Registration No. 33-14538
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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POST-EFFECTIVE AMENDMENT NO. 12 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 HIGH YIELD FUND, INC.
(Exact name of Registrant as specified in Charter)
The Principal Financial Group
Des Moines, Iowa 50392
(Address of principal executive offices)
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Telephone Number (515) 248-3842
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MICHAEL D. ROUGHTON Copy to:
The Principal Financial Group JOHN W. BLOUCH, L.L.P.
Des Moines, Iowa 50392 Suite 405 West
1025 Thomas Jefferson Street, N.W.
Washington, DC 20007-0805
(Name and address of agent for service)
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It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b)of Rule 485
on May 1, 1997 pursuant to paragraph (b) of Rule 485
60 days after filing pursuant to paragraph (a)(1) of Rule 485
X on January 1, 1997 pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
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Pursuant to the provisions of Rule 24f-2 under the Investment Company Act
of 1940, Registrant has registered an indefinite number of shares under the
Securities Act of 1933; Registrant filed a Rule 24f-2 Notice for the fiscal year
ended December 31, 1996 on February 27, 1997.
<PAGE>
The Principal Variable Contracts Fund, Inc. described in this Prospectus is
a diversified, open-end management investment company which offers a variety of
Accounts each of which was formerly a separately incorporated investment
company. Together the Accounts provide the following range of investment
objectives:
Growth-Oriented Accounts
Balanced Account (formerly known as Principal Balanced Fund, Inc.) seeks to
generate a total return consisting of current income and capital appreciation
while assuming reasonable risks in furtherance of the investment objective.
Capital Value Account (formerly known as Principal Capital Accumulation Fund,
Inc.) seeks to achieve primarily long-term capital appreciation and secondary
growth of investment income through the purchase primarily of common stocks, but
the Account may invest in other securities.
MidCap Account (formerly known as Principal Emerging Growth Fund, Inc.) seeks to
achieve capital appreciation by investing primarily in securities of emerging
and other growth-oriented companies.
Income-Oriented Accounts
Bond Account (formerly known as Principal Bond Fund, Inc.) seeks to provide as
high a level of income as is consistent with preservation of capital and prudent
investment risk.
High Yield Account (formerly known as Principal High Yield Fund, Inc.) seeks
high current income. Capital growth is a secondary objective when consistent
with the objective of high current income. The Account seeks to achieve its
objective primarily through the purchase of high yielding, lower or non-rated
fixed income securities commonly referred to as "junk bonds." Bonds of this type
are considered to be speculative with regard to payment of interest and return
of principal. Purchasers should carefully assess the risks associated with an
investment in this Account.
Money Market Account
Money Market Account (formerly known as Principal Money Market Fund, Inc.) seeks
as high a level of income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
An investment in any of the Accounts is neither insured nor guaranteed by
the U.S. Government. There can be no assurance the Money Market Account will be
able to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Variable
Contracts Fund, Inc. that an investor ought to know before investing. It should
be read and retained for future reference.
Additional information about the Fund has been filed with the Securities
and Exchange Commission, including a document called Statement of Additional
Information, dated __________________. The Statement of Additional Information
is incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Variable Contracts Fund, Inc.
A Member of
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is__________________.
TABLE OF CONTENTS
Page
Summary .......................................................... 3
Financial Highlights............................................... 5
Investment Objectives, Policies and Restrictions................... 10
Certain Investment Policies and Restrictions....................... 15
Manager and Sub-Advisor .......................................... 16
Duties Performed by the Manager and Sub-Advisor.................... 17
Managers' Comments................................................. 17
Determination of Net Asset Value of Account Shares................. 20
Performance Calculation............................................ 21
Income Dividends, Distributions and Tax Status..................... 21
Eligible Purchasers and Purchase of Shares......................... 22
Shareholder Rights ................................................ 23
Redemption of Shares............................................... 23
Additional Information............................................. 24
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, shares of the Fund in any jurisdiction in which such sale,
offer to sell, or solicitation may not be lawfully made. No dealer, salesperson,
or other person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund or the Fund's Managers.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Variable Contracts Fund, Inc. ("Fund") is an incorporated,
open-end diversified management investment company offering multiple accounts.
Who may purchase shares of the Accounts?
Shares of the Accounts are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What do the Accounts offer investors?
Professional Investment Management: Experienced securities analysts provide
each Account with professional investment management.
Diversification: Each Account will diversify by investing in securities
issued by a number of issuers doing business in a variety of industries and/or
located in different geographical regions. Diversification reduces investment
risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Accounts creates administrative efficiencies.
Redeemability: Upon request each Account will redeem its shares and
promptly pay the investor the current net asset value of the shares redeemed.
See "Redemption of Shares."
What are the Accounts' investment objectives?
Growth-Oriented Accounts
The investment objective of Balanced Account is to seek to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of this objective. The Account intends to pursue
a flexible investment policy in seeking to achieve this investment objective.
The primary investment objective of Capital Value Account is long-term
capital appreciation and its secondary investment objective is growth of
investment income. The Account seeks to achieve its investment objectives
through the purchase primarily of common stocks, but the Account may invest in
other securities.
The investment objective of MidCap Account is to achieve capital
appreciation by investing primarily in securities of emerging and other
growth-oriented companies.
Income-Oriented Accounts
The investment objective of Bond Account is to provide as high a level of
income as is consistent with preservation of capital and prudent investment
risk.
The primary investment objective of High Yield Account is to seek high
current income. Capital growth is a secondary objective when consistent with the
objective of high current income. The Account will invest primarily in high
yielding, lower or non-rated fixed income securities.
Money Market Account
The investment objective of Money Market Account is to seek as high a level
of current income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
There can be no assurance that the investment objectives of any of the
Accounts will be realized. See "Investment Objectives, Policies and
Restrictions."
Who serves as Manager for the Accounts?
Principal Management Corporation (formerly known as Princor Management
Corporation), a corporation organized in 1969 by Principal Mutual Life Insurance
Company, is the Manager for each of the Accounts. It is also the dividend
disbursing and transfer agent for the Fund. In order to provide investment
advisory services for the Balanced Account, Capital Value Account and MidCap
Account, the Manager has executed a sub-advisory agreement with Invista Capital
Management, Inc. ("Invista" or "Sub-Advisor"). See "Manager and Sub-Advisor."
What fees and expenses apply to ownership of shares of the Accounts?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Accounts.
ANNUAL ACCOUNT OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Account Fee Expenses Expenses
Balanced Account .60% .03% .63%
Bond Account .50% .03% .53%
Capital Value Account .48% .01% .49%
High Yield Account .60% .10% .70%
MidCap Account .64% .02% .66%
Money Market Account .50% .06% .56%
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Period (in years)
Account 1 3 5 10
Balanced Account $6 $20 $35 $79
Bond Account $5 $17 $30 $66
Capital Value Account $5 $16 $27 $62
High Yield Account $7 $22 $39 $87
MidCap Account $7 $21 $37 $82
Money Market Account $6 $18 $31 $70
This Example is based on the Annual Account Operating expenses for each
Account described above. Please remember that the Example should not be
considered a representation of past or future expenses and that actual
expenses may be greater or less than shown.
The purpose of the above table is to assist you in understanding the
various expenses that an investor in the Accounts will bear directly or
indirectly. See "Duties Performed by the Manager."
FINANCIAL HIGHLIGHTS
The following financial highlights for the periods ended December 31, 1996
and prior thereto are derived from financial statements which have been audited
by Ernst & Young LLP, independent auditors, whose report has been incorporated
by reference herein. The financial highlights should be read in conjunction with
the financial statements, related notes, and other financial information
incorporated by reference herein. Audited financial statements may be obtained
by shareholders, without charge, by telephoning 1-800-451-5447. INVESTMENT
<TABLE>
<CAPTION>
Income from
Investment Operations
Net Realized
and
Net Asset Unrealized Total
Value at Net Gain from
Beginning Investment (Loss) on Investment
of Period Income Investments Operations
Balanced Account(a)
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $13.97 $ .40 $ 1.41 $1.81
1995 11.95 .45 2.44 2.89
1994 12.77 .37 (.64) (.27)
1993 12.58 .42 .95 1.37
Six Months Ended
December 31, 1992(b) 12.93 .23 .75 .98
Year Ended June 30,
1992 11.33 .47 1.61 2.08
1991 10.79 .54 .59 1.13
1990 11.89 .60 (.48) .12
1989 11.75 .62 .30 .92
Period Ended June 30, 1988(e) 10.00 .27 1.51 1.78
Bond Account
Year Ended December 31,
1996 11.73 .68 (.40) .28
1995 10.12 .62 1.62 2.24
1994 11.16 .72 (1.04) (.32)
1993 10.77 .88 .38 1.26
Six Months Ended
December 31, 1992(b) 11.08 .45 .13 .58
Year Ended June 30,
1992 10.64 .91 .46 1.37
1991 10.72 .94 (.06) .88
1990 10.92 .95 (.21) .74
1989 10.68 1.15 .17 1.32
Period Ended June 30, 1988(e) 10.00 .32 .40 .72
Capital Value Account
Year Ended December 31,
1996 27.80 .57 5.82 6.39
1995 23.44 .60 6.69 7.29
1994 24.61 .62 (.49) .13
1993 25.19 .61 1.32 1.93
Six Months Ended
December 31, 1992(b) 26.03 .31 1.84 2.15
Year Ended June 30,
1992 23.35 .65 2.70 3.35
1991 22.48 .74 1.22 1.96
1990 23.63 .79 .14 .93
1989 23.23 .77 1.32 2.09
1988 27.51 .60 (1.50) (.90)
1987 25.48 .40 4.46 4.86
</TABLE>
<TABLE>
<CAPTION>
Less Distributions
Excess
Dividends Distributions Distributions
from Net from from
Investment Capital Capital Total
Income Gains Gains Distributions
Balanced Account(a)
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $(.40) $ (.94) $ -- $(1.34)
1995 (.45) (.42) -- (.87)
1994 (.37) (.18) -- (.55)
1993 (.42) (.76) -- (1.18)
Six Months Ended
December 31, 1992(b) (.47) (.86) -- (1.33)
Year Ended June 30,
1992 (.48) -- -- (.48)
1991 (.57) (.02) -- (.59)
1990 (.63) (.59) -- (1.22)
1989 (.55) (.23) -- (.78)
Period Ended June 30, 1988(e) (.03) -- -- (.03)
Bond Account
Year Ended December 31,
1996 (.68) -- -- (.68)
1995 (.63) -- -- (.63)
1994 (.72) -- -- (.72)
1993 (.87) -- -- (.87)
Six Months Ended
December 31, 1992(b) (.89) -- -- (.89)
Year Ended June 30,
1992 (.93) -- -- (.93)
1991 (.96) -- -- (.96)
1990 (.94) -- -- (.94)
1989 (.96) (.12) -- (1.08)
Period Ended June 30, 1988(e) (.04) -- -- (.04)
Capital Value Account
Year Ended December 31,
1996 (.58) (3.77) -- (4.35)
1995 (.60) (2.33) -- (2.93)
1994 (.61) (.69) -- (1.30)
1993 (.60) (1.91) -- (2.51)
Six Months Ended
December 31, 1992(b) (.64) (2.35) -- (2.99)
Year Ended June 30,
1992 (.67) -- -- (.67)
1991 (.79) (.30) -- (1.09)
1990 (.81) (1.27) -- (2.08)
1989 (.68) (1.01) -- (1.69)
1988 (.69) (2.69) -- (3.38)
1987 (.50) (2.33) -- (2.83)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
Balanced Account(a)
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $14.44 13.13% $ 93,158 .63% 3.45% 22.6% $.0417
1995 13.97 24.58% 45,403 .66% 4.12% 25.7% N/A
1994 11.95 (2.09)% 25,043 .69% 3.42% 31.5% N/A
1993 12.77 11.06% 21,399 .69% 3.30% 15.8% N/A
Six Months Ended
December 31, 1992(b) 12.58 8.00%(c) 18,842 .73%(d) 3.71%(d) 38.4%(d) N/A
Year Ended June 30,
1992 12.93 18.78% 17,344 .72% 3.80% 26.6% N/A
1991 11.33 11.36% 14,555 .73% 5.27% 27.1% N/A
1990 10.79 .87% 13,016 .74% 5.52% 33.1% N/A
1989 11.89 8.55% 12,751 .74% 5.55% 29.3% N/A
Period Ended June 30, 1988(e) 11.75 17.70%(c) 11,469 .80%(d) 4.96%(d) 41.7%(d) N/A
Bond Account
Year Ended December 31,
1996 11.33 2.36% 63,387 .53% 7.00% 1.7% N/A
1995 11.73 22.17% 35,878 .56% 7.28% 5.9% N/A
1994 10.12 (2.90)% 17,108 .58% 7.86% 18.2% N/A
1993 11.16 11.67% 14,387 .59% 7.57% 14.0% N/A
Six Months Ended
December 31, 1992(b) 10.77 5.33%(c) 12,790 .62%(d) 8.10%(d) 6.7%(d) N/A
Year Ended June 30,
1992 11.08 13.57% 12,024 .62% 8.47% 6.1% N/A
1991 10.64 8.94% 10,552 .63% 9.17% 2.7% N/A
1990 10.72 7.15% 9,658 .64% 9.09% 0.0% N/A
1989 10.92 13.51% 9,007 .64% 9.18% 12.2% N/A
Period Ended June 30, 1988(e) 10.68 6.06%(c) 17,598 .58%(d) 8.11%(d) 68.8%(d) N/A
Capital Value Account
Year Ended December 31,
1996 29.84 23.50% 205,019 .49% 2.06% 48.5% .0426
1995 27.80 31.91% 135,640 .51% 2.25% 49.2% N/A
1994 23.44 .49% 120,572 .51% 2.36% 44.5% N/A
1993 24.61 7.79% 128,515 .51% 2.49% 25.8% N/A
Six Months Ended
December 31, 1992(b) 25.19 8.81%(c) 105,355 .55%(d) 2.56%(d) 39.7%(d) N/A
Year Ended June 30,
1992 26.03 14.53% 94,596 .54% 2.65% 34.8% N/A
1991 23.35 9.46% 76,537 .53% 3.53% 14.0% N/A
1990 22.48 3.94% 74,008 .56% 3.56% 30.2% N/A
1989 23.63 10.02% 68,132 .57% 3.53% 23.5% N/A
1988 23.23 (2.67)% 62,696 .60% 2.76% 26.7% N/A
1987 27.51 22.17% 57,478 .63% 1.99% 16.1% N/A
</TABLE>
Notes to financial highlights
(a) Effective May 1, 1994, the name of Principal Managed Fund, Inc. was
changed to Principal Balanced Fund, Inc.
(b) Effective July 1, 1992 the fund changed its fiscal year end from June
30 to December 31.
(c) Total return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating
$.01 per share for the period from the initial purchase of shares on
December 10, 1987 through December 17, 1987 was recognized, all of
which was distributed to the Account's sole stockholder, Principal
Mutual Life Insurance Company. This represented activity of the
Account prior to the initial offering of shares to eligible
purchasers.
