registered as such under the
Investment Company Act of 1940, as amended (the "Investment Company
Act"), or any series thereof for which the Adviser is the investment
adviser.
H. "Portfolio manager" means every person who is responsible for the
day-to-day management of an investment company, or who shares such
responsibility with another portfolio manager.
I. "Purchase or sale of a security" includes, among other things, the
writing of an option to purchase or sell a security.
J. "Review Officer" means the officer of the Adviser designated from time
to time by the Adviser to receive and review reports of purchases and
sales by access persons. The term "Alternative Review Officer" shall
mean the officer of the Adviser designated from time to time by the
Adviser to receive and review reports of purchases and sales by the
Review Officer, and who shall act in all respects in the manner
prescribed herein for the Review Officer. It is recognized that a
different Review Officer and Alternative Review Officer may be
designated with respect to each Adviser.
K. "Security" shall have the meaning set forth in Section 2(a)(36) of the
Investment Company Act, except that it shall not include shares of
registered open-end investment companies (including those for which
the Adviser serves as investment adviser), securities issued by the
Government of the United States or an agency thereof within the
meaning of Section 2(a)(16), bankers' acceptances, bank certificates
of deposit, commercial paper and, for other than Quantitative
Equity/Trading Personnel of the Adviser, options on broad based market
indices.
II. LEGAL REQUIREMENTS
Section 17(j) of the Investment Company Act provides, among other
things, that it is unlawful for any access person of the Adviser to engage in
any act, practice or course of business in connection with the purchase or sale,
directly or indirectly, by such access person of any security held or to be
acquired by an investment company in contravention of such rules and regulations
as the Securities and Exchange Commission (the "Commission") may adopt to define
and prescribe means reasonably necessary to prevent such acts, practices or
courses of business as are fraudulent, deceptive or manipulative. Pursuant to
Section 17(j), the Commission has adopted Rule 17j-1 which provides, among other
things, that it is unlawful for any access person of the Adviser in connection
with the purchase or sale, directly or indirectly, by such person of a security
held or to be acquired by an investment company:
(1) To employ any device, scheme or artifice to defraud such registered
investment company;
(2) To make to such registered investment company any untrue statement of
a material fact or omit to state to such registered investment company
a material fact necessary in order to make the statements made, in
light of the circumstances under which they are made, not misleading;
(3) To engage in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon any such registered
investment company; or
(4) To engage in any manipulative practice with respect to such registered
investment company.
III. STATEMENT OF POLICY
It is the policy of the Adviser that no access person shall
engage in any act, practice or course of conduct that would violate the
provisions of Rule 17j-1. The fundamental position of the Adviser is, and has
been, that each access person shall place at all times the interests of each
investment company and its shareholders first in conducting personal securities
transactions. Accordingly, private securities transactions by access persons of
the Adviser must be conducted in a manner consistent with this Code and so as to
avoid any actual or potential conflict of interest or any abuse of an access
person's position of trust and responsibility. Further, access persons should
not take inappropriate advantage of their positions with, or relationship to,
any investment company, the Adviser or any affiliated company.
Without limiting in any manner the fiduciary duty owed by access
persons to the investment companies or the provisions of this Code, it should be
noted that the Adviser and the investment companies consider it proper that
purchases and sales be made by its access persons in the marketplace of
securities owned by the investment companies; provided, however, that such
securities transactions comply with the spirit of, and the specific restrictions
and limitations set forth in, this Code. Such personal securities transactions
should also be made in amounts consistent with the normal investment practice of
the person involved and with an investment, rather than a trading, outlook. Not
only does this policy encourage investment freedom and result in investment
experience, but it also fosters a continuing personal interest in such
investments by those responsible for the continuous supervision of the
investment companies' portfolios. It is also evidence of confidence in the
investments made. In making personal investment decisions with respect to any
security, however, extreme care must be exercised by access persons to ensure
that the prohibitions of this Code are not violated. Further, personal investing
by an access person should be conducted in such a manner so as to eliminate the
possibility that the access person's time and attention is being devoted to his
or her personal investments at the expense of time and attention that should be
devoted to management of an investment company's portfolio. It bears emphasis
that technical compliance with the procedures, prohibitions and limitations of
this Code will not automatically insulate from scrutiny personal securities
transactions which show a pattern of abuse by an access person of his or her
fiduciary duty to any investment company.
IV. EXEMPTED TRANSACTIONS
The Statement of Policy set forth above shall be deemed not to be
violated by and the prohibitions of Section V of this Code shall not apply to:
A. Purchases or sales of securities effected in any account over which
the access person has no direct or indirect influence or control;
B. Purchases or sales of securities which are not eligible for purchase
or sale by an investment company;
C. Purchases or sales of securities which are non-volitional on the part
of either the access person or an investment company;
D. Purchases or sales of securities which are part of an automatic
dividend reinvestment, cash purchase or withdrawal plan provided that
no adjustment is made by the access person to the rate at which
securities are purchased or sold, as the case may be, under such a
plan during any period in which the security is being considered for
purchase or sale by an investment company;
E. Purchases of securities effected upon the exercise of rights issued by
an issuer pro --- rata to all holders of a class of its securities, to
the extent such rights were acquired from such issuer, and sales of
such rights so acquired;
F. Tenders of securities pursuant to tender offers which are expressly
conditioned on the tender offer's acquisition of all of the securities
of the same class; and
G. Purchases or sales which receive the prior approval of the Review
Officer because they are only remotely potentially harmful to an
investment company because the securities transaction involves a small
number of shares of an issuer with a very large market capitalization
and high average daily trading volume or would otherwise be very
unlikely to affect a highly institutional market.
V. PROHIBITED PURCHASES AND SALES
While the scope of actions which may violate the Statement of
Policy set forth above cannot be exactly defined, such actions would always
include at least the following prohibited activities.
A. No access person shall purchase or sell, directly or indirectly, any
security in which he or she has, or by reason of such transaction
acquires, any direct or indirect beneficial ownership and which to his
or her actual knowledge at the time of such purchase or sale the
security:
(1) is being considered for purchase or sale by an investment
company; or
(2) is being purchased or sold by an investment company.
B. No access person shall reveal to any other person (except in the
normal course of his or her duties on behalf of an investment company)
any information regarding securities transactions by an investment
company or consideration by an investment company or the Adviser of
any such securities transaction.
C. No access person shall recommend any securities transaction for an
investment company without having disclosed his or her interest, if
any, in such securities or the issuer thereof, including without
limitation (i) his or her direct or indirect beneficial ownership of
any securities or such issuer, (ii) any contemplated transaction by
such person in such securities, (iii) any position with such issuer or
its affiliates and (iv) any present or proposed business relationship
between such issuer or its affiliates, on the one hand, and such
person or any party in which such person has a significant interest,
on the other; provided, however, that in the event the interest of
such access person in such securities or issuer is not material to his
or her personal net worth (as determined by the Review Officer) and
any contemplated transaction by such person in such securities cannot
reasonably be expected to have a material adverse effect on any such
transaction by the company or on the market for the securities
generally, such access person shall not be required to disclose his or
her interest in the securities or issuer thereof in connection with
any such recommendation.
D. No access person shall engage in, or permit anyone within his or her
control to engage in, any act, practice or course of conduct which
would operate as a fraud or deceit upon, or constitute a manipulative
practice with respect to, an investment company or any issuer of any
security owned by an investment company.
E. No advisory person shall accept any gift or personal benefit valued in
excess of $100 annually from any single person or entity that does
business with or on behalf of an investment company. Gifts of a de
minimis value (i.e., gifts whose reasonable value is no more than $100
annually from any single person or entity), and customary business
lunches, dinners and entertainment at which both the advisory person
and the giver are present, and promotional items of de minimis value
may be accepted. Any solicitation of gifts or gratuities is
unprofessional and is strictly prohibited.
F. No access person shall enter an order for the purchase or sale of a
security which an investment company is purchasing or selling or
considering for purchase or sale until the later of (i) the day after
the investment company's transaction in that security is completed or
(ii) after the investment company is no longer considering the
security for purchase or sale, unless the Review Officer determines
that it is clear that, in view of the nature of the security and the
market for such security, the order of the access person will not
adversely affect the price paid or received by the investment company.
Any securities transactions by an access person in violation of this
Subsection F must be unwound, if possible, and the profits, if any,
must be disgorged to the affected investment company or to charity.
G. No advisory person shall, directly or indirectly, purchase any
security sold in an initial or secondary public offering of an issuer,
regardless of whether the issue is a "hot issue."
H. No advisory person shall, directly or indirectly, purchase any
security issued pursuant to a private placement without obtaining
prior written approval from the Review Officer. Any approval will take
into account whether the investment opportunity should be reserved for
an investment company and whether the opportunity is being offered to
the advisory person by virtue of his or her position with or
relationship to an investment company.
I. No advisory person shall serve on the board of directors of any
publicly traded company, absent prior written authorization and
determination by the Review Officer that the board service would be
consistent with the interests of the investment companies and their
shareholders. Such interested advisory person may not participate in
the decision for any investment company to purchase and sell
securities of such company.
J. No portfolio manager shall, directly or indirectly, purchase or sell
any security in which he or she has, or by reason of such purchase
acquires, any beneficial ownership interest within a period of seven
(7) calendar days before and after any investment company advised by
the portfolio manager has purchased or sold such security. Any
securities transaction by a portfolio manager in violation of this
Subsection J must be unwound, if possible, and the profits, if any,
must be disgorged to the applicable investment company or to charity.
K. No access person shall, in the absence of prior written approval by
the Review Officer, sell any security (including any option) that was
purchased, or purchase a security (including any option) that was
sold, within the prior 60 calendar days (measured on a last-in
first-out basis).
VI. BROKERAGE ACCOUNTS
Access persons are required to direct their brokers to supply to
the Review Officer on a timely basis duplicate copies of confirmations of all
securities transactions in which the access person has a beneficial ownership
interest and related periodic statements, whether or not one of the exemptions
listed in Section IV applies. If an access person is unable to arrange for
duplicate copies of confirmations and periodic account statements to be sent to
the Review Officer, he or she must immediately notify the Review Officer.
VII. PRECLEARANCE PROCEDURE
Prior to effecting any securities transactions in which an access
person has a beneficial ownership interest, the access person must receive
approval by the Adviser. Any approval is valid only for the number of day(s) as
may be determined from time to time by the Adviser. If an access person is
unable to effect the securities transaction during such period, he or she must
reobtain approval prior to effecting the securities transaction.
The Adviser will decide whether to approve a personal securities
transaction for an access person after considering the specific restrictions and
limitations set forth in, and the spirit of, this Code, including whether the
security at issue is being considered for purchase or sale for an investment
company. The Adviser is not required to give any explanation for refusing to
approve a securities transaction.
VIII. REPORTING
A. Every access person shall report to the Review Officer the information
described in Section VIII-C of this Code with respect to transactions
in any security in which such access person has, or by reason of such
transaction acquires or disposes of, any direct or indirect beneficial
ownership in the security.
B. Notwithstanding Section VIII-A of this Code, an access person need not
make a report where the report would duplicate information recorded
pursuant to Rules 204-2(a)(12) or 204-2(a)(13) under the Investment
Advisers Act of 1940.
C. Unless reports are deemed to have been made under Section VIII-F of
this Code, every report shall be made not later than 10 days after the
end of the calendar quarter in which the transaction to which the
report relates was effected, and shall contain the following
information:
(1) The date of the transaction, the title, class and the number of
shares, and the principal amount of each security involved;
(2) The nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
(3) The price at which the transaction was effected; and
(4) The name of the broker, dealer or bank with or through whom the
transaction was effected.
D. If no transactions in any securities required to be reported under
Section VIII-A were effected during a quarterly period by an access
person, such access person shall report to the Review Officer not
later than ten (10) days after the end of such quarterly period
stating that no reportable securities transactions were effected.
E. These reporting requirements shall apply whether or not one of the
exemptions listed in Section IV applies except that an access person
shall not be required to make a report with respect to securities
transactions effected for any account over which such access person
does not have any direct or indirect influence or control. Every
report concerning a securities transaction with respect to which the
reporting person relies upon one of the exemptions provided in Section
IV shall contain a brief statement of the exemption relied upon and
the circumstances of the transaction.
F. Reports shall be deemed made with respect to any account where the
access person has made provisions for transmittal of all daily trading
information regarding the account to be delivered to the designated
Review Officer for his or her review. With respect to investment
companies for which the Adviser does not act as investment adviser,
reports required to be furnished by officers and trustees of such
investment companies who are access persons of the Adviser must be
made under Section VIII-C of this Code and furnished to the designated
review officer of the relevant investment adviser.
G. Any such report may contain a statement that the report shall not be
construed as an admission by the person making such report that (a) he
or she has or had any direct or indirect beneficial ownership in the
security to which the report relates (a "Subject Security") or (b) he
or she knew or should have known that the Subject Security was being
purchased or sold, or considered for purchase or sale, by an
investment company on the same day.
IX. DISCLOSURE OF PERSONAL HOLDINGS.
All advisory persons shall submit to the Review Officer initially
upon becoming an advisory person, and annually thereafter in January, a report,
in a form acceptable to the Adviser, disclosing all securities in which such
person has a beneficial ownership interest.
X. ANNUAL CERTIFICATION OF COMPLIANCE
Each access person shall certify to the Review Officer annually
on the form annexed hereto as Form A that he or she (i) has read and understands
this Code of Ethics and recognizes that he or she is subject thereto, (ii) has
complied with the requirements of this Code of Ethics and (iii) has disclosed or
reported all personal securities transactions required to be disclosed or
reported pursuant to the requirements of this Code of Ethics.
XI. CONFIDENTIALITY
All reports of securities transactions and any other information
filed with the Adviser pursuant to this Code shall be treated as confidential,
except that reports of securities transactions hereunder will be made available
to the investment companies and to the Commission or any other regulatory or
self-regulatory organization to the extent required by law or regulation or to
the extent the Adviser considers necessary or advisable in cooperating with an
investigation or inquiry by the Commission or any other regulatory or
self-regulatory organization.
XII. REVIEW OF REPORTS
A. The Review Officer shall compare the reported personal securities
transactions of each access person with completed and contemplated
portfolio transactions of the investment companies to determine
whether any transactions that violate the Statement of Policy set
forth above may have occurred (a "Reviewable Transaction"). In the
case of reports of personal securities transactions of the Review
Officer, the Alternative Review Officer shall perform such comparison.
Before making any determination that a violation has been committed by
any access person, the Review Officer (or Alternative Review Officer,
as the case may be) shall provide such person an opportunity to supply
additional explanatory material.
B. If the Review Officer determines that a Reviewable Transaction may
have occurred, he shall submit his written determination, together
with the confidential quarterly report and any additional explanatory
material provided by the access person to the President of the Adviser
(or any Vice President of the Adviser if the actions of the President
are at issue), who shall make an independent determination of whether
a violation of this Code has occurred.
C. On an annual basis, the Review Officer shall prepare for the Board of
Trustees a summary of the level of compliance by all access persons
with this Code of Ethic during the previous year, including without
limitation the percentage of reports timely filed and the number and
nature of all material violations. Also on an annual basis, the Review
Officer shall prepare a report identifying any recommended changes to
existing restrictions or procedures based upon the Adviser's
experience under this Code of Ethics, evolving industry practices and
developments in applicable laws or regulations. The Alternative Review
Officer shall prepare reports with respect to compliance by the Review
Officer.
XIII. SANCTIONS
Upon discovering a violation of this Code, the Adviser may impose such
sanction(s) as it deems appropriate, including, among other things, a
letter of censure, suspension or termination of the employment of the
violator and/or restitution to the affected investment company of an amount
equal to the advantage that the offending person gained by reason of such
violation. In addition, as part of any sanction, the Adviser may require
the access person to reverse the trade(s) at issue and forfeit any profit
or absorb any loss from the trade. It is noted that violations of this Code
by an access person may also result in criminal prosecution or civil
action. All material violations of this Code and any sanctions imposed with
respect thereto shall be reported periodically to the board of trustees of
the investment company with respect to whose securities the violation
occurred.
XIV. INTERPRETATION OF PROVISIONS
The Adviser may from time to time adopt such interpretations of
this Code as it deems appropriate.
XV. IDENTIFICATION OF ACCESS PERSONS
The Adviser shall identify all persons who are considered to be "access
persons," "advisory persons" and "portfolio managers," inform such persons
of their respective duties and provide such persons with copies of this
Code.
XVI. EXCEPTIONS TO THE CODE
Although exceptions to the Code will rarely, if ever, be granted, the
President of the Adviser, after consultation with the Review Officer, may
make exceptions on a case by case basis, from any of the provisions of this
Code upon a determination that the conduct at issue involves a negligible
opportunity for abuse or otherwise merits an exemption from the Code. All
such exemptions must be received in writing by the person requesting the
exemption before becoming effective. The Review Officer shall report any
exception to the Board of Trustees of the investment companies at their
next regularly scheduled Board meetings.
XVII. RECORDS
The Adviser shall maintain records in the manner and to the extent set
forth below, which records may be maintained on microfilm under the
conditions described in Rule 31a-2(f)(1) under the Investment Company Act
and shall be available for examination by representatives of the
Commission.
A. A copy of this Code and any other code which is, or at any time within
the past five years has been, in effect shall be preserved for a
period of not less than five years in an easily accessible place;
B. A record of any violation of this Code and of any action taken as a
result of such violation shall be preserved in an easily accessible
place for a period of not less than five years following the end of
the fiscal year in which the violation occurs;
C. A copy of each report made by an access person pursuant to this Code
shall be preserved for a period of not less than five years from the
end of the fiscal year in which it is made, the first two years in an
easily accessible place; and
D. A list of all persons who are, or within the past five years have
been, required to make reports pursuant to this Code shall be
maintained in an easily accessible place.
CODE OF ETHICS
1. Purposes
This Code of Ethics (the "Code") has been adopted by the Directors of
J.P. Morgan Investment Management Inc. (the "Adviser"), in accordance with Rule
17j-1(c) promulgated under the Investment Company Act of 1940, as amended (the
"Act"). Rule 17j-1 under the Act generally proscribes fraudulent or manipulative
practices with respect to purchases or sales of securities Held or to be
Acquired (defined in Section 2(k) of this Code) by investment companies, if
effected by associated persons of such companies. The purpose of this Code is to
adopt provisions reasonably necessary to prevent Access Persons from engaging in
any unlawful conduct as set forth in Rule 17j-1(b) as follows:
It is unlawful for any affiliated person of or principal
underwriter for a Fund, or any affiliated person of an investment adviser of or
principal underwriter for a Fund, in connection with the purchase or sale,
directly or indirectly, by the person of a Security Held or to be Acquired by
the Fund:
(a) To employ any device, scheme or artifice to defraud the Fund;
(b) To make any untrue statement of a material fact to the Fund or omit to
state a material fact necessary in order to make the statements made
to the Fund, in light of the circumstances under which they are made,
not misleading;
(c) To engage in any act, practice, or course of business that operates or
would operate as a fraud or deceit on the Fund; or
(d) To engage in any manipulative practice with respect to the Fund.
2. Definitions
(a) "Access Person" means any director, officer, general partner or
Advisory Person of the Adviser.
(b) "Administrator" means Morgan Guaranty Trust Company.
(c) "Advisory Person" means (i) any employee of the Adviser or the
Administrator (or any company in a control relationship to the
Adviser) who, in connection with his or her regular functions or
duties, makes, participates in, or obtains information regarding the
purchase or sale of securities for a Fund, or whose functions relate
to the making of any recommendations with respect to such purchases or
sales; and (ii) any natural person in a control relationship to the
Adviser who obtains information concerning recommendations regarding
the purchase or sale of securities by a Fund.
(d) "Beneficial ownership" shall be interpreted in the same manner as it
would be under Exchange Act Rule 16a-1(a)(2)in determining whether a
person is subject to the provisions of Section 16 of the Securities
Exchange Act of 1934 and the rules and regulations thereunder.
(e) "Control" has the same meaning as in Section 2(a)(9) of the Act.
(f) "Covered Security" shall have the meaning set forth in Section
2(a)(36) of the Act, except that it shall not include shares of
open-end funds, direct obligations of the United States Government,
bankers' acceptances, bank certificates of deposit, commercial paper
and high quality short-term debt instruments, including repurchase
agreements.
(g) "Fund" means an Investment Company registered under the Investment
Company Act of 1940.
(h) "Initial Public Offering" means an offering of Securities registered
under the Securities Act of 1933, the issuer of which, immediately
before the registration, was not subject to the reporting requirements
of Sections 13 or 15(d) of the Securities Exchange Act.
(i) "Limited Offering" means an offering that is exempt from registration
under the Securities Act pursuant to Section 4(2) or Section 4(6) or
pursuant to Rule 504, Rule 505, or Rule 506 under the Securities Act.
(j) "Purchase or sale of a Covered Security" includes, among other things,
the writing of an option to purchase or sell a Covered Security.
(k) "Security Held or to be Acquired" by a Adviser means: (i) any Covered
Security which, within the most recent 15 days, is or has been held by
a Fund or other client of the Adviser or is being or has been
considered by the Adviser for purchase by a Fund or other client of
the Adviser; and (ii) any option to purchase or sell, and any security
convertible into or exchangeable for, a Covered Security described in
Section 2(k)(i) of this Code.
3. Statement of Principles
It is understood that the following general fiduciary principles govern the
personal investment activities of Access Persons:
(a) the duty to at all times place the interests of shareholders and other
clients of the Adviser first;
(b) the requirement that all personal securities transactions be conducted
consistent with this Code of Ethics and in such a manner as to avoid
any actual or potential conflict of interest or any abuse of an
individual's position of trust and responsibility;
(c) the fundamental standard that Investment Personnel may not take
inappropriate advantage of their position; and (d)all personal
transactions must be oriented toward investment, not short-term or
speculative trading.
It is further understood that the procedures, reporting and
recordkeeping requirements set forth below are hereby adopted and certified by
the Adviser as reasonably necessary to prevent Access Persons from violating the
provisions of this Code of Ethics.
4. Procedures to be followed regarding Personal Investments by Access Persons
--------------------------------------------------------------------------
(a) Pre-clearance requirement. Each Access Person must obtain prior
written approval from his or her group head (or designee) and from the
Adviser's trading desk before transacting in any Covered Security
based on certain quidelines set forth from time to time by the
Adviser's compliance Department. For details regarding transactions in
mutual funds, see Section 4(e).
(b) Brokerage transaction reporting requirement. Each Access Person
working in the United States must maintain all of his or her accounts
and the accounts of any person of which he or she is deemed to be a
beneficial owner with a broker designated by the Adviser and must
direct such broker to provide broker trade confirmations to the
Adviser's legal/compliance department, unless an exception has been
granted by the Adviser's legal/compliance department. Each Access
Person to whom an exception to the designated broker requirement has
been granted must instruct his or her broker to forward all trade
confirms and monthly statements to the Adviser's legal/compliance
department. Access Persons located outside the United States are
required to provide details of each brokerage transaction of which he
or she is deemed to be the beneficial owner, to the Adviser's
legal/compliance group, within the customary period for the
confirmation of such trades in that market.
(c) Initial public offerings (new issues). Access Persons are prohibited
from participating in Initial Public Offerings, whether or not J.P.
Morgan or any of its affiliates is an underwriter of the new issue,
while the issue is in syndication.
(d) Minimum investment holding period. Each Access Person is subject to a
60-day minimum holding period for personal transactions in Covered
Securities. An exception to this minimum holding period requirement
may be granted in the case of hardship as determined by the
legal/compliance department.
(e) Mutual funds. Each Access Person must pre-clear transactions in shares
of closed-end Funds with the Adviser's trading desk, as they would
with any other Covered Security. See Section 4(a). Each Access Person
must obtain pre-clearance from his or her group head(or designee)
before buying or selling shares in an open-end Fund or a sub-advised
Fund managed by the Adviser if such Access Person or the Access
Person's department has had recent dealings or responsibilities
regarding such mutual fund.
(f) Limited offerings. An Access Person may participate in a limited
offering only with written approval of such Access Person's group head
(or designee) and with advance notification to the Adviser's
compliance group.
(g) Blackout periods. Advisory Persons are subject to blackout periods 7
calendar days before and after the trade date of a Covered Security
where such Advisory Person makes, participates in, or obtains
information regarding the purchase or sale of such Covered Security
for any of their client accounts. In addition, Access Persons are
prohibited from executing a transaction in a Covered Security during a
period in which there is a pending buy or sell order on the Adviser's
trading desk.
(h) Prohibitions. Short sales are generally prohibited. Transactions in
options, rights, warrants, or other short-term securities and in
futures contracts (unless for bona fide hedging) are prohibited,
except for purchases of options on widely traded indices specified by
the Adviser's compliance group if made for investment purposes.
(i) Securities of J.P. Morgan. No Access Person may buy or sell any
security issued by J.P. Morgan from the 27th of each March, June,
September, and December until the first full business day after
earnings are released in the following month. All transactions in
securities issued by J.P. Morgan must be pre-cleared with the
Adviser's compliance group and executed through an approved trading
area. Transactions in options and short sales of J.P. Morgan stock are
prohibited.
(j) Certification requirements. In addition to the reporting requirements
detailed in Sections 6 below, each Access Person, no later than 30
days after becoming an Access Person, must certify to the Adviser's
compliance group that he or she has complied with the broker
requirements in Section 4(b).
5. Other Potential Conflicts of Interest
(a) Gifts. No employee of the Adviser or the Administrator may (i)accept
gifts, entertainment, or favors from a client, potential client,
supplier, or potential supplier of goods or services to the Adviser or
the Administrator unless what is given is of nominal value and refusal
to accept it would be discourteous or otherwise harmful to the Adviser
or Administrator; (ii)provide excessive gifts or entertainment to
clients or potential clients; and (iii) offer bribes, kickbacks, or
similar inducements.
(b) Outside Business Activities. The prior consent of the Chairman of the
Board of J.P. Morgan, or his or her designee, is required for an
officer of the Adviser or Administrator to engage in any
business-related activity outside of the Adviser or Administrator,
whether the activity is intermittent or continuing, and whether or not
compensation is received. For example, such approval is required such
an officer to become: -An officer, director, or trustee of any
corporation (other than a nonprofit corporation or cooperative
corporation owning the building in which the officer resides); -A
member of a partnership (other than a limited partner in a partnership
established solely for investment purposes); -An executor, trustee,
guardian, or similar fiduciary advisor (other than for a family
member).
6. Reporting Requirements
(a) Every Access Person must report to the Adviser:
(i) Initial Holdings Reports. No later than 10 days after the person
becomes an Access Person, the following information: (A) the
title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person; (B)
the name of any broker, dealer or bank with whom the Access
Person maintained an account in which any Covered Securities were
held for the direct or indirect benefit of the Access Person as
of the date the person became an Access Person; and (C) the date
that the report is submitted by the Access Person.
(ii) Quarterly Transaction Reports. No later than 10 days after the
end of a calendar quarter, with respect to any transaction during
the quarter in a Covered Security in which the Access Person had
any direct or indirect Beneficial Ownership: (A) the date of the
transaction, the title, the interest rate and maturity date (if
applicable), the number of shares and principal amount of each
Covered Security involved; (B) the nature of the transaction; (C)
the price of the Covered Security at which the transaction was
effected; (D) the name of the broker, dealer or bank with or
through which the transaction was effected; and (E) the date that
the report is submitted by the Access Person.
(iii)New Account Report. No later than 10 days after the calendar
quarter, with respect to any account established by the Access
Person in which any Covered Securities were held during the
quarter for the direct or indirect benefit of the Access Person:
(A) the name of the broker, dealer or bank with whom the Access
Person established the account; (B) the date the account was
established; and (C) the date that the report is submitted by the
Access Person.
(iv) Annual Holdings Report. Annually, the following information
(which information must be current as of a date no more than 30
days before the report is submitted): (A) the title, number of
shares and principal amount of each Covered Security in which the
Access Person had any direct or indirect beneficial ownership;
(B) the name of any broker, dealer or bank with whom the Access
Person maintains an account in which any Covered Securities are
held for the direct or indirect benefit of the Access Person: and
(C) the date that the report is submitted by the Access Person.
(b) Exceptions from the Reporting Requirements.
(i) Notwithstanding the provisions of Section 6(a), no Access Person
shall be required to make:
A. a report with respect to transactions effected for any
account over which such person does not have any direct or
indirect influence or control;
B. a Quarterly Transaction or New Account Report under Sections
6(a)(ii) or (iii) if the report would duplicate information
contained in broker trade confirmations or account
statements received by the Adviser with respect to the
Access Person no later than 10 days after the calendar
quarter end, if all of the information required by Sections
6(a)(ii) or (iii), as the case may be, is contained in the
broker trade confirmations or account statements, or in the
records of the Adviser.
(c) Each Access Person shall promptly report any transaction which is, or
might appear to be, in violation of this Code. Such report shall
contain the information required in Quarterly Transaction Reports
filed pursuant to Section 6(a)(ii).
(d) All reports prepared pursuant to this Section 6 shall be filed with
the appropriate compliance personnel designated by the Adviser and
reviewed in accordance with procedures adopted by such personnel.
(e) The Adviser will identify all Access Persons who are required to file
reports pursuant to this Section 6 and will inform them of their
reporting obligation.
(f) The Adviser no less frequently than annually shall furnish to a Fund's
board of directors for their consideration a written report that:
(a) describes any issues under this Code of Ethics or related
procedures since the last report to the board of directors,
including, but limited to, information about material violations
of the Code or procedures and sanctions imposed in response to
the material violations; and
(b) certifies that the Adviser has adopted procedures reasonably
necessary to prevent Access Persons from violating this Code of
Ethics.
7. Recordkeeping Requirements
The Adviser must at its principal place of business maintain records in
the manner and extent set out in this Section of this Code and must
make available to the Securities and Exchange Commission (SEC) at any
time and from time to time for reasonable, periodic, special or other
examination:
(a) A copy of its code of ethics that is in effect, or at any time
within the past five years was in effect, must be maintained in
an easily accessible place;
(b) A record of any violation of the code of ethics, and of any
action taken as a result of the violation, must be maintained in
an easily accessible place for at least five years after the end
of the fiscal year in which the violation occurs;
(c) A copy of each report made by an Access Person as required by
Section 6(a) including any information provided in lieu of a
quarterly transaction report, must be maintained for at least
five years after the end of the fiscal year in which the report
is made or the information is provided, the first two years in an
easily accessible place.
(d) A record of all persons, currently or within the past five years,
who are or were required to make reports as Access Persons or who
are or were responsible for reviewing these reports, must be
maintained in an easily accessible place.
(e) A copy of each report required by 6(f) above must be maintained
for at least five years after the end of the fiscal year in which
it is made, the first two years in an easily accessible place.
(f) A record of any decision and the reasons supporting the decision
to approve the acquisition by Access Persons of securities under
Section 4(f) above, for at least five years after the end of the
fiscal year in which the approval is granted.
8. Sanctions
Upon discovering a violation of this Code, the Directors of the Adviser
may impose such sanctions as they deem appropriate, including, inter alia,
financial penalty, a letter of censure or suspension or termination of the
employment of the violator.
Janus Graphic
JANUS ETHICS RULES
"ACT IN THE BEST INTEREST OF OUR INVESTORS - EARN THEIR
CONFIDENCE WITH EVERY ACTION"
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CODE OF ETHICS
INSIDER TRADING POLICY
GIFT POLICY
OUTSIDE EMPLOYMENT POLICY
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LAST REVISED MARCH 3, 1999
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<PAGE>
definitions__________________________________________________________________0
introduction_________________________________________________________________0
CAUTION REGARDING PERSONAL TRADING ACTIVITIES_____________________________0
COMMUNICATIONS WITH OUTSIDE TRUSTEES/DIRECTORS____________________________0
code of ethics_______________________________________________________________0
Overview__________________________________________________________________0
General Prohibitions______________________________________________________0
Trading Restrictions______________________________________________________0
Excluded Transactions__________________________________________________0
Preclearance___________________________________________________________0
Trading Ban on Portfolio Managers and Assistant Portfolio Managers_____0
60 Day Rule____________________________________________________________0
Blackout Period________________________________________________________0
Fifteen Day Rule_______________________________________________________0
Seven Day Rule_________________________________________________________0
Short Sales____________________________________________________________0
Hedge Funds, Investment Clubs, and Other Investments___________________0
Preclearance Procedures___________________________________________________0
General Preclearance___________________________________________________0
Preclearance Requirements For Investment Personnel_____________________0
Preclearance of Company Stock__________________________________________0
Preclearance of Tender Offers and Stock Purchase Plans_________________0
Four Day Effective Period______________________________________________0
Reporting Transactions and Accounts_______________________________________0
Monthly Transaction Reports____________________________________________0
Non-Influence and Non-Control Accounts_________________________________0
Other Required Forms______________________________________________________0
Acknowledgement Forms__________________________________________________0
Investment Personnel Representation Form_______________________________0
Outside Director/Trustee Representation Form___________________________0
insider trading policy_______________________________________________________0
BACKGROUND INFORMATION____________________________________________________0
Who is an Insider?_____________________________________________________0
When is Information Nonpublic?_________________________________________0
What is Material Information?__________________________________________0
When is Information Misappropriated?___________________________________0
Penalties for Insider Trading__________________________________________0
Who is a Controlling Person?___________________________________________0
PROCEDURES TO IMPLEMENT POLICY____________________________________________0
Identifying Material Inside Information________________________________0
Reporting Inside Information___________________________________________0
Watch and Restricted Lists_____________________________________________0
Protecting Information_________________________________________________0
Responsibility to Monitor Transactions_________________________________0
Record Retention_______________________________________________________0
Tender Offers__________________________________________________________0
gift policy__________________________________________________________________0
Gift Giving_______________________________________________________________0
Gift Receiving____________________________________________________________0
Customary Business Amenities______________________________________________0
outside employment policy____________________________________________________0
penalty guidelines___________________________________________________________0
OVERVIEW__________________________________________________________________0
PENALTY GUIDELINES________________________________________________________0
supervisory and compliance procedures________________________________________0
Supervisory Procedures____________________________________________________0
Prevention of Violations_______________________________________________0
Detection of Violations________________________________________________0
Compliance Procedures_____________________________________________________0
Reports of Potential Deviations or Violations__________________________0
Annual Reports_________________________________________________________0
Records________________________________________________________________0
Inspection_____________________________________________________________0
Confidentiality________________________________________________________0
The Ethics Committee______________________________________________________0
Membership of the Committee____________________________________________0
Committee Meetings_____________________________________________________0
Special Discretion_____________________________________________________0
General Information About the Ethics Rules___________________________________0
Designees______________________________________________________________0
Enforcement____________________________________________________________0
Internal Use___________________________________________________________0
forms________________________________________________________________________0
<PAGE>
JANUS ETHICS RULES
"ACT IN THE BEST INTEREST OF OUR INVESTORS - EARN THEIR CONFIDENCE
WITH EVERY ACTION"
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definitions
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The following definitions are used throughout this document. You are
responsible for reading and being familiar with each definition.
1) "Access Persons" are Investment Personnel, Directors, Trustees,
and officers of JCC and other designated persons deemed by the Ethics
Committee to have access to current trading information. Access
Persons are subject to additional scrutiny and more restrictions
because of their access or potential access to information about
current portfolio holdings and transactions.
2) "Beneficial Ownership" shall be interpreted in the same manner as it
would be in determining whether a person is subject to the provisions
of Section 16 of the Securities Exchange Act of 1934 and the rules and
regulations thereunder. For example, in addition to a person's own
accounts the term "Beneficial Ownership" encompasses securities held
in the name of a spouse or equivalent domestic partnership, minor
children, a relative sharing your home, or certain trusts under which
you or a related party is a beneficiary, or held under other
arrangements indicating a sharing of financial interest.
3) "Company Stock" is any stock or option issued by Janus or Kansas City
Southern Industries, Inc. ("KCSI").
4) "Covered Securities" generally include all securities, whether
publicly or privately traded (including securities issued by KCSI or
JCC) and any option, future, forward contract or other obligation
involving a security or index thereof, including an instrument whose
value is derived or based on any of the above (a "derivative"). The
following investments are not Covered Securities:
o shares of open-end investment companies (e.g. mutual funds);
o direct obligations of the U.S. government (e.g., Treasury
securities), or any derivative thereof;
o obligations of agencies and instrumentalities of the U.S.
government with a remaining term to maturity of one year or less,
or any derivative thereof;
o securities representing a limited partnership interest in a real
estate limited partnership;
o money market instruments, such as certificates of deposit,
bankers' acceptances, repurchase agreements, and commercial
paper;
o insurance contracts, including life insurance or annuity
contracts;
o direct investments in real estate, business franchises or similar
ventures; and
o physical commodities (including foreign currencies), or any
derivatives thereof.
5) "Designated Compliance Representatives" are Ernie Overholt, Ted Dryden
and/or his designee(s), and Stephen Stieneker and/or his designee(s).
6) "Designated Legal Representatives" are Debby Bielicke-Eades, Stephen
Stieneker, or their designee(s).
7) "Designated Trading Operations Representatives" are Lesa Finney, John
Porro, and Mark Farrell.
8) "Directors" are directors of JCC.
9) "Ethics Committee" is comprised of Ted Dryden, Thomas Early, Steve
Goodbarn, and Stephen Stieneker.
10) "Inside Trustees and Directors" are Trustees and Directors that are
also employed by Janus.
11) "Investment Personnel" are portfolio managers, assistant portfolio
managers, research analysts, trading department personnel and any
other employees deemed by the Compliance Department to be comparable.
12) "Janus" is Janus Investment Fund, Janus Aspen Series, Janus Capital
Corporation, Janus Service Corporation, Janus Distributors, Inc.,
Janus Capital International Ltd, and Janus International (UK) Ltd.
13) "Janus Funds" are Janus Investment Fund and Janus Aspen Series.
14) "JCC" is Janus Capital Corporation.
15) "JDI" is Janus Distributors, Inc.
16) "JDI's Operations Manager" is Dana Wagener and/or her designee(s).
17) "NASD" is the National Association of Securities Dealers, Inc.
18) "Non-Access Person" is any person that is not an Access Person.
19) "Outside Directors" are Directors who are not employed by Janus.
20) "Outside Trustees" are Trustees who are not identified as an
"interested person" in the registration statement of the Janus Funds.
21) "Registered Persons" are persons registered with the NASD by JDI.
22) "SEC" is Securities and Exchange Commission.
23) "Trustees" are trustees of Janus Investment Fund and Janus Aspen
Series.
These definitions may be updated from time to time to reflect changes in
personnel.
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INTRODUCTION
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These Ethics Rules ("Rules") apply to all Directors, Trustees, officers,
and employees of Janus ("Covered Persons"). The Rules apply to transactions for
your personal accounts and any other accounts you Beneficially Own. You may be
deemed the beneficial owner of any account in which you have a direct or
indirect financial interest. Such accounts include, among others, accounts held
in the name of your spouse or equivalent domestic partnership, your minor
children, a relative sharing your home, or certain trusts under which you or
such persons are a beneficiary.
The Rules are intended to ensure that you (i) at all times place first the
interests of Janus' mutual funds and other clients ("Clients"), (ii) conduct all
personal trading consistent with the Rules and in such a manner as to avoid any
actual or potential conflict of interest or any abuse of your position of trust
and responsibility, and (iii) not use any material nonpublic information in
securities trading. The Rules also establish policies regarding other matters,
such as outside employment and the giving or receiving of gifts.
You are required to read and retain these Rules and to sign and return the
attached Acknowledgment Form to the Compliance Department ("Compliance") upon
commencement of employment or other services, and on an annual basis thereafter.
The Acknowledgment confirms that (i) you have received, read and asked any
questions necessary to understand the Rules, (ii) you agree to conduct yourself
in accordance with the Rules, and (iii) you have complied with the Rules during
such time as you have been associated with Janus. Depending on your status, you
may be required to submit additional reports and/or obtain clearances as
discussed more fully below.
Unless otherwise defined, all capitalized terms shall have the same meaning
as set forth in the Definitions section.
CAUTION REGARDING PERSONAL TRADING ACTIVITIES
Certain personal trading activities may be risky not only because of the
nature of the transactions, but also because action necessary to close out a
position may, for some Covered Persons, become prohibited while the position
remains open. For example, closing out short sales and transactions in
derivatives. Furthermore, if JCC becomes aware of material nonpublic
information, or if a Client is active in a given security, some Covered Persons
may find themselves "frozen" in a position. JCC will not bear any losses in
personal accounts resulting from the application of these Rules.
COMMUNICATIONS WITH OUTSIDE TRUSTEES/DIRECTORS
As a regular business practice, JCC attempts to keep the Directors and
Trustees informed with respect to its investment activities through reports and
other information provided to them in connection with board meetings and other
events. In addition, Janus personnel are encouraged to respond to inquiries from
Directors and Trustees, particularly as they relate to general strategy
considerations or economic or market conditions affecting Janus. However, it is
JCC's policy not to communicate specific trading information and/or advice on
specific issues to the Outside Directors and Outside Trustees (i.e., no
information should be given on securities for which current activity is being
considered for Clients). Any pattern of repeated requests by such Directors or
Trustees should be reported to the Chief Compliance Officer or the Director of
Compliance.
<PAGE>
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CODE OF ETHICS
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OVERVIEW
In general, it is unlawful for persons affiliated with investment
companies, their principal underwriters or their investment advisers to engage
in personal transactions in securities which are held or are to be acquired by a
registered investment company, if such personal transactions are made in
contravention of rules which the SEC has adopted to prevent fraudulent,
deceptive and manipulative practices. Such rules require each registered
investment company, investment adviser and principal underwriter to adopt its
own written code of ethics containing provisions reasonably necessary to prevent
its access persons from engaging in such conduct, and to maintain records, use
reasonable diligence, and institute such procedures as are reasonably necessary
to prevent violations of such code. This Code of Ethics ("Code") and information
reported hereunder will enable Janus to fulfill these requirements.
GENERAL PROHIBITIONS
The following are prohibited for Covered Persons (remember, if you work at
Janus or you're a Trustee or Director, you're a Covered Person). Persons who
violate any prohibition shall disgorge any profits realized in connection with
such violation to a charitable organization selected by the Ethics Committee,
and may be subject to sanctions imposed by the Ethics Committee, as outlined in
the Penalty Guidelines.
1. Purchasing, in an initial public offering, Covered Securities (see
Definitions section) for which no public market in the same or similar
securities of that issuer has previously existed. No securities may be
purchased in an offering that constitutes a "hot issue" as defined in NASD
rules. Such securities may be purchased, however, where the individual has
an existing right to purchase the security based on his or her status as an
investor, policyholder or depositor of the issuer. In addition, securities
issued in reorganizations are also outside the scope of this prohibition if
the transaction involves no investment decision on the part of the employee
except in connection with a shareholder vote.*
2. Causing a Client to take action, or to fail to take action, for personal
benefit, rather than to benefit such Client. For example, an employee would
violate this Code by causing a Client to purchase a security owned by the
employee for the purpose of supporting or increasing the price of that
security or by causing a Client to refrain from selling a security in an
attempt to protect a personal investment, such as an option on that
security.
3. Using knowledge of portfolio transactions made or contemplated for Clients
to profit, or cause others to profit, by the market effect of such
transactions.
4. Disclosing current portfolio transactions made or contemplated for Clients
as well as any other nonpublic information to anyone outside of Janus.
5. Engaging in fraudulent conduct in connection with the purchase or sale of a
security held or to be acquired by a Client, including without limitation:
a) employing any device, scheme or artifice to defraud any Client;
b) making to any Client any untrue statement of material fact or omitting
to state to any Client a material fact necessary in order to make the
statements made, in light of the circumstances under which they are
made, not misleading;
c) engaging in any act, practice or course of business which operates or
would operate as a fraud or deceit upon any Client;
d) engaging in any manipulative practice with respect to any Client; or
e) investing in derivatives to evade the restrictions of this Code.