<TABLE>
<CAPTION>
Income from
Investment Operations
Net Realized
and
Net Asset Unrealized Total
Value at Net Gain from
Beginning Investment (Loss) on Investment
of Period Income Investments Operations
High Yield Account
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $ 8.39 $ .80 $ .30 $1.10
1995 7.91 .76 .51 1.27
1994 8.62 .77 (.72) .05
1993 8.38 .80 .23 1.03
Six Months Ended
December 31, 1992(a) 8.93 .45 (.10) .35
Year Ended June 30,
1992 8.28 .92 .66 1.58
1991 8.96 .99 (.53) .46
1990 10.37 1.21 (1.35) (.14)
1989 11.01 1.23 (.45) .78
Period Ended June 30, 1988(d) 10.00 .67 .49 1.16
MidCap Account(d)
Year Ended December 31,
1996 25.33 .22 5.07 5.29
1995 19.97 .22 5.57 5.79
1994 20.79 .14 .03 .17
1993 18.91 .17 3.47 3.64
Six Months Ended
December 31, 1992(b) 15.97 .10 3.09 3.19
Year Ended June 30,
1992 13.93 .21 2.04 2.25
1991 14.25 .20 .50 .70
1990 13.35 .24 .87 1.11
1989 12.85 .16 1.35 1.51
Period Ended June 30, 1988(e) 10.00 .05 2.83 2.88
Money Market Account
Year Ended December 31,
1996 1.000 .049 -- .049
1995 1.000 .054 -- .054
1994 1.000 .037 -- .037
1993 1.000 .027 -- .027
Six Months Ended
December 31, 1992(a) 1.000 .016 -- .016
Year Ended June 30,
1992 1.000 .046 -- .046
1991 1.000 .070 -- .070
1990 1.000 .077 -- .077
1989 1.000 .083 -- .083
1988 1.000 .064 -- .064
1987 1.000 .057 -- .057
</TABLE>
<TABLE>
<CAPTION>
Less Distributions
Excess
Dividends Distributions Distributions
from Net from from
Investment Capital Capital Total
Income Gains Gains Distributions
High Yield Account
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $ (.77) $ -- $ -- $ (.77)
1995 (.77) (.02) -- (.79)
1994 (.76) -- -- (.76)
1993 (.79) -- -- (.79)
Six Months Ended
December 31, 1992(a) (.90) -- -- (.90)
Year Ended June 30,
1992 (.93) -- -- (.93)
1991 (1.14) -- -- (1.14)
1990 (1.22) (.05) -- (1.27)
1989 (1.21) (.21) -- (1.42)
Period Ended June 30, 1988(d) (.15) -- -- (.15)
MidCap Account(d)
Year Ended December 31,
1996 (.22) (.66) -- (.88)
1995 (.22) (.21) -- (.43)
1994 (.14) (.85) -- (.99)
1993 (.17) (1.59) -- (1.76)
Six Months Ended
December 31, 1992(b) (.21) (.04) -- (.25)
Year Ended June 30,
1992 (.21) -- -- (.21)
1991 (.23) (.79) -- (1.02)
1990 (.20) (.01) -- (.21)
1989 (.11) (.90) -- (1.01)
Period Ended June 30, 1988(e) (.03) -- -- (.03)
Money Market Account
Year Ended December 31,
1996 (.049) -- -- (.049)
1995 (.054) -- -- (.054)
1994 (.037) -- -- (.037)
1993 (.027) -- -- (.027)
Six Months Ended
December 31, 1992(a) (.016) -- -- (.016)
Year Ended June 30,
1992 (.046) -- -- (.046)
1991 (.070) -- -- (.070)
1990 (.077) -- -- (.077)
1989 (.083) -- -- (.083)
1988 (.064) -- -- (.064)
1987 (.057) -- -- (.057)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
High Yield Account
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $ 8.72 13.13% $13,740 .70% 9.21% 32.0% N/A
1995 8.39 16.08% 11,830 .73% 9.09% 35.1% N/A
1994 7.91 .62% 9,697 .73% 9.02% 30.6% N/A
1993 8.62 12.31% 9,576 .74% 8.80% 28.7% N/A
Six Months Ended
December 31, 1992(a) 8.38 4.06%(b) 8,924 .77%(c) 10.33%(c) 20.6%(c) N/A
Year Ended June 30,
1992 8.93 20.70% 8,556 .77% 11.00% 31.3% N/A
1991 8.28 6.35% 7,085 .82% 12.58% 6.4% N/A
1990 8.96 (1.46)% 6,643 .83% 13.07% 24.2% N/A
1989 10.37 7.88% 6,741 .95% 11.89% 27.8% N/A
Period Ended June 30, 1988(d) 11.01 11.25%(b) 6,703 .78%(c) 11.71%(c) 58.2%(c) N/A
MidCap Account(d)
Year Ended December 31,
1996 29.74 21.11% 137,161 .66% 1.07% 8.8% .0379
1995 25.33 29.01% 58,520 .70% 1.23% 13.1% N/A
1994 19.97 .78% 23,912 .74% 1.15% 12.0% N/A
1993 20.79 19.28% 12,188 .78% .89% 22.4% N/A
Six Months Ended
December 31, 1992(b) 18.91 20.12%(c) 9,693 .81%(d) 1.24%(e) 8.6%(e) N/A
Year Ended June 30,
1992 15.97 16.19% 7,829 .82% 1.33% 10.1% N/A
1991 13.93 5.72% 6,579 .89% 1.70% 11.1% N/A
1990 14.25 8.32% 6,067 .88% 1.74% 17.9% N/A
1989 13.35 13.08% 5,509 .90% 1.31% 21.4% N/A
Period Ended June 30, 1988(e) 12.85 28.72%(c) 4,857 .94%(d) .64%(e) 4.6%(e) N/A
Money Market Account
Year Ended December 31,
1996 1.000 5.07% 46,244 .56% 5.00% N/A N/A
1995 1.000 5.59% 32,670 .58% 5.32% N/A N/A
1994 1.000 3.76% 29,372 .60% 3.81% N/A N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A N/A
Six Months Ended
December 31, 1992(a) 1.000 1.54%(b) 27,680 .59%(c) 3.10%(c) N/A N/A
Year Ended June 30,
1992 1.000 4.64% 25,194 .57% 4.54% N/A N/A
1991 1.000 7.20% 26,509 .56% 6.94% N/A N/A
1990 1.000 8.37% 26,588 .57% 8.05% N/A N/A
1989 1.000 8.59% 20,707 .61% 8.40% N/A N/A
1988 1.000 6.61% 14,571 .64% 6.39% N/A N/A
1987 1.000 5.78% 11,902 .65% 5.68% N/A N/A
</TABLE>
Notes to financial highlights
(a) Effective July 1, 1992 the fund changed its fiscal year end from June
30 to December 31.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Effective May 1, 1992, the name of Principal Aggressive Growth Fund,
Inc. was changed to Principal Emerging Growth Fund, Inc.
(e) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating
$.01 per share for the period from the initial purchase of shares on
December 10, 1987 through December 17, 1987 was recognized, all of
which was distributed to the Account's sole stockholder, Principal
Mutual Life Insurance Company. This represented activity of the
Account prior to the initial offering of shares to eligible
purchasers.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Account are described below.
There can be no assurance that the objectives of the Accounts will be realized.
GROWTH-ORIENTED ACCOUNTS
The Fund includes two Accounts which seek capital appreciation through
investments in equity securities (Capital Value Account and MidCap Account) and
one Account which seeks a total investment return including both capital
appreciation and income through investments in equity and debt securities
(Balanced Account). These three Accounts are collectively referred to as the
Growth-Oriented Accounts.
The Growth-Oriented Accounts may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and American Depository Receipts based
on any of the foregoing securities. The Capital Value and MidCap Accounts will
seek to be fully invested under normal conditions in equity securities. When in
the opinion of the Manager current market or economic conditions warrant, a
Growth-Oriented Account may for temporary defensive purposes place all or a
portion of its assets in cash, on which the Account would earn no income, cash
equivalents, bank certificates of deposit, bankers acceptances, repurchase
agreements, commercial paper, commercial paper master notes which are floating
rate debt instruments without a fixed maturity, United States Government
securities, and preferred stocks and debt securities, whether or not convertible
into or carrying rights for common stock. A Growth-Oriented Account may also
maintain reasonable amounts in cash or short-term debt securities for daily cash
management purposes or pending selection of particular long-term investments.
Balanced Account
The investment objective of the Balanced Account is to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of the investment objective. The term
"reasonable risks" refers to investment decisions that in the Manager's judgment
do not present a greater than normal risk of loss in light of current or
anticipated future market and economic conditions, trends in yields and interest
rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Account invests
primarily in growth and income-oriented common stocks (including securities
convertible into common stocks), corporate bonds and debentures and short-term
money market instruments. The Account may also invest in other equity
securities, and in debt securities issued or guaranteed by the United States
Government and its agencies or instrumentalities. The Account seeks to generate
real (inflation plus) growth during favorable investment periods and may
emphasize income and capital preservation strategies during uncertain investment
periods. The Manager will seek to minimize declines in the net asset value per
share. However, there is no guarantee that the Manager will be successful in
achieving this goal.
The portions of the Account's total assets invested in equity securities,
debt securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Account's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Manager as to general market and economic conditions, trends in investment
yields and interest rates and changes in fiscal or monetary policies.
The Account may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Account may invest in
both exchange-listed and over-the-counter securities, in small or large
companies, and in well-established or unseasoned companies. Also, the Account's
investments in corporate bonds and debentures and money market instruments are
not restricted by credit ratings or other objective investment criteria, except
with respect to bank certificates of deposit as set forth below. Some of the
fixed income securities in which the Account may invest may be considered to
include speculative characteristics and the Account may purchase such securities
that are in default but does not currently intend to invest more than 5% of its
assets in securities rated below BBB by Standard & Poor's or Baa by Moody's. See
the discussion of the High Yield Account for information concerning risks
associated with below-investment grade bonds. The Account will not concentrate
its investments in any industry.
In selecting common stocks, the Manager seeks companies which the Manager
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Manager determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Manager may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Account may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Account may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The short-term money market investments in which the Account may invest
include the following: U.S. Treasury bills, bank certificates of deposit,
bankers' acceptances, repurchase agreements, commercial paper and commercial
paper master notes which are floating rate debt instruments without a fixed
maturity. The Account will only invest in domestic bank certificates of deposit
issued by banks which are members of the Federal Reserve System that have total
deposits in excess of one billion dollars.
The United States government securities in which the Account may invest
include U.S. Treasury obligations and obligations of certain agencies, such as
the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Capital Value Account
The primary objective of the Capital Value Account is long-term capital
appreciation. A secondary objective is growth of investment income.
The Account will invest primarily in common stocks, but it may invest in
other securities. In making selections for the Account's investment portfolio,
the Manager will use an approach described broadly as that of fundamental
analysis, which is discussed in the Statement of Additional Information. To
achieve the investment objective, Invista will invest in securities that have
"value" characteristics. This process is known as "value investing." Value
investing is purchasing securities of companies with above average dividend
yields and below average price to earnings (P/E) ratios. Securities chosen for
investment may include those of companies which the Manager believes can
reasonably be expected to share in the growth of the nation's economy over the
long term.
MidCap Account
The objective of the MidCap Account is to achieve capital appreciation. The
strategy of this Account is to invest primarily in the common stocks and
securities (both debt and preferred stock) convertible into common stocks of
emerging and other growth-oriented companies that, in the judgment of the
Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the MidCap Account may invest, for any period of time, in
any industry, in any kind of growth-oriented company, whether new and unseasoned
or well known and established.
There can be, of course, no assurance that the Account will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Account invests, the Account believes that its shares are
suitable only for persons who are prepared to experience above-average
fluctuations in net asset value, to assume above-average investment risk in
search of above-average return, and to consider the Account as a long-term
investment and not as a vehicle for seeking short-term profits. Moreover, since
the Account will not be seeking current income, investors should not view a
purchase of Account shares as a complete investment program.
INCOME-ORIENTED ACCOUNTS
The Fund currently includes two Accounts which seek a high level of income
through investments in fixed-income securities (Bond Account and High Yield
Account) collectively referred to as the "Income-Oriented Accounts." An
investment in any of the Income-Oriented Accounts involves market risks
associated with movements in interest rates. The market value of the Accounts'
investments will fluctuate in response to changes in interest rates and other
factors. During periods of falling interest rates, the values of outstanding
long-term fixed-income securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. Changes
by recognized rating agencies in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities will affect the Accounts' net asset values but will not affect cash
income derived from the securities unless a change results from a failure of an
issuer to pay interest or principal when due. Each Account's rating limitations
apply at the time of acquisition of a security, and any subsequent change in a
rating by a rating service will not require elimination of a security from the
Account's portfolio. The Statement of Additional Information contains
descriptions of ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard and Poor's Corporation ("S&P").
Bond Account
The investment objective of the Bond Account is to provide as high a level
of income as is consistent with preservation of capital and prudent investment
risk.
In seeking to achieve the investment objective, the Account will
predominantly invest in marketable fixed-income securities. Investments will be
made generally on a long-term basis, but the Account may make short-term
investments from time to time as deemed prudent by the Manager. Longer
maturities typically provide better yields but will subject the Account to a
greater possibility of substantial changes in the values of its portfolio
securities as interest rates change.
Under normal circumstances, the Account will invest at least 65% of its
assets, exclusive of cash items, in one or more of the following kinds of
securities: (i) corporate debt securities and taxable municipal obligations,
which at the time of purchase have an investment grade rating within the four
highest grades used by Standard & Poor's Corporation (AAA, AA, A or BBB) or by
Moody's Investors Service, Inc. (Aaa, Aa, A or Baa) or which, if lower-rated or
nonrated, are comparable in quality in the opinion of the Account's Manager;
(ii) similar Canadian corporate, Provincial and Federal Government securities
payable in U.S. funds; and (iii) securities issued or guaranteed by the United
States Government or its agencies or instrumentalities. The balance of the
Account's assets may be invested in other fixed income securities, including
domestic and foreign corporate debt securities or preferred stocks, in common
stocks that provide returns that compare favorably with the yields on fixed
income investments, and in common stocks acquired upon conversion of debt
securities or preferred stocks or upon exercise of warrants acquired with debt
securities or otherwise and foreign government securities. The debt securities
and preferred stocks in which the Account invests may be convertible or
nonconvertible. The Account does not intend to purchase debt securities rated
lower than Ba3 by Moody's or BB - by S & P (bonds which are judged to have
speculative elements; their future cannot be considered as well-assured). See
the discussion of the High Yield Account for information concerning risks
associated with below investment grade bonds.
During the year ended December 31, 1996, the percentage of the Account's
portfolio securities invested in the various ratings established by Moody's
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
Aaa .18%
Aa .81%
A 24.05%
Baa 68.04%
Ba 6.92%
* The above percentages for A rated securities include .57% unrated
securities which have been determined by the Manager to be of comparable
quality.
Cash equivalents in which the Account invests include corporate commercial
paper rated A-1+, A-1 or A-2 by Standard & Poor's or P-1 or P-2 by Moody's,
unrated commercial paper issued by corporations with outstanding debt securities
rated in the four highest grades by Standard & Poor's and Moody's and bank
certificates of deposit and bankers' acceptances issued or guaranteed by
national or state banks and repurchase agreements considered by the Account to
have investment quality. Under unusual market or economic conditions, the
Account may for temporary defense purposes invest up to 100% of its assets in
cash or cash equivalents.
High Yield Account
The High Yield Account's primary investment objective is high current
income. Capital growth is a secondary objective when consistent with the
objective of high current income. This Account is designed for investors willing
to assume additional risk in return for above average income.
In seeking to attain the Account's objective of high current income, the
Account invests primarily in high yielding, lower or non-rated (high risk)
fixed-income securities, commonly known as "junk bonds," constituting a
diversified portfolio which the Account Manager believes does not involve undue
risk to income or principal. Normally, at least 80% of the Account's assets will
be invested in debt securities, convertible securities (both debt and preferred
stock) or preferred stocks that are consistent with its primary investment
objective of high current income. The Account's remaining assets may be held in
cash or cash equivalents, or invested in common stocks and other equity
securities when these types of investments are consistent with the objective of
high current income.
The Account seeks to invest its assets in securities rated Ba1 or lower by
Moody's Investors Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's
Corporation ("S&P") or in unrated securities which the Account's Manager
believes are of comparable quality. These securities are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and to repay principal in accordance with the terms of the obligation.
The Account will not invest in securities rated Caa or lower by Moody's and CCC
or lower by S&P.
The rating services' descriptions of securities rating categories in which
the Account may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class. B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the high end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB, B, CCC, CC: Debt rated
"BB", "B", "CCC" and "CC" is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
The higher-yielding, lower-rated securities in which the High Yield Account
invests present special risks to investors. The market value of lower-rated
securities may be more volatile than that of higher-rated securities and
generally tends to reflect the market's perception of the creditworthiness of
the issuer and short-term market developments to a greater extent than more
highly rated securities, which reflect primarily fluctuations in general levels
of interest rates. Periods of economic uncertainty and change can be expected to
result in increased volatility in the market value of lower-rated securities.
Further, such securities may be subject to greater risks of loss of income and
principal, particularly in the event of adverse economic changes or increased
interest rates, because their issuers generally are not as financially secure or
as creditworthy as issuers of higher-rated securities. Additionally, to the
extent that there is not a national market system for secondary trading of
lower-rated securities, there may be a low volume of trading in such securities
which may make it more difficult to value or sell those securities than
higher-rated securities. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly traded market.
Investors should recognize that the market for higher yielding, lower-rated
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the High Yield Account and the
ability of the issuers of the securities held by it to pay principal and
interest. A default by an issuer may result in the Account incurring additional
expenses to seek recovery of the amounts due it.
Some of the securities in which the Account invests contain call
provisions. If the issuer of such a security exercises a call provision in a
declining interest rate market, the Account would have to replace the security
with a lower-yielding security, resulting in a decreased return for investors.
Further, a higher-yielding security's value will decrease in a rising interest
rate market, which will be reflected in the Account's net asset value per share.
Investors should carefully consider their ability to assume the risks of
investing in lower-rated securities before making an investment in the High
Yield Account and should be prepared to maintain their investment during periods
of adverse market conditions. Investors should not rely on the Account for their
short-term financial needs.
The Account seeks to minimize the risks of investing in lower-rated
securities through diversification, investment analysis and attention to current
developments in interest rates and economic conditions. Because the Account
invests primarily in securities in the lower rating categories, the achievement
of the Account's goals is more dependent on the Manager's ability than would be
the case if the Account were investing in securities in the higher rating
categories. Although the Account's Manager considers security ratings when
making investment decisions, it performs its own investment analysis and does
not rely principally on the ratings assigned by the rating services. There are
risks in applying credit ratings as a method for evaluating high yield
securities. For example, credit ratings evaluate the safety of principal and
interest payments, not the market value risk of high yield securities, and
credit rating agencies may fail to make timely changes in credit ratings to
reflect subsequent events. The Manager's analysis includes traditional security
analysis considerations such as the issuer's experience and managerial strength,
changing financial condition, borrowing requirements or debt maturity schedules,
and its responsiveness to changes in business conditions and interest rates. It
also considers relative values based on anticipated cash flow, interest or
dividend coverage, asset coverage and earnings prospects. In addition, the
Manager analyzes general business conditions and other factors such as
anticipated changes in economic activity and interest rates, the availability of
new investment opportunities, and the economic outlook for specific industries.
The Manager continuously monitors the issuers of portfolio securities to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments and to assure the securities' liquidity
so the Account can meet redemption requests. During the year ended December 31,
1996 the percentage of the Account's portfolio securities invested in the
various ratings established by Moody's, based upon the weighted average ratings
of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
Baa 2.63%
Ba 38.86%
B 56.47%
C 2.04%
The above percentages for B and Ba rated securities include 2.72% and
- -1.13%, respectively, unrated securities which have been determined by the
Manager to be of comparable quality.
There may be times when, in the Manager's judgment, unusual market or
economic conditions make pursuing the Account's basic investment strategy
inconsistent with the best interests of its shareholders. At such times the
Manager may employ alternative strategies, primarily seeking to reduce
fluctuations in the value of the Account's assets. In implementing these
"defensive" strategies, the Account may temporarily invest in money-market
instruments of all types, higher-rated fixed-income securities or any other
fixed-income securities that the Account considers consistent with such
strategy. The yield to maturity on these securities would generally be lower
than the yield to maturity on lower-rated fixed-income securities. It is
impossible to predict when, or for how long, such alternative strategies will be
utilized.
The Account's Manager buys and sells securities for the Account principally
in response to its evaluation of an issuer's continuing ability to meet its
obligations, the availability of better investment opportunities, and its
assessment of changes in business conditions and interest rates. From time to
time, consistent with its investment objectives, the Account may sell securities
that have appreciated in value because of declines in interest rates. It may
also trade securities for the purpose of seeking short-term profits. Securities
may be sold in anticipation of a market decline or bought in anticipation of a
market rise. They may also be traded for securities of comparable quality and
maturity to take advantage of perceived short-term disparities in market values
or yields.