Accordingly, individuals may not use derivatives to take positions in
securities which the Code would prohibit if the positions were taken
directly.
6. No Investment Personnel may serve on the board of directors of a publicly
traded company without prior written authorization by the Ethics Committee.
No such service shall be approved without a finding by the Committee that
the board service would not be inconsistent with the interests of Clients.
If board service is authorized by the Committee, the Investment Personnel
serving as director normally should be isolated from those making
investment decisions with respect to the company involved through "Chinese
Walls" or other procedures.**
7. If an Investment Person is planning to invest or make a recommendation to
invest in a security for a Client, and such person has a material interest
in the security, such person must first disclose such interest to their
manager or the Chief Investment Officer and obtain their consent. The
manager or Chief Investment Officer may only grant consent if they have no
material interest in the security. A material interest is Beneficial
Ownership of any securities (including derivatives, options, warrants or
rights), offices, directorships, significant contracts, or interests or
relationships that are likely to affect such person's judgment.**
TRADING RESTRICTIONS
The trading restrictions of the Code apply to all direct or indirect
acquisitions or dispositions of Covered Securities, whether by purchase, sale,
tender, stock purchase plan, gift, inheritance, or otherwise. Unless otherwise
noted, the following Trading Restrictions are applicable to any transaction in a
Covered Security Beneficially Owned by a Covered Person. Outside Directors and
Outside Trustees are exempt from certain Trading Restrictions because of their
limited access to current information regarding Client investments.
Any disgorgement of profits required under any of the following provisions
shall be donated to a charitable organization selected by the Ethics Committee,
as outlined in the Penalty Guidelines. However, if disgorgement is required as a
result of trades by a portfolio manager that conflicted with that manager's own
Clients, disgorgement proceeds shall be paid directly to such Clients. If
disgorgement is required under more than one provision, the Committee shall
determine in its sole discretion the provision that shall control. 1
EXCLUDED TRANSACTIONS
Some or all of the Trading Restrictions listed below do not apply to the
following transactions; however, these transactions must still be reported to
Compliance (see Reporting Transactions and Accounts):
o Tender offer transactions are exempt from all Trading Restrictions except
Preclearance.
o The acquisition of securities through stock purchase plans are exempt from
all Trading Restrictions except Preclearance, the Trading Ban On Portfolio
Managers and Assistant Portfolio Managers, and the Seven Day Rule (note,
sales of such securities are subject to the Trading Restrictions of the
Code).
o The acquisition of securities through stock dividends, dividend
reinvestments, stock splits, reverse stock splits, mergers, consolidations,
spin-offs, or other similar corporate reorganizations or distributions
generally applicable to all holders of the same class of such securities
are exempt from all Trading Restrictions.
o The acquisition of securities through the exercise of rights issued by an
issuer pro rata to all holders of a class of securities, to the extent the
rights were acquired in the issue are exempt from all Trading Restrictions.
o Nondiscretionary transactions in Company Stock (e.g., the acquisition of
securities through KCSI's Employee Stock Purchase Plan ("ESPP") or the
receipt of options in Company Stock as part of a compensation or benefit
plan) are exempt from all Trading Restrictions. Discretionary transactions
in Company Stock issued by JCC are exempt from all Trading Restrictions.
Discretionary transactions in Company Stock issued by KCSI (e.g.,
exercising options or selling ESPP Stock) are exempt from all Trading
Restrictions except Preclearance (See procedures for Preclearance of
Company Stock).
o The acquisition of securities by gift or inheritance are exempt from all
Trading Restrictions.
PRECLEARANCE
Access Persons (except Outside Directors and Outside Trustees) must obtain
preclearance prior to engaging in any personal transaction in applicable Covered
Securities. Preclearance procedures, as well as special procedures for
preclearing transactions in KCSI securities, tender offer transactions and stock
purchase plans are set forth below.
TRADING BAN ON PORTFOLIO MANAGERS AND ASSISTANT PORTFOLIO MANAGERS
Portfolio managers and their assistants are prohibited from trading
personally in Covered Securities. However, the following types of transactions
are exempt from this policy, but are subject to all applicable provisions of the
Rules, including preclearance:
o Purchases or sales of securities issued by JCC or KCSI;
o The sale of any security that is not held by any Client; and
o The sale of any security in order to raise cash to meet personal financial
needs (e.g., to purchase a home, automobile, etc.).
60 DAY RULE
Access Persons (except Outside Directors and Outside Trustees) shall
disgorge any profits realized in the purchase and sale, or sale and purchase, of
the same or equivalent Covered Securities within 60 calendar days if a Client
held or traded the security during the 60 day period.
BLACKOUT PERIOD
No Access Person may engage in a transaction in a Covered Security when
such person knows there to be pending, on behalf of any Client, a "buy" or
"sell" order in that same security. The existence of pending orders will be
checked as part of the preclearance process referenced above. Preclearance may
be given when any pending Client order is executed or withdrawn.
FIFTEEN DAY RULE
Any Access Person (except Outside Directors and Outside Trustees) who buys
or sells an applicable Covered Security within fifteen calendar days before such
security is bought or sold on behalf of any Client must disgorge any price
advantage realized. The price advantage shall be the favorable spread, if any,
between the price paid or received by such person and the least favorable price
paid or received by a Client during such period.1
SEVEN DAY RULE
Any portfolio manager or assistant portfolio manager who buys or sells an
applicable Covered Security within seven calendar days before or after he or she
trades in that security on behalf of a Client shall disgorge any profits
realized on such transaction.
SHORT SALES
Any Access Person who sells short a Covered Security that such person knows
is held long by any Client shall disgorge any profit realized on such
transaction. This prohibition shall not apply, however, to securities indices or
derivatives thereof (such as futures contracts on the S&P 500 index). Client
ownership of Covered Securities will be checked as part of the Preclearance
process referenced above.
HEDGE FUNDS, INVESTMENT CLUBS, AND OTHER INVESTMENTS
No Access Person (except Outside Directors and Outside Trustees) may
participate in hedge funds, partnerships, investment clubs, or similar
investment vehicles, unless such person does not have any direct or indirect
influence or control over the trading. Covered Persons relying upon this
provision will be required to file a Certification of Non-Influence and
Non-Control Form with the Director of Compliance.
PRECLEARANCE PROCEDURES
Preclearance must be obtained by Access Persons for all applicable
transactions in Covered Securities in which such person has a Beneficial
Interest. A Preclearance Form must be completed and forwarded to Compliance.
Compliance will notify the person when preclearance has been approved and the
trade then has four days to be executed.
GENERAL PRECLEARANCE
General preclearance shall be obtained from an authorized person from each
of the following three groups:
o A Designated Legal or Compliance Representative, who will present the
personal investment to the attendees of the weekly investment meeting,
whereupon an opportunity will be given to orally object. An attendee of the
weekly investment meeting shall object to such clearance if such person
knows of a conflict with a pending Client transaction or a transaction
known by such attendee to be under consideration for a Client. Objections
to such clearance should also take into account, among other factors,
whether the investment opportunity should be reserved for a Client. If no
objections are raised, the Designated Legal or Compliance Representative
shall so indicate by signing the Preclearance Form. Such approval shall not
be required for sales of securities not held by any Clients.
In place of this authorization, Investment Personnel are required to obtain
portfolio manager approvals as noted in the section below entitled
Preclearance Requirements for Investment Personnel.
o A Designated Trading Operations Representative, who may provide clearance
if such Representative knows of no pending "buy" or "sell" order in the
security on behalf of a Client and no such trades are known by such person
to be under consideration.
o The Director of Compliance, or a Designated Legal or Compliance
Representative if the Director of Compliance is not available, who may
provide clearance if no legal prohibitions are known by such person to
exist with respect to the proposed trade. Approvals for such clearance
should take into account, among other factors, the existence of any Watch
List or Restricted List and, to the extent reasonably practicable, recent
trading activity and holdings of Clients.
Except for transactions in KCSI, no authorized person may preclear a
transaction in which such person has a beneficial interest.
PRECLEARANCE REQUIREMENTS FOR INVESTMENT PERSONNEL
Trades by Investment Personnel may not be precleared by presentation at the
weekly investment meeting. Instead, Investment Personnel must obtain the
following portfolio management approvals. However, such approval shall not be
required for sales of securities not held by any Clients:
o Trades in Equity Securities require prior written approval from all senior
equity portfolio managers and either Ron Speaker or Sandy Rufenacht;
o Trades in Debt Securities require prior written approval from all senior
fixed income portfolio managers plus either Jim Craig or two other senior
equity portfolio managers.
A portfolio manager may not preclear his/her own transaction.
PRECLEARANCE OF COMPANY STOCK
Officers of Janus and certain persons designated by Compliance who wish to
make discretionary transactions in KCSI securities, or derivatives thereon, must
preclear such transactions only with the Director of Compliance or other
Designated Legal or Compliance Representative. If such persons are subject to
the provisions of Section 16 (b) of the Securities Exchange Act of 1934, trading
will generally be allowed only in the 10 business day period beginning 72 hours
after KCSI files its quarterly results with the SEC (e.g., 10Q or 10K filing,
not earnings release). To preclear the trade, the Director of Compliance or such
other Representative shall discuss the transaction with Janus' General Counsel
or Chief Financial Officer.
PRECLEARANCE OF TENDER OFFERS AND STOCK PURCHASE PLANS
Access Persons (other than Outside Directors and Outside Trustees) who wish
to participate in a tender offer or stock purchase plan must preclear such
trades only with the Director of Compliance prior to submitting notice to
participate in such tender offer or notice of participation in such stock
purchase plan to the applicable company. To preclear the trade, the Director of
Compliance shall consider all material factors relevant to a potential conflict
of interest between the Access Person and Clients. In addition, any increase of
$100 or more to a pre-existing stock purchase plan must be precleared.
FOUR DAY EFFECTIVE PERIOD
Clearances to trade will be in effect for only four trading days from and
including the date of the last Authorized Person's signature (which may not be
provided more than one day after the first Authorized Person's signature). For
tender offers, stock purchase plans, exercise of Company Stock and similar
transactions, the date the request is submitted to the company processing the
transaction will be considered the trade date for purposes of this requirement.
Open orders, including stop loss orders, will generally not be allowed unless
such order is expected to be completed within the four day effective period. It
will be necessary to re-preclear transactions not executed within the four day
effective period.
REPORTING TRANSACTIONS AND ACCOUNTS
Access Persons (other than Outside Trustees) must arrange for their brokers
or financial institutions to provide to Compliance, on a timely basis, duplicate
account statements and confirmations showing all transactions in brokerage or
commodities accounts in which they have a Beneficial Interest. Please note that,
even if such person does not trade Covered Securities in a particular brokerage
or commodities account (e.g., trading mutual funds in a Schwab account), the
reporting of duplicate account statements and confirmations is still required.
However, if such person only uses a particular brokerage account for checking
account purposes, and not investment purposes, they may in-lieu of reporting
duplicate account statements, report duplicate confirmations and make a
quarterly representation to Compliance indicating that no investment
transactions occurred in the account during the calendar quarter. Reporting of
accounts that do not allow any trading in Covered Securities (e.g., a mutual
fund account held directly with the fund sponsor) is not required.
Access Persons must notify Compliance of each reportable account at the
time it is opened, and annually thereafter, including the name of the firm and
the name under which the account is carried. An Account Information Form should
be completed for this purpose.
Certain transactions, such as private placements, inheritances or gifts,
might not be reported through a securities account. In these instances, Access
Persons must report these transactions using a Monthly Transaction Report as
noted below.
Any REGISTERED PERSON, whether or not an Access Person, must notify
Compliance of each brokerage account in which they have a beneficial interest,
including the name of the firm and the name under which the account is carried.
An Account Information Form should be completed for this purpose. Such persons
are also required to authorize Janus to request and receive directly, duplicate
trade confirmations and duplicate account statements for each account.
Compliance may, from time to time, request and spot check such information for
all or a portion of such transactions or accounts.
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Registered Persons are reminded that they must also inform any
brokerage firm with which they open an account, at the time the account
is opened, that they are registered with JDI. Registered Persons,
unless they are also Access Persons, should not arrange to send
duplicate confirms - compliance will arrange this if desired.
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NON-ACCESS PERSONS who engage in an aggregate of $25,000 or more of
transactions in Covered Securities within a calendar year, must provide
Compliance an Annual Transaction Report listing all such transactions in all
accounts in which such person has a Beneficial Interest. Compliance will request
this information annually and will spot check such reports.
OUTSIDE TRUSTEES need only report a transaction in a Covered Security if
such person, at the time of that transaction, knew or, in the ordinary course of
fulfilling his or her official duties as a Trustee should have known, that,
during the fifteen-day period immediately preceding the date of his or her
personal transaction, such security was purchased or sold by, or was being
considered for purchase or sale on behalf of, any Janus Fund for which such
person acts as Trustee.
MONTHLY TRANSACTION REPORTS
ACCESS PERSONS (other than Outside Trustees) must provide a Monthly
Transaction Report within 10 days after any month end showing all transactions
in Covered Securities for which confirmations are known by such person to not
have been timely provided to Janus, and all such transactions that are not
effected in securities or commodities accounts, including without limitation
nonbrokered private placements, gifts, inheritances, and other transactions in
Covered Securities.
Such persons must promptly comply with any request of the Director of
Compliance to provide monthly reports regardless of whether their broker has
been instructed to provide duplicate confirmations. Such reports may be
requested, for example, to check that all applicable confirmations are being
received or to supplement the requested confirmations where a broker is
difficult to work with or otherwise fails to provide duplicate confirmations on
a timely basis.
NON-INFLUENCE AND NON-CONTROL ACCOUNTS
The Rules shall not apply to any account, partnership, or similar
investment vehicle over which a Covered Person has no direct or indirect
influence or control. Covered Persons relying upon this provision will be
required to file a Certification of Non-Influence and Non-Control Form with the
Director of Compliance.
Any Account beneficially owned by a Covered Person that is managed by JCC
in a discretionary capacity is not covered by these Rules so long as such person
has no direct or indirect influence or control over the account. The employment
relationship between the account-holder and the individual managing the account,
in the absence of other facts indicating control, will not be deemed to give
such account-holder influence or control over the account.
OTHER REQUIRED FORMS
In addition to the Account Information Form, Monthly and Annual Transaction
Reports, and Certification of Non-Influence and Non-Control Form discussed
above, the following forms must be completed if applicable to you:
ACKNOWLEDGEMENT FORMS
Each Covered Person must, upon commencement of services and annually
thereafter, provide Compliance with an Acknowledgment Form stating that he or
she has reviewed and complied with the Rules and has reported all applicable
securities transactions.
INVESTMENT PERSONNEL REPRESENTATION FORM
Investment Personnel must, upon commencement of services and annually
thereafter, provide Compliance with an Investment Personnel Representation Form
which lists all Covered Securities beneficially held. In addition, such persons
must provide a brief description of any positions held (e.g., director, officer,
other) with for-profit entities other than Janus.
OUTSIDE DIRECTOR/TRUSTEE REPRESENTATION FORM
All Outside Directors and Outside Trustees must, upon commencement of
services and annually thereafter, provide Compliance with an Outside
Director/Trustee Representation Form. The Form declares that such persons agree
to refrain from trading in any securities when they are in possession of any
information regarding trading recommendations made or proposed to be made to any
Client by Janus or its officers or employees.
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INSIDER TRADING POLICY
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BACKGROUND INFORMATION
The term "insider trading" is not defined in the federal securities
statutes, but generally is used to refer to the use of material nonpublic
information to trade in securities (whether or not one is an "insider") or to
communications of material nonpublic information to others.
While the law concerning insider trading can be complex and unclear, you
should assume that the law prohibits:
o trading by an insider, while in possession of material nonpublic
information,
o trading by a non-insider, while in possession of material nonpublic
information, where the information was disclosed to the non-insider (either
directly or through one or more intermediaries) in violation of an
insider's duty to keep it confidential,
o communicating material nonpublic information to others in breach of a duty
not to disclose such information, and
o misappropriating confidential information for securities trading purposes,
in breach of a duty owed to the source of the information to keep the
information confidential.
Trading based on material nonpublic information about an issuer does not
violate this policy unless the trader (i) is an "insider" with respect to an
issuer; (ii) receives the information from an insider or from someone that the
trader knows received the information from an insider, either directly or
indirectly, or (iii) misappropriates the nonpublic information or obtains or
misuses it in breach of a duty of trust and confidence owed to the source of the
information. Accordingly, trading based on material nonpublic information about
an issuer can be, but is not necessarily, a violation of this Policy. Trading
while in possession of material nonpublic information relating to a tender offer
is prohibited under this Policy regardless of how such information was obtained.
Application of the law of insider trading to particular transactions can be
difficult, particularly if it involves a determination about trading based on
material nonpublic information. You legitimately may be uncertain about the
application of this Policy in particular circumstances. If you have any
questions regarding the application of the Policy or you have any reason to
believe that a violation of the Policy has occurred or is about to occur, you
should contact the Chief Compliance Officer or the Director of Compliance.
The following discussion is intended to help you understand the principal
concepts involved in insider trading.
WHO IS AN INSIDER?
The concept of "insider" is broad. It includes officers, directors and
employees of a company. In addition, a person can be a "temporary insider" if he
or she enters into a special confidential relationship in the conduct of a
company's affairs and as a result is given access to information solely for the
company's purposes. A temporary insider can include, among others, a company's
attorneys, accountants, consultants, bank lending officers, and the employees of
such organizations. In addition, one or more of the Janus entities may become a
temporary insider of a company it advises or for which it performs other
services. To be considered an insider, the company must expect the outsider to
keep the disclosed nonpublic information confidential and/or the relationship
must at least imply such a duty.
WHEN IS INFORMATION NONPUBLIC?
Information remains nonpublic until it has been made public. Information
becomes public when it has been effectively communicated to the marketplace,
such as by a public filing with the SEC or other governmental agency, inclusion
in the Dow Jones "tape" or publication in The Wall Street Journal or another
publication of general circulation. Moreover, sufficient time must have passed
so that the information has been disseminated widely.
WHAT IS MATERIAL INFORMATION?
Trading on inside information is not a basis for liability unless the
information is material. "Material information" generally means information for
which there is a substantial likelihood that a reasonable investor would
consider it important in making his or her investment decisions, or information
that is reasonably certain to have a substantial effect on the price of a
company's securities. Information that should be considered material includes,
but is not limited to: dividend changes, earnings estimates, changes in
previously released earnings estimates, significant merger or acquisition
proposals or agreements, major litigation, liquidation problems, and
extraordinary management developments.
Material information may also relate to the market for a company's
securities. Information about a significant order to purchase or sell securities
may, in some contexts, be deemed material. Similarly, prepublication information
regarding reports in the financial press also may be deemed material. For
example, the Supreme Court upheld the criminal convictions of insider trading
defendants who capitalized on prepublication information about The Wall Street
Journal's "Heard on the Street" column.
WHEN IS INFORMATION MISAPPROPRIATED?
The misappropriation theory prohibits trading on the basis of non-public
information by a corporate "outsider" in breach of a duty owed not to a trading
party, but to the source of confidential information. Misappropriation of
information occurs when a person obtains the non-public information through
deception or in breach of a duty of trust and loyalty to the source of the
information.
PENALTIES FOR INSIDER TRADING
Penalties for trading on or communicating material nonpublic information
are severe, both for individuals involved in such unlawful conduct and their
employers or other controlling persons. A person can be subject to some or all
of the penalties below even if he or she does not personally benefit from the
violation. Penalties include:
o civil injunctions
o treble damages
o disgorgement of profits
o jail sentences for up to 10 years
o fines up to $1,000,000 (or $2,500,000 for corporations and other entities)
o civil penalties for the person who committed the violation of up to three
times the profit gained or loss avoided, whether or not the person actually
benefited, and
o civil penalties for the employer or other controlling person of up to the
greater of $1,000,000 or three times the amount of the profit gained or
loss avoided.
In addition, any violation of the law may result in serious sanctions by
Janus, including termination of employment.
WHO IS A CONTROLLING PERSON?
Included as controlling persons are Janus and its Directors, Trustees and
officers. If you are a Director, Trustee or officer, you have a duty to act to
prevent insider trading. Failure to fulfill such a duty may result in penalties
as described above.
PROCEDURES TO IMPLEMENT POLICY
The following procedures have been established to aid the Directors,
Trustees, officers and employees of Janus in avoiding insider trading, and to
aid Janus in preventing, detecting and imposing sanctions against insider
trading.
IDENTIFYING MATERIAL INSIDE INFORMATION
Before trading for yourself or others, including the Janus Funds or other
Clients, in the securities of a company about which you may have potential
inside information, ask yourself the following questions:
o To whom has this information been provided? Has the information been
effectively communicated to the marketplace?
o Has this information been obtained from either the issuer or from another
source in breach of a duty to that source to keep the information
confidential?
o Is the information material? Is this information that an investor would
consider important in making his or her investment decisions? Is this
information that would affect the market price of the securities if
generally disclosed?
Special caution should be taken with respect to potential inside
information regarding JCC. Although JCC's shares are not publicly traded, JCC's
parent, KCSI, is a publicly traded company. KCSI owns 82% of the stock of JCC.
As a result, potential inside information regarding JCC may affect trading in
KCSI stock and should be reported pursuant to the procedures set forth below.
REPORTING INSIDE INFORMATION
If, after consideration of the above, you believe that the information is
material and nonpublic, or if you have questions as to whether the information
is material and nonpublic, you should take the following steps:
o Do not purchase or sell the securities on behalf of yourself or others,
including Clients.
o Do not communicate the information inside or outside of Janus, other than
to the Chief Compliance Officer or the Director of Compliance.
o Immediately advise the Chief Compliance Officer or Director of Compliance
of the nature and source of such information. The Chief Compliance Officer
or Director of Compliance will review the information with the Ethics
Committee.
o Depending upon the determination made by the Ethics Committee, or by the
Chief Compliance Officer until the Committee can be convened, you may be
instructed to continue the prohibition against trading and communication
and the Director of Compliance will place the security on a Restricted List
or Watch List, as described below. Alternatively, if it is determined that
the information obtained is not material nonpublic information, you may be
allowed to trade and communicate the information.
WATCH AND RESTRICTED LISTS
Whenever the Ethics Committee or the Chief Compliance Officer determines
that a Director, Trustee, officer or employee of Janus is in possession of
material nonpublic information with respect to a company (regardless of whether
it is currently owned by any Client) such company will either be placed on a
Watch List or on a Restricted List.
WATCH LIST. If the security is placed on a Watch List, the flow of the
information to other Janus personnel will be restricted in order to allow such
persons to continue their ordinary investment activities. This procedure is
commonly referred to as a "Chinese Wall."
RESTRICTED LIST. If the Ethics Committee or the Chief Compliance Officer
determines that material nonpublic information is in the possession of a
Director, Trustee, officer, or employee of Janus and cannot be adequately
isolated through the use of a Chinese Wall, the company will be placed on the
Restricted List. While a company is on the Restricted List, no Investment Person
shall initiate or recommend any transaction in any Client account, and no Access
Person shall be precleared to transact in any account in which he or she has a
beneficial interest, with respect to the securities of such company. The Ethics
Committee or the Chief Compliance Officer will also have the discretion of
placing a company on the Restricted List even though no "break in the Chinese
Wall" has or is expected to occur with respect to the material nonpublic
information about the company. Such action may be taken by such persons for the
purpose of avoiding any appearance of the misuse of material nonpublic
information.
The Ethics Committee or the Chief Compliance Officer will be responsible
for determining whether to remove a particular company from the Watch List or
Restricted List. The only persons who will have access to the Watch List or
Restricted List are members of the Ethics Committee, Designated Legal or
Compliance Representatives and such persons who are affected by the information.
The Watch List and Restricted List are highly confidential and should, under no
circumstances, be discussed with or disseminated to anyone other than the
persons noted above.
PROTECTING INFORMATION
Directors, Trustees, officers and employees of Janus shall not disclose any
nonpublic information (whether or not it is material) relating to Janus or its
securities transactions to any person outside Janus (unless such disclosure has
been authorized by the Chief Compliance Officer). Material nonpublic information
may not be communicated to anyone, including any Director, Trustee, officer or
employee of Janus, except as provided in this Policy. Access to such information
must be restricted. For example, access to files containing material nonpublic
information and computer files containing such information should be restricted,
and conversations containing such information, if appropriate at all, should be
conducted in private.
To insure the integrity of the Chinese Wall and to avoid unintended
disclosures, it is important that all employees take the following steps with
respect to confidential or nonpublic information:
o Do not discuss confidential information in public places such as elevators,
hallways or social gatherings.
o To the extent practical, limit access to the areas of the firm where
confidential information could be observed or overheard to employees with a
business need for being in the area.
o Avoid use of speakerphones in areas where unauthorized persons may overhear
conversations.
o Avoid use of wireless and cellular phones, or other means of communication
which may be intercepted.
o Where appropriate, maintain the confidentiality of Client identities by
using code names or numbers for confidential projects.
o Exercise care to avoid placing documents containing confidential
information in areas where they may be read by unauthorized persons and to
store such documents in secure locations when they are not in use.
o Destroy copies of confidential documents no longer needed for a project
unless required to be saved pursuant to applicable recordkeeping policies
or requirements.
RESPONSIBILITY TO MONITOR TRANSACTIONS
Compliance will monitor transactions of Clients and employees for which
reports are received to detect the existence of any unusual trading activities
with respect to companies on the Watch and Restricted Lists. Compliance will
immediately report any unusual trading activity directly to the Director of
Compliance, and in his or her absence, the Chief Compliance Officer, who will be
responsible for determining what, if any, action should be taken.
RECORD RETENTION
Copies of the Watch List and Restricted List shall be maintained by the
Director of Compliance for a minimum of six years.
TENDER OFFERS
Tender offers represent a particular concern in the law of insider trading
for two reasons. First, tender offer activity often produces extraordinary
fluctuations in the price of the target company's securities. Trading during
this time period is more likely to attract regulatory attention (and produces a
disproportionate percentage of insider trading cases). Second, the SEC has
adopted a rule which expressly forbids trading and "tipping" while in possession
of material nonpublic information regarding a tender offer received from the
tender offeror, the target company or anyone acting on behalf of either. Janus
employees and others subject to this Policy should exercise particular caution
any time they become aware of nonpublic information relating to a tender offer.
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GIFT POLICY
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Gifts may only be given (or accepted) if they are in accordance with
normally accepted business practices and do not raise any question of
impropriety. A question of impropriety may be raised if a gift influences or
gives the appearance of influencing the recipient. The following outlines Janus'
policy on giving and receiving gifts to help us maintain those standards and is
applicable to all Inside Directors and Inside Trustees, officers and employees
of Janus.
GIFT GIVING
Neither you nor members of your immediate family may give any gift, series
of gifts, or other thing of value, including cash, loans, personal services, or
special discounts ("Gifts") in excess of $100 per year to any Client or any one
person or entity that does or seeks to do business with or on behalf of Janus or
any Client (collectively referred to herein as "Business Relationships").
GIFT RECEIVING
Neither you nor members of your immediate family may receive any Gift of
material value from any single Business Relationship. A Gift will be considered
material in value if it influences or gives the appearance of influencing the
recipient.
In the event the aggregate fair market value of all Gifts received by you
from any single Business Relationship is estimated to exceed $250 in any
12-month period, you must immediately notify your manager. Managers that receive
such notification must report this information to the Director of Compliance if
it appears that such Gifts may have improperly influenced the receiver. If the
Gift is made in connection with the sale or distribution of registered
investment company or variable contract securities, the aggregate fair market
value of all such Gifts received by you from any single Business Relationship
may never exceed $100 in any 12-month period.
Occasionally, Janus employees are invited to attend or participate in
conferences, tour a company's facilities, or meet with representatives of a
company. Such invitations may involve traveling and may require overnight
lodging. Generally, all travel and lodging expenses provided in connection with
such activities must be paid for by Janus. However, if appropriate, and with
prior approval from your manager, you may accept travel related amenities if the
costs are considered insubstantial and are not readily ascertainable.
The solicitation of a Gift is prohibited (i.e., you may not request a Gift,
such as tickets to a sporting event, be given to you).
CUSTOMARY BUSINESS AMENITIES
Customary business amenities are not considered Gifts so long as such
amenities are business related (e.g., if you are accepting tickets to a sporting
event, the offerer must go with you), reasonable in cost, appropriate as to time
and place, and neither so frequent nor so costly as to raise any question of
impropriety. Customary business amenities which you and, if appropriate, your
guests, may accept (or give) include an occasional meal, a ticket to a sporting
event or the theater, green fees, an invitation to a reception or cocktail
party, or comparable entertainment.
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OUTSIDE EMPLOYMENT POLICY
- --------------------------------------------------------------------------------
No Inside Director, Inside Trustee, officer or employee of Janus shall
accept employment or compensation as a result of any business activity (other
than a passive investment), outside the scope of his relationship with Janus
unless such person has provided prompt written notice of such employment or
compensation to the Chief Compliance Officer (or, for Registered Persons, to
JDI's Operations Manager), and, in the case of securities-related employment or
compensation, has received the prior written approval of the Ethics Committee.
Registered Persons are reminded to update and submit their Outside Business
Activity Disclosure forms as appropriate pursuant to JDI's Written Supervisory
Procedures and applicable NASD rules.
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PENALTY GUIDELINES
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OVERVIEW
Covered Persons who violate any of the requirements, restrictions, or
prohibitions of the Rules may be subject to sanctions imposed by the Ethics
Committee. The following guidelines shall be used by the Director of Compliance
for recommending remedial actions for Covered Persons who violate prohibitions
or disregard requirements of the Rules. Deviations from the Fifteen Day Rule are
not considered to be violations under the Rules and, therefore, are not subject
to the penalty guidelines.
Upon learning of a potential deviation or violation from the Rules, the
Director of Compliance will provide a written recommendation of remedial action
to the Ethics Committee. The Ethics Committee has full discretion to approve
such recommendations or impose other sanctions it deems appropriate. The Ethics
Committee will take into consideration, among other things, whether the
violation was a technical violation of the Rules or inadvertent oversight (i.e.,
ill-gotten profits versus general oversight). The guidelines are designed to
promote consistency and uniformity in the imposition of sanctions and
disciplinary matters.
PENALTY GUIDELINES
Outlined below are the guidelines for the sanctions that may be imposed on
Covered Persons who fail to comply with the Rules:
o 1st violation - Compliance will send a memorandum of reprimand to the
person, copying his/her supervisor. The memorandum will generally reinforce
the person's responsibilities under the Rules, educate the person on the
severity of personal trading violations and inform the person of the
possible penalties for future failure to comply with the Rules;
o 2nd violation - Janus' Chief Investment Officer, James P. Craig, will meet
with the person to discuss the violations in detail and will reinforce the
importance of complying with the Rules;
o 3rd violation - Janus' Chairman of the Board, Thomas H. Bailey, will meet
the person to discuss the violations in detail and will reinforce the
importance of complying with the Rules;
o 4th violation - The Executive Committee will impose such sanctions as it
deems appropriate, including without limitation, a letter of censure,
fines, withholding of bonus payments, or suspension or termination of
employment or personal trading privileges.
In addition to the above disciplinary sanctions, such persons may be
required to disgorge any profits realized in connection with such violation. All
disgorgement proceeds collected will be donated to a charitable organization
selected by the Ethics Committee. All sanctions imposed will be documented in
such person's personal trading file maintained by Janus, and will be reported to
the Executive Committee.
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SUPERVISORY AND COMPLIANCE PROCEDURES
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Supervisory procedures can be divided into two classifications: prevention
of violations and detection of violations. Compliance review procedures include
preparation of special and annual reports, record maintenance and review, and
confidentiality preservation.
SUPERVISORY PROCEDURES
Prevention of Violations
To prevent violations of the Rules, the Director of Compliance should, in
addition to enforcing the procedures outlined in the Rules:
1. review and update the Rules as necessary, at least once annually, including
but not limited to a review of the Code by the Chief Compliance Officer,
the Ethics Committee and/or counsel;
2. answer questions regarding the Rules, or refer the same to the Chief
Compliance Officer;
3. request from all persons upon commencement of services, and annually
thereafter, any applicable forms and reports as required by the Rules;
4. write letters to the securities firms requesting duplicate confirmations
and account statements where necessary; and
5. with such assistance from the Human Resources Department as may be
appropriate, maintain a continuing education program consisting of the
following:
a) orienting Directors, Trustees, officers, and employees who are new to
Janus to the Rules, and
b) further educating Directors, Trustees, officers, and employees by
distributing memos or other materials that may be issued by outside
organizations such as the Investment Company Institute discussing the
issue of insider trading and other issues raised by the Rules.
DETECTION OF VIOLATIONS
To detect violations of these Rules, the Director of Compliance should, in
addition to enforcing the procedures outlined in the Rules:
o Review reports, confirmations, and statements relative to applicable
restrictions, as provided under the Code;
o Review the Restricted and Watch Lists relative to applicable personal and
Client trading activity, as provided under the Policy;
Spot checks of certain information are permitted as noted under the Code.
COMPLIANCE PROCEDURES
REPORTS OF POTENTIAL DEVIATIONS OR VIOLATIONS
Upon learning of a potential deviation or violation of the Rules, the
Director of Compliance should prepare a written report providing full details
and a recommendation of remedial action to the Ethics Committee. The Ethics
Committee shall thereafter take such action as it deems appropriate (see Penalty
Guidelines).
ANNUAL REPORTS
The Director of Compliance should prepare at least annually a written
report for the Ethics Committee. This report shall set forth the following
information, and shall be confidential.
o Copies of the Rules, as revised, including a summary of any changes made
during the past year;
o Identification of any violations requiring significant remedial action
during the past year; and
o Recommendations, if any, regarding changes in existing restrictions or
procedures based upon Janus' experience under these Rules, evolving
industry practices, or developments in applicable laws or regulations.
The Ethics Committee will annually report to the Trustees with respect to
any of the above items to the extent that the Janus Funds are materially
affected thereby.
RECORDS
Compliance should maintain the following records:
o Files for personal securities transaction confirmations and account
statements, all reports and other forms submitted by Covered Persons
pursuant to these Rules and any other pertinent information. Such files
shall be stored in a secure location;
o A copy of each preclearance;
o A list of all persons who are, or have been, required to make reports
pursuant to these Rules.
INSPECTION
The records and reports maintained by Compliance pursuant to the Rules
shall at all times be available for inspection, without prior notice, by any
member of the Ethics Committee.
CONFIDENTIALITY
All procedures, reports and records monitored, prepared or maintained
pursuant to these Rules shall be considered confidential and proprietary to
Janus and shall be maintained and protected accordingly. Except as otherwise
required by law or this Policy, such matters shall not be disclosed to anyone
other than to members of the Ethics Committee, as requested.
THE ETHICS COMMITTEE
The purpose of this Section is to describe the Ethics Committee. The Ethics
Committee is created to provide an effective mechanism for monitoring compliance
with the standards and procedures contained in the Rules and to take appropriate
action at such times as violations or potential violations are discovered.
MEMBERSHIP OF THE COMMITTEE
The Committee consists of Steven R. Goodbarn, Vice President of Finance,
Treasurer and Chief Financial Officer; Thomas A. Early, Vice President and
General Counsel; Stephen L. Stieneker, Vice President of Compliance, Chief
Compliance Officer and Assistant General Counsel; and Ted S. Dryden, Director of
Compliance. The Director of Compliance currently serves as the Chairman of the
Committee. The composition of the Committee may be changed from time to time.
COMMITTEE MEETINGS
The Committee shall generally meet every four months or as often as
necessary to review operation of the compliance program and to consider
technical deviations from operational procedures, inadvertent oversights, or any
other potential violation of the Rules. At such time as the Director of
Compliance learns of a potential violation, he or she shall report such
violation to the Chief Compliance Officer, together with all documents relating
to the matter. The Chief Compliance Officer shall either present the information
at the next regular meeting of the Committee, or convene a special meeting.
Deviations alternatively may be addressed by including them in the
employee's personnel records maintained by Janus. Committee meetings are
primarily intended for consideration of the general operation of the compliance
program and substantive or serious departures from standards and procedures in
the Rules.
A Committee meeting may be attended, at the discretion of the Committee, by
such other persons as the Committee shall deem appropriate. Any individual whose
conduct has given rise to the meeting may also be called upon, but shall not
have the right, to appear before the Committee.
It is not required that minutes of Committee meetings be maintained; in
lieu of minutes the Committee may issue a report describing any action taken.
The report shall be included in the confidential file maintained by the Director
of Compliance with respect to the particular employee or employees whose conduct
has been the subject of the meeting.
SPECIAL DISCRETION
The Committee shall have the authority by unanimous action to exempt any
person or class of persons from all or a portion of the Rules, provided that:
o the Committee determines, on advice of counsel, that the particular
application of all or a portion of the Rules is not legally required;
o the Committee determines that the likelihood of any abuse of the Rules by
such exempted person(s) is remote;
o the terms or conditions upon which any such exemption is granted is
evidenced in a written instrument; and
o the exempted person(s) agrees to execute and deliver to the Director of
Compliance, at least annually, a signed Acknowledgment Form, which
Acknowledgment shall, by operation of this provision, include such
exemptions and the terms and conditions upon which it was granted.
The Committee shall also have the authority by unanimous action to impose
such additional requirements or restrictions as it, in its sole discretion,
determines appropriate or necessary, as outlined in the Penalty Guidelines.
Any exemption, and any additional requirement or restriction, may be
withdrawn by the Committee at any time (such withdrawal action is not required
to be unanimous).
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GENERAL INFORMATION ABOUT THE ETHICS RULES
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DESIGNEES
The Director of Compliance and the Chief Compliance Officer may appoint
designees to carry out their functions pursuant to these Rules.
ENFORCEMENT
In addition to the penalties described in the Penalty Guidelines and
elsewhere in the Rules, upon discovering a violation of the Rules, the Janus
entity with which you are associated may impose such sanctions as it deems
appropriate, including without limitation, a letter of censure or suspension or
termination of employment or personal trading privileges of the violator. All
material violations of the Rules and any sanctions imposed with respect thereto
shall be reported periodically to the Directors and Trustees and the directors
of any other Janus entity which has been directly affected by the violation.
INTERNAL USE
The Rules are intended solely for internal use by Janus and do not
constitute an admission, by or on behalf of such companies, their controlling
persons or persons they control, as to any fact, circumstance or legal
conclusion. The Rules are not intended to evidence, describe or define any
relationship of control between or among any persons. Further, the Rules are not
intended to form the basis for describing or defining any conduct by a person
that should result in such person being liable to any other person, except
insofar as the conduct of such person in violation of the Rules may constitute
sufficient cause for Janus to terminate or otherwise adversely affect such
person's relationship with Janus.
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FORMS
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Attached are blank forms for use in complying with the Rules. These forms
may be revised from time to time, as the Ethics Committee shall determine.
Please contact Compliance if you need additional forms or if you have any
questions.
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* Item 1 is not applicable to Outside Directors and Outside Trustees.
** Items 6 and 7 are applicable to Investment Personnel only.
Unless otherwise noted, restrictions on personal transactions apply to
transactions involving Covered Securities, including any derivative thereof.
When determining the amount of disgorgement required with respect to a
derivative, consideration will be given to price differences in both the
derivative and the underlying securities, with the lesser amount being used for
purposes of computing disgorgement. For example, in determining whether a
reimbursement is required when the applicable personal trade is in a derivative
and the Client transaction is in the underlying security, the amount shall be
calculated using the lesser of (a) the difference between the price paid or
received for the derivative and the closing bid or ask price (as appropriate)
for the derivative on the date of the Client transaction, or (b) the difference
between the last sale price, or the last bid or ask price (as appropriate) of
the underlying security on the date of the derivative transaction, and the price
received or paid by the Client for the underlying security. Neither preclearance
nor disgorgement shall be required if such person's transaction is to close,
sell or exercise a derivative within five days of its expiration.
1 Personal purchases are matched only against subsequent Client purchases, and
personal sales are only matched against subsequent Client sales for purposes of
this restriction.
MORGAN STANLEY DEAN WITTER AFRICA INVESTMENT FUND, INC.
MORGAN STANLEY DEAN WITTER ASIA-PACIFIC FUND, INC.
MORGAN STANLEY DEAN WITTER EASTERN EUROPE FUND, INC.
MORGAN STANLEY DEAN WITTER EMERGING MARKETS FUND, INC.
MORGAN STANLEY DEAN WITTER EMERGING MARKETS DEBT FUND, INC.
MORGAN STANLEY DEAN WITTER GLOBAL OPPORTUNITY BOND FUND, INC.
MORGAN STANLEY DEAN WITTER HIGH YIELD FUND, INC.
MORGAN STANLEY DEAN WITTER INDIA INVESTMENT FUND, INC.
THE LATIN AMERICAN DISCOVERY FUND, INC.
THE MALAYSIA FUND, INC.
THE PAKISTAN INVESTMENT FUND, INC.
THE THAI FUND, INC.
THE TURKISH INVESTMENT FUND, INC.
(THE "CLOSED-END FUNDS")
AND
MORGAN STANLEY DEAN WITTER INSTITUTIONAL FUND, INC.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
MORGAN STANLEY DEAN WITTER STRATEGIC ADVISER FUND, INC.
(THE "OPEN-END FUNDS", AND TOGETHER WITH THE CLOSED-END FUNDS, THE "FUNDS")
AND
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC.
("MSDW INVESTMENT MANAGEMENT")
AND
MILLER ANDERSON & SHERRERD, LLP
("MAS", AND TOGETHER WITH MSDW INVESTMENT MANAGEMENT, THE "INVESTMENT MANAGERS")
AND
MORGAN STANLEY & CO. INCORPORATED
("MS&Co.")
CODE OF ETHICS
1. Purposes
This Code of Ethics has been adopted by the Funds, the Investment
Managers and MS&Co., the principal underwriter of the Open-End Funds, in
accordance with Rule 17j-1 under the Investment Company Act of 1940, as amended
(the "Act"). Rule 17j-1 under the Act generally proscribes fraudulent or
manipulative practices with respect to purchases or sales of securities held or
to be acquired by investment companies, if effected by affiliated persons (as
defined under the Act) of such companies. Specifically, Rule 17j-1 provides that
it is unlawful for any affiliated person of or principal underwriter for a
registered investment company, or any affiliated person of an investment adviser
of or principal underwriter for a registered investment company, in connection
with the purchase or sale, directly or indirectly, by such person of a security
held or to be acquired by such registered investment company:
(a) To employ any device, scheme or artifice to defraud such
registered investment company;
(b) To make to such registered investment company any untrue
statement of a material fact or omit to state to such
registered investment company a material fact necessary in
order to make the statements made, in light of the
circumstances under which they are made, not misleading;
(c) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any such
registered investment company; or
(d) To engage in any manipulative practice with respect to
such registered investment company.
While Rule 17j-1 is designed to protect only the interests of the Funds
and their stockholders, the Investment Managers apply the policies and
procedures described in this Code of Ethics to all employees of the Investment
Managers to protect the interests of their non-Fund clients as well
(hereinafter, where appropriate, non-Fund clients of the Investment Managers are
referred to as "Advisory Clients" and any reference to an Advisory Client(s)
relates only to the activities of employees of the Investment Managers).
The purpose of this Code of Ethics is to (i) ensure that Access Persons
conduct their personal securities transactions in a manner which does not (a)
create an actual or potential conflict of interest with the Funds' or an
Advisory Client's portfolio transactions, (b) place their personal interests
before the interest of the Funds and their stockholders or an Advisory Client or
(c) take unfair advantage of their relationship to the Funds or an Advisory
Client and (ii) provide policies and procedures consistent with the Act and Rule
17j-1 designed to give effect to the general prohibitions set forth in Rule
17j-l.