MONEY MARKET ACCOUNT
The Fund also includes an Account which invests primarily in short-term
securities, Money Market Account. Securities in which the Money Market Account
will invest may not yield as high a level of current income as securities of low
quality and longer maturities which generally have less liquidity, greater
market risk and more fluctuation.
The Money Market Account will limit its portfolio investments to United
States dollar denominated instruments that the board of directors determines
present minimal credit risks and which are at the time of acquisition "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the remaining maturity of 397 days or less that is
rated (or that has been issued by an issuer that is rated in respect to
a class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security at the time of issuance was a long-term security that has a
remaining maturity of 397 calendar days or less, and whose issuer has
received from a nationally recognized statistical rating organization a
rating, with respect to a class of short-term debt obligations (or any
security within that class) that is now comparable in priority and
security with the security, in one of the two highest rating categories
for short-term debt obligations; or
(3) An unrated security that is of comparable quality to a security meeting
the requirements of (1) or (2) above, as determined by the board of
directors.
The Account will not invest more than 5% of its total assets in the
following securities:
(1) Securities which, when acquired by the Account (either initially or
upon any subsequent rollover), are rated below the highest rating
category for short-term debt obligations;
(2) Securities which, at the time of issuance were long-term securities but
when acquired by the Account have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, below the highest
rating category for short-term obligations;
(3) Securities which are unrated but are determined by the board of
directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations. The Account
will maintain a dollar-weighted average portfolio maturity of 90 days
or less.
The objective of Money Market Account is to seek as high a level of current
income available from short-term securities as is considered consistent with
preservation of principal and maintenance of liquidity by investing its assets
in a portfolio of money market instruments. These money market instruments are
U.S. Government Securities, U.S. Government Agency Securities, Bank Obligations,
Commercial Paper, Short-term Corporate Debt and Repurchase Agreements, which are
described briefly below and in more detail in the Statement of Additional
Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
The Account intends to hold its investments until maturity, but may on
occasion trade securities to take advantage of market variations. Also, revised
valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at times when such sales might otherwise not be
desirable. The Account's right to borrow to facilitate redemptions may reduce
the need for such sales. It is the Account's policy to be as fully invested as
reasonably practical at all times to maximize current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the Account
expects to usually transact purchases and sales of portfolio securities with
issuers or dealers on a net basis, it is not anticipated that the Account will
pay any significant brokerage commissions. The Account is free to dispose of
portfolio securities at any time, when changes in circumstances or conditions
make such a move desirable in light of the investment objective.
A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Account invests.
The rate of return and the net asset value will be affected by such other
factors as sales of portfolio securities prior to maturity and the Account's
operating expenses.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Accounts
may use in an effort to achieve their respective investment objectives.
Diversification
Each Account is subject to the diversification requirements of Section
817(h) of the Internal Revenue Code (the "Code") which must be met at the end of
each quarter of the year (or within 30 days thereafter). Regulations issued by
the Secretary of the Treasury have the effect of requiring each Account to
invest no more than 55% of its total assets in securities of any one issuer, no
more than 70% in the securities of any two issuers, no more than 80% in the
securities of any three issuers, and no more than 90% in the securities of any
four issuers. For this purpose, the United States Treasury and each U.S.
Government agency and instrumentality is considered to be a separate issuer.
In the event any of the Accounts do not meet the diversification
requirements of Section 817(h) of the Code, the contracts funded by shares of
the Accounts will not be treated as annuities or life insurance for Federal
income tax purposes and the owners of the Accounts will be subject to taxation
on their share of the dividends and distributions paid by the Accounts.
Foreign Securities
Each of the following Accounts has adopted investment restrictions that
limit its investments in foreign securities to the indicated percentage of its
assets: Bond, Capital Value and High Yield - 20%; Balanced and MidCap - 10%.
Debt securities issued in the United States pursuant to a registration statement
filed with the Securities and Exchange Commission are not considered "foreign
securities" for purposes of this investment limitation. Investment in foreign
securities presents certain risks including those resulting from fluctuations in
currency exchange rates, revaluation of currencies, the imposition of foreign
taxes, future political and economic developments including war, expropriations,
nationalization, the possible imposition of currency exchange controls and other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers, and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic issuers. Moreover, securities of many foreign issuers may
be less liquid and their prices more volatile than those of comparable domestic
issuers. In addition, transactions in foreign securities may be subject to
higher costs, and the time for settlement of transactions in foreign securities
may be longer than the settlement period for domestic issuers. An Account's
investment in foreign securities may also result in higher custodial costs and
the costs associated with currency conversions.
Repurchase Agreements
Each of the Accounts, may enter into repurchase agreements with, and each
of the Accounts, except the Capital Value and Money Market Accounts, may lend
its portfolio securities to, unaffiliated broker-dealers and other unaffiliated
qualified financial institutions. These transactions must be fully
collateralized at all times, but involve some credit risk to the Account if the
other party should default on its obligations, and the Account is delayed or
prevented from recovering on the collateral. See the Fund's Statement of
Additional Information for further information regarding the credit risks
associated with repurchase agreements and the standards adopted by the Board of
Directors to deal with those risks. None of the Accounts intend either (i) to
enter into repurchase agreements that mature in more than seven days if any such
investment, together with any other illiquid securities held by the Account,
would amount to more than 10% of its total assets or (ii) to loan securities in
excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Accounts may enter into forward commitment
agreements which call for the Account to purchase or sell a security on a future
date and at a price fixed at the time the Account enters into the agreement.
Each of these Accounts may also acquire rights to sell its investments to other
parties, either on demand or at specific intervals.
Warrants
Each of the Accounts, except the Money Market Account, may invest in
warrants up to 5% of its assets, of which not more than 2% may be invested in
warrants that are not listed on the New York or American Stock Exchange.
Borrowing
As a matter of fundamental policy, each Account may borrow money only for
temporary or emergency purposes. The Balanced, Bond, Capital Value, High Yield
and Money Market Accounts may borrow only from banks. Further, each may borrow
only in an amount not exceeding 5% of its assets, except the Capital Value
Account which may borrow only in an amount not exceeding the lesser of (i) 5% of
the value of its assets less liabilities other than such borrowings, or (ii) 10%
of its assets taken at cost at the time the borrowing is made, and the Money
Market Account which may borrow only in an amount not exceeding the lesser of
(i) 5% of the value of its assets, or (ii) 10% of the value of its net assets
taken at cost at the time the borrowing is made.
Options
The Balanced, Bond, High Yield and MidCap Accounts may purchase covered
spread options, which would give the Account the right to sell a security that
it owns at a fixed dollar spread or yield spread in relationship to another
security that the Account does not own, but which is used as a benchmark. These
same Accounts may also purchase and sell financial futures contracts, options on
financial futures contracts and options on securities and securities indices,
but will not invest more than 5% of their assets in the purchase of options on
securities, securities indices and financial futures contracts or in initial
margin and premiums on financial futures contracts and options thereon. The
Accounts may write options on securities and securities indices to generate
additional revenue and for hedging purposes and may enter into transactions in
financial futures contracts and options on those contracts for hedging purposes.
The Statement of Additional Information includes further information
concerning the Accounts' investment policies and applicable investment
restrictions. Each Account's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for an Account are not fundamental
and may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER AND SUB-ADVISOR
The Manager for the Fund is Principal Management Corporation (the
"Manager"), an indirectly wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the State of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969,
and since that time has managed various mutual funds sponsored by Principal
Mutual Life Insurance Company. As of December 31, 1996, the Manager served as
investment advisor for 26 such funds with assets totaling approximately $4.0
billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced, Capital Value
and MidCap Accounts. The Manager will reimburse Invista for the cost of
providing these services. Invista, an indirectly wholly-owned subsidiary of
Principal Mutual Life Insurance company and an affiliate of the Manager, was
founded in 1985 and manages investments for institutional investors, including
Principal Mutual Life. Assets under management at December 31, 1996 were
approximately $19.6 billion. Invista's address is 1800 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
The Manager or Invista has assigned certain individuals the primary
responsibility for the day-to-day management of each Account's portfolio. The
persons primarily responsible for the day-to-day management of each Account are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Account Responsible Since Person Primarily Responsible
<S> <C> <C>
Balanced April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice
President, Invista Capital Management, Inc.
Bond November, 1996 Scott A. Bennett, CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Mutual Life Insurance Company.
Capital Value November, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice President,
(Account's inception) Invista Capital Management, Inc.; Co-Manager since November, 1996: Catherine A.
Green, CFA, (MBA degree, Drake University). Vice President, Invista Capital
Management, Inc.
High Yield December, 1987 James K. Hovey, CFA (MBA degree University of Iowa). Director - Investment
(Account's inception) Securities, Principal Mutual Life Insurance Company.
MidCap December, 1987 Michael R. Hamilton, (BMBA degree, Bellarmine College). Vice President, Invista
(Account's inception) Capital Management, Inc.
</TABLE>
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISOR
Under Maryland law, the business and affairs of each of the Accounts are
managed under the direction of the Board of Directors. The investment services
and certain other services referred to under the heading "Cost of Manager's
Services" in the Statement of Additional Information are furnished to the
Accounts under the terms of a Management Agreement between the Fund and the
Manager, and for the Balanced, Capital Value and MidCap Accounts, a Sub-Advisory
Agreement between the Manager and Invista. The Manager, or Invista, advises the
Accounts on investment policies and on the composition of the Accounts'
portfolios. In this connection, the Manager, or Invista, furnishes to the Board
of Directors of the Fund a recommended investment program consistent with the
Account's investment objective and policies. The Manager, or Invista, is
authorized, within the scope of the approved investment program, to determine
which securities are to be bought or sold, and in what amounts.
The compensation paid by each Account to the Manager for the fiscal year
ended December 31, 1996 was, on an annual basis, equal to the following
percentage of average net assets:
Total
Manager's Annualized
Account Fee Expenses
Balanced Account .60% .63%
Bond Account .50% .53%
Capital Value Account .48% .49%
High Yield Account .60% .70%
MidCap Account .64% .66%
Money Market Account .50% .56%
The Manager, or Invista, may purchase at its own expense statistical and
other information or services from outside sources, including Principal Mutual
Life Insurance Company. An Investment Service Agreement between the Fund, the
Manager and Principal Mutual Life Insurance Company provides that Principal
Mutual Life Insurance Company will furnish certain personnel, services and
facilities required by the Manager in connection with its performance of the
Management Agreements, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard.
The Accounts may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc., a broker-dealer that is an affiliate of the Distributor and
Manager for the Fund.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company.
MANAGERS' COMMENTS
Principal Management Corporation and Invista are staffed with investment
professionals who manage each individual Account. Comments by these individuals
in the following paragraphs summarize in capsule form the general strategy and
results of each Account through 1996. The accompanying charts display results
for the past 10 years or the life of the Account, whichever is shorter. Average
Annual Total Return figures provided for each Account in the graphs below
reflect all expenses of the Account and assume all distributions are reinvested
at net asset value. The figures do not reflect expenses of the variable life
insurance contracts or variable annuity contracts that purchase Account shares;
performance figures for the divisions of the contracts would be lower than
performance figures for the Accounts due to the additional contract expenses.
Past performance is not predictive of future performance. Returns and net asset
values fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
The various indices included in the graphs below are unmanaged and do not
reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index. Investors cannot invest
directly into these or any indices.
Growth-Oriented Accounts
Balanced Account
(Judith A. Vogel)
This balanced portfolio combines stocks, bonds and cash in a relatively
conservative mix which seeks to provide both capital appreciation and income to
the shareholder without taking on undue risk. The asset allocation of the
Account generally approximates 60% stocks and 40% bonds. In the year ended
December 31, 1996 the stock market produced exceptional results. Aided by a
healthy economy, continued corporate profit growth, and a good dose of investor
enthusiasm, the S&P 500 Stock Index advanced nearly 23%. Conditions in the bond
market were less supportive over the year. Long-term interest rates rose 0.70%
in 1996, with a lot of volatility along the way, causing the bond returns to
hover between zero and 3% for the year. Demonstrating its balanced nature, the
Account produced a 13% annual return, about midway between stock and bond market
results and very near the Lipper Balanced Fund Average. The bond portion of the
Account's portfolio is comprised of U.S. Government notes and bonds with an
emphasis on safety of principal. The stock portion of the portfolio is
concentrated in companies with stable or growing earnings that are not terribly
sensitive to economic activity. After six years of economic expansion resulting
in high rates of resource utilization, corporate profit growth is likely to come
down, causing a scarcity of earnings growth. Companies that can continue to grow
earnings will be afforded premium valuations. There is no independent market
index against which to measure returns of balanced portfolios, however, we show
the S&P 500 Stock Index for your information.
Total Returns *
As of December 31, 1996
---------------------------------------------------
Since Inception
1 Year 5 Year Date 12/18/87
13.13% 11.57% 12.16%
Comparison of Change in Value of $10,000 Investment in the
Balanced Account, S&P 500 and Lipper Balanced Fund Average
----------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Mid Cap
December 31, Return Index Index
10,000 10,000 10,000
1988 11,637 11,661 11,229
1989 12,982 15,356 13,429
1990 12,147 14,877 13,355
1991 16,321 19,412 16,930
1992 18,410 20,891 18,122
1993 20,447 22,992 20,066
1994 20,019 23,294 19,561
1995 24,941 32,037 24,482
1996 28,215 39,388 27,851
Note: Past performance is not predictive of future performance.
Capital Value Account
(David L. White and Catherine A. Green)
The strategy with this portfolio is to hold common stocks of companies
based on a valuation that is attractive when compared to the market. The
analytical staff looks at companies' current valuations compared to the market,
then at historical information to compare valuations to historical averages. The
focus is on the fundamentals of an industry and the company to determine the
current and future outlook as these potential investments. From there the
portfolio is constructed to provide a diversified set of investments.
The Account outperformed the S&P 500 Index and Lipper Growth and Income
Fund Average for 1996. The strength of the market was in much fewer stocks than
in the past. The volatility between industries was much greater than the overall
results. The Account benefited from several areas of exposure. Banks and health
care were the strongest areas for the Account during the year. The focus has
been away from the more cyclical areas of the economy which also helped during
the year. As the economic cycle progresses, the market places more emphasis on
companies with consistent earnings growth, and we have tended to overweight
these areas of the market. As the market performance continues to narrow,
however, it becomes increasingly difficult to select the correct areas of
overperformance.
Total Returns *
As of December 31, 1996
----------------------------------------
1 Year 5 Year 10 Year
23.50% 14.08% 13.08%
Comparison of Change in Value of $10,000 Investment in the
Capital Value Account, S&P 500 and Lipper Growth and Income Fund Average
----------------------------------------------------------------------------
Fund S&P 500 Lipper
Year Ended Total Stock Growth & Income
December 31, Return Index Fund Average
10,000 10,000 10,000
1987 10,647 10,526 10,184
1988 12,183 12,274 11,814
1989 14,155 16,163 14,596
1990 12,759 15,659 13,946
1991 17,693 20,433 18,002
1992 19,377 21,990 19,618
1993 20,888 24,201 21,884
1994 20,990 24,519 21,678
1995 27,688 33,722 28,360
1996 34,193 41,460 34,253
Note: Past performance is not predictive of future performance.
MidCap Account
(Michael R. Hamilton)
The equity market was strong in 1996, but within the market there were two
different trends. Large-cap stocks performed much better than small-cap stocks.
The MidCap Account returned 19.13% compared with the Lipper Mid Cap Average of
17.9%. The Account and the Lipper Average trailed the S&P 500 Index because of
their emphasis on small cap stocks. While both trailed the S&P 500, this was a
good year for the Account.
The financial market continues to grapple with the paradox of strong
economic growth with no apparent inflation. Productivity will be key in 1997 if
inflation is to remain benign. The Account's portfolio continues to be focused
on companies that should enhance productivity of both labor and capital. Several
of the technology, service and cyclical areas support this emphasis. The
portfolio is also overweighted in the financial sector as bank consolidation
continues.
Continued profit growth will be important in 1997 as well. Companies with
more predictable and visible earnings growth are preferred. This continues to be
those that are low cost producers and have competitive barriers to entry.
Selectivity in all sectors will be crucial to outperformance.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
21.11% 16.64% 17.73%
Comparison of Change in Value of $10,000 Investment
in the Emerging Growth Account, S&P 500 and
Lipper Mid Cap Fund Average
-----------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 MID CAP
December 31, Return Index Index
10,000 10,000 10,000
1988 12,369 11,661 11,476
1989 15,070 15,356 14,586
1990 13,186 14,877 14,067
1991 20,240 19,412 21,275
1992 23,264 20,891 23,213
1993 27,750 22,992 26,625
1994 27,967 23,294 26,079
1995 36,080 32,037 34,469
1996 43,697 39,388 40,646
Note: Past performance is not predictive of future performance.
Important Notes of the Growth-Oriented Accounts:
Standard & Poor's 500 Stock Index: an unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average at December 31, 1996 contained 272 mutual funds.
Lipper Growth & Income Fund Average: this average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one year average contained 522 funds on December
31, 1996.
Lipper Mid Cap Fund Average: This average consists of funds which by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average contained 154 funds on December 31,
1996.
Income-Oriented Accounts
Bond Account
(Scott A. Bennett)
The Bond Account's performance in 1996 lagged when compared to 1995. 1995
was a banner year, mainly because of dramatically declining interest rates.
During 1996 interest rates increased throughout most of the year based on fears
of increasing inflation. This hurt the Account's relative performance as the
duration target of 7 years (actual duration at 12/31/96 was 6.98 years) is
longer than the average BBB rated bond fund and the BAA Lehman Corporate Index.
Relative performance was also negatively impacted by the lack of a significant
amount of less than investment grade bonds in the portfolio. High yield (less
than investment grade) debt performed extremely well during 1996, with many of
the top performing funds in the Lipper BAA universe having significant exposures
to this asset class.
Over the long-term, the Account continues to outperform the average BBB
fund. This is attributed to remaining fully invested and not trying to guess
interest rates. The BBB corporate bond class continued to be an attractive asset
class in 1996, outperforming all other taxable investment grade classes. Spreads
continued to narrow during the year with defaults low and a large amount of
funds chasing the available bonds.
Total Returns *
As of December 31, 1996
- --------------------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
2.36% 8.20% 9.55%
Comparison of Change in Value of $10,000 Investment in the Bond Account, Lehman
Brothers BAA Corporate Index and Lipper Corporate Debt BBB Rated Fund Average
-----------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total BAA BBB
December 31, Return Index Avg
10,000 10,000 10,000
1988 10,991 11,129 10,900
1989 12,514 12,699 12,060
1990 13,167 13,595 12,751
1991 15,369 16,113 15,020
1992 16,810 17,512 16,258
1993 18,771 19,665 18,261
1994 18,227 18,707 17,447
1995 22,268 22,959 20,948
1996 22,794 23,882 21,616
Note: Past performance is not predictive of future performance.
High Yield Account
(James K. Hovey)
While most bond investments had very low returns for 1996, high yield bonds
in general and the High Yield Account included had a good year. The Account's
total return for 1996 was 13.13% which compares to 11.35% for the Lehman
Brothers High Yield Index and 13.67% for the Lipper High Current Yield Fund
Average. For comparison, 10 year U.S. Treasury bonds had a total return for 1996
of 0.04%. This low return was caused by increasing interest rates causing the
value of Treasury bonds to fall.
High yield bonds are somewhat insulated from interest rate movements due to
their characteristic of a large risk premium or spread that can offset general
interest rate movements for assets with less credit risk. In 1996, the risk
premium for high yield bonds declined enough to not only offset the risk free
interest rate increase, but also to allow price increases of many high yield
bonds. While the annual total return performance was similar to both Lipper and
Lehman, the Account underperformed both during the first two quarters and
outperformed during the third and fourth quarters of the year. Our Account has a
B+ average credit rating and has approximately the same amount of BB exposure as
B exposure. This more closely resembles the Lehman index while high yield mutual
funds, as reflected by the Lipper average, typically have a riskier credit
profile than our Account. This risk profile was an advantage to the Lipper
average over the first two quarters as risk premium tightening was more
pronounced in riskier bonds. Our Account significantly outperformed in the
fourth quarter due to excellent performance by individual securities that were
upgraded or for which tender offers had been received at attractive levels. Our
Account also benefited over the course of the year by not having any credit
defaults. The return performance of the Account during 1996 is a good indicator
of how high yield is a worthwhile asset class that can enhance diversification.
The decline of risk premiums will make outperformance of other types of income
oriented funds more difficult going forward, but also makes our conservative
risk position even more appropriate.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
13.13% 11.20% 9.89%
Comparison of Change in Value of $10,000 Investment in the High Yield Account,
Lehman Brothers High Yield Index and Lipper High Current Yield Fund Average
Fund Lehman Lipper
Year Ended Total High Yield Narrow
December 31, Return Index Index
10,000 10,000 10,000
1988 11,492 11,524 11,298
1989 11,735 11,620 11,239
1990 10,831 10,506 10,059
1991 13,788 15,346 13,876
1992 15,798 17,764 16,352
1993 17,743 20,803 19,500
1994 17,854 20,593 18,753
1995 20,725 24,549 21,844
1996 23,446 27,335 24,830
Note: Past performance is not predictive of future performance.
Important Notes of the Income-Oriented Accounts:
Lehman Brothers, BAA Corporate Index: an unmanaged index of all publicly issued
fixed rate nonconvertible, dollar-denominated, SEC-registered corporate debt
rated Baa or BBB by Moody's or S&P.
Lipper Corporate Debt BBB Rated Funds Average: this average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average on
December 31, 1996 contained 102 mutual funds.
Lehman Brothers High Yield Index: an unmanaged index of all publicly issued
fixed, dollar-denominated, SEC-registered corporate debt rated Ba1 or lower with
at least $100 million outstanding and one-year or more to maturity.
Lipper High Current Yield Fund Average: this average consists of mutual funds
investing in high (relative) current yield fixed income securities with no
quality or maturity restrictions. The mutual funds tend to invest in lower grade
debt issues. The one year average on December 31, 1996 contained 148 mutual
funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
DETERMINATION OF NET ASSET VALUE OF ACCOUNT SHARES
The net asset value of each Account's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange,
except on days on which changes in the value of the Account's portfolio
securities will not materially affect the current net asset value of the
Account's redeemable securities, on days during which an Account receives no
order for the purchase or sale of its redeemable securities and no tender of
such a security for redemption, and on customary national business holidays. The
net asset value per share of each Account is determined by dividing the value of
the Account's securities plus all other assets, less all liabilities, by the
number of Account shares outstanding.
Growth-Oriented and Income-Oriented Accounts
The following valuation information applies to the Growth-Oriented and
Income-Oriented Accounts. Securities for which market quotations are readily
available are valued using those quotations. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board that amortized cost reflects fair value. Other assets are valued at
fair value as determined in good faith by the Board of Directors of the Fund.
As previously described, some of the Accounts may purchase foreign
securities whose trading is substantially completed each day at various times
prior to the close of the New York Stock Exchange. The values of such securities
used in computing net asset value per share are usually determined as of such
times. Occasionally, events which affect the values of such securities and
foreign currency exchange rates may occur between the times at which they are
generally determined and the close of the New York Stock Exchange and would
therefore not be reflected in the computation of the Account's net asset value.
If events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by the Manager under procedures established and regularly reviewed
by the Board of Directors. To the extent the Account invests in foreign
securities listed on foreign exchanges which trade on days on which the Account
does not determine its net asset value, for example Saturdays and other
customary national U.S. Holidays, the Account's net asset value could be
significantly affected on days when shareholders have no access to the Account.
Money Market Account
The Money Market Account values its securities at amortized cost. For a
description of this calculation procedure see the Fund's Statement of Additional
Information.
PERFORMANCE CALCULATION
From time to time, the Accounts may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Accounts. The Accounts' yield and total return
figures described below will vary depending upon market conditions, the
composition of the Accounts' portfolios and operating expenses. These factors
and possible differences in the methods used in calculating yield and total
return should be considered when comparing the Accounts' performance figures to
performance figures published for other investment vehicles. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices. Any performance data quoted for the Accounts represents only
historical performance and is not intended to indicate future performance of the
Accounts. The calculation of average annual total return and yield for the
Accounts does not include fees and charges of the separate accounts that invest
in the Accounts and, therefore, does not reflect the investment performance of
those separate accounts. For further information on how the Accounts calculate
yield and total return figures, see the Statement of Additional Information.
Average Annual Total Return
Each Account may advertise its respective average annual total return.
Average annual total return for each Account is computed by calculating the
average annual compounded rate of return over the stated period that would
equate an initial $1,000 investment to the ending redeemable value assuming the
reinvestment of all dividends and capital gains distributions at net asset
value. The same assumptions are made when computing cumulative total return by
dividing the ending redeemable value by the initial investment. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices.
Yield and Effective Yield
From time to time the Money Market Account may advertise its respective
yield and effective yield. The yield of the Account refers to the income
generated by an investment in the Account over a seven-day period. This income
is then annualized. That is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the
Account is assumed to be reinvested. The effective yield will be slightly higher
than the yield because of the compounding effect of this assumed reinvestment.
The yield for the Money Market Account will fluctuate daily as the income
earned on the investments of the Account fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. There is no guarantee that the net asset value or any stated
rate of return will remain constant. A shareholder's investment in the Account
is not insured. Investors comparing results of the Account with investment
results and yields from other sources such as banks or savings and loan
associations should understand these distinctions. Historical and comparative
yield information may, from time to time, be presented by the Account.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
It is the policy of each Account to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which
the Fund so qualifies it will be exempt from federal income tax upon the amounts
so distributed to investors.
Any dividends from the net investment income of the Accounts (except the
Money Market Account) will normally be payable to the shareholders annually, and
any net realized gains will be distributed annually. All dividends and capital
gains distributions are applied to purchase additional Account shares at net
asset value as of the payment date without the imposition of any sales charge.
Each Account will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Accounts to consult with tax advisors on the federal
and state tax aspects of their investments and redemptions.
Money Market Account
The Money Market Account declares dividends of all its daily net investment
income on each day the Account's net asset value per share is determined.
Dividends are payable daily and are automatically reinvested in full and
fractional shares of the Account at the then current net asset value unless a
shareholder requests payment in cash.
Net investment income, for dividend purposes, consists of (1) accrued
interest income plus or minus accrued discount or amortized premium; plus or
minus (2) all net short-term realized gains and losses; minus (3) all accrued
expenses of the Account. Expenses of the Account are accrued each day. Net
income will be calculated immediately prior to the determination of net asset
value per share of the Account.
Since the Account's policy is, under normal circumstances, to hold
portfolio securities to maturity and to value portfolio securities at amortized
cost, it does not expect any capital gains or losses. If the Account does
experience gains, however, it could result in an increase in dividends. Capital
losses could result in a decrease in dividends. If for some extraordinary reason
the Account realizes net long-term capital gains, it will distribute them once
every 12 months.
Since the net income of the Account (including realized gains and losses on
the portfolio securities) is declared as a dividend each time the net income of
the Account is determined, the net asset value per share of the Account normally
remains at $1.00 immediately after each determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Account,
representing reinvestment of dividend income, is reflected by an increase in the
number of shares of the Account .
Normally the Account will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net income of the Account
determined at any time is a negative amount, the net asset value per share will
be reduced below $1.00. If this happens, the Account may endeavor to restore the
net asset value per share to $1.00 by reducing the number of outstanding shares
by redeeming proportionately from shareholders without the payment of any
monetary consideration, such number of full and fractional shares as is
necessary to maintain a net asset value per share of $1.00. Each shareholder
will be deemed to have agreed to such a redemption in these circumstances by
investing in the Account. The Account may seek to achieve the same objective of
restoring the net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share would increase to the extent of positive net income which
is not declared as a dividend, or any other method approved by the Board of
Directors.
The Board of Directors may revise the above dividend policy, or postpone
the payment of dividends, if the Account should have or anticipate any large
presently unexpected expense, loss or fluctuation in net assets which in the
opinion of the Board might have a significant adverse affect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Accounts. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Account shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of each
Account reserves the right to broaden or limit the designation of Eligible
Purchasers.
The Balanced, Bond, Capital Value, MidCap and Money Market Accounts each
serve as an underlying investment medium for variable annuity contracts and
variable life insurance policies that are funded in separate accounts
established by Principal Mutual Life Insurance Company. It is conceivable that
in the future it may be disadvantageous for variable life insurance separate
accounts and variable annuity separate accounts to invest in the Accounts
simultaneously. Although neither Principal Mutual Life Insurance Company nor the
Accounts currently foresee any such disadvantages either to variable life
insurance policy owners or to variable annuity contract owners, the Board of
Directors intends to monitor events in order to identify any material conflicts
between such policy owners and contract owners and to determine what action, if
any, should be taken in response thereto. Such action could include the sale of
Account shares by one or more of the separate accounts, which could have adverse
consequences. Material conflicts could result from, for example, (1) changes in
state insurance laws, (2) changes in Federal income tax law, (3) changes in the
investment management of the Account, or (4) differences in voting instructions
between those given by policy owners and those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Fund. There are no sales charges on the Accounts'
shares. There are no restrictions on amounts to be invested in the Accounts'
shares.
Shareholder accounts for each Account will be maintained under an open
account system. Under this system, an account is automatically opened and
maintained for each new investor. Each investment is confirmed by sending the
investor a statement of account showing the current purchase and the total
number of shares then owned. The statement of account is treated by each Account
as evidence of ownership of Account shares in lieu of stock certificates, and
unless written request is made to the Account, stock certificates will not be
issued or delivered to investors. Certificates, which can be stolen or lost, are
unnecessary except for special purposes such as collateral for a loan.
Fractional interests in the Account's shares are reflected to three decimal
places in the statement of account, but any stock certificates will be issued
only for full shares owned.
If an offer to purchase shares is received by any of the Accounts before
the close of trading on the New York Stock Exchange, the shares will be issued
at the offering price (net asset value of Account shares) computed on that day.
If an offer is received after the close of trading or on a day which is not a
trading day, the shares will be issued at the offering price computed on the
first succeeding day on which a price is determined. Dividends on the Money
Market Account shares will be paid on the next day following the effective date
of a purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each Account of the Principal
Variable Contracts Fund, Inc. Each Account share is entitled to one vote either
in person or by proxy at all shareholder meetings for that Account. This
includes the right to vote on the election of directors, selection of
independent accountants and other matters submitted to meetings of shareholders
of the Account. Each share has equal rights with every other share as to
dividends, earnings, voting, assets and redemption. Shares are fully paid and
non-assessable, and have no preemptive or conversion rights. Shares may be
issued as full or fractional shares, and each fractional share has
proportionately the same rights, including voting, as are provided for a full
share. Shareholders of each of these Accounts may remove any director with or
without cause by the vote of a majority of the votes entitled to be cast at a
meeting of all Account shareholders.
The bylaws of the Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of the Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. The Fund intends to hold shareholder meetings only when required by
law and at such other times as may be deemed appropriate by their respective
Boards of Directors.
Shareholder inquiries should be directed to the Principal Variable
Contracts Fund, Inc. at The Principal Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Fund's shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of the Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Account's shares
allocated to each of its separate accounts registered under the Investment
Company Act of 1940 and attributable to variable annuity contracts or variable
life insurance policies participating therein in accordance with instructions
received from contract or policy holders, participants and annuitants. Other
shares of each Account held by each registered separate account, including those
for which no timely instructions are received, are voted in proportion to the
instructions that are received with respect to contracts or policies
participating in that separate account. Shares of each of the Accounts held in
the general account of Principal Mutual Life Insurance Company or in its
unregistered separate accounts are voted in proportion to the instructions that
are received with respect to contracts and policies participating in its
registered and unregistered separate accounts. If Principal Mutual determines
pursuant to applicable law that an Account's shares held in one or more separate
accounts or in its general account need not be voted pursuant to instructions
received with respect to participating contracts or policies, it then may vote
those Account shares in its own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Account will redeem its shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Account requesting redemption of any part or all of
the shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, the Account will not require a signature guarantee as a part of a
proper endorsement; otherwise the shareholder's signature must be guaranteed by
either a commercial bank, trust company, credit union, savings and loan
association, national securities exchange member, or by a brokerage firm. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Account in proper and complete form. The amount received for
shares upon redemption may be more or less than the cost of such shares
depending upon the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Account may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Account of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Account
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Account. An Account
will redeem only those shares for which it has good payment. To avoid the
inconvenience of such a delay, shares may be purchased with a certified check,
bank cashier's check or money order. During the period prior to the time a
redemption from the Money Market Account is effective, dividends on such shares
will accrue and be payable and the shareholder will be entitled to exercise all
other rights of beneficial ownership.
Restricted Transfer: Shares of each of the Accounts may be transferred to
an Eligible Purchaser. However, whenever any of the Accounts is requested to
transfer shares to other than an Eligible Purchaser, the Account has the right
at its election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Account must notify the transferee or transferees of such
shares in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Accounts.
The custodian performs no managerial or policymaking functions for the Accounts.
Organization and Share Ownership: Effective January 1, 1998, an Agreement
and Plan of Reorganization and Liquidation was implemented under which a Series
of the Principal Variable Contracts Fund, Inc. adopted the assets and
liabilities of a corresponding Fund. The Funds were incorporated in the state of
Maryland on the following dates: Balanced Fund - November 26, 1986; Bond Fund -
November 26, 1986; Capital Accumulation Fund - May 26, 1989 (effective November
1, 1989 succeeded to the business of a predecessor Fund that had been
incorporated in Delaware on February 6, 1969); Emerging Growth Fund - February
20, 1987; High Yield Fund - December 2, 1986; and Money Market Fund - June 10,
1982. Principal Mutual Life Insurance Company owns 100% of each Fund's
outstanding shares.
Capitalization: The authorized capital stock of each Account consists of
100,000,000 shares of common stock (500,000,000 for Money Market Account), $.01
par value.
Financial Statements: Copies of the financial statements of each Account
will be mailed to each shareholder of that Account semi-annually. At the close
of each fiscal year, each Account's financial statements will be audited by a
firm of independent auditors. The firm of Ernst & Young LLP has been appointed
to audit the financial statements of each Account for their respective present
fiscal years.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the Fund
has filed with the Securities and Exchange Commission. The Fund's Statement of
Additional Information is hereby incorporated by reference into this Prospectus.
A copy of the Statement of Additional Information can be obtained upon request,
free of charge, by writing or telephoning the Fund. You may obtain a copy of
Part C of the Registration Statements filed with the Securities and Exchange
Commission, Washington, D.C., from the Commission upon payment of the prescribed
fees.
Principal Underwriter: Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for the Fund.
PART B
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
Statement of Additional Information
dated _______________
This Statement of Additional Information provides information about the
Fund in addition to the information that is contained in the Fund's Prospectus,
dated _______________.
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Fund's Prospectus, a copy of which can be
obtained free of charge by writing or telephoning:
Principal Variable Contracts Fund, Inc.
The Principal Financial Group
Des Moines, Iowa 50392-0200
Telephone: 1-800-247-4123
TABLE OF CONTENTS
Investment Policies and Restrictions of the Fund............................ 3
Growth-Oriented Accounts............................................. 3
Income-Oriented Accounts............................................. 8
Money Market Account................................................. 11
Account Investments......................................................... 13
Directors and Officers of the Fund.......................................... 24
Manager and Sub-Advisors ................................................... 26
Cost of Manager's Services ................................................. 27
Brokerage on Purchases and Sales of Securities.............................. 29
Determination of Net Asset Value of Account Shares.......................... 31
Performance Calculation..................................................... 33
Tax Status.................................................................. 35
General Information and History............................................. 35
Financial Statements........................................................ 36
Appendix A.................................................................. 37
INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND
The following information about the Principal Variable Contracts Fund,
Inc. an incorporated, diversified, open-end management investment company,
commonly called a mutual fund, supplements the information provided in the
Prospectus under the caption "Investment Objectives, Policies and Restrictions."