Among other things, the procedures set forth in this Code of Ethics
require that all (i) Access Persons review this Code of Ethics at least
annually, (ii) Access Persons, unless excepted by Sections 8. (d) or (e) of this
Code of Ethics, report transactions in Covered Securities, (iii) Access Persons
refrain from engaging in certain transactions, and (iv) employees of the
Investment Managers pre-clear with the Compliance Department or the trading desk
at MAS any transactions in Covered Securities.
2. Definitions
(a) "Access Person" means (i) any director, officer or Advisory
Person of the Funds or of the Investment Managers, and (ii)
any director or officer of MS&Co., who, in the ordinary course
of business, makes, participates in or obtains information
regarding the purchase or sale of Covered Securities by the
Funds.
(b) "Advisory Person" means any employee of the Funds, or of the
Investment Managers (or of any company in a control
relationship to the Funds or the Investment Managers), who, in
connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase
or sale of Covered Securities by the Funds or an Advisory
Client, or whose functions relate to the making of any
recommendations with respect to such purchases or sales.
(c) "Beneficial ownership" shall be interpreted in the same manner
as it would be in determining whether a person is subject to
the provisions of Section 16 of the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder,
except that the determination of direct or indirect beneficial
ownership shall apply to all securities which an Access Person
has or acquires.
(d) "Control" shall have the same meaning as that set forth in
Section 2(a)(9) of the Act.
(e) "Compliance Department" means the MSDW Investment Management or
MAS Compliance Department.
(f) "Covered Security" means a security as defined in Section
2(a)(36) of the Act, except that it does not include: (i)
shares of registered open-end investment companies, (ii)
direct obligations of the Government of the United States, and
(iii) bankers' acceptances, bank certificates of deposit,
commercial paper, and high quality short-term debt
instruments, including repurchase agreements.
(g) "Disinterested Director" means a director of a Fund who is not
an "interested person" of such Fund within the meaning of
Section 2(a)(19) of the Act.
(h) "Purchase or sale (or sell)" with respect to a Covered
Security means any acquisition or disposition of a direct or
indirect beneficial interest in a Covered Security, including,
inter alia, the writing or buying of an option to purchase or
sell a Covered Security.
(i) "Security held or to be acquired" means (i) any Covered
Security which, within the most recent 15 days, is or has been
held by a Fund or an Advisory Client, or is being or has been
considered by a Fund or an Advisory Client or the Investment
Managers for purchase by a Fund or an Advisory Client and (ii)
any option to purchase or sell, and any security convertible
into or exchangeable for, a Covered Security described in this
paragraph.
3. Prohibited Transactions
(a) No Access Person or employee of the Investment Managers shall
purchase or sell any Covered Security which to his or her
actual knowledge at the time of such purchase or sale:
(i) is being considered for purchase or sale by a Fund or an
Advisory Client; or
(ii) is being purchased or sold by a Fund or an Advisory
Client.
(b) No employee of the Investment Managers shall purchase or sell
a Covered Security while there is a pending "buy" or "sell"
order in the same or a related security for a Fund or an
Advisory Client until that order is executed or withdrawn.
(c) No Advisory Person shall purchase or sell a Covered Security
within seven calendar days before or after any portfolio(s) of
the Funds over which such Advisory Person exercises investment
discretion or an Advisory Client over which the Advisory
Person exercises investment discretion purchases or sells the
same or a related Covered Security. Any profits realized or
unrealized by the Advisory Person on a prohibited purchase or
sale within the proscribed period shall be disgorged to a
charity.
(d) No employee of the Investment Managers shall profit from the
purchase and sale or sale and purchase of the same (or
equivalent) Covered Security within 60 calendar days, except
that he or she may sell a Covered Security for a loss after 30
calendar days. Any profits realized within 60 calendar days on
such purchase or sale shall be disgorged to a charity.
(e) No employee of the Investment Managers shall purchase any
securities in an initial public offering.
(f) No employee of the Investment Managers shall purchase
privately-placed securities unless such purchase is pre-approved
by the Compliance Department. Any such person who has previously
purchased privately-placed securities must disclose such
purchases to the Compliance Department before such person
participates in a Fund's or an Advisory Client's subsequent
consideration of an investment in the securities of the same or a
related issuer. Upon such disclosure, the Compliance Department
shall appoint another person with no personal interest in the
issuer, to conduct an independent review of such Fund's or such
Advisory Client's decision to purchase securities of the same or
a related issuer.
(g) No Access Person or employee of the Investment Managers shall
recommend the purchase or sale of any Covered Securities to a
Fund or to an Advisory Client without having disclosed to the
Compliance Department his or her interest, if any, in such
Covered Securities or the issuer thereof, including without
limitation (i) his or her direct or indirect beneficial ownership
of any securities of such issuer, (ii) any contemplated purchase
or sale by such person of such securities, (iii) any position
with such issuer or its affiliates, and (iv) any present or
proposed business relationship between such issuer or its
affiliates, on the one hand, and such person or any party in
which such person has a significant interest, on the other;
provided, however, that in the event the interest of such person
in such securities or the issuer thereof is not material to his
or her personal net worth and any contemplated purchase or sale
by such person in such securities cannot reasonably be expected
to have a material adverse effect on any such purchase or sale by
a Fund or an Advisory Client or on the market for the securities
generally, such person shall not be required to disclose his or
her interest in the securities or the issuer thereof in
connection with any such recommendation.
(h) No Access Person or employee of the Investment Managers shall
reveal to any other person (except in the normal course of his
or her duties on behalf of a Fund or an Advisory Client) any
information regarding the purchase or sale of any Covered
Security by a Fund or an Advisory Client or consideration of
the purchase or sale by a Fund or an Advisory Client of any
such Covered Security.
4. Pre-Clearance of Covered Securities Transactions and Permitted Brokerage
Accounts
No employee of MSDW Investment Management shall purchase or sell
Covered Securities without prior written authorization from its Compliance
Department. No employee of MAS shall purchase or sell Covered Securities without
prior written authorization from the appropriate trading desk. Unless otherwise
indicated by the Compliance Department, pre-clearance of a purchase or sale
shall be valid and in effect only for the business day in which such
pre-clearance is given; provided, however, that the approval of an unexecuted
purchase or sale is deemed to be revoked when the employee becomes aware of
facts or circumstances that would have resulted in the denial of approval of the
approved purchase or sale were such facts or circumstances made known to the
Compliance Department or MAS trading desk, as appropriate, at the time the
proposed purchase or sale was originally presented for approval. The Investment
Managers require all of their employees to maintain their personal brokerage
accounts at MS&Co. or a broker/dealer affiliated with MS&Co. (hereinafter, a
"Morgan Stanley Account"). Outside personal brokerage accounts are permitted
only under very limited circumstances and only with express written approval by
the Compliance Department. The Compliance Department has implemented procedures
reasonably designed to monitor purchases and sales effected pursuant to the
aforementioned pre-clearance procedures.
5. Exempted Transactions
(a) The prohibitions of Section 3 and Section 4 of this Code of
Ethics shall not apply to:
(i) Purchases or sales effected in any account over which
an Access Person or an employee of the Investment
Managers has no direct or indirect influence or
control;
(ii) Purchases or sales which are non-volitional;
(iii) Purchases which are part of an automatic purchase
plan directly with the issuer or its agent or which
are part of an automatic dividend reinvestment plan;
or
(iv) Purchases effected upon the exercise of rights issued
by an issuer pro rata to all holders of a class of
its securities and sales of such rights so acquired,
but only to the extent such rights were acquired from
such issuer.
(b) Notwithstanding the prohibitions of Sections 3. (a), (b) and (c)
of this Code of Ethics, the Compliance Department or MAS trading
desk, as appropriate, may approve a purchase or sale of a Covered
Security by employees of the Investment Managers which would
appear to be in contravention of the prohibitions in Sections 3.
(a), (b) and (c) if it is determined that (i) the facts and
circumstances applicable at the time of such purchase or sale do
not conflict with the interests of a Fund or an Advisory Client,
or (ii) such purchase or sale is only remotely potentially
harmful to a Fund or an Advisory Client because it would be very
unlikely to affect a highly institutional market, or because it
is clearly not related economically to the securities to be
purchased, sold or held by such Fund or Advisory Client, and
(iii) the spirit and intent of this Code of Ethics is met.
6. Restrictions on Receiving Gifts
No employee of the Investment Managers shall receive any gift or other
consideration in merchandise, service or otherwise of more than de minimis value
from any person, firm, corporation, association or other entity that does
business with or on behalf of the Funds or an Advisory Client.
7. Service as a Director
No employee of the Investment Managers shall serve on the board of
directors of a publicly-traded company without prior written authorization from
the Compliance Department. Approval will be based upon a determination that the
board service would not conflict with the interests of the Funds and their
stockholders or an Advisory Client.
8. Reporting
(a) Unless excepted by Section 8. (d) or (e) of this Code of
Ethics, each Access Person must disclose all personal holdings
in Covered Securities to the Compliance Department for its
review no later than 10 days after becoming an Access Person
and annually thereafter. The initial and annual holdings
reports must contain the following information:
(i) The title, number of shares and principal amount of
each Covered Security in which the Access Person has
any direct or indirect beneficial ownership;
(ii) The name of any broker, dealer or bank with or
through whom the Access Person maintained an account
in which any securities were held for the direct or
indirect benefit of the Access Person; and
(iii) The date the report was submitted to the Compliance
Department by the Access Person.
(b) Unless excepted by Section 8. (d) or (e) of this Code of
Ethics, each Access Person and each employee of the Investment
Managers must report to the Compliance Department for its
review within 10 days of the end of a calendar quarter the
information described below with respect to transactions in
Covered Securities in which such person has, or by reason of
such transactions acquires any direct or indirect beneficial
interest:
(i) The date of the transaction, the title, the interest
rate and maturity date (if applicable), the number of
shares and the principal amount of each Covered
Security involved;
(ii) The nature of the transaction (i.e., purchase, sale
or any other type of acquisition or disposition);
(iii) The price of the Covered Security at which the purchase
or sale was effected;
(iv) The name of the broker, dealer or bank with or
through which the purchase or sale was effected; and
(v) The date the report was submitted to the Compliance
Department by such person.
(c) Unless excepted by Section 8. (d) or (e) of this Code of
Ethics, each Access Person and each employee of the Investment
Managers must report to the Compliance Department for its
review within 10 days of the end of a calendar quarter the
information described below with respect to any account
established by such person in which any securities were held
during the quarter for the direct or indirect benefit of such
person:
(i) The name of the broker, dealer or bank with whom the
account was established;
(ii) The date the account was established; and
(iii) The date the report was submitted to the Compliance
Department by such person.
(d) An Access Person will not be required to make any reports
described in Sections 8. (a), (b) and (c) above for any account
over which the Access Person has no direct or indirect influence
or control. An Access Person or an employee of the Investment
Managers will not be required to make the annual holdings report
under Section 8. (a) and the quarterly transactions report under
Section 8. (b) with respect to purchases or sales effected for,
and Covered Securities held in: (i) a Morgan Stanley Account,
(ii) an account in which the Covered Securities were purchased
pursuant to an automatic purchase plan set up directly with the
issuer or its agent or pursuant to a dividend reinvestment plan,
or (iii) an account for which the Compliance Department receives
duplicate trade confirmations and quarterly statements. An Access
Person or an employee of MSDW Investment Management will not be
required to make a report under Section 8. (c) for any account in
which only shares of open-end registered investment companies can
be purchased or sold. Lastly, an employee of MSDW Investment
Management will no be required to make a report under Section 8.
(c) for any account established with MS&Co. or a broker/dealer
affiliated with MS&Co., or for any account which was pre-approved
by the Compliance Department.
(e) A Disinterested Director of a Fund, who would be required to make
a report solely by reason of being a Fund director, is not
required to make initial and annual holdings reports.
Additionally, such Disinterested Director need only make a
quarterly transactions report for a purchase or sale of Covered
Securities if he or she, at the time of that transaction, knew
or, in the ordinary course of fulfilling his or her official
duties as a Disinterested Director of a Fund, should have known
that, during the 15-day period immediately preceding or following
the date of the Covered Securities transaction by him or her,
such Covered Security is or was purchased or sold by a Fund or
was being considered for purchase or sale by a Fund.
(f) The reports described in Sections 8. (a), (b) and (c) above
may contain a statement that the reports shall not be
construed as an admission by the person making such reports
that he or she has any direct or indirect beneficial ownership
in the Covered Securities to which the reports relate.
9. Annual Certifications
All Access Persons and employees of the Investment Managers must
certify annually that they have read, understood and complied with the
requirements of this Code of Ethics and recognize that they are subject to this
Code of Ethics by signing the certification attached hereto as Exhibit A.
10. Board Review
The management of the Funds and representatives or officers of the
Investment Managers and, with respect to the Open-End Funds, MS&Co., shall each
provide each Fund's Board of Directors, at least annually, with the following:
(a) a summary of existing procedures concerning personal investing
and any changes in the procedures made during the past year;
(b) a description of any issues arising under this Code of Ethics or
procedures since the last such report, including, but not limited
to, information about material violations of this Code of Ethics
or procedures and sanctions imposed in response to material
violations;
(c) any recommended changes in the existing restrictions or
procedures based upon a Fund's or the Investment Managers'
experience under this Code of Ethics, evolving industry practices
or developments in applicable laws and regulations; and
(d) a certification (attached hereto as Exhibits B, C, D, and E, as
appropriate) that each has adopted procedures reasonably
necessary to prevent its Access Persons from violating this Code
of Ethics.
11. Sanctions
Upon discovering a violation of this Code of Ethics, the Board of
Directors of such Fund or of the Investment Managers, as the case may be, may
impose such sanctions as it deems appropriate.
12. Recordkeeping Requirements
The management of the Funds and representatives or officers of the
Investment Managers and, with respect to the Open-End Funds, MS&Co., each shall
maintain, as appropriate, the following records for a period of five years, the
first two years in an easily accessible place, and shall make these records
available to the Securities and Exchange Commission or any representative of
such during an examination of the Funds or of the Investment Managers:
(a) a copy of this Code of Ethics or any other Code of Ethics
which was in effect at any time within the previous five
years;
(b) a record of any violation of this Code of Ethics during the
previous five years, and of any action taken as a result of
the violation;
(c) a copy of each report required by Section 8. of this Code of
Ethics, including any information provided in lieu of each
such report;
(d) a record of all persons, currently or within the past five
years, who are or were subject to this Code of Ethics and who
are or were required to make reports under Section 8. of this
Code of Ethics;
(e) a record of all persons, currently or within the past five
years, who are or were responsible for reviewing the reports
required under Section 8. of this Code of Ethics; and
(f) a record of any decision, and the reasons supporting the
decision, to approve the acquisition of securities described
in Sections 3. (e) and (f) of this Code of Ethics.
EXHIBIT A
MORGAN STANLEY DEAN WITTER AFRICA INVESTMENT FUND, INC.
MORGAN STANLEY DEAN WITTER ASIA-PACIFIC FUND, INC.
MORGAN STANLEY DEAN WITTER EASTERN EUROPE FUND, INC.
MORGAN STANLEY DEAN WITTER EMERGING MARKETS FUND, INC.
MORGAN STANLEY DEAN WITTER EMERGING MARKETS DEBT FUND, INC.
MORGAN STANLEY DEAN WITTER GLOBAL OPPORTUNITY BOND FUND, INC.
MORGAN STANLEY DEAN WITTER HIGH YIELD FUND, INC.
MORGAN STANLEY DEAN WITTER INDIA INVESTMENT FUND, INC.
THE LATIN AMERICAN DISCOVERY FUND, INC.
THE MALAYSIA FUND, INC.
THE PAKISTAN INVESTMENT FUND, INC.
THE THAI FUND, INC.
THE TURKISH INVESTMENT FUND, INC.
(THE "CLOSED-END FUNDS")
AND
MORGAN STANLEY DEAN WITTER INSTITUTIONAL FUND, INC.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
MORGAN STANLEY DEAN WITTER STRATEGIC ADVISER FUND, INC.
(THE "OPEN-END FUNDS", AND TOGETHER WITH THE CLOSED-END FUNDS, THE "FUNDS")
AND
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC.
("MSDW INVESTMENT MANAGEMENT")
AND
MILLER ANDERSON & SHERRERD, LLP
("MAS", AND TOGETHER WITH MSDW INVESTMENT MANAGEMENT, THE "INVESTMENT MANAGERS")
AND
MORGAN STANLEY & CO., INCORPORATED
("MS&Co.")
CODE OF ETHICS
ANNUAL CERTIFICATION
I hereby certify that I have read and understand the Code of Ethics
(the "Code") which has been adopted by the Funds, the Investment Managers and
MS&Co. and recognize that it applies to me and agree to comply in all respects
with the policies and procedures described therein. Furthermore, I hereby
certify that I have complied with the requirements of the Code in effect, as
amended, for the year ended December 31, ____, and that all of my reportable
transactions in Covered Securities were executed and reflected accurately in a
Morgan Stanley Account (as defined in the Code) or that I have attached a report
that satisfies the annual holdings disclosure requirement as described in
Section 8. (a) of the Code.
Date: ,
Name:______________________________
Signature:___________________________
EXHIBIT B
MORGAN STANLEY DEAN WITTER AFRICA INVESTMENT FUND, INC.
MORGAN STANLEY DEAN WITTER ASIA-PACIFIC FUND, INC.
MORGAN STANLEY DEAN WITTER EASTERN EUROPE FUND, INC.
MORGAN STANLEY DEAN WITTER EMERGING MARKETS FUND, INC.
MORGAN STANLEY DEAN WITTER EMERGING MARKETS DEBT FUND, INC.
MORGAN STANLEY DEAN WITTER GLOBAL OPPORTUNITY BOND FUND, INC.
MORGAN STANLEY DEAN WITTER HIGH YIELD FUND, INC.
MORGAN STANLEY DEAN WITTER INDIA INVESTMENT FUND, INC.
MORGAN STANLEY DEAN WITTER INSTITUTIONAL FUND, INC.
MORGAN STANLEY DEAN WITTER STRATEGIC ADVISER FUND, INC.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE LATIN AMERICAN DISCOVERY FUND, INC.
THE MALAYSIA FUND, INC.
THE PAKISTAN INVESTMENT FUND, INC.
THE THAI FUND, INC.
THE TURKISH INVESTMENT FUND, INC.
(THE "FUNDS")
ANNUAL CERTIFICATION UNDER RULE 17j-1
OF THE INVESTMENT COMPANY ACT OF 1940
Pursuant to Rule 17j-1 under the Investment Company Act of 1940, as
amended (the "1940 Act") and pursuant to the Code of Ethics for the Funds,
Morgan Stanley Dean Witter Investment Management, Inc., Miller, Anderson
&Sherrerd, LLP and Morgan Stanley & Co., Incorporated (the "Code of Ethics"),
each of the Funds hereby certifies to such Fund's Board of Directors that such
Fund has adopted procedures reasonably necessary to prevent Access Persons (as
defined in the Code of Ethics) from violating the Code of Ethics.
Date:_________________ By:__________________________________
Name: Mary E. Mullin
Title: Secretary
EXHIBIT E
MORGAN STANLEY & CO. INCORPORATED
("MS&Co.")
ANNUAL CERTIFICATION UNDER RULE 17j-1
OF THE INVESTMENT COMPANY ACT OF 1940
Pursuant to Rule 17j-1 under the Investment Company Act of 1940, as
amended (the "1940 Act") and pursuant to the Code of Ethics for MS&Co., the
Open-End Funds (as defined in the Code of Ethics), Morgan Stanley Dean Witter
Investment Management Inc., and Miller, Anderson & Sherrerd, LLP (the "Code of
Ethics"), MS&Co. hereby certifies to the Board of Directors of the Open-End
Funds that MS&Co. has adopted procedures reasonably necessary to prevent Access
Persons (as defined in the Code of Ethics) from violating the Code of Ethics.
Date:_________________ By:__________________________________
Name: Harold J. Schaaff, Jr.
Title: Managing Director
EXHIBIT C
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT, INC.
("MSDW INVESTMENT MANAGEMENT")
ANNUAL CERTIFICATION UNDER RULE 17j-1
OF THE INVESTMENT COMPANY ACT OF 1940
Pursuant to Rule 17j-1 under the Investment Company Act of 1940, as
amended (the "1940 Act") and pursuant to the Code of Ethics for MSDW Investment
Management, the Funds (as defined in the Code of Ethics) and Morgan Stanley &
Co., Incorporated (the "Code of Ethics"), MSDW Investment Management hereby
certifies to the Board of Directors of the Funds that MSDW Investment Management
has adopted procedures reasonably necessary to prevent Access Persons (as
defined in the Code of Ethics) from violating the Code of Ethics.
Date:_________________ By:__________________________________
Name: Harold J. Schaaff, Jr.
Title: General Counsel
EXHIBIT D
MILLER, ANDERSON & SHERRERD, LLP ("MAS")
ANNUAL CERTIFICATION UNDER RULE 17j-1
OF THE INVESTMENT COMPANY ACT OF 1940
Pursuant to Rule 17j-1 under the Investment Company Act of 1940, as
amended (the "1940 Act") and pursuant to the Code of Ethics for MAS, the Funds
(as defined in the Code of Ethics) and Morgan Stanley & Co., Incorporated (the
"Code of Ethics"), MAS hereby certifies to the Board of Directors of the Funds
that MAS has adopted procedures reasonably necessary to prevent Access Persons
(as defined in the Code of Ethics) from violating the Code of Ethics.
Date:_________________ By:__________________________________
Name: Paul A. Frick
Title: Compliance Officer
CODE OF ETHICS
This Code of Ethics ("Code") is adopted by Neuberger Berman Management Inc. ("NB
Management") and Neuberger Berman, LLC (NB") with respect to NB Management's
services as the sub-adviser of one or more registered investment companies or
series thereof ("Fund") for which neither NB Management nor any of its
affiliates is investment manager, investment adviser, administrator or
distributor.