The Fund offers multiple Accounts.
There are three categories of Accounts: Growth-Oriented Accounts, which
include five Accounts which seek primarily capital appreciation through
investments in equity securities (Aggressive Growth, Capital Value, Growth,
International and MidCap) and two Accounts which seek a total investment return
including both capital appreciation and income through investments in equity and
debt securities (Asset Allocation and Balanced); Income-Oriented Accounts, which
include three Accounts which seek primarily a high level of income through
investments in debt securities (Bond, Government Securities and High Yield) and
a Money Market Account, which seeks primarily a high level of income through
investments in short-term debt securities.
In seeking to achieve its investment objective, each Account has adopted
as matters of fundamental policy certain investment restrictions which cannot be
changed without approval by the holders of the lesser of: (i) 67% of the
Account's shares present or represented at a shareholders' meeting at which the
holders of more than 50% of such shares are present or represented by proxy; or
(ii) more than 50% of the outstanding shares of the Account. Similar shareholder
approval is required to change the investment objective of each of the Accounts.
The following discussion provides for each Account a statement of its investment
objective, a description of its investment restrictions that are matters of
fundamental policy and a description of any investment restrictions it may have
adopted that are not matters of fundamental policy and may be changed without
shareholder approval. For purposes of the investment restrictions, all
percentage and rating limitations apply at the time of acquisition of a
security, and any subsequent change in any applicable percentage resulting from
market fluctuations or in a rating by a rating service will not require
elimination of any security from the portfolio. Unless specifically identified
as a matter of fundamental policy, each investment policy discussed in the
Prospectus or the Statement of Additional Information is not fundamental and may
be changed by the Fund's Board of Directors.
GROWTH-ORIENTED ACCOUNTS
Investment Objectives
Aggressive Growth Account (formerly known as Principal Aggressive
Growth Fund, Inc.) seeks to provide long-term capital appreciation
by investing primarily in growth-oriented common stocks of medium
and large capitalization U.S. corporations and, to a limited
extent, foreign corporations.
Asset Allocation Account (formerly known as Principal Asset
Allocation Fund, Inc.) seeks to generate a total investment return
consistent with the preservation of capital.
Balanced Account (formerly known as Principal Balanced Fund, Inc.)
seeks to generate a total investment return consisting of current
income and capital appreciation while assuming reasonable risks in
furtherance of the investment objective.
Capital Value Account (formerly known as Principal Capital
Accumulation Fund, Inc.) seeks to achieve primarily long-term
capital appreciation and secondarily growth of investment income
through the purchase primarily of common stocks, but the Account
may invest in other securities.
Growth Account (formerly known as Principal Growth Fund, Inc.)
seeks growth of capital through the purchase primarily of common
stocks, but the Account may invest in other securities.
International Account (formerly known as Principal World Fund,
Inc.) seeks long- term growth of capital by investing in a
portfolio of equity securities of companies domiciled in any of the
nations of the world.
MidCap Account (formerly known as Principal Emerging Growth Fund,
Inc.) seeks to achieve capital appreciation by investing primarily
in securities of emerging and other growth-oriented companies.
Investment Restrictions
Aggressive Growth Account, Asset Allocation Account, Balanced Account,
Growth Account, International Account and MidCap Account
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Aggressive
Growth Account, Asset Allocation Account, Balanced Account, Growth Account,
International Account and MidCap Account each may not:
(1) Issue any senior securities as defined in the Investment Company
Act of 1940. Purchasing and selling securities and futures
contracts and options thereon and borrowing money in accordance
with restrictions described below do not involve the issuance of a
senior security.
(2) Purchase or retain in its portfolio securities of any issuer if
those officers or directors of the Account or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(3) Invest in commodities or commodity contracts, but it may purchase
and sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which
are secured by real estate and securities of issuers which invest
or deal in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Account's total assets
at the time of the borrowing. The Balanced Account may borrow only
from banks.
(6) Make loans, except that the Account may (I) purchase and hold debt
obligations in accordance with its investment objective and
policies, (ii) enter into repurchase agreements, and (iii) lend its
portfolio securities without limitation against collateral
(consisting of cash or securities issued or guaranteed by the
United States Government or its agencies or instrumentalities)
equal at all times to not less than 100% of the value of the
securities loaned.
(7) Invest more than 5% of its total assets in the securities of any
one issuer (other than obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities)
except that this limitation shall apply only with respect to 75% of
the total assets of the Aggressive Growth Account, Asset Allocation
Account, Growth Account and International Account; or purchase more
than 10% of the outstanding voting securities of any one issuer.
(8) Act as an underwriter of securities, except to the extent the
Account may be deemed to be an underwriter in connection with the
sale of securities held in its portfolio.
(9) Concentrate its investments in any particular industry or
industries, except that the Account may invest not more than 25% of
the value of its total assets in a single industry.
(10) Sell securities short (except where the Account holds or has the
right to obtain at no added cost a long position in the securities
sold that equals or exceeds the securities sold short) or purchase
any securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
deposit or payment of margin in connection with transactions in
options and financial futures contracts is not considered the
purchase of securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Account may invest in securities
of issuers which invest in or sponsor such programs.
Each of these Accounts has also adopted the following restrictions which
are not fundamental policies and may be changed without shareholder approval. It
is contrary to each Account's present policy to:
(1) Invest more than 10% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market, including all covered spread options and the assets used as
cover for any options written in the Over-the-Counter market are
included as part of this 10% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2%
may be invested in warrants that are not listed on the New York or
American Stock Exchange. The 2% limitation for the International
Account does not apply to warrants listed on the Toronto Stock
Exchange or the Chicago Board Options Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Account's investments in
all such issuers to exceed 5% of the value of its total assets.
(4) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on futures contracts are not deemed to be
pledges or other encumbrances.
(5) Invest in companies for the purpose of exercising control or
management.
(6) Invest more than 10% (25% for the Aggressive Growth Account) of its
total assets in securities of foreign issuers. This restriction
does not pertain to the International Account or the Asset
Allocation Account.
(7) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on
securities, securities indices and financial futures contracts.
Options on financial futures contracts and options on securities
indices will be used solely for hedging purposes; not for
speculation.
(8) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(9) Invest in arbitrage transactions.
(10) Invest in real estate limited partnership interests.
The Balanced Account and MidCap Account have also adopted the following
restrictions which are not fundamental policies and may be changed without
shareholder approval. It is contrary to each such Account's present policy to:
(1) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization
or by purchase in the open market of securities of closed-end
companies where no underwriter or dealer's commission or profit,
other than a customary broker's commission, is involved, and if
immediately thereafter not more than 10% of the value of the
Account's total assets would be invested in such securities.
The Aggressive Growth, Asset Allocation, Growth and International
Accounts have also adopted the following restriction which is not a fundamental
policy and may be changed without shareholder approval. It is contrary to each
such Account's present policy to:
(1) Invest its assets in the securities of any investment company
except that the Account may invest not more than 10% of its assets
in securities of other investment companies, invest not more than
5% of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting
securities of any one investment company except in connection with
a merger, consolidation or plan of reorganization, and the Account
may purchase securities of closed-end companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
Capital Value Account
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Capital Value
Account may not:
(1) Concentrate its investments in any one industry. No more than 25%
of the value of its total assets will be invested in any one
industry.
(2) Purchase the securities of any issuer if the purchase will cause
more than 5% of the value of its total assets to be invested in the
securities of any one issuer (except U. S. Government securities).
(3) Purchase the securities of any issuer if the purchase will cause
more than 10% of the voting securities, or any other class of
securities of the issuer, to be held by the Account.
(4) Underwrite securities of other issuers, except that the Account may
acquire portfolio securities under circumstances where if sold the
Account might be deemed an underwriter for purposes of the
Securities Act of 1933.
(5) Purchase securities of any company with a record of less than three
years' continuous operation (including that of predecessors) if the
purchase would cause the value of the Account's aggregate
investments in all such companies to exceed 5% of the Account's
total assets.
(6) Engage in the purchase and sale of illiquid interests in real
estate. For this purpose, readily marketable interests in real
estate investment trusts are not interests in real estate.
(7) Engage in the purchase and sale of commodities or commodity
contracts.
(8) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or the Manager owning
beneficially more than one-half of one percent (0.5%) of the
securities of the issuer together own beneficially more than 5% of
such securities.
(9) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
Account will not issue or acquire put and call options.
(10) Invest in companies for the purpose of exercising control or
management.
(11) Invest more than 5% of its assets at the time of purchase in rights
and warrants (other than those that have been acquired in units or
attached to other securities).
(12) Invest more than 20% of its total assets in securities of foreign
issuers.
In addition:
(13) The Account may make loans through the purchase in private
offerings of debentures or other evidences of indebtedness of types
customarily purchased by institutional investors.
(14) The Account does not propose to borrow money except for temporary
or emergency purposes from banks in an amount not to exceed the
lesser of (I) 5% of the value of the Account's assets, less
liabilities other than such borrowings, or (ii) 10% of the
Account's assets taken at cost at the time such borrowing is made.
The Account may not pledge, mortgage, or hypothecate its assets (at
value) to an extent greater than 15% of the gross assets taken at
cost.
(15) It is contrary to the Account's present policy to purchase warrants
in excess of 5% of its total assets of which 2% may be invested in
warrants that are not listed on the New York or American Stock
Exchange.
The Account has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval. It is
contrary to the Account's present policy to:
(1) Invest its assets in the securities of any investment company
except that the Account may invest not more than 10% of its assets
in securities of other investment companies, invest not more than
5% of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting
securities of any one investment company except in connection with
a merger, consolidation, or plan of reorganization, and the Account
may purchase securities of closed-end companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
(2) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreement maturing in more than seven
days.
INCOME-ORIENTED ACCOUNTS
Investment Objectives
Bond Account seeks to provide as high a level of income as is
consistent with preservation of capital and prudent investment
risk.
Government Securities Account seeks a high level of current income,
liquidity and safety of principal by purchasing obligations issued
or guaranteed by the United States Government or its agencies, with
emphasis on Government National Mortgage Association Certificates
("GNMA Certificates"). The guarantee by the United States
Government extends only to principal and interest; Account shares
are not guaranteed by the United States Government. There are
certain risks unique to GNMA Certificates.
High Yield Account seeks high current income primarily by
purchasing high yielding, lower or non-rated fixed income
securities which are believed to not involve undue risk to income
or principal. Capital growth is a secondary objective when
consistent with the objective of high current income.
Investment Restrictions
Bond Account and High Yield Account
Each of the following numbered restrictions is a matter of
fundamental policy and may not be changed without shareholder approval.
The Bond Account and High Yield Account each may not:
(1) Issue any senior securities as defined in the Investment Company
Act of 1940. Purchasing and selling securities and futures
contracts and options thereon and borrowing money in accordance
with restrictions described below do not involve the issuance of a
senior security.
(2) Purchase or retain in its portfolio securities of any issuer if
those officers or directors of the Account or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(3) Invest in commodities or commodity contracts, but it may purchase
and sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which
are secured by real estate and securities of issuers which invest
or deal in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Account's total assets
at the time of the borrowing. The Bond Account and High Yield
Account may borrow only from banks.
(6) Make loans, except that the Account may (I) purchase and hold debt
obligations in accordance with its investment objective and
policies, (ii) enter into repurchase agreements, and (iii) lend its
portfolio securities without limitation against collateral
(consisting of cash or securities issued or guaranteed by the
United States Government or its agencies or instrumentalities)
equal at all times to not less than 100% of the value of the
securities loaned.
(7) Invest more than 5% of its total assets in the securities of any
one issuer (other than obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities); or
purchase more than 10% of the outstanding voting securities of any
one issuer.
(8) Act as an underwriter of securities, except to the extent the
Account may be deemed to be an underwriter in connection with the
sale of securities held in its portfolio.
(9) Concentrate its investments in any particular industry or
industries, except that the Bond Account and High Yield Account
each may invest not more than 25% of the value of its total assets
in a single industry.
(10) Sell securities short (except where the Account holds or has the
right to obtain at no added cost a long position in the securities
sold that equals or exceeds the securities sold short) or purchase
any securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
deposit or payment of margin in connection with transactions in
options and financial futures contracts is not considered the
purchase of securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Account may invest in securities
of issuers which invest in or sponsor such programs.
Each of these Accounts has also adopted the following restrictions which
are not fundamental policies and may be changed without shareholder approval. It
is contrary to each Account's present policy to:
(1) Invest more than 10% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market, including all covered spread options and the assets used as
cover for any options written in the Over-the-Counter market are
included as part of this 10% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2%
may be invested in warrants that are not listed on the New York or
American Stock Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Account's investments in
all such issuers to exceed 5% of the value of its total assets.
(4) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization
or by purchase in the open market of securities of closed-end
companies where no underwriter or dealer's commission or profit,
other than a customary broker's commission, is involved, and if
immediately thereafter not more than 10% of the value of the
Account's total assets would be invested in such securities.
(5) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on futures contracts are not deemed to be
pledges or other encumbrances.
(6) Invest in companies for the purpose of exercising control or
management.
(7) Invest more than 20% of its total assets in securities of foreign
issuers.
(8) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on
securities, securities indices and financial futures contracts.
Options on financial futures contracts and options on securities
indices will be used solely for hedging purposes; not for
speculation.
(9) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(10) Invest in arbitrage transactions.
(11) Invest in real estate limited partnership interests.
Government Securities Account
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Government
Securities Account may not:
(1) Issue any senior securities as defined in the Act except insofar as
the Account may be deemed to have issued a senior security by
reason of (a) purchasing any securities on a standby, when-issued
or delayed delivery basis; or (b) borrowing money in accordance
with restrictions described below.
(2) Purchase any securities other than obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities, except
that the Account may maintain reasonable amounts in cash or
commercial paper or purchase short-term debt securities not issued
or guaranteed by the U.S. Government or its agencies or
instrumentalities for daily cash management purposes or pending
selection of particular long-term investments.
(3) Act as an underwriter of securities, except to the extent the
Account may be deemed to be an underwriter in connection with the
sale of GNMA certificates held in its portfolio.
(4) Engage in the purchase and sale of interests in real estate,
including interests in real estate investment trusts (although it
will invest in securities secured by real estate or interests
therein, such as mortgage-backed securities) or invest in
commodities or commodity contracts, oil and gas interests, or
mineral exploration or development programs.
(5) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(6) Sell securities short or purchase any securities on margin, except
it may obtain such short-term credits as are necessary for the
clearance of transactions. The deposit or payment of margin in
connection with transactions in options and financial futures
contracts is not considered the purchase of securities on margin.
(7) Invest in companies for the purpose of exercising control or
management.
(8) Make loans, except that the Account may purchase or hold debt
obligations in accordance with the investment restrictions set
forth in paragraph (2) and may enter into repurchase agreements for
such securities, and may lend its portfolio securities without
limitation against collateral consisting of cash, or securities
issued or guaranteed by the United States Government or its
agencies or instrumentalities, which is equal at all times to 100%
of the value of the securities loaned.
(9) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Account's total assets
at the time of the borrowing.
(10) Enter into repurchase agreements maturing in more than seven days
if, as a result thereof, more than 10% of the value of the
Account's total assets would be invested in such repurchase
agreements and other assets without readily available market
quotations.
(11) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on
securities, securities indices and financial futures contracts.
(12) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
The Government Securities Account has also adopted the following
restrictions which are not a fundamental policy and may be changed without
shareholder approval. It is contrary to the Government Securities Account's
present policy to:
(1) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on future contracts are not deemed to be
pledges or other encumbrances.
(2) Invest its assets in the securities of any investment company
except that the Account may invest not more than 10% of its assets
in securities of other investment companies, invest not more than
5% of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting
securities of any one investment company except in connection with
a merger, consolidation, or plan of reorganization, and the Account
may purchase securities of closed-end companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
MONEY MARKET ACCOUNT
Investment Objective
Money Market Account seeks as high a level of income available from
short-term securities as is considered consistent with preservation
of principal and maintenance of liquidity by investing in a
portfolio of money market instruments.
Investment Restrictions
Money Market Account
Each of the following numbered restrictions is a matter of
fundamental policy and may not be changed without shareholder approval.
The Money Market Account may not:
(1) Concentrate its investments in any one industry. No more than 25%
of the value of its total assets will be invested in securities of
issuers having their principal activities in any one industry,
other than securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities, or obligations of domestic
branches of U.S. banks and savings institutions. (See "Bank
Obligations").
(2) Purchase the securities of any issuer if the purchase will cause
more than 25% of the value of its total assets to be invested in
the securities of any one issuer (except securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities).
(3) Purchase the securities of any issuer if the purchase will cause
more than 10% of the outstanding voting securities of the issuer to
be held by the Account (other than securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities).
(4) Invest a greater percentage of its total assets in securities not
readily marketable than is allowed by federal securities rules or
interpretations.
(5) Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an
underwriter under the federal securities laws.
(6) Purchase securities of any company with a record of less than 3
years continuous operation (including that of predecessors) if the
purchase would cause the value of the Account's aggregate
investments in all such companies to exceed 5% of the value of the
Account's total assets.
(7) Engage in the purchase and sale of illiquid interests in real
estate, including interests in real estate investment trusts
(although it may invest in securities secured by real estate or
interests therein) or invest in commodities or commodity contracts,
oil and gas interests, or mineral exploration or development
programs.
(8) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Account or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(9) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
Account will not issue or acquire put and call options, straddles
or spreads or any combination thereof.
(10) Invest in companies for the purpose of exercising control or
management.
(11) Make loans to others except through the purchase of debt
obligations in which the Account is authorized to invest and by
entering into repurchase agreements (see "Account Investments").
(12) Borrow money, except from banks for temporary or emergency
purposes, including the meeting of redemption requests which might
otherwise require the untimely disposition of securities, in an
amount not to exceed the lesser of (1) 5% of the value of the
Account's assets, or (ii) 10% of the value of the Account's net
assets taken at cost at the time such borrowing is made. The
Account will not issue senior securities except in connection with
such borrowings. The Account may not pledge, mortgage, or
hypothecate its assets (at value) to an extent greater than 10% of
the net assets.
(13) Invest in uncertificated time deposits maturing in more than seven
days; uncertificated time deposits maturing from two business days
through seven calendar days may not exceed 10% of the value of the
Account's total assets.
(14) Enter into repurchase agreements maturing in more than seven days
if, as a result thereof, more than 10% of the value of the
Account's total assets would be invested in such repurchase
agreements and other assets (excluding time deposits) without
readily available market quotations.
The Money Market Account has also adopted the following restriction which
is not a fundamental policy and maybe changed without shareholder approval. It
is contrary to the Money Market Account's present policy to:
(1) Invest its assets in the securities of any investment company
except that the Account may invest not more than 10% of its assets
in securities of other investment companies, invest not more than
5% of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting
securities of any one investment company except in connection with
a merger, consolidation, or plan of reorganization, and the Account
may purchase securities of closed-end companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
ACCOUNT INVESTMENTS
The following information further supplements the discussion of the
Account's investment objectives and policies in the Prospectus under the caption
"INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS."
Selections of equity securities for the Accounts, except the Aggressive
Growth and Asset Allocation Accounts, are made based upon an approach described
broadly as that of fundamental analysis. Three basic steps are involved in this
analysis. First is the continuing study of basic economic factors in an effort
to conclude what the future general economic climate is likely to be over the
next one to two years. Second, given some conviction as to the likely economic
climate, the Account attempts to identify the prospects for the major
industrial, commercial and financial segments of the economy, by looking at such
factors as demand for products, capacity to produce, operating costs, pricing
structure, marketing techniques, adequacy of raw materials and components,
domestic and foreign competition, and research productivity, to ascertain
prospects for each industry for the near and intermediate term. Finally,
determinations are made regarding earnings prospects for individual companies
within each industry by considering the same types of factors described above.
These earnings prospects are then evaluated in relation to the current price of
the securities of each company.
Although the Accounts may pursue the investment practices described under
the captions Restricted Securities, Foreign Securities, Spread Transactions,
Options on Securities and Securities Indices, and Futures Contracts and Options
on Futures Contracts, Currency Contracts, Repurchase Agreements, Lending of
Portfolio Securities and When Issued and Delay of Delivery Securities, none of
the Accounts either committed during the last fiscal year or currently intends
to commit during the present fiscal year more than 5% of its net assets to any
of the practices, with the following exceptions. Investments in foreign
securities by the Aggressive Growth, Asset Allocation and International Accounts
are expected to exceed 5% of each Account's net assets.
Restricted Securities
Each of the following Accounts has adopted investment restrictions as
non-fundamental policies that limit its investments in restricted securities and
other illiquid securities to 10% of its assets: Aggressive Growth, Asset
Allocation, Balanced, Bond, Capital Value, Growth, High Yield, International and
MidCap Accounts.
Generally, restricted securities are not readily marketable because they
are subject to legal or contractual restrictions upon resale. They may be sold
only in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 or in a transaction which is exempt from
the registration requirements of that act. When registration is required, an
Account may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Account may by permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Account might obtain a less favorable price than prevailed when
it decided to sell. Restricted securities and other securities not readily
marketable will be priced at fair value as determined in good faith by or under
the direction of the Board of Directors.
Foreign Securities
Each of the following Accounts has adopted investment restrictions as
non-fundamental policies that limit its investments in foreign securities to the
indicated percentage of its assets: Asset Allocation and International Accounts
- - 100% ; Aggressive Growth - 25%; Bond, Capital Value, High Yield 20%; Balanced,
Growth and MidCap - 10%. Debt securities issued in the United States pursuant to
a registration statement filed with the Securities and Exchange Commission are
not considered "foreign securities" for purposes of this investment limitation.
Investment in foreign securities presents certain risks, including those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. Each Account's investment in foreign securities may also
result in higher custodial costs and the costs associated with currency
conversions.
Spread Transactions, Options on Securities and Securities Indices, and Futures
Contracts and Options on Futures Contracts
The Aggressive Growth, Asset Allocation, Balanced, Bond, Government
Securities, Growth, High Yield, International and MidCap Accounts may each
engage in the practices described under this heading. None of the Accounts will
invest more than 5% of its assets in the purchase of call and put options on
individual securities, securities indices and futures contracts. In the
following discussion, the terms "the Account," "each Account" or "the Accounts"
refer to each of these Accounts.
Spread Transactions
Each Account may purchase from securities dealers covered spread options.
Such covered spread options are not presently exchange listed or traded. The
purchase of a spread option gives the Account the right to put, or sell, a
security that it owns at a fixed dollar spread or fixed yield spread in
relationship to another security that the Account does not own, but which is
used as a benchmark. The risk to the Account in purchasing covered spread
options is the cost of the premium paid for the spread option and any
transaction costs. In addition, there is no assurance that closing transactions
will be available. The purchase of spread options can be used to protect each
Account against adverse changes in prevailing credit quality spreads, i.e., the
yield spread between high quality and lower quality securities. The security
covering the spread option will be maintained in a segregated account by each
Account's custodian. The Accounts do not consider a security covered by a spread
option to be "pledged" as that term is used in the Accounts' policy limiting the
pledging or mortgaging of assets.
Options on Securities and Securities Indices
Each Account may write (sell) and purchase call and put options on
securities in which it may invest and on securities indices based on securities
in which the Account may invest. The Accounts may write call and put options to
generate additional revenue, and may write and purchase call and put options in
seeking to hedge against a decline in the value of securities owned or an
increase in the price of securities which the Account plans to purchase.
Writing Covered Call and Put Options. When an Account writes a call
option, it gives the purchaser of the option, in return for the premium it
receives, the right to buy from the Account the underlying security at a
specified price at any time before the option expires. When an Account writes a
put option, it gives the purchaser of the option, in return for the premium it
receives, the right to sell to the Account the underlying security at a
specified price at any time before the option expires.
The premium received by an Account, when it writes a put or call option,
reflects, among other factors, the current market price of the underlying
security, the relationship of the exercise price to the market price, the time
period until the expiration of the option and interest rates. The premium will
generate additional income for the Account if the option expires unexercised or
is closed out at a profit. By writing a call, an Account limits its opportunity
to profit from any increase in the market value of the underlying security above
the exercise price of the option, but it retains the risk of loss if the price
of the security should decline. By writing a put, an Account assumes the risk
that it may have to purchase the underlying security at a price that may be
higher than its market value at time of exercise.
The Accounts write only covered options and will comply with applicable
regulatory and exchange cover requirements. The Accounts usually will own the
underlying security covered by any outstanding call option that it has written.
With respect to an outstanding put option that it has written, each Account will
deposit and maintain with its custodian cash, U.S. Government securities or
other liquid securities with a value at least equal to the exercise price of the
option.
Once an Account has written an option, it may terminate its obligation,
before the option is exercised, by effecting a closing transaction, which is
accomplished by the Account's purchasing an option of the same series as the
option previously written. The Accounts will have a gain or loss depending on
whether the premium received when the option was written exceeds the closing
purchase price plus related transaction costs.
Purchasing Call and Put Options. When an Account purchases a call
option, it receives, in return for the premium it pays, the right to buy from
the writer of the option the underlying security at a specified price at any
time before the option expires. The Account may purchase call options in
anticipation of an increase in the market value of securities that it intends
ultimately to buy. During the life of the call option, the Account would be able
to buy the underlying security at the exercise price regardless of any increase
in the market price of the underlying security. In order for a call option to
result in a gain, the market price of the underlying security must rise to a
level that exceeds the sum of the exercise price, the premium paid and
transaction costs.
When an Account purchases a put option, it receives, in return for the
premium it pays, the right to sell to the writer of the option the underlying
security at a specified price at any time before the option expires. The Account
may purchase put options in anticipation of a decline in the market value of the
underlying security. During the life of the put option, the Account would be
able to sell the underlying security at the exercise price regardless of any
decline in the market price of the underlying security. In order for a put
option to result in a gain, the market price of the underlying security must
decline, during the option period, below the exercise price sufficiently to
cover the premium and transaction costs.
Once an Account has purchased an option, it may close out its position by
selling an option of the same series as the option previously purchased. The
Account will have a gain or loss depending on whether the closing sale price
exceeds the initial purchase price plus related transaction costs.
Options on Securities Indices. Each Account may purchase and sell
put and call options on any securities index based on securities in which the
Account may invest. Securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Options on securities indices are
similar to options on securities, except that the exercise of securities index
options requires cash payments and does not involve the actual purchase or sale
of securities. The Accounts would engage in transactions in put and call options
on securities indices for the same purposes as they would engage in transactions
in options on securities. When an Account writes call options on securities
indices, it will hold in its portfolio underlying securities which, in the
judgment of the Manager or the Sub-Advisor, correlate closely with the
securities index and which have a value at least equal to the aggregate amount
of the securities index options.
Risks Associated with Options Transactions. An options position may
be closed out only on an exchange which provides a secondary market for an
option of the same series. Although the Accounts will generally purchase or
write only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange will
exist for any particular option, or at any particular time. For some options, no
secondary market on an exchange or elsewhere may exist. If an Account is unable
to effect closing sale transactions in options it has purchased, the Account
would have to exercise its options in order to realize any profit and may incur
transaction costs upon the purchase or sale of underlying securities pursuant
thereto. If an Account is unable to effect a closing purchase transaction for a
covered option that it has written, it will not be able to sell the underlying
securities, or dispose of the assets held in a segregated account, until the
option expires or is exercised. An Account's ability to terminate option
positions established in the over-the-counter market may be more limited than
for exchange-traded options and may also involve the risk 35 that broker-dealers
participating in such transactions might fail to meet their obligations.
Futures Contracts and Options on Futures
Each Account may purchase and sell financial futures contracts and
options on those contracts. Financial futures contracts are commodities
contracts based on financial instruments such as U.S. Treasury bonds or bills or
on securities indices such as the S&P 500 Index. Futures contracts, options on
futures contracts and the commodity exchanges on which they are traded are
regulated by the Commodity Futures Trading Commission ("CFTC"). Through the
purchase and sale of futures contracts and related options, an Account may seek
to hedge against a decline in securities owned by the Account or an increase in
the price of securities which the Account plans to purchase.
Futures Contracts. When an Account sells a futures contract based
on a financial instrument, the Account becomes obligated to deliver that kind of
instrument at a specified future time for a specified price. When an Account
purchases that kind of contract, it becomes obligated to take delivery of the
instrument at a specified time and to pay the specified price. In most
instances, these contracts are closed out by entering into an offsetting
transaction before the settlement date, thereby canceling the obligation to make
or take delivery of specific securities. The Account realizes a gain or loss
depending on whether the price of an offsetting purchase plus transaction costs
are less or more than the price of the initial sale or on whether the price of
an offsetting sale is more or less than the price of the initial purchase plus
transaction costs. Although the Account will usually liquidate futures contracts
on financial instruments in this manner, they may instead make or take delivery
of the underlying securities whenever it appears economically advantageous to do
so.
A futures contract based on a securities index provides for the purchase
or sale of a group of securities at a specified future time for a specified
price. These contracts do not require actual delivery of securities, but result
in a cash settlement based upon the difference in value of the index between the
time the contract was entered into and the time it is liquidated, which may be
at its expiration or earlier if it is closed out by entering into an offsetting
transaction.
When a futures contract is purchased or sold a brokerage commission is
paid, but unlike the purchase or sale of a security or option, no price or
premium is paid or received. Instead, an amount of cash or U.S. Government
securities, which varies, but is generally about 5% of the contract amount, is
deposited by the Account with its custodian for the benefit of the futures
commission merchant through which the Account engages in the transaction. This
amount is known as "initial margin." It does not involve the borrowing of funds
by the Account to finance the transaction, but instead represents a "good faith"
deposit assuring the performance of both the purchaser and the seller under the
futures contract. It is returned to the Account upon termination of the futures
contract, if all the Account's contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin,"
are required to be made on a daily basis as the price of the futures contract
fluctuates, making the long or short positions in the futures contract more or
less valuable, a process known as "marking to market." If the position is closed
out by taking an opposite position prior to the settlement date of the futures
contract, a final determination of variation margin is made, additional cash is
required to be paid to or released by the broker, and the Account realizes a
loss or gain.
In using futures contracts, the Accounts will seek to establish more
certainly than would otherwise be possible the effective price of or rate of
return on portfolio securities or securities that the Account proposes to
acquire. An Account, for example, may sell futures contracts in anticipation of
a rise in interest rates which would cause a decline in the value of its debt
investments. When this kind of hedging is successful, the futures contracts
should increase in value when the Account's debt securities decline in value and
thereby keep the Account's net asset value from declining as much as it
otherwise would. An Account may also sell futures contracts on securities
indices in anticipation of or during a stock market decline in an endeavor to
offset a decrease in the market value of its equity investments. When an Account
is not fully invested and anticipates an increase in the cost of securities it
intends to purchase, it may purchase financial futures contracts. When increases
in the prices of equities are expected, an Account may purchase futures
contracts on securities indices in order to gain rapid market exposure that may
partially or entirely offset increases in the cost of the equity securities it
intends to purchase.
Options on Futures. The Accounts may also purchase and write call
and put options on futures contracts. A call option on a futures contract gives
the purchaser the right, in return for the premium paid, to purchase a futures
contract (assume a long position) at a specified exercise price at any time
before the option expires. A put option gives the purchaser the right, in return
for the premium paid, to sell a futures contract (assume a short position), for
a specified exercise price, at any time before the option expires.
Upon the exercise of a call, the writer of the option is obligated to
sell the futures contract (to deliver a long position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a put, the
writer of the option is obligated to purchase the futures contract (deliver a
short position to the option holder) at the option exercise price, which will
presumably be higher than the current market price of the contract in the
futures market. However, as with the trading of futures, most options are closed
out prior to their expiration by the purchase or sale of an offsetting option at
a market price that will reflect an increase or a decrease from the premium
originally paid.
Options on futures can be used to hedge substantially the same risks as
might be addressed by the direct purchase or sale of the underlying futures
contracts. For example, if an Account anticipated a rise in interest rates and a
decline in the market value of the debt securities in its portfolio, it might
purchase put options or write call options on futures contracts instead of
selling futures contracts.
If an Account purchases an option on a futures contract, it may obtain
benefits similar to those that would result if it held the futures position
itself. But in contrast to a futures transaction, the purchase of an option
involves the payment of a premium in addition to transaction costs. In the event
of an adverse market movement, however, the Account will not be subject to a
risk of loss on the option transaction beyond the price of the premium it paid
plus its transaction costs.
When an Account writes an option on a futures contract, the premium paid
by the purchaser is deposited with the Account's custodian, and the Account must
maintain with its custodian all or a portion of the initial margin requirement
on the underlying futures contract. The Account assumes a risk of adverse
movement in the price of the underlying futures contract comparable to that
involved in holding a futures position. Subsequent payments to and from the
broker, similar to variation margin payments, are made as the premium and the
initial margin requirement are marked to market daily. The premium may partially
offset an unfavorable change in the value of portfolio securities, if the option
is not exercised, or it may reduce the amount of any loss incurred by the
Account if the option is exercised.
Risks Associated with Futures Transactions. There are a number of
risks associated with transactions in futures contracts and related options. An
Account's successful use of futures contracts is subject to the Manager's and
the Sub-Advisor's ability to predict correctly the factors affecting the market
values of the Account's portfolio securities. For example, if an Account was
hedged against the possibility of an increase in interest rates which would
adversely affect debt securities held by the Account and the prices of those
debt securities instead increased, the Account would lose part or all of the
benefit of the increased value of its securities which it hedged because it
would have offsetting losses in its futures positions. Other risks include
imperfect correlation between price movements in the financial instrument or
securities index underlying the futures contract, on the one hand, and the price
movements of either the futures contract itself or the securities held by the
Account, on the other hand. If the prices do not move in the same direction or
to the same extent, the transaction may result in trading losses.
Prior to exercise or expiration, a position in futures may be terminated
only by entering into a closing purchase or sale transaction. This requires a
secondary market on the relevant contract market. The Account will enter into a
futures contract or related option only if there appears to be a liquid
secondary market therefor. There can be no assurance, however, that such a
liquid secondary market will exist for any particular futures contract or
related option at any specific time. Thus, it may not be possible to close out a
futures position once it has been established. Under such circumstances, the
Account would continue to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such situations, if the
Account has insufficient cash, it may be required to sell portfolio securities
to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. In addition, the Account may be required to perform
under the terms of the futures contracts it holds. The inability to close out
futures positions also could have an adverse impact on the Account's ability
effectively to hedge its portfolio.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. This daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
Limitations on the Use of Futures and Options on Futures. Each
Account intends to come within an exclusion from the definition of "commodity
pool operator" provided by CFTC regulations by complying with certain
limitations on the use of futures and related options prescribed by those
regulations.
None of the Accounts will purchase or sell futures contracts or options
thereon if immediately thereafter the aggregate initial margin and premiums
exceed 5% of the fair market value of the Account's assets, after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into (except that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount generally may be excluded in computing
the 5%).
The Accounts will enter into futures contracts and related options
transactions only for bona fide hedging purposes as permitted by the CFTC and
for other appropriate risk management purposes, if any, which the CFTC may deem
appropriate for mutual funds excluded from the regulations governing commodity
pool operators. The Accounts are not permitted to engage in speculative futures
trading. Each Account will determine that the price fluctuations in the futures
contracts and options on futures used for hedging or risk management purposes
are substantially related to price fluctuations in securities held by the
Account or which it expects to purchase. In pursuing traditional hedging
activities, each Account will sell futures contracts or acquire puts to protect
against a decline in the price of securities that the Account owns, and each
Account will purchase futures contracts or calls on futures contracts to protect
the Account against an increase in the price of securities the Account intends
to purchase before it is in a position to do so.