This Code is adopted pursuant to Rule 17j-1 promulgated by the Securities and
Exchange Commission (the "Rule") under the Investment Company Act of 1940.
Statement of General Principles
This Code of Ethics is adopted in recognition of the general fiduciary
principles that govern personal investment activities of all individuals
employed by or associated with NB Management and NB.
It is the duty at all times to place the interests of Fund shareholders
first. Priority must be given to Fund trades over personal securities
trades.
All personal securities transactions must be conducted consistent with
this Code of Ethics and in such a manner as to avoid any actual or
potential conflict of interest or any abuse of an individual's position
of trust and responsibility.
Individuals should not take advantage of their positions.
<PAGE>
TABLE OF CONTENTS
1. General Prohibitions ........................................... 4
2. Definitions .................................................... 5
Access Person .................................................. 5
Advisory Person ................................................ 5
Beneficial Interest ............................................ 5
Blind Trust .................................................... 6
Day ............................................................ 6
Immediate Family ............................................... 6
Investment Company ............................................. 6
Investment Personnel ........................................... 6
Legal and Compliance Department ................................ 6
Portfolio Manager .............................................. 6
Related Issuer ................................................. 6
Security ....................................................... 7
Trading Desk ................................................... 7
3. Required Compliance Procedures ............................ 8
3.1 All Securities Transactions through Neuberger & Berman 8
3.2 Preclearance of Securities Transactions by Access Persons 8
3.3 Post-Trade Monitoring of Precleared Transactions 9
3.4 Disclosure of Personal Holdings ......................... 10
3.5 Certification of Compliance with Code of Ethics .... 10
4. Restrictions and Disclosure Requirements ................. 11
4.1 Initial Public Offerings ................................... 11
4.2 Private Placements ......................................... 11
4.3 Related Issuers ............................................ 11
4.4 Blackout Periods ........................................... 12
4.5 Same Day Price Switch ...................................... 13
4.6 Short-Term Trading Profits ................................. 15
4.7 Gifts ...................................................... 16
4.8 Service as Director of Publicly Traded Companies .. 16
5. Procedures with Regard to Dissemination of Information 17
6. Reporting by Access Persons ................................... 18
6.1 General Requirement ........................................ 18
6.2 Contents ................................................... 18
7. Code of Ethics Implementation .................................. 19
8. Reports to Directors of Funds .......................... 20
9. Other Matters .................................................. 21
9.1 Forms ...................................................... 21
9.2 Exceptions ................................................. 21
<PAGE>
1. General Prohibitions
No individual associated with NB Management or NB in connection with the
purchase or sale, directly or indirectly, by such person of a security held or
to be acquired by a Fund, shall:
Employ any device, scheme or artifice to defraud such Fund;
Make to such Fund any untrue statement of a material fact or omit to
state to such Fund a material fact necessary in order to make the
statements made, in light of the circumstances under which they are
made, not misleading;
Engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any such Fund;
Engage in any manipulative practice with respect to such Fund;
Engage in any transaction in a security while in possession of material
nonpublic information regarding the security or the issuer of the
security; or
Engage in any transaction intended to raise, lower, or maintain the
price of any security or to create a false appearance of active
trading.
<PAGE>
2. Definitions
The following words have the following meanings, regardless of whether such
terms are capitalized or not in this Code:
Access Person - any principal or employee of NB who is an Advisory
Person and all Trustees, directors, officers, or Advisory Persons of NB
Management. The determination as to whether an individual is an Access Person
shall be made by the Legal and Compliance Department.
Advisory Person - any employee of NB Management (or of any company in a
control relationship to NB or NB Management) or any employee or principal of NB
who, in connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase or sale of a
security by the Fund, or whose functions relate to the making of any
recommendations with respect to such purchases or sales.
Beneficial Interest - a person has a Beneficial Interest in an account
in which he or she may profit or share in the profit from transactions. Without
limiting the foregoing, a person has a Beneficial Interest when the securities
in the account are held:
(i) in his or her name;
(ii) in the name of any of his or her Immediate Family;
(iii)in his or her name as trustee for himself or herself or for his
or her Immediate Family;
(iv) in a trust in which he or she has a Beneficial Interest or is the
settlor with a power to revoke;
(v) by another person and he or she has a contract or an
understanding with such person that the securities held in that
person's name are for his or her benefit;
(vi) in the form of a right to acquisition of such security through
the exercise of warrants, options, rights, or conversion rights;
(vii) by a partnership of which he or she is a member;
(viii) by a corporation which he or she uses as a personal trading
medium;
(ix) by a holding company which he or she controls; or
(x) any other relationship in which a person would have beneficial
ownership under Section 16 of the Securities Exchange Act of
1934 and the rules and regulations thereunder, except that the
determination of direct or indirect Beneficial Interest shall
apply to all securities which an Access Person has or
acquires.
Any person who wishes to disclaim a Beneficial Interest in any securities must
submit a written request to the Legal and Compliance Department explaining the
reasons therefor. Any disclaimers granted by the Legal and Compliance Department
must be made in writing. Without limiting the foregoing, if a disclaimer is
granted to any person with respect to shares held by a member or members of his
or her Immediate Family, the provisions of this Code of Ethics applicable to
such person shall not apply to any member or members of his or her Immediate
Family for which such disclaimer was granted, except with respect to
requirements specifically applicable to members of a person's Immediate Family.
Blind Trust - a trust in which an Access Person or employee has
Beneficial Interest or is the settlor with a power to revoke, with respect to
which the Legal and Compliance Department has determined that such Access Person
or employee has no direct or indirect influence or control over the selection or
disposition of securities and no knowledge of transactions therein, provided,
however, that direct or indirect influence or control of such trust is held by a
person or entity not associated with NB or any affiliate of NB and not a
relative of such Access Person or employee
Legal and Compliance Department - NB Legal and Compliance Department
-------------------------------
Day - a calendar day
---
Immediate Family - any of the following relatives sharing the same
household with an individual: child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, sister-in-law, including adoptive relationships
Investment Company - each registered investment company and series
thereof for which NB Management is the investment manager, investment adviser,
sub-adviser, administrator or distributor, or for which NB is the investment
adviser or sub-adviser.
Investment Personnel - Portfolio Managers, and Access Persons who, in
connection with their regular functions or duties, provide information and
advice to a Portfolio Manager or who help execute a Portfolio Manager's
decisions. Each member of this category is individually referred to as an
Investment Person. The determination as to whether an individual is an
Investment Person shall be made by the Legal and Compliance Department.
Portfolio Manager - an Access Person who has or shares principal
day-to-day responsibility for managing the portfolio of any Fund. The
determination as to whether an individual is a Portfolio Manager shall be made
by the Legal and Compliance Department.
Related Issuer - an issuer with respect to which an Investment Person or
his or her Immediate Family: (i) has a business relationship with such issuer or
any promoter, underwriter, officer, director, or employee of such issuer; or
(ii) is related to any officer, director or employee of such issuer.
Security - any option, stock or option thereon, instrument, bond,
debenture, pre-organization certificate, investment contract, any other interest
commonly known as a security, and any security or instrument related to, but not
necessarily the same as, those held or to be acquired by a Fund; provided,
however, that the following shall not be considered a "security": securities
issued by the United States Government, bankers' acceptances, bank certificates
of deposit, commercial paper, shares of registered open-end investment
companies, commodities, futures, and options on futures.
Trading Desk - NB Trading Desk
<PAGE>
3. Required Compliance Procedures
3.1 All Securities Transactions through NB.
(a) Every Access Person, and every employee of NB Management or NB and
principal of NB is required to execute through Neuberger & Berman ("NB") all
transactions in securities held in his or her own name or in which he or she has
a Beneficial Interest. Every Portfolio Manager is also required to provide the
Legal and Compliance Department with duplicate copies of confirmations of all
transactions in securities held in the name of members of his or her Immediate
Family or in which such members have a Beneficial Interest.
(b) Exceptions will only be granted upon a showing of extenuating
circumstances. Any individual seeking an exception to this policy must submit a
written request to the Legal and Compliance Department explaining the reasons
therefor. Any exceptions granted must be made in writing.
(c) Any individual granted an exception is required to direct his or her
broker, adviser or trustee, as the case may be, to supply to the Legal and
Compliance Department, on a timely basis, duplicate copies of confirmations of
all personal securities transactions and copies of periodic statements for all
securities accounts in his or her own name or in which he or she has a
Beneficial Interest.
(d) Individuals are not required to execute through NB transactions in
which they are establishing a dividend reinvestment plan directly through an
issuer. However, individuals must obtain written approval from the Legal and
Compliance Department prior to establishing any such plan and supply to the
Legal and Compliance Department, on a timely basis, duplicate copies of all
confirmations relating to the plan.
3.2 Preclearance of Securities Transactions by Access Persons.
(a) Every Access Person must obtain prior approval from the Trading Desk
before executing any transaction in securities held in his or her own name or in
which he or she has a Beneficial Interest. Before executing any such
transaction, the Trading Desk shall determine that:
(i) No Investment Company has a pending "buy" or "sell" order in that
security;
(ii) The security does not appear on any "restricted" list of NB; and
(iii) Such transaction is not short selling or option trading that is
economically opposite any pending transaction for any Investment
Company.
(b) The following securities are exempt from preclearance
requirements:
(i) Securities transactions effected in blind trusts
(ii) The acquisition of securities through stock dividends, dividend
reinvestments, stock splits, reverse stock splits, mergers,
consolidations, spin-offs, or other similar corporate
reorganizations or distributions generally applicable to all
holders of the same class of securities
(iii) The acquisition of securities through the exercise of rights
issued by an issuer pro rata to all holders of a class of
securities, to the extent the rights were acquired in the issue,
and sales of such rights so acquired
(iv) Repurchase agreements
(v) Options on the Standard & Poor's "500" Composite Stock Price
Index
(vi) Other securities that may from time to time be so designated in
writing by the Code of Ethics Board
(c) Obtaining preclearance approval does not constitute a waiver of
any prohibitions, restrictions, or disclosure requirements in
this Code of Ethics.
3.3 Post-Trade Monitoring of Precleared Transactions.
After the Trading Desk has granted preclearance to an Access Person with
respect to any personal securities transaction, the investment activity of such
Access Person shall be monitored by the Legal and Compliance Department to
ascertain that such activity conforms to the preclearance so granted and the
provisions of this Code.
<PAGE>
3.4 Disclosure of Personal Holdings.
All Access Persons are required to disclose all holdings in securities
held in their own names or in which they have a Beneficial Interest to the Legal
and Compliance Department upon commencement of employment and thereafter on an
annual basis.
3.5 Certification of Compliance With Code of Ethics.
All Access Persons are required to certify annually in writing that they
have:
(a) read and understand the Code of Ethics and recognize that they
are subject thereto;
(b) complied with the requirements of the Code of Ethics;
(c) disclosed or reported all personal securities transactions
required to be disclosed or reported pursuant to the requirements
of the Code; and
(d) with respect to any blind trusts in which such person has a
Beneficial Interest, that such person has no direct or indirect
influence or control and no knowledge of any transactions
therein.
<PAGE>
4. Restrictions and Disclosure Requirements
4.1 Initial Public Offerings.
All Investment Personnel are prohibited from acquiring a Beneficial
Interest in any securities in an initial public offering, in order to preclude
any possibility of their profiting improperly from their positions on behalf of
a Fund. No member of an Immediate Family of an Investment Person may acquire a
Beneficial Interest in an initial public offering without the prior written
consent of the Legal and Compliance Department.
4.2 Private Placements.
(a) No Investment Person or member of his or her Immediate Family may
acquire a Beneficial Interest in any securities in private placements without
prior written approval by the Legal and Compliance Department.
(b) Prior approval shall take into account, among other factors, whether
the investment opportunity should be reserved for a Fund and its shareholders
and whether the opportunity is being offered to an individual by virtue of his
or her position or relationship to the Fund.
(c) An Investment Person who has (or a member of whose Immediate Family
has) acquired a Beneficial Interest in securities in a private placement is
required to disclose that investment to the Portfolio Manager when such
Investment Person plays a part in any subsequent consideration of an investment
in the issuer for any Fund; provided, however, that if any such Investment
Person is the Portfolio Manager, such Investment Person shall make such
disclosure to the Legal and Compliance Department. In any such circumstances,
the decision to purchase securities of the issuer for a Fund is subject to an
independent review by Investment Personnel with no personal interest in the
issuer. Such independent review shall be made in writing and furnished to the
Legal and Compliance Department.
4.3 Related Issuers.
Investment Personnel are required to disclose to the Portfolio Manager
when they play a part in any consideration of an investment by a Fund in a
Related Issuer; provided, however, that if any such Investment Person is the
Portfolio Manager, such Investment Person shall make such disclosure to the
Legal and Compliance Department. In any such circumstances, the decision to
purchase securities of the Related Issuer for a Fund is subject to an
independent review by Investment Personnel with no personal interest in the
Related Issuer. Such independent review shall be made in writing and furnished
to the Legal and Compliance Department.
<PAGE>
4.4 Blackout Periods.
(a) No Access Person may execute a securities transaction in securities
held in his or her own name or in which he or she has a Beneficial Interest on a
day during which any Investment Company has a pending "buy" or "sell" order in
that same security until that order is executed or withdrawn.
(b) No Portfolio Manager or member of his or her Immediate Family may
buy or sell a security held in his or her own name or in which he or she has a
Beneficial Interest within seven (7) Days before or after a Fund that such
Portfolio Manager manages trades in that security, provided, however, that this
prohibition shall not apply to:
(i) Securities transactions effected in blind trusts
(ii) Securities transactions that are non-volitional on the part of
either the Access Person or the Fund
(iii)The acquisition of securities through stock dividends, dividend
reinvestments, stock splits, reverse stock splits, mergers,
consolidations, spin-offs, or other similar corporate
reorganizations or distributions generally applicable to all
holders of the same class of securities
(iv) The acquisition of securities through the exercise of rights
issued by an issuer pro rata to all holders of a class of
securities, to the extent the rights were acquired in the issue,
and sales of such rights so acquired
(v) Repurchase agreements
(vi) Options on the Standard & Poor's "500" Composite Stock Price
Index
(vii)Other securities that may from time to time be so designated in
writing by the Code of Ethics Board
<PAGE>
(c) Any securities position established in violation of Section 4.4(b)
shall be closed out as soon as possible consistent with applicable law. Any
profits on trades within the proscribed periods shall be disgorged to the Fund.
(d) The foregoing blackout periods should not operate to the detriment
of any Investment Company. Without limiting the scope or meaning of this
statement, the following procedure is to be implemented under extraordinary
situations:
(i) If a Portfolio Manager of a Fund or member of his or her
Immediate Family has executed a transaction in a security and
within seven (7) Days thereafter such security is considered for
purchase or sale by such Fund, such Portfolio Manager shall
submit a written memorandum to the Legal and Compliance
Department prior to the entering of the purchase or sale order
for the Fund. Such memorandum shall describe the circumstances
underlying the consideration of such transaction for the Fund.
(ii) Based on such memorandum and other factors it deems relevant
under the specific circumstances, the Legal and Compliance
Department shall have authority to determine that the prior
transaction by the Portfolio Manager or member of his or her
Immediate Family shall not be considered a violation of the
provisions of paragraph (b) of this section.
(iii) The Legal and Compliance Department shall make a written record
of any determination made under paragraph (d)(ii) of this
section, including the reasons therefor. The Legal and Compliance
Department shall maintain records of any such memoranda and
determinations.
4.5 Same Day Price Switch.
(a) If any employee of NB Management, or any employee or principal of NB
purchases a security (other than a fixed income security) held, or by reason of
such transaction held, in his or her own name or in which he or she has a
Beneficial Interest and subsequent thereto a Fund purchases the same security
during the same day, then, to the extent that the price paid per share by the
Fund for such purchase is less favorable than the price paid per share by such
principal or employee, the Fund shall have the benefit of the more favorable
price per share.
(b) If any such principal or employee sells a security (other than a
fixed income security) held in his or her own name or in which he or she has a
Beneficial Interest and subsequent thereto a Fund sells the same security during
the same day, then, to the extent that the price per share received by the Fund
for such sale is less favorable than the price per share received by the
principal or employee, the Fund shall have the benefit of the more favorable
price per share.
(c) An amount of money necessary to effectuate the price adjustment
shall be transferred from the account of the principal or employee subject to
the price adjustment policies, to the Fund's account. The price adjustment shall
be limited to the number of shares purchased or sold by the principal or
employee or the number of shares purchased or sold by the Fund, whichever is
smaller.
(d) Notwithstanding the foregoing, price switching shall not apply to:
(i) Securities transactions effected in blind trusts
(ii) Securities transactions that are non-volitional on the part of
either the Access Person or the Fund
(iii)The acquisition of securities through stock dividends, dividend
reinvestments, stock splits, reverse stock splits, mergers,
consolidations, spin-offs, or other similar corporate
reorganizations or distributions generally applicable to all
holders of the same class of securities
(iv) The acquisition of securities through the exercise of rights
issued by an issuer pro rata to all holders of a class of
securities, to the extent the rights were acquired in the issue,
and sales of such rights so acquired
(v) Repurchase agreements
(vi) Options on the Standard & Poor's "500" Composite Stock Price
Index
(vii)Transactions in which the adjustment resulting from the price
switch is less than Five Hundred Dollars ($ 500.00)
(viii) Transactions arising through arbitrage, market making
activities or hedged options trading
(ix) Transactions in the NB ERISA Profit Sharing and Retirement Plan
(x) Transactions involving odd lots
(xi) Other securities that may from time to time be so designated in
writing by the Code of Ethics Board
<PAGE>
4.6 Short-Term Trading Profits.
(a) No Investment Person may profit in the purchase and sale, or sale
and purchase, of the same (or equivalent) securities held in his or her own name
or in which he or she has a Beneficial Interest within sixty (60) Days,
provided, however, that this prohibition shall not apply to:
(i) Any security that was neither held, purchased, nor sold by any
Investment Company during such sixty (60) Day period
(ii) Securities transactions effected in blind trusts
(iii)Securities transactions that are non-volitional on the part of
either the Access Person or the Fund
(iv) The acquisition of securities through stock dividends, dividend
reinvestments, stock splits, reverse stock splits, mergers,
consolidations, spin-offs, or other similar corporate
reorganizations or distributions generally applicable to all
holders of the same class of securities
(v) The acquisition of securities through the exercise of rights
issued by an issuer pro rata to all holders of a class of
securities, to the extent the rights were acquired in the issue,
and sales of such rights so acquired
(vi) Repurchase agreements
(vii)Options on the Standard & Poor's "500" Composite Stock Price
Index
(viii) Other securities that may from time to time be so designated in
writing by the Code of Ethics Board
(b) Any profits on trades within the proscribed periods shall be
disgorged to a charity to be determined by the Legal and Compliance Department.
(c) In determining the applicability of this section, determinations
shall be made based upon a last-in, first-out ("LIFO") calculation; provided,
however, that such determinations shall be solely for purposes of this Code of
Ethics and shall not have any applicability for tax or other purposes.
<PAGE>
4.7 Gifts.
All Access Persons and employees are prohibited from giving or receiving
any gift or other thing of more than One Hundred Dollars ($ 100) in value to or
from any person or entity that does business with or on behalf of the Fund in
any one year.
4.8 Service as Director of Publicly Traded Companies.
Investment Personnel are prohibited from serving on the Boards of
Directors of publicly traded companies.
<PAGE>
5. Procedures with Regard to Dissemination of Information
Access Persons and principals and employees of NB Management or NB are
prohibited from revealing information relating to current or anticipated
investment intentions, portfolio transactions or activities of a Fund except (a)
to persons whose responsibilities require knowledge of the information or (b) to
the investment adviser, administrator, custodian or Board of Directors of such
Fund.
<PAGE>
6. Reporting by Access Persons
6.1 General Requirement.
Every Access Person shall report, or cause to be reported to the Legal
and Compliance Department the information described in Section 6.3 with respect
to transactions in any security in which such Access Person has, or by reason of
such transaction acquires, any direct or indirect Beneficial Interest; provided,
however, that no report is required with respect to transactions where such
report would duplicate information recorded by NB or NB Management pursuant to
Rules 204-2(a)(12) or 204-2(a)(13) under the Investment Advisers Act of 1940.
For purposes of the foregoing (b), the Legal and Compliance Department maintains
(i) electronic records of all securities transactions effected through NB, and
(ii) copies of any duplicate confirmations that have been provided to the Legal
and Compliance Department under this Code of Ethics with respect to securities
transactions that, pursuant to exceptions granted by the Legal and Compliance
Department, have not been effected through NB; accordingly, no report is
required with respect to such transactions.
6.2 Contents.
Every report shall be made not later than 10 days after the end of the
calendar quarter in which the transaction to which the report relates was
effected, and shall contain the following information:
(i) The date of the transaction, the title and the number of shares,
and the principal amount of each security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
(iii) The price at which the transaction was effected; and
(iv) The name of the broker, dealer or bank with or through whom the
transaction was effected.
Unless otherwise stated, no report shall be construed as an admission by the
person making such report that he or she has any direct or indirect Beneficial
Interest in the security to which the report relates.
<PAGE>
7. Code of Ethics Implementation
A monthly report shall be provided to the Director of Compliance of NB
Management certifying that except as specifically disclosed, the Legal and
Compliance Department knows of no violation of this Code.
NB Management and NB shall have authority to impose sanctions for
violations of this Code. The Legal and Compliance Department shall make
recommendations regarding sanctions to be imposed on Access Persons who violate
this Code. Such recommendations may include a letter of censure, suspension or
termination of the employment of the violator, forfeiture of profits, forfeiture
of personal trading privileges, forfeiture of gifts, or any other penalty the
Legal and Compliance Department deems to be appropriate. All such
recommendations shall be submitted to NB Management and NB.
<PAGE>
8. Reports to Board of Directors of Fund.
NB Management shall prepare reports to the Boards of Directors of the Fund that:
(i) summarizes existing procedures concerning personal investing and
any changes in the procedures made during the past year;
(ii) identifies any violations requiring significant remedial action;
or
(iii)provides such other information as shall be requested by the
Board of Directors.
Such reports shall be prepared with such frequency as shall be requested by the
Board of Directors of the Fund.
<PAGE>
9. Other Matters
9.1 Forms.
The Legal and Compliance Department is authorized, with the advice of
counsel, to prepare written forms for use in implementing this Code. Such forms
shall be attached as an Appendix to this Code and shall be disseminated to all
individuals subject to the Code.
9.2 Exceptions.
Exceptions to the requirements of this Code shall rarely, if ever, be
granted. However, the Legal and Compliance Department shall have authority to
grant exceptions on a case-by-case basis. Any exceptions granted must be in
writing and reported to the Director of Compliance of NB Management.
Revised January 1999
CODE OF ETHICS AND STATEMENT OF POLICIES
ADOPTED BY BERGER LLC
Last Revised April 18, 2000
<PAGE>
I. STATEMENT OF GENERAL PRINCIPLES
The success of Berger LLC (the "Adviser") as an investment adviser depends upon
its reputation for excellence and integrity in the investment marketplace. All
Directors, officers and employees of the Adviser must therefore act in
accordance with the highest ethical standards.
A relationship of trust and confidence exists between the Adviser and its
clients. As a result, the interests of the Adviser's clients must always come
first. This means that all actions by Directors, officers and employees of the
Adviser which are detrimental, or potentially detrimental, to the Adviser's
clients must be avoided. While this principle extends to a broad range of
actions and practices, it is of particular relevance to any decision relating to
the personal investment activities of all Directors, officers and employees of
the Adviser since such activities may involve potential conflicts of interest.
In order to fulfill their fiduciary duties, all Directors, officers and
employees of the Adviser must conduct their personal securities transactions in
a manner which does not operate adversely to the interests of the Adviser's
clients and must otherwise avoid serving their own personal interests ahead of
such clients.
In order to ensure that Directors, officers and employees of the Adviser comply
with their fiduciary duties and other standards imposed by federal securities
law upon their personal investment activities, the Adviser has adopted this Code
of Ethics and Statement of Policies (the "Code"). The Code includes specific
provisions with which all covered persons must comply. However, compliance with
these technical provisions alone will not be sufficient to insulate from
scrutiny trades which show a pattern of abuse of the individual's fiduciary
relationships. All Directors, officers and employees are expected to abide by
the spirit of the Code and the principles articulated herein. Upon assuming
their position with the Adviser, each Director, officer or employee of the
Adviser is required to certify in writing that they have read and understand the
Code and that they recognize they are subject to the Code and will comply with
its requirements.
In the course of fulfilling the responsibilities of their position, Directors,
officers, and employees of the Adviser may deal with issuers of securities,
broker/dealers and business associates of the Adviser and its clients. Such
relationships can result in the individual being offered or given investment
opportunities, perquisites, or gifts from persons doing or seeking business with
the Adviser or its clients. All such offers and gifts which are more than de
minimis in value (see Section III.(c) of the Code) should be declined or
returned in order to prevent a situation which might compromise or appear to
compromise a Director's, officer's or employee's exercise of independent and
objective judgment on behalf of the Adviser's clients.
This Code establishes policies and procedures which govern certain types of
personal securities transaction by individuals deemed "Access Persons" of the
Adviser. In addition, the Code establishes policies and procedures applicable to
all Directors, officers and employees of the Adviser which have been designed to
detect and prevent the misuse of material, nonpublic information in securities
transactions and to provide guidance in other legal and regulatory matters.
Compliance with the Code is a condition of employment and willful or repeated
violation of its provisions may be cause for termination of employment.
II. DEFINITIONS
(a) "Access Person" means (i) any Director or officer of the Adviser,
(ii) any employee of the Adviser (or any employee of any company
in a Control relationship to the Adviser) who, in connection with
his or her regular functions or duties, makes, participates in,
or obtains information regarding the purchase or sale of a
Security by an Investment Company/Account, or whose functions
relate to the making of any recommendations with respect to such
purchases or sales and (iii) any natural person in a Control
relationship to the Adviser who obtains information concerning
recommendations made to an Investment Company/Account, with
regard to the purchase or sale of a Security.
(b) "Beneficial Ownership" shall be interpreted in the same manner as
it would be under Rule 16a-1(a)(2) under the Securities Exchange
Act of 1934 in determining whether a person is subject to the
provisions of Section 16 and the rules and regulations
thereunder, except that the determination of direct or indirect
beneficial ownership shall apply to all Securities which an
Access Person has or acquires. Application of this definition is
explained in more detail in Appendix A attached hereto.
(c) "Investment Personnel" shall mean (i) any employee of the Adviser
(or any employee of any company in a Control relationship to the
Adviser) who, in connection with his or her regular functions or
duties, makes or participates in making recommendations regarding
the purchase or sale of a Security by an Investment
Company/Account and (ii) any natural person who controls the
Adviser and who obtains information concerning recommendations
made to the Fund regarding the purchase or sale of a Security by
an Investment Company/Account. Investment Personnel shall include
all persons employed by the Adviser as portfolio managers,
security analysts and security traders.
(d) "Security" shall have the same meaning as that set forth in
Section 2(a)(36) of the Investment Company Act of 1940
(generally, all securities) except that it shall not include
shares of registered open-end investment companies (i.e., mutual
funds), direct obligations of the Government of the United States
(e.g., U.S. Treasury securities), banker's acceptances, bank
certificates of deposit, commercial paper and high quality
short-term debt instruments, including repurchase agreements.
(e) "Purchase or sale of a Security", or phrases of similar import,
shall include, among other things, the purchase, writing or sale
of an option to purchase or sell that Security, the purchase or
sale of any derivative Security whose value is derived from that
Security, such as a Security convertible into or exchangeable for
that Security, and the purchase or sale of any other Security
which has a substantial economic relationship to that Security
being purchased or sold by an Investment Company/Account (e.g., a
Security issued by a partnership which has a substantial portion
of its assets invested in the Security being purchased or sold).
(f) A Security is "being considered for purchase or sale" when a
portfolio manager is seriously considering the purchase or sale
of a Security for an Investment Company/Account, or, with respect
to a security analyst who makes a recommendation to purchase or
sell a Security for an Investment Company/Account, when such
person seriously considers making such a recommendation.
(g) "Control", which shall have the same meaning as that set forth in
Section 2(a)(9) of the Investment Company Act of 1940, generally
means the power to exercise a controlling influence over the
management or policies of a company, unless such power is solely
the result of an official position with such company.
<PAGE>
(h) "Compliance Officer" shall mean the employee of the Adviser
designated by the Adviser to receive reports and take certain
actions as provided in this Code of Ethics and Statement of
Policies. The Compliance Officer may appoint designees to carry
out his/her functions pursuant to the Code.
(i) "Investment Company/Account" means a company registered as such
under the Investment Company Act of 1940 and for which the
Adviser or an entity controlled by the Adviser is the investment
adviser or sub-adviser, or any pension or profit-sharing plan or
any institutional or private account managed by the Adviser.
(j) "Director" of the Adviser shall mean a member of the Board of
Directors of the Adviser's member-manager, Stilwell Management,
Inc.
(k) "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the
reporting requirements of sections 13 or 15(d) of the Securities
Exchange Act of 1934.
(l) "Limited Offering" means an offering that is exempt from
registration under the Securities Act of 1933 pursuant to section
4(2) or section 4(6) or pursuant to rule 504, rule 505, or rule
506 thereunder.
Any Director, officer or employee of the Adviser who has any questions regarding
these definitions should consult with the Adviser's Compliance Officer.
III. PROHIBITIONS
NOTE: Subject to a final decision by Adviser management after having reviewed
all of the facts and circumstances relevant to the particular transaction,
individuals covered by the following prohibitions may be required to disgorge
all or a portion of any profits gained or losses avoided as a result of
participating in any of the prohibited personal securities transactions
discussed below. See Section VII. SANCTIONS of the Code for a more detailed
discussion of this matter.
Prohibitions Applicable To All Access Persons
(a) No Access Person shall purchase or sell, directly or indirectly,
any Security in which he or she has, or by reason of such
transaction acquires, any direct or indirect Beneficial Ownership
and which he or she knows or should have known at the time of such
purchase or sale:
(1) is being purchased or sold by an Investment Company/ Account;
(2) is being considered for purchase or sale by an Investment
Company/Account; or
(3) has been purchased or sold by an Investment Company/Account
within the previous 7 calendar days.
Although explained more fully in the definition of "purchase or
sale of a Security" in Section II. of the Code, it bears emphasis
here that included for purposes of this prohibition is any
personal securities transaction involving a derivative Security or
other Security which has a substantial economic relationship to
the Security being considered for purchase or sale or that is
being, or that within the previous 7 calendar days has been,
purchased or sold by an Investment Company/Account.
(b) All Access Persons are prohibited from the purchase or sale of
Securities without prior approval from the Compliance Officer,
unless such purchase or sale is an exempted transaction as defined
in Section IV. of the Code. The preclearance process shall include
the Compliance Officer presenting each requested personal
securities transaction to the Adviser's portfolio manager(s) (or,
for Investment Companies/Accounts for which the Adviser has
contracted with another investment adviser, to such sub-adviser)
for the purpose of determining whether the provisions of Sections
III.(a)(1) and III.(a)(2) prevent its current approval. If
granted, such approval will normally be given in writing (see
Appendix B). In circumstances that require approval of the
transaction to be granted verbally, the Compliance Officer shall
document for the Adviser's records all information pertinent to
the approved purchase or sale. Any approval for a personal
securities transaction will be effective for 3 business days
following the date of approval (unless otherwise specified in the
written approval). Any transaction not completed within the 3 day
(or other specified) time period will require reapproval by the
Compliance Officer prior to engaging in any further purchases or
sales.
When requesting approval for a personal securities transaction,
all Access Persons should be careful to identify for the
Compliance Officer any factors potentially relevant to a conflict
of interest. This is especially true when an Access Person
requests approval to purchase or sell a Security with a
complicated investment structure, since the Security may be
substantially economically related to a separate Security which is
being considered for purchase or sale or being purchased or sold
by an Investment Company/Account.
A portfolio manager may not preclear his/her own personal
securities transactions. Any personal securities transaction
requested by a portfolio manager shall, in addition to the
standard preclearance process, be presented to the President of
the Adviser for his/her approval. In addition, because the
Compliance Officer may not preclear his/her own personal
securities transactions, the Compliance Officer shall request
approval for his or her personal securities transactions from
his/her supervisor, the Vice President-Legal.
(c) All Access Persons are prohibited from receiving on an annual
basis any gifts or other things of value from any person or entity
that does business with or on behalf of the Adviser or the
Investment Companies/Accounts which in total could reasonably be
valued above $100. However, this policy does not apply to
customary business meals or entertainment, or promotional items
(e.g., pens, mugs, caps, T-shirts, etc.) which are consistent with
customary business practices in the industry.
(d) All Access Persons must immediately notify the Compliance Officer
upon becoming a member of a board of directors of a publicly
traded company. As a condition of being given approval to engage
in any personal securities transaction involving the securities of
such company(s), the Access Person will be required to obtain
documented approval to trade from the company's management, in
light of their procedures designed to prevent the misuse of
material, nonpublic information by company insiders (For a
description of each Director's, officer's and employee's
responsibilities in the event that they come into the possession
of material, nonpublic information, see Section VIII. of the
Code). Notwithstanding this provision, those Access Persons that
are also Investment Personnel are generally prohibited from
serving on the board of directors of publicly traded companies
(See Section III.(i) of the Code).
Prohibitions Applicable Only To Investment Personnel
(e) Prior to recommending a Security for purchase or sale by an
Investment Company/Account, Investment Personnel are required to
provide disclosure, if applicable, of any ownership/Security
position they have in the issuer, or any present or proposed
business relationship between such issuer and such person, to the
Chief Investment Officer and the Compliance Officer. In the event
that such disclosure is required of the Chief Investment Officer,
it should be made to the Compliance Officer. The Investment
Personnel's holdings/relationship will then be reviewed to
determine whether it presents a conflict of interest that should
be addressed prior to the Adviser acting on their purchase or sale
recommendation for the Investment Company/Account.
(f) All Investment Personnel are prohibited from profiting in the
purchase and sale, or sale and purchase, of the same (or
equivalent) Security within 60 calendar days. This prohibition
shall not apply to exchange-traded stock options that are
purchased for the purpose of establishing a bona fide position
hedge on Securities held in excess of 60 calendar days, or to
options on stock indices which are composed of 100 or more
Securities. However, any transaction which is exempt from this
prohibition shall be subject to all otherwise applicable
provisions of the Code, including but not limited to the
preclearance requirements of Section III(b).
(g) All Investment Personnel are prohibited from acquiring any Security
in an Initial Public Offering.
(h) All Investment Personnel are prohibited from acquiring any
Security in a Limited Offering without prior written approval.
Request for such approval should be made via a memorandum directed
to the Chief Investment Officer and the Compliance Officer.
Limited Offerings for which the Chief Investment Officer is
seeking approval will be reviewed by the President and the
Compliance Officer. The memo shall state the name of the company,
the number of shares/units being offered and the offering price
per share/unit, a description of the company's history and
operations, and a discussion of whether the company's current
business plan anticipates a future Initial Public Offering of its
Securities. No approval will be granted for the acquisition of
Securities in a Limited Offering if the company currently has any
publicly traded equity Securities (or other publicly traded
Securities convertible into equity Securities) issued and
outstanding. A copy of the Limited Offering agreement or the
purchase contract should be attached to the memo.
Subsequent to Investment Personnel obtaining shares/units of a
company in a Limited Offering, the company may issue and have
outstanding publicly traded Securities. If in the course of
performing their job responsibilities any Investment Personnel who
acquired shares/units in a Limited Offering transaction becomes
involved in the consideration of an investment in the issuer by an
Investment Company /Account, they will disclose the existence of
their personal ownership in the company to the Chief Investment
Officer. The Adviser will then excuse such employee from the
investment decision making process for the Security.
(i) All Investment Personnel are prohibited from serving on the boards
of directors of publicly traded companies, absent prior
authorization based upon a determination by Adviser management
that the board service would be consistent with the interests of
the Investment Companies/Accounts. In instances where Adviser
management determines that board service for a company is merited,
such Investment Personnel will be subject to the same restrictions
that are imposed on all other Access Persons with respect to their
personal securities transactions which involve Securities of the
company for which they are a director, as described in Section
III. (d) of the Code.
(j) All Investment Personnel must make disclosure with respect to any
family member(s) employed in the securities business who might be
in a position to benefit as a result of the trading activity of
the Investment Companies/Accounts. It is prohibited for Investment
Personnel to influence the allocation of brokerage for direct or
indirect personal or familial benefit. However, such disclosure
shall not be deemed evidence that any benefit has been conferred,
directly or indirectly, by Investment Personnel on such family
member(s).
Prohibition Applicable Only To Portfolio Managers
(k) All portfolio managers are prohibited from purchasing or selling
any Security (or equivalent Security) within at least 7 calendar
days before or after an Investment Company/Account that he or she
manages purchases or sells that Security.
IV. EXEMPTED TRANSACTIONS
The prohibitions of Section III. of the Code shall not apply to:
(a) purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control;
(b) purchases or sales which are non-volitional on the part of the
Access Person, such as Securities acquired as a result of a
spin-off of an entity from a company whose Securities are owned by
an Access Person, or the involuntary sale of Securities due to a
merger or as the result of a company exercising a call provision
on its outstanding debt;
(c) purchases which are part of an automatic dividend reinvestment
plan or a company sponsored stock purchase plan;
(d) purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its Securities, to the
extent such rights were acquired from such issuer, and sales of
such rights so acquired; and
(e) any Securities transaction, or series of related transactions,
involving 500 shares or less in the aggregate, if the issuer has a
market capitalization (outstanding shares multiplied by the
current price per share) greater than $10 billion. This exemption
(e) is not available to Investment Personnel.
<PAGE>
V. REPORTING
(a) Within 10 days of their commencement of employment with the
Adviser (or if not an employee, of their otherwise becoming an
Access Person to the Adviser), all Access Persons shall disclose
in writing to the Compliance Officer all of their Security
holdings in which they have any direct or indirect Beneficial
Ownership at such time as the person became an Access Person (see
Appendix E).
Thereafter, when requested by the Compliance Officer all Access
Persons shall on an annual basis disclose in writing to the
Compliance Officer all of their Security holdings in which they
have any direct or indirect Beneficial Ownership. This information
must be current as of a date no more than 30 days before the
report is submitted.
Both the Initial and the Annual Holdings Report shall contain the
following information:
(1) the title, number of shares and the principal amount of each
Security;
(2) the name of any broker, dealer or bank with whom the Access
Person maintained an account in which any Securities were held;
and
(3) the date that the report is submitted by the Access Person.
The above notwithstanding, an Access Person shall not be required
to make a report with respect to any Security held in any account
over which he or she does not have any direct or indirect
influence or control. Each such report may contain a statement
that the report shall not be construed as an admission by the
Access Person that he or she has any direct or indirect Beneficial
Ownership in the Security to which the report relates.
(b) All Access Persons shall direct their brokers to supply the
Compliance Officer, on a timely basis, duplicate copies of
confirmations of all personal securities transactions and copies
of all statements for all Securities accounts. Please note that
even if the Access Person does not currently intend to purchase or
sell Securities (as defined at Section II.(d) above) in the
account, the Access Person must direct their brokers to send the
Compliance Officer duplicate confirmations and statements on the
account if the account allows any trading in such Securities.
(c) Whether or not one of the exemptions listed in Section IV. of the
Code applies, each Access Person shall file with the Compliance
Officer a written report (see Appendix C) containing the
information described in Section V.(d) of the Code with respect to
each transaction in any Security in which such Access Person by
reason of such transaction acquires or disposes of any direct or
indirect Beneficial Ownership in the Security; provided, however,
that an Access Person shall not be required to make a report with
respect to any transaction effected for any account over which he
or she does not have any direct or indirect influence or control.
Each such report may contain a statement that the report shall not
be construed as an admission by the Access Person that he or she
has any direct or indirect Beneficial Ownership in the Security to
which the report relates.
(d) Such report shall be made not later than 10 days after the end of
the calendar quarter in which the transaction to which the report
relates was effected, and shall contain the following information:
(1) the date of the transaction, the title, the interest rate and
maturity date (if applicable), the number of shares and the
principal amount of each Security involved;
(2) the nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(3) the price at which the Security transaction was effected;
(4) the name of the broker, dealer or bank with or through whom the
transaction was effected; and
(5) the date that the report is submitted by the Access Person.
For any report concerning a purchase or sale in which the Access
Person relied upon one of the exemptions provided in Section IV. of
the Code, the Access Person will provide a brief statement of the
exemption relied upon and the circumstances of the transaction if
requested by the Compliance Officer.
In addition to such report, within 10 days after the end of the
calendar quarter in which an Access Person opens any brokerage
account, the Access Person provide the Compliance Officer with the
following information:
(1) the name of the broker, dealer or bank with whom the Access
Person established the account;
(2) the date the account was established; and
(3) the date that the report is submitted by the Access Person.
(e) The Securities transaction reporting requirements of Sections V.
(c) and V.(d) of the Code may be satisfied by the Compliance
Officer receiving all confirmations of Security transactions
and/or periodic statements for each Access Person's Securities
accounts. Confirmations of Security transactions and/or Security
account statements received by the Compliance Officer will be
distributed quarterly to Access Persons for their review to ensure
that such confirmations/statements include all Security
transactions required to be reported under this Code.
(f) An Access Person will be deemed to have participated in, and must
report under this Code, any Securities transactions participated
in by:
(1) The person's spouse;
(2) The person's minor children;
(3) Any other relatives sharing the person's household;
(4) A trust in which the person has a beneficial interest, unless
such person has no direct or indirect control over the trust;
(5) A trust as to which the person is a trustee;
(6) A revocable trust as to which the person is a settler; or
(7) A partnership of which the person is a partner (including most
investment clubs) unless the person has no direct or indirect
control over the partnership.
(g) The Compliance Officer shall identify all Access Persons who are
required to make the reports required by Section V. of the Code
and shall inform them of their reporting obligations hereunder.
VI. REVIEW
The Compliance Officer shall review or supervise the review of the personal
securities transactions and the holdings reported pursuant to Section V. of the
Code. Personal securities transactions and holdings reported by the Compliance
Officer shall be reviewed by the Vice President-Legal. As part of this review,
each such reported personal securities transaction shall be compared against the
trading activity of the Investment Companies/Accounts to determine whether a
violation of Section III. of the Code may have occurred. If the Compliance
Officer or Vice President-Legal determines that a violation may have occurred,
he or she shall promptly submit the pertinent information regarding the
transaction to Adviser management, who shall evaluate whether a violation of the
Code has occurred, taking into account all the exemptions provided under Section
IV. of the Code, and if so, whether such violation is material. The Adviser will
consider all relevant facts and circumstances surrounding the transaction prior
to making its determination. In addition, before making any determination that a
material violation has occurred, Adviser management shall give the person
involved an opportunity to supply additional information regarding the
transaction in question.
VII. SANCTIONS
If a final determination is made that a material violation of this Code has
occurred, the Adviser's management may require the Access Person to disgorge to
the affected Investment Company/Account or, if not related to a particular
Investment Company/Account, a charitable organization, all or a portion of the
profits gained or losses avoided as a result of the prohibited transaction. The
Compliance Officer or Vice President-Legal shall provide a written report of
management's determination to the Board of Directors of the member-manager for
such further action and sanctions as said Board deems appropriate, which
sanctions may in the Board's discretion include, among other things, imposition
of a monetary penalty and/or censure, suspension or termination of the Access
Person. A copy of the report shall also be provided to the Board of
directors/trustees of each investment company for which the Adviser is the
investment adviser or sub-adviser.