When an Account purchases a futures contract, or purchases a call option
on a futures contract, it will maintain an amount of cash, cash equivalents or
short-term high grade fixed income securities in a segregated account with the
Account's custodian, so that the amount so segregated plus the amount of initial
margin held for the account of its broker equals the market value of the futures
contract.
The Accounts will not maintain open short positions in futures contracts,
call options written on futures contracts, and call options written on
securities indices if, in the aggregate, the value of the open positions (marked
to market) exceeds the current market value of that portion of its securities
portfolio being hedged by those futures and options plus or minus the unrealized
gain or loss on those open positions, adjusted for the historical volatility
relationship between that portion of the portfolio and the contracts (i.e., the
Beta volatility factor). To the extent an Account has written call options on
specific securities in that portion of its portfolio, the value of those
securities will be deducted from the current market value of that portion of the
securities portfolio. If this limitation should be exceeded at any time, the
Account will take prompt action to close out the appropriate number of open
short positions to bring its open futures and options positions within this
limitation.
Currency Contracts
The Aggressive Growth, Asset Allocation and International Accounts each
may engage in currency transactions with securities dealers, financial
institutions or other parties that are deemed creditworthy by the Account's
Sub-Advisor to hedge the value of portfolio securities denominated in particular
currencies against fluctuations in relative value. Currency transactions include
forward currency contracts, exchange-listed currency futures contracts and
options thereon and exchange-listed and over-the-counter options on currencies.
A forward currency contract involves a privately negotiated obligation to
purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract.
The Accounts will engage in currency transactions only for hedging and
other non-speculative purposes, including transaction hedging and position
hedging. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Account, which will generally
arise in connection with the purchase or sale of the Account's portfolio
securities or the receipt of income from them. Position hedging is entering into
a currency transaction with respect to portfolio securities positions
denominated or generally quoted in that currency. The Accounts will not enter
into a transaction to hedge currency exposure to an extent greater, after
netting all transactions intended wholly or partially to offset other
transactions, than the aggregate market value (at the time of entering into the
transaction) of the securities held by the Account that are denominated or
generally quoted in or currently convertible into the currency, other than with
respect to proxy hedging as described below.
The Accounts may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to increase or decline
in value relative to other currencies to which the Account has or in which the
Account expects to have exposure. To reduce the effect of currency fluctuations
on the value of existing or anticipated holdings of its securities, the Account
may also engage in proxy hedging. Proxy hedging is often used when the currency
to which an Account's holding is exposed is difficult to hedge generally or
difficult to hedge against the dollar. Proxy hedging entails entering into a
forward contract to sell a currency, the changes in the value of which are
generally considered to be linked to a currency or currencies in which some or
all of an Account's securities are or are expected to be denominated, and to buy
dollars. The amount of the contract would not exceed the market value of the
Account's securities denominated in linked currencies.
Except when an Account enters into a forward contract in connection with
the purchase or sale of a security denominated in a foreign currency or for
other non-speculative purposes, which requires no segregation, a currency
contract that obligates the Account to buy or sell a foreign currency will
generally require the Account to hold an amount of that currency or liquid
securities denominated in that currency equal to the Account's obligations or to
segregate liquid high grade debt obligations equal to the amount of the
Account's obligations.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to an Account if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, the risk exists that
the perceived linkage between various currencies may not be present or may not
be present during the particular time that an Account is engaging in proxy
hedging. Currency transactions are also subject to risks different from those of
other portfolio transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and policy, purchases
and sale of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to an Account if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs. Currency exchange
rates may also fluctuate based on factors extrinsic to a country's economy.
Buyers and sellers of currency futures contracts are subject to the same risks
that apply to the use of futures contracts generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures contracts
is relative new, and the ability to establish and close out positions on these
options is subject to the maintenance of a liquid market that may not always be
available.
Repurchase Agreements
All the Accounts may invest in repurchase agreements. None of the
Accounts will enter into repurchase agreements that do not mature within seven
days if any such investment, together with other illiquid securities held by the
Account, would amount to more than 10% of its assets. Repurchase agreements will
typically involve the acquisition by the Account of debt securities from a
selling financial institution such as a bank, savings and loan association or
broker-dealer. A repurchase agreement provides that the Account will sell back
to the seller and that the seller will repurchase the underlying securities at a
specified price and at a fixed time in the future. Repurchase agreements may be
viewed as loans by an Account collateralized by the underlying securities
("collateral"). This arrangement results in a fixed rate of return that is not
subject to market fluctuation during the Account's holding period. Although
repurchase agreements involve certain risks not associated with direct
investments in debt securities, each of the Accounts follows procedures
established by the Board of Directors which are designed to minimize such risks.
These procedures include entering into repurchase agreements only with large,
well-capitalized and well-established financial institutions, which have been
approved by the Board of Directors and which the Manager believes present
minimum credit risks. In addition, the value of the collateral underlying the
repurchase agreement will always be at least equal to the repurchase price,
including accrued interest. In the event of a default or bankruptcy by a selling
financial institution, the affected Account bears a risk of loss. In seeking to
liquidate the collateral, an Account may be delayed in or prevented from
exercising its rights and may incur certain costs. Further to the extent that
proceeds from any sale upon a default of the obligation to repurchase were less
than the repurchase price, the Account could suffer a loss.
Lending of Portfolio Securities
All the Accounts may lend their portfolio securities. None of the
Accounts intends to lend its portfolio securities if as a result the aggregate
of such loans made by the Account would exceed 30% of its total assets.
Portfolio securities may be loaned to unaffiliated broker-dealers and other
unaffiliated qualified financial institutions provided that such loans are
callable at any time on not more than five business days' notice and that cash
or government securities equal to at least 100% of the market value of the
securities loaned, determined daily, is deposited by the borrower with the
Account and is maintained each business day in a segregated account. While such
securities are on loan, the borrower will pay the Account any income accruing
thereon, and the Account may invest any cash collateral, thereby earning
additional income, or may receive an agreed upon fee from the borrower. Borrowed
securities must be returned when the loan is terminated. Any gain or loss in the
market price of the borrowed securities which occurs during the term of the loan
inures to the Account and its shareholders. An Account may pay reasonable
administrative, custodial and other fees in connection with such loans and may
pay a negotiated portion of the interest earned on the cash or government
securities pledged as collateral to the borrower or placing broker. An Account
does not vote securities that have been loaned, but it will call a loan of
securities in anticipation of an important vote.
When-Issued and Delayed Delivery Securities
Each of the Accounts may from time to time purchase securities on a
when-issued basis and may purchase or sell securities on a delayed delivery
basis. The price of such a transaction is fixed at the time of the commitment,
but delivery and payment take place on a later settlement date, which may be a
month or more after the date of the commitment. No interest accrues to the
purchaser during this period, and the securities are subject to market
fluctuation, which involves the risk for the purchaser that yields available in
the market at the time of delivery may be higher than those obtained in the
transaction. Each Account will only purchase securities on a when-issued or
delayed delivery basis with the intention of acquiring the securities, but an
Account may sell the securities before the settlement date, if such action is
deemed advisable. At the time an Account makes the commitment to purchase
securities on a when-issued or delayed delivery basis, it will record the
transaction and thereafter reflect the value, each day, of the securities in
determining its net asset value. Each Account will also establish a segregated
account with its custodian bank in which it will maintain cash or cash
equivalents, United States Government securities and other high grade debt
obligations equal in value to the Account's commitments for such when-issued or
delayed delivery securities. The availability of liquid assets for this purpose
and the effect of asset segregation on an Account's ability to meet its current
obligations, to honor requests for redemption and to have its investment
portfolio managed properly will limit the extent to which the Account may engage
in forward commitment agreements. Except as may be imposed by these factors,
there is no limit on the percent of an Account's total assets that may be
committed to transactions in such agreements.
Money Market Instruments
The Money Market Account will invest all of its available assets in money
market instruments maturing in 397 days or less. The types of instruments which
this Account may purchase are described below.
(1) U.S. Government Securities -- Securities issued or guaranteed by
the U.S. Government, including treasury bills, notes and bonds.
(2) U.S. Government Agency Securities -- Obligations issued or
guaranteed by agencies or instrumentalities of the U.S. Government.
U.S. agency obligations include, but are not limited to, the
Student Loan Marketing Association, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association. U.S.
instrumentality obligations include, but are not limited to, the
Export-Import Bank and Farmers Home Administration. Some
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, such as those issued by Federal Intermediate
Credit Banks, are supported by the right of the issuer to borrower
from the Treasury, others such as those issued by the Federal
National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality, and others, such as those issued by the Student
Loan Marketing Association, only by the credit of the agency or
instrumentality.
(3) Bank Obligations -- Certificates of deposit, time deposits and
bankers' acceptances of U.S. commercial banks having total assets
of at least one billion dollars, and of the overseas branches of
U.S. commercial banks and foreign banks, which in the Manager's
opinion, are of comparable quality, provided each such bank with
its branches has total assets of at least five billion dollars, and
certificates, including time deposits of domestic savings and loan
associations having at least one billion dollars in assets which
are insured by the Federal Savings and Loan Insurance Corporation.
The Account may acquire obligations of U.S. banks which are not
members of the Federal Reserve System or of the Federal Deposit
Insurance Corporation. Any obligations of foreign banks shall be
denominated in U.S. dollars. Obligations of foreign banks and
obligations of overseas branches of U.S. banks are subject to
somewhat different regulations and risks than those of U.S.
domestic banks. For example, an issuing bank may be able to
maintain that the liability for an investment is solely that of the
overseas branch which could expose the Account to a greater risk of
loss. In addition, obligations of foreign banks or of overseas
branches of U.S. banks may be affected by governmental action in
the country of domicile of the branch or parent bank. Examples of
adverse foreign governmental actions include the imposition of
currency controls, the imposition of withholding taxes on interest
income payable on such obligations, interest limitations, seizure
or nationalization of assets, or the declaration of a moratorium.
Deposits in foreign banks or foreign branches of U.S. banks are not
covered by the Federal Deposit Insurance Corporation. The Account
will only buy short-term instruments where the risks of adverse
governmental action are believed by the Manager to be minimal. The
Account will consider these factors along with other appropriate
factors in making an investment decision to acquire such
obligations and will only acquire those which, in the opinion of
management, are of an investment quality comparable to other debt
securities bought by the Account. The Account may invest in
certificates of deposit of selected banks having less than one
billion dollars of assets providing the certificates do not exceed
the level of insurance (currently $100,000) provided by the
applicable government agency.
A certificate of deposit is issued against funds deposited in a
bank or savings and loan association for a definite period of time,
at a specified rate of return. Normally they are negotiable.
However, the Account may occasionally invest in certificates of
deposit which are not negotiable. Such certificates may provide for
interest penalties in the event of withdrawal prior to their
maturity. A bankers' acceptance is a short-term credit instrument
issued by corporations to finance the import, export, transfer or
storage of goods. They are termed "accepted" when a bank guarantees
their payment at maturity and reflect the obligation of both the
bank and drawer to pay the face amount of the instrument at
maturity.
(4) Commercial Paper -- Short-term promissory notes issued by
corporations which at time of purchase are rated A-1 or better by
Standard and Poor's ("S&P") or Prime-1 or better by Moody's
Investors Service, Inc. ("Moody's") or, if not rated, issued or
guaranteed by a corporation with outstanding debt rated AA or
better by S&P or Aa or better by Moody's. The Account will not
invest in master demand notes. (See Appendix A.)
(5) Short-term Corporate Debt -- Corporate notes, bonds and debentures
which at the time of purchase are rated AA or better by S&P or Aa
or better by Moody's provided such securities have one year or less
remaining to maturity. (See Appendix A.)
(6) Repurchase Agreements -- Instruments under which securities are
purchased from a bank or securities dealer with an agreement by the
seller to repurchase the securities at the same price plus interest
at a specified rate. (See "ACCOUNT INVESTMENTS - Repurchase
Agreements.")
The ratings of Moody's and S&P, which are described in Appendix A,
represent their opinions as to the quality of the money market instruments which
they undertake to rate. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. These ratings are the initial
criteria for selection of portfolio investments, but the Manager will further
evaluate these securities.
Portfolio Turnover
Portfolio turnover will normally differ for each Account, may vary from
year to year, as well as within a year, and may be affected by portfolio sales
necessary to meet cash requirements for redemptions of Account shares. The
portfolio turnover rate for an Account is calculated by dividing the lesser of
purchases or sales of its portfolio securities during the fiscal year by the
monthly average of the value of its portfolio securities (excluding from the
computation all securities, including options, with maturities at the time of
acquisition of one year or less). A high rate of portfolio turnover generally
involves correspondingly greater brokerage commission expenses, which must be
borne directly by the Account. No portfolio turnover rate can be calculated for
the Money Market Account because of the short maturities of the securities in
which it invests. The portfolio turnover rates for each of the other Accounts
for its most recent and immediately preceding fiscal periods, respectively, were
as follows: Aggressive Growth - 166.9% and 172.9%; Asset Allocation - 108.2% and
47.1%; Balanced - 22.6% and 25.7%; Bond - 1.7% and 5.9%; Capital Value 48.5% and
49.2%; Government Securities - 8.4% and 9.8%; Growth - 2.0% and 6.9%; High Yield
- - 32.0% and 35.1%; International - 12.5% and 15.6%; MidCap - 8.8% and 13.1%.
DIRECTORS AND OFFICERS OF THE FUNDS
The following listing discloses the principal occupations and other
principal business affiliations of the Fund's Officers and Directors during the
past five years. All mailing addresses are The Principal Financial Group, Des
Moines, Iowa 50392, unless otherwise indicated.
@James D. Davis, 63, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.
Roy W. Ehrle, 69, Director. 2424 Jordan Trail, West Des Moines, Iowa.
Vice Chairman, Principal Mutual Life Insurance Company, Retired.
Pamela A. Ferguson, 54, Director. P.O. Box 805, Grinnell, Iowa.
President, Grinnell College since 1991.
@Richard W. Gilbert, 57, Director. 1357 Asbury Avenue, Winnetka, IL.
President, Gilbert Communications, Inc. since 1993. Prior thereto, President and
Publisher, Pioneer Press.
*&J. Barry Griswell, 48, Director and Chairman of the Board. Senior Vice
President, Principal Mutual Life Insurance Company, since 1991. Director and
Chairman of the Board, Principal Management Corporation, Princor Financial
Services Corporation.
*&Stephan L. Jones, 62, Director and President. Vice President, Principal
Mutual Life Insurance Company since 1986. Director and President, Princor
Financial Services Corporation and Principal Management Corporation.
*Ronald E. Keller, 61, Director. Executive Vice President, Principal
Mutual Life Insurance Company since 1992. Prior thereto, Senior Vice President,
Principal Mutual Life Insurance Company. Director, Princor Financial Services
Corporation and Principal Management Corporation. Director and Chairman, Invista
Capital Management, Inc.
@Barbara A. Lukavsky, 57, Director. 3920 Grand Avenue, Des Moines, Iowa.
President and CEO, Lu San ELITE USA, L.C.
&Richard G. Peebler, 68, Director. 1916 79th Street, Des Moines, Iowa.
Professor, Drake University, College of Business and Public Administration,
since 1990.
*Craig L. Bassett, 45, Treasurer. Director - Treasury, since 1996. Prior
thereto, Associate Treasurer, Principal Mutual Life Insurance Company since
1988.
*Michael J. Beer, 36, Financial Officer. Vice President and Chief
Operating Officer, Princor Financial Services Corporation and Principal
Management Corporation, since 1995. Prior thereto, Financial Officer.
*David J. Brown, 37, Assistant Counsel. Counsel, Principal Mutual Life
Insurance Company since 1995. Attorney 1994-1995. Prior thereto, Attorney,
Dickinson, Mackaman, Tyler & Hogan, P.C. 1986-1994.
*Michael W. Cumings, 46, Assistant Counsel. Counsel, Principal Mutual
Life Insurance Company since 1989.
* Arthur S. Filean, 59, Vice President and Secretary. Vice President,
Princor Financial Services Corporation since
1990. Vice President, Principal Management Corporation since 1996.
* Ernest H. Gillum, 42, Assistant Secretary. Assistant Vice President,
Registered Products, Princor Financial Services Corporation and Principal
Management Corporation, since 1995. Prior thereto, Product Development and
Compliance Officer.
Jane E. Karli, 40, Assistant Treasurer. Senior Accounting and Custody
Administrator, Principal Mutual Life Insurance Company since 1994; Senior
Investment Cost Accountant 1993-1994; Senior Investment Accountant 1992-1993;
Prior thereto, Manager-Investment Accounting and Treasury.
*Michael D. Roughton, 46, Counsel. Counsel, Principal Mutual Life
Insurance Company since 1994. Prior thereto, Assistant Counsel. Counsel, Invista
Capital Management, Inc., Princor Financial Services Corporation, Principal
Investors Corporation and Principal Management Corporation.
@ Member of Audit and Nominating Committee.
* Affiliated with the Manager of the Fund or its parent and considered an
"Interested Person," as defined in the Investment Company Act of 1940, as
amended.
& Member of the Executive Committee. The Executive Committee is elected
by the Board of Directors and may exercise all the powers of the Board of
Directors, with certain exceptions, when the Board is not in session and shall
report its actions to the Board.
All Directors and Officers listed above hold similar positions with
nineteen mutual funds sponsored by Principal Mutual Life Insurance Company. In
addition, James D. Davis, Pamela A. Ferguson, Stephan L. Jones, J. Barry
Griswell, Barbara A. Lukavsky, and all of the officers hold similar positions
with one other Fund sponsored by Principal Mutual Life Insurance Company.
The following information relates to compensation paid by each Account
during the fiscal year ended December 31, 1996.