VIII. PROCEDURES FOR PREVENTING THE TRADING ON MATERIAL, NONPUBLIC INFORMATION
(a) In addition to the prohibitions set forth in Section III. of the
Code which are applicable only to Access Persons of the Adviser,
the Adviser forbids any Director, officer or employee (including
spouses, minor children and adults living in the same household as
the Director, officer or employee), either personally or on behalf
of others (such as Investment Companies/Accounts managed by the
Adviser) from trading on material, nonpublic information or
communicating material, nonpublic information to others in
violation of the securities laws. This conduct is frequently
referred to as "insider trading." The Adviser's policy against
insider trading applies to every Director, officer and employee
and extends to activities within and outside their duties at the
Adviser. Any questions regarding the Adviser's policies and
procedures should be referred to the Compliance Officer.
The term "insider trading" is not defined in the federal securities
laws, but generally is used to refer to the use of material,
nonpublic information to trade in securities (whether or not one is
an "insider") or to the communication of material, nonpublic
information to others.
While the law concerning insider trading is not static, it is
generally understood that the law prohibits:
o trading by an insider, while in possession of material,
nonpublic information, or
o trading by a non-insider, while in possession of material,
nonpublic information, where the information either was
disclosed to the non-insider in violation of an insider's duty
to keep it confidential or was misappropriated, or
o communicating material, nonpublic information to others.
The elements of insider trading and the penalties for such
unlawful conduct are discussed below. If, after reviewing this
policy statement, you have any questions, you should consult the
Compliance Officer.
1. Who is an insider?
-----------------
The concept of "insider" is broad. It includes directors,
officers and employees of a company. In addition, a person can
be a "temporary insider" if he or she enters into a special
confidential relationship with a company and as a result is
given access to information solely for such company's
purposes. A temporary insider can include, among others, a
company's attorneys, accountants, consultants and bank lending
officers, and the employees and associates of such persons. In
addition, the Adviser may become a temporary insider of a
company it advises or for which it performs other services.
According to the Supreme Court, the company must expect the
outsider to keep the nonpublic information confidential, and
the relationship must at least imply such a duty before the
outsider will be considered a temporary insider. In addition,
one who receives material, nonpublic information (a "tippee")
or one who gives material, nonpublic information to another
person (a "tipper") may become an insider and therefore incur
liability for insider trading. Finally, and perhaps most
relevant for the Code, a Director, officer or employee of the
Adviser may become an insider if material, nonpublic
information is received from an insider of a company whose
securities are held or being considered for purchase by an
Investment Company/Account.
2. What is Material Information?
----------------------------
Trading on inside information is not a basis for liability
unless the information is material. "Material information"
generally is defined as information for which there is a
substantial likelihood that a reasonable investor would
consider it important in a decision to buy, hold or sell
stock, or information that is reasonably certain to have a
substantial effect on the price of a company's securities.
Information that Directors, officers or employees should
consider material includes, but is not limited to: dividend
changes, earnings estimates, changes in previously released
earnings estimates, significant merger or acquisition
proposals or agreements, major litigation, liquidation
problems, and extraordinary management developments.
Material information does not have to relate to a company's
business. For example, in Carpenter v. U.S., 108 U.S. 316
(1987), the U.S. Supreme Court considered material certain
information about the contents of a forthcoming newspaper
column that was expected to affect the market price of a
security. In that case, a Wall Street Journal reporter was
found criminally liable for disclosing to others the dates
that reports on various companies would appear in the Journal
and whether those reports would be favorable.
3. What is Nonpublic Information?
-----------------------------
Information is nonpublic until it has been effectively
communicated to the marketplace. One must be able to point to
some fact to show that the information is generally public.
For example, information found in a report filed with the U.S.
Securities and Exchange Commission or appearing in Dow Jones,
Reuters Economic Services, The Wall Street Journal or other
publications would be considered public.
4. Penalties for Insider Trading
-----------------------------
Penalties for trading on or communicating material, nonpublic
information are severe, both for the individuals involved in
such unlawful conduct and their employers. A person can be
subjected to some or all of the penalties below even if he or
she does not personally benefit from the violation. Penalties
include:
o Civil injunctions,
o treble damages,
o jail sentences of up to ten years,
o civil penalties for the person who committed the violation
of up to three times the profit gained or loss avoided,
whether or not the person actually benefited,
o criminal fines (no matter how small the profit) of up to
$1 million, civil penalties for the employer or other
controlling person of up to the greater of $1 million or
three times the profit gained or loss avoided.
Because of the serious potential penalties against employers
as well as violators, any violation of this Code of Ethics and
Statement of Policies which involves insider trading can be
expected to result in serious sanctions by the Adviser,
including dismissal of the persons involved for cause.
(b) The following procedures have been established to aid the
Directors, officers and employees of the Adviser in avoiding
insider trading, and to aid the Adviser in preventing, detecting
and imposing sanctions against insider trading. Every Director,
officer and employee of the Adviser must follow these procedures
or risk serious sanctions by the Adviser, including dismissal for
cause, substantial personal liability and criminal penalties. If
you have any questions about these procedures, you should consult
the Compliance Officer.
<PAGE>
Identifying Inside Information in the Context of Personal
Securities Trading
Before trading for yourself or others, including Investment
Companies/Accounts managed by the Adviser, in the securities of a
company about which you may have potential inside information,
whether obtained through the Advisers activities or not, ask
yourself the following questions:
(a) Is the information material? Is there a substantial
likelihood that a reasonable investor would consider this
information important in making his or her decision to
buy, hold or sell stock? Is it reasonably certain that
this information would substantially affect the market
price of the securities if it were generally disclosed?
(b) Is the information nonpublic? To whom has this information
been provided? Has the information been effectively
communicated to the marketplace by being filed with the
U.S. Securities and Exchange Commission or published in
Reuters, The Wall Street Journal or other such
publications?
(c) If your securities transactions became the subject of
scrutiny, how would they be viewed after-the-fact with the
benefit of hindsight? As a result, before engaging in any
transaction, you should carefully consider how regulators
and others might view your transaction in hindsight.
If, after consideration of the above, you believe that the
information is material and nonpublic, or if you have any doubt as
to whether the information is material and nonpublic, you must
take the following steps:
(1) Report the matter immediately to the Compliance Officer,
(2) Refrain from purchasing or selling the securities on
behalf of yourself or others, including Investment
Companies/Accounts managed by the Adviser,
(3) Refrain from communicating the information inside or
outside of the Adviser, other than to the Compliance
Officer, and
(4) After the Compliance Officer has reviewed the issue, you
will be instructed to continue the prohibitions against
trading and communication, or you will be allowed to trade
and communicate the information.
Restricting Access to Material, Nonpublic Information
(a) General Procedures
Material, nonpublic information in the possession of a
Director, officer or employee of the Adviser may not be
communicated to anyone, including persons within the Adviser
except to the Compliance Officer as provided in Section VIII.
(b) of the Code or as is necessary for individuals to perform
their duties at the Adviser. In addition, care should be taken
so that such information is secure. For example, files
containing material, nonpublic information should be
maintained in a secure manner; access to computer files
containing material, nonpublic information should be
restricted.
(b) Contacts With Public Companies
For the Adviser, contacts with public companies represent an
important part of its research efforts. The Adviser may make
investment decisions on the basis of the firm's conclusions
formed through such contacts and analysis of
publicly-available information. Difficult legal issues arise,
however, when, in the course of these contacts, a Director,
officer or employee of the Adviser becomes aware of material,
nonpublic information. This could happen, for example, if a
company's Chief Financial Officer prematurely discloses
quarterly results to an analyst or an investor relations
representative makes a selective disclosure of adverse news to
a handful of investors. In such situations, the Adviser must
make a judgment as to its further conduct. To protect the
Adviser and its Investment Companies/Accounts, all Directors,
officers and employees of the Adviser should contact the
Compliance Officer immediately if they believe that they may
have received material, nonpublic information.
(c)Tender Offers
Tender offers represent a particular concern in the law of
insider trading for two reasons. First, tender offer activity
often produces extraordinary gyrations in the price of the
target company's securities. Trading during this time period
is more likely to attract regulatory attention (and produces a
disproportionate percentage of insider trading cases). Second,
the U.S. Securities and Exchange Commission has adopted a rule
which expressly forbids trading and "tipping" while in
possession of material, nonpublic information regarding a
tender offer received from the tender offeror, the target
company or anyone acting on behalf of either. Directors,
officers and employees of the Adviser should exercise
particular caution any time they become aware of nonpublic
information relating to a tender offer.
Procedures Designed to Prevent and Detect Insider Trading
The following procedures are designed to prevent and detect
insider trading within the Adviser or by the Adviser's Directors,
officers and employees. To prevent and detect insider trading the
Compliance Officer should:
(a) Provide, on an annual basis, an educational program designed
to familiarize Directors, officers and employees of the
Adviser with the Adviser's policies and procedures on insider
trading, misuse of material, nonpublic information, reporting
requirements for personal securities transactions and related
matters.
(b) Answer questions from Directors, officers and employees of the
Adviser relating to the Adviser's policies and procedures.
(c) Resolve issues of whether information received by Directors,
officers and employees of the Adviser is material and
nonpublic.
(d) Review on an annual basis and update as necessary the
Adviser's policies and procedures to reflect changes in rules,
regulations and case law.
(e) When it has been determined that a Director, officer or
employee of the Adviser has material, nonpublic information on
a company, the Compliance Officer will take reasonable steps
to (i) ensure that such information is not disseminated, and
(ii) restrict Directors, officers and employees from trading
in securities to which the information relates, either for
their own accounts or for Investment Companies/Accounts
managed by the Adviser. These objectives will be served by
placing the company on a "Restricted List" that will be
maintained by the Compliance Officer.
While each such company is on the Restricted List, no
portfolio manager shall initiate or recommend any transaction
in the company's securities in any Investment
Companies/Accounts managed by the Adviser. The Compliance
Officer will be responsible for removing a particular company
from the Restricted List after having received permission for
such action from Adviser management, and will be responsible
for making available the Restricted List and any updates to it
to all Investment Personnel. The Restricted List is highly
confidential and shall, under no circumstances, be discussed
with or disseminated to anyone outside of the Adviser.
Special Restricted List Procedures
(1) Purchase and Sale of Securities Issued by the Adviser's
Parent Company
More than 80% of the Adviser's stock is indirectly owned
by a publicly traded company. As a result, the Company is
considered to be in a position of Control with respect to
the Adviser. Federal securities law prohibits any
Investment Company for which the Adviser acts as
investment adviser or sub-adviser from investing in the
securities of such a company. The Company has been placed
on the Adviser's Restricted List indefinitely, and
therefore no Investment Company/Account may invest in any
of its securities. Personal security transactions by
Directors, officers and employees of the Adviser in the
securities of this Company will be allowed pursuant to
policies and procedures as in effect from time to time
that will be provided to you by the Compliance Officer.
(2) Publicly Traded Companies for Which a Director, Officer or
Employee of the Adviser Serves as a Director or Officer
Subject to the requirement that they disclose their
position to the Compliance Officer (and, in the case of
Investment Personnel, that they obtain prior approval from
Adviser management), Directors, officers and employees of
the Adviser may serve on the boards of directors of
publicly traded companies. In addition, Directors,
officers and employees of the Adviser may be officers of
publicly traded companies. To preclude the possibility of
trades of such companies' securities occurring in
Investment Companies/Accounts while the Adviser may be in
possession of material, nonpublic information, any
publicly traded company for which a Director, officer or
employee of the Adviser is a director or officer shall be
placed on the Restricted List and shall remain on the list
until their directorship or officership is terminated and
the Director, officer or employee of the Adviser ceases to
be an insider to the company.
While a company is on the Restricted List, each of the
Adviser's Directors, officers and employees who are a
member of the board of directors of a publicly traded
company or an officer of a publicly traded company may
engage in personal securities transactions involving the
securities of such company, subject to preclearance that
will be conditioned upon obtaining documented approval to
trade from such company's management, in light of their
procedures designed to prevent the misuse of material,
nonpublic information by company insiders.
(f) Promptly, upon learning of a potential violation of the
Adviser's policies and procedures on insider trading, prepare
a written report to Adviser management with full details about
the potential violation and recommendations for further
action.
IX. ANNUAL REPORTING AND CERTIFICATION
(a) On an annual basis, the Compliance Officer shall prepare a written
report to the President of the Adviser and the Board of Directors
of the member-manager setting forth the following:
(1) A summary of existing procedures to detect and prevent
violations of the Code,
(2) Full details of any investigation, either internal or by a
regulatory agency, of any violations of the Code, the
resolution of such investigations and the steps taken to
prevent further violations,
(3) An evaluation of the current compliance procedures and any
recommendations for improvement, and
(4) A description of the Adviser's continuing efforts to educate
all Directors, officers and employees of the Adviser regarding
the Code, including the dates of any such educational programs
presented since the last report.
A report setting forth the above shall also be made annually to
the board of directors/trustees of each Investment Company for
which the Adviser acts as investment adviser or sub-adviser,
except that any information about violations of the Code may be
limited to only material violations. In addition, the Adviser
shall certify to each such Investment Company annually that it has
adopted procedures reasonably necessary to prevent Access Persons
from violating the Code.
After September 1, 2000, before being approved as an investment
adviser or sub-adviser for any Investment Company, the Adviser is
required to provide the Code to the Investment Company's
directors/trustees for approval along with a certification that
the Adviser has adopted procedures reasonably necessary to prevent
Access Persons from violating the Code.
Any material changes to the Code must be approved by each
Investment Company's directors/trustees within 6 months after
adoption of the material change.
(b) On an annual basis, all Directors, officers and employees of the
Adviser are required to certify in writing that they have read and
understand the Code of Ethics and Statement of Policies and
recognize that they are subject thereto. In addition, all such
persons are required to certify annually that they have complied
with the requirements of the Code and, as for Access Persons, that
they have reported all personal securities transactions and
holdings required to be reported pursuant to the Code (see
Appendix D).
In conjunction with such certification, the Compliance Officer
will provide all Access Persons with an educational program
designed to familiarize them with their responsibilities under the
Code. If a Director, officer or employee of the Adviser has any
questions pertaining to these responsibilities or about the
policies or procedures contained in the Code , they should discuss
them with the Compliance Officer prior to completing their annual
certification statement.
X. OTHER LEGAL AND REGULATORY MATTERS
(a) Confidentiality. All account information concerning the Adviser's
clients (e. g., name, account size, specific securities held,
securities trades, etc.) is absolutely confidential. Therefore,
access to Investment Company/Account information is limited to
those individuals who must have such access to perform their
duties, and such information shall not be communicated to any
other person either within or outside the Adviser. The
confidentiality of all Investment Company/Account information is
critical to the Adviser's reputation for excellence and integrity
and maintenance of the Adviser's competitive position, and any
disclosure of confidential information can be expected to result
in serious sanctions by the Adviser, including possible dismissal
for cause.
(b) Bankruptcy/Criminal Offenses. The Adviser is required to notify
regulatory organizations when certain events occur regarding its
Directors, officers and/or employees. Accordingly the Vice
President-Legal must be notified if any of the following occur
with respect to a Director, officer or employee:
o Personal bankruptcy.
o The bankruptcy of a corporation in which any Director, officer
or employee owns 10% or more of the securities.
o Arrest, arraignment, indictment or conviction for, or the
entry of a guilty or no contest plea for, any criminal offense
(other than minor traffic violations).
(c) Receipt of Legal Documents. On occasion, employees are served with
legal documents (e.g., a subpoena) for the Adviser. Upon receipt
of legal documents, the Adviser's Vice President-Legal is to be
notified immediately.
(d) Retention of Outside Counsel. Directors, officers and employees
may not retain the services of outside counsel under circumstances
such that the Adviser would be obligated to pay legal fees unless
the Adviser's Vice President-Legal has granted approval for
retention of such counsel in advance.
(e) Contact with Industry Regulators. In the event of an inquiry from
an industry regulator--whether via the telephone, mail or personal
visit--Directors, officers and employees must contact the
Adviser's Vice President-Legal as soon as possible for
instructions.
(f) Political Contributions. The use of funds or assets of the Adviser
for any unlawful or improper purpose is prohibited. This
prohibition includes any contribution to any public official,
political candidate or political entity, except as may be
expressly permitted by law. This shall also preclude unlawful
contributions through consultants, customers or other third
parties, including payments where Directors, officers or employees
of the Adviser know or have reason to believe that payments made
to such other third parties will be used as unlawful
contributions.
The above prohibitions relate only to the use of corporate funds
and in no way are intended to discourage Directors, officers or
employees from making personal contributions to political
candidates or parties of their choice. No such individual
contribution will be reimbursed by the Adviser in any manner,
directly or indirectly.
(g) Business Conduct. It is the policy of the Adviser to conduct
business in accordance with the applicable laws and regulations of
the United States and all other individual states and countries in
which the Adviser operates or has any significant contacts.
Unethical business practices will subject Directors, officers and
employees to appropriate disciplinary action, including dismissal
for cause if warranted, and may result in prosecution for
violating federal, state or foreign laws.
No payment (cash or otherwise) can be made (directly or
indirectly) to any employee, official or representative of any
domestic or foreign governmental agency, instrumentality, party,
or candidate thereof, for the purpose of influencing any act,
omission or decision.
The Adviser's books, records and accounts must be maintained in
sufficient detail as to accurately reflect the transactions and
dispositions of its assets. No undisclosed or unrecorded fund or
asset of the Adviser may be established for any purpose.
Any Director, officer or employee with questions about or
knowledge of violations of these policies must contact the
Adviser's Vice President-Legal.
XI. MISCELLANEOUS PROVISIONS
(a) The Adviser shall maintain records in the manner and to the extent
set forth below, and make such records available for examination
by representatives of the U.S. Securities and Exchange Commission:
(1) A copy of this Code and any other code of ethics which is, or
at any time within the past five years has been, in effect
shall be preserved in an easily accessible place;
(2) A record of any violation of the Code and of any action taken
as a result of such violation shall be preserved in an easily
accessible place for a period of not less than five years
following the end of the fiscal year in which the violation
occurs;
(3) A copy of each report made by an Access Person pursuant to the
Code shall be preserved for a period of not less than five
years from the end of the fiscal year in which it is made, the
first two years in an easily accessible place;
(4) A list of all persons who are, or within the past five years
have been, required to make reports pursuant to the Code, and
who are, or within the past five years have been, responsible
for reviewing these reports, shall be maintained in an easily
accessible place; and
(5) A record of any decision, and the reasons supporting the
decision, to approve the acquisition by any Investment
Personnel of a Security pursuant to a Limited Offering shall
be preserved for a period of not less than five years from the
end of the fiscal year in which the approval was granted.
(b) All reports of Securities transactions and any other information
filed with the Adviser or furnished to any person pursuant to the
Code shall be treated as confidential, but are subject to review
as provided herein and by representatives of the U.S. Securities
and Exchange Commission or any other regulatory or self-regulatory
organization to the extent required by law or regulation.
(c) The Board of Directors of the member-manager may from time to time
adopt such interpretations of the Code and such exceptions to
provisions of the Code as they deem appropriate.
<PAGE>
APPENDIX A
For purposes of the attached Code of Ethics and Statement of Policies, a
"beneficial owner" shall mean any Director, officer or employee who, directly or
indirectly, through any contract, arrangement, understanding, relationship or
otherwise, has or shares a direct or indirect opportunity to profit or share in
any profit derived from a transaction in the subject securities. The term
"Beneficial Ownership" of securities would include not only ownership of
securities held by a Director, officer or employee for his or her own benefit,
whether in bearer form or registered in their name or otherwise, but also
ownership of securities held for his or her benefit by others (regardless of
whether or how they are registered) such as custodians, brokers, executors,
administrators, or trustees (including trusts in which he or she has only a
remainder interest), and securities held for his or her account by pledgees,
securities owned by a partnership in which he or she is a member if they may
exercise a controlling influence over the purchase, sale or voting of such
securities, and securities owned by any corporation that he or she should regard
as a personal holding corporation. Correspondingly, this term would exclude
securities held by a Director, officer or employee for the benefit of someone
else.
Ordinarily, this term would not include securities held by executors or
administrators in estates in which a Director, officer or employee is a legatee
or beneficiary unless there is a specific legacy to such person of such
securities or such person is the sole legatee or beneficiary and there are other
assets in the estate sufficient to pay debts ranking ahead of such legacy, or
the securities are held in the estate more than a year after the decedent's
death.
Securities held in the name of another should be considered as "beneficially"
owned by a Director, officer or employee where such person enjoys "benefits
substantially equivalent to ownership". The U.S. Securities and Exchange
Commission has said that although the final determination of Beneficial
Ownership is a question to be determined in the light of the facts of the
particular case, generally a person is regarded as the beneficial owner of
securities held in the name of his or her spouse and their minor children.
Absent special circumstances such relationship ordinarily results in such person
obtaining benefits substantially equivalent to ownership, e.g., application of
the income derived from such securities to maintain a common home, to meet
expenses that such person otherwise would meet from other sources, or the
ability to exercise a controlling influence over the purchase, sale or voting of
such securities.
A Director, officer, or employee also may be regarded as the beneficial owner of
securities held in the name of another person, if by reason of any contract,
understanding, relationship, agreement, or other arrangement, he or she obtains
therefrom benefits substantially equivalent to those of ownership. Moreover, the
fact that the holder is a relative or relative of a spouse and sharing the same
home as a Director, officer or employee may in itself indicate that the
Director, officer or employee would obtain benefits substantially equivalent to
those of ownership from securities held in the name of such relative. Thus,
absent countervailing facts, it is expected that securities held by relatives of
the Director, officer or employee or his or her spouse who share the same home
as the Director, officer or employee will be treated as being beneficially owned
by the Director, officer or employee.
A Director, officer or employee also is regarded as the beneficial owner of
securities held in the name of a spouse, minor children or other person, even
though he or she does not obtain therefrom the aforementioned benefits of
ownership, if they can vest or revest title in themselves at once or at some
future time.