Director Each Account
-------- ------------
James D. Davis $1,200
Roy W. Ehrle $1,200
Pamela A. Ferguson $1,350
Richard W. Gilbert $1,200
Barbara A. Lukavsky $1,350
Richard G. Peebler $1,350*
* Richard G. Peebler received $1,350 from each of the Account. He received an
additional $75 from Aggressive Growth, Asset Allocation, Balanced, Capital
Value, International and MidCap Accounts due to his participation in the
executive committee of each of those Accounts.
The Fund does not provide retirement benefits for any of the directors.
Total compensation from the investment companies included in the fund complex
for the fiscal year ended December 31, 1996 was as follows:
James D. Davis $32,100 Richard W. Gilbert $33,000
Roy W. Ehrle $30,900 Barbara A. Lukavsky $35,850
Pamela A. Ferguson $35,850 Richard G. Peebler $33,525
All of the outstanding shares of the Fund are owned by Principal Mutual
Life Insurance Company and its Separate Accounts B and C and Variable Life
Separate Account. As of December 31, 1996, the Officers and Directors as a group
owned none of the outstanding shares of the Fund.
MANAGER AND SUB-ADVISORS
The Manager of each of the Accounts is Principal Management Corporation
(formerly known as Princor Management Corporation (the "Manager"), a
wholly-owned subsidiary of Princor Financial Services Corporation which is a
wholly-owned subsidiary of Principal Holding Company. Principal Holding Company
is a holding company which is a wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the state of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969 and
since that time has managed various mutual funds sponsored by Principal Mutual
Life Insurance Company.
The Manager has executed an agreement with Invista Capital Management,
Inc. ("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced, Capital Value,
Government Securities, Growth, International and MidCap Accounts. The Manager
will reimburse Invista for the cost of providing these services. Invista, an
indirectly wholly-owned subsidiary of Principal Mutual Life Insurance Company
and an affiliate of the Manager, was founded in 1985 and manages investments for
institutional investors, including Principal Mutual Life. Assets under
management at December 31, 1996 were approximately $19.6 billion. Invista's
address is 1500 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.
The Manager has also executed an agreement with Morgan Stanley Asset
Management Inc. ("MSAM") under which MSAM has agreed to assume the obligations
of the Manager to provide investment advisory services for the Aggressive Growth
Account and Asset Allocation Account. The Manager pays MSAM a fee for such
investment advisory services. MSAM, with principal offices at 1221 Avenue of the
Americas, New York, NY 10020, provides a broad range of portfolio management
services to customers in the United States and abroad. At December 31, 1996,
MSAM managed investments totaling approximately $72.6 billion, including
approximately $54.9 billion under active management and $17.7 billion as Named
Fiduciary or Fiduciary Adviser.
Each of the persons affiliated with the Fund who is also an affiliated
person of the Manager or a Sub-Advisor is named below, together with the
capacities in which such person is affiliated:
Office Held With Office Held With
Name The Fund The Manager/Invista
Craig Bassett Treasurer Treasurer (Manager)
Michael J. Beer Financial Officer Vice President &
Financial Officer (Manager)
Ernest H. Gillum Assistant Secretary Product Development and
Compliance Officer
(Manager)
J. Barry Griswell Director and Chairman Director and Chairman of
of the Board the Board (Manager)
Director (Manager)
Stephan L. Jones Director and Director and President
President (Manager)
Ronald E. Keller Director Director (Manager)
Director and Chairman of
the Board (Invista)
Michael D. Roughton Counsel Counsel (Manager; Invista)
COST OF MANAGER'S SERVICES
For providing the investment advisory services, and specified other
services, the Manager, under the terms of the Management Agreement for the Fund,
is entitled to receive a fee computed and accrued daily and payable monthly, at
the following annual rates:
<TABLE>
<CAPTION>
Aggressive High Yield
Growth and and All
Net Asset Value Asset Allocation International MidCap Balanced Other
of Fund Accounts Account Account Accounts Accounts
- ------------------------ ----------------- -------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
First $100,000,000 .80% .75% .65% .60% .50%
Next 100,000,000 .75% .70% .60% .55% .45%
Next 100,000,000 .70% .65% .55% .50% .40%
Next 100,000,000 .65% .60% .50% .45% .35%
Over 400,000,000 .60% .55% .45% .40% .30%
</TABLE>
There is no assurance that any of the Accounts' net assets will reach
sufficient amounts to be able to take advantage of the rate decreases. The net
asset value of each Account on December 31, 1996 and the rate of the fee for
each Account for investment management services as provided in the Management
Agreement for the fiscal year then ended were as follows:
Management Fee
Net Assets as of For Year Ended
Account December 31, 1996 December 31, 1996
----------------------- ----------------- -----------------
Aggressive Growth $ 90,105,549 .80%
Asset Allocation 61,631,138 .80
Balanced 93,157,669 .60
Bond 63,386,561 .50
Capital Value 205,018,528 .48
Government Securities 85,099,858 .50
Growth 99,611,910 .50
High Yield 13,740,343 .60
International 71,682,015 .75
MidCap 137,160,881 .64
Money Market 46,244,249 .50
Under a Sub-Advisory Agreement between Invista and the Manager, Invista
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the Balanced, Capital Value, Government Securities,
Growth, International and MidCap Accounts and is reimbursed by the Manager for
the cost of providing such services.
Under a Sub-Advisory Agreement between MSAM and the Manager, MSAM
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the Aggressive Growth and Asset Allocation Accounts.
The Manager pays MSAM a fee that is accrued daily and payable monthly.
The fee is based on the net asset value of each Account as follows: first $40
million of net assets - the fee is 0.45%; next $160 million - 0.30%; next $100
million - 0.25%; and net assets over $300 million - 0.20%.
Except for certain Fund expenses set out below, the Manager is
responsible for expenses, administrative duties and services including the
following: Expenses incurred in connection with the registration of the Fund and
Fund shares with the Securities and Exchange Commission and state regulatory
agencies; office space, facilities and costs of keeping the books of the Fund;
compensation of personnel and officers and any directors who are also affiliated
with the Manager; fees for auditors and legal counsel; preparing and printing
Fund prospectuses; administration of shareholder accounts, including issuance,
maintenance of open account system, dividend disbursement, reports to
shareholders, and redemption. However, some or all of these expenses may be
assumed by Principal Mutual Life Insurance Company and some or all of the
administrative duties and services may be delegated by the Manager to Principal
Mutual Life Insurance Company or affiliate thereof.
Each Account pays for certain corporate expenses incurred in its
operation. Among such expenses, the Account pays brokerage commissions on
portfolio transactions, transfer taxes and other charges and fees attributable
to investment transactions, any other local, state or federal taxes, fees and
expenses of all directors of the Fund who are not persons affiliated with the
Manager, interest, fees for Custodian of the Account, and the cost of meetings
of shareholders.
Fees paid for investment management services during the periods indicated
were as follows:
Management Fees For Year Ended December 31,
1996 1995 1994
---- ---- ----
Aggressive Growth $491,699 $180,022 $ 53,716 *
Asset Allocation 425,427 272,724 127,034 *
Balanced 420,010 206,614 131,488
Bond 260,242 122,783 72,199
Capital Value 816,437 591,891 637,781
Government Securities 360,968 202,554 195,469
Growth 357,833 137,029 24,971 **
High Yield 75,111 64,422 57,369
International 376,123 172,258 38,147 **
MidCap 606,697 264,411 94,644
Money Market 208,822 140,895 125,791
* Period beginning June 1, 1994 and ended December 31, 1994.
** Period beginning May 1, 1994 and ended December 31, 1994.
The Management Agreements, Sub-Advisory Agreements and Investment Service
Agreements, pursuant to which Principal Mutual Life Insurance Company has agreed
to furnish certain personnel, services and facilities required by the Manager to
enable it to fulfill its investment advisory responsibilities for each of the
Accounts except the Aggressive Growth and Asset Allocation Accounts, were last
approved by the Fund's Board of Directors on September 8, 1997. Each of these
agreements provides for continuation in effect from year to year only so long as
such continuation is specifically approved at least annually either by the Board
of Directors of the Fund or by vote of a majority of the outstanding voting
securities of an Account of the Fund, provided that in either event such
continuation shall be approved by vote of a majority of the Directors who are
not "interested persons" (as defined in the Investment Company Act of 1940) of
the Manager, Principal Mutual Life Insurance Company or its subsidiaries, the
Fund and, in the case of the Sub-Advisory Agreement for each of the Accounts
other than the Aggressive Growth and Asset Allocation Accounts, Invista, and in
the case of the Sub-Advisory Agreement for each of the Aggressive Growth and
Asset Allocation Accounts, MSAM, cast in person at a meeting called for the
purpose of voting on such approval. The Agreements may be terminated at any time
on 60 days written notice to the Manager by the Board of Directors of the Fund
or by a vote of a majority of the outstanding securities of the Fund and by the
Manager, Invista, MSAM or Principal Mutual Life Insurance Company, as the case
may be, on 60 days written notice to the Fund. The Agreements will automatically
terminate in the event of their assignment.
BROKERAGE ON PURCHASES AND SALES OF SECURITIES
In distributing brokerage business arising out of the placement of orders
for the purchase and sale of securities for any Account, the objective of the
Accounts' Manager or Sub-Advisor is to obtain the best overall terms. In
pursuing this objective, the Manager, or Sub-Advisor, considers all matters it
deems relevant, including the breadth of the market in the security, the price
of the security, the financial condition and executing capability of the broker
or dealer and the reasonableness of the commission, if any (for the specific
transaction and on a continuing basis). This may mean in some instances that the
Manager, or Sub-Advisor, will pay a broker commissions that are in excess of the
amount of commission another broker might have charged for executing the same
transaction when the Manager, or Sub-Advisor, believes that such commissions are
reasonable in light of (a) the size and difficulty of transactions (b) the
quality of the execution provided and (C) the level of commissions paid relative
to commissions paid by other institutional investors. (Such factors are viewed
both in terms of that particular transaction and in terms of all transactions
that broker executes for accounts over which the Manager, or Sub-Advisor,
exercises investment discretion. The Manager, or Sub-Advisor, may purchase
securities in the over-the-counter market, utilizing the services of principal
market matters, unless better terms can be obtained by purchases through brokers
or dealers, and may purchase securities listed on the New York Stock Exchange
from non-Exchange members in transactions off the Exchange.) The Manager, or
Sub-Advisor, gives consideration in the allocation of business to services
performed by a broker (e.g. the furnishing of statistical data and research
generally consisting of information of the following types: analyses and reports
concerning issuers, s). If any such allocation is made, the primary criteria
used will be to obtain the best overall terms for such transactions. The
Manager, or Sub-Advisor, may pay additional commission amounts for research
services but generally does not do so. Such statistical data and research
information received from brokers or dealers may be useful in varying degrees
and the Manager, or Sub-Advisor, may use it in servicing some or all of the
accounts it manages. Some statistical data and research information may not be
useful to the Manager, or Sub-Advisor, in managing the client account, brokerage
for which resulted in the Manager's, or Sub-Advisor's, receipt of the
statistical data and research information. However, in the Manager's, or
Sub-Advisor's, opinion, the value thereof is not determinable and it is not
expected that the Manager's, or Sub-Advisor's, expenses will be significantly
reduced since the receipt of such statistical data and research information is
only supplementary to the Manager's, or Sub-Advisor's, own research efforts. The
Manager, or Sub-Advisor, allocated portfolio transactions for the Aggressive
Growth Account, Asset Allocation Account, Balanced Account, Capital Value
Account, Growth Account, International Account and MidCap Account to certain
brokers during the fiscal year ended December 31, 1996 due to research services
provided by such brokers. These portfolio transactions resulted in commissions
paid to such brokers by the Funds in the amounts of $15,242, $15,438, $13,692,
$29,405, $500, $3,955 and $2,591, respectively.
Purchases and sales of debt securities and money market instruments
usually will be principal transactions; portfolio securities will normally be
purchased directly from the issuer or from an underwriter or marketmaker for the
securities. Such transactions are usually conducted on a net basis with the
Account paying no brokerage commissions. Purchases from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
the purchases from dealers serving as marketmakers will include the spread
between the bid and asked prices.
The following table shows the brokerage commissions paid during the
periods indicated. In each year, 100% of the commissions paid by each Account
went to broker-dealers which provided research, statistical or other factual
information.
Total Brokerage Commissions Paid
Fiscal Year Ended
December 31,
Account 1996 1995 1994
------- -------------------------------------------------------
Aggressive Growth $250,591 $102,404 $37,910 *
Asset Allocation 109,360 35,476 40,055 *
Balanced 46,458 18,780 14,596
Capital Value 183,156 142,577 149,871
Growth 45,131 28,870 7,280 **
International 156,842 78,939 43,151 **
MidCap 63,355 31,588 7,527
* Period beginning June 1, 1994 and ended December 31, 1994.
** Period beginning May 1, 1994 and ended December 31, 1994.
Brokerage commissions paid to affiliates during the year ended December
31, 1996 were as follows:
Commissions Paid to Principal Financial Securities, Inc.
Total Dollar As Percent of As Percent of Dollar Amount
Account Amount Total Commissions of Commissionable Transactions
------- ------ ----------------- ------------------------------
Capital Value $ 6,612 3.61% 7.92%
Growth 438 .97% .86%
Commissions Paid to Morgan Stanley and Co.
Total Dollar As Percent of As Percent of Dollar Amount
Account Amount Total Commissions of Commissionable Transactions
- -------------- ------ ----------------- ------------------------------
Balanced $ 1,300 2.80% 1.82%
Capital Value 3,650 1.99% 1.48%
International 3,176 2.02% 1.78%
Morgan Stanley and Co. is affiliated with Morgan Stanley Asset
Management, Inc., which acts as a sub-advisor to two Accounts included in the
Fund.
The Manager acts as investment advisor for each of the funds sponsored by
Principal Mutual Life Insurance Company and places orders to trade portfolio
securities for the funds and these Accounts, except the Aggressive Growth
Account and Asset Allocation Account. If, in carrying out the investment
objectives of the Accounts, occasions arise when purchases or sales of the same
equity securities are to be made for two or more of the Accounts or Funds at the
same time, (or, in the case of Accounts managed by Invista, for two or more
Funds and any other accounts managed by Invista), the Manager or Invista may
submit the orders to purchase or, whenever possible, to sell, to a broker/dealer
for execution on an aggregate or "bunched" basis. The Manager (or, in the case
of Accounts managed by Invista, Invista) may create several aggregate or
"bunched" orders relating to a single security at different times during the
same day. On such occasion, the Manager (or, in the case of Accounts managed by
Invista, Invista) will employ a computer program to randomly order the Accounts
whose individual orders for purchase or sale make up each aggregate or "bunched"
order. Securities purchased or proceeds of sales received on each trading day
with respect to each such aggregate or "bunched" orders shall be allocated to
the various Accounts (or, in the case of Invista, the various Accounts or Funds
and other client accounts) whose individual orders for purchase or sale make up
the aggregate or "bunched" order by filling each Account's or Fund's (or, in the
case of Invista, each Account's or Fund's or other client account's) order, in
the sequence arrived at by the random ordering. Securities purchased for funds
(or, in the case of Invista, Accounts, Funds and other clients accounts)
participating in an aggregate or "bunched" order will be placed into those
Accounts and, where applicable, other client accounts at a price equal to the
average of the prices achieved in the course of filling that aggregate or
"bunched" order.
If purchases or sales of the same debt securities are to be made for two
or more of the Accounts or Funds at the same time, the securities will be
purchased or sold proportionately in accordance with the amount of such security
sought to be purchased or sold at that time for each Account or Fund. If the
purchase or sale of securities consistent with the investment objectives of the
Accounts or one or more of the other clients for which MSAM acts as investment
sub-advisor or advisor is to be made at the same time, the securities will be
purchased or sold proportionately in accordance with the amount of such security
sought to be purchased or sold at that time for each Account or client.
DETERMINATION OF NET ASSET VALUE OF ACCOUNT SHARES
Growth-Oriented and Income-Oriented Accounts
The net asset values of the shares of each of the Growth-Oriented and
Income-Oriented Accounts are determined daily, Monday through Friday, as of the
close of trading on the New York Stock Exchange, except on days on which changes
in the value of an Account's portfolio securities will not materially affect the
current net asset value of that Account's redeemable securities, on days during
which an Account receives no order for the purchase or sale of its redeemable
securities and no tender of such a security for redemption, and on customary
national business holidays. The Accounts treat as customary national business
holidays those days on which the New York Stock Exchange is closed for New
Year's Day (January 1), Washington's Birthday (third Monday in February), Good
Friday (variable date between March 20 and April 23, inclusive), Memorial Day
(last Monday in May), Independence Day (July 4), Labor Day (first Monday in
September), Thanksgiving Day (fourth Thursday in November) and Christmas Day
(December 25). The net asset value per share for each Account is determined by
dividing the value of securities in the Account's investment portfolio plus all
other assets, less all liabilities, by the number of Account shares outstanding.
Securities for which market quotations are readily available, including options
and futures traded on an exchange, are valued at market value, which is
currently determined using the last reported sale price or, if no sales are
reported, as is regularly the case for some securities traded over-the-counter,
the last reported bid price. When reliable market quotations are not considered
to be readily available, which may be the case, for example, with respect to
certain debt securities, preferred stocks, foreign securities and
over-the-counter options, the investments are valued by using market quotations,
prices provided by market makers, which may include dealers with which the
Account has executed transactions, or estimates of market values obtained from
yield data and other factors relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by the
Board of Directors. Securities with remaining maturities of 60 days or less are
valued at amortized cost. Other assets are valued at fair value as determined in
good faith by the Board of Directors.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of the New York Stock Exchange. The
values of such securities used in computing net asset value per share are
usually determined as of such times. Occasionally, events which affect the
values of such securities and foreign currency exchange rates may occur between
the times at which they are generally determined and the close of the New York
Stock Exchange and would therefore not be reflected in the computation of the
Account's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Manager under procedures
established and regularly reviewed by the Board of Directors. To the extent the
Account invests in foreign securities listed on foreign exchanges which trade on
days on which the Account does not determine its net asset value, for example
Saturdays and other customary national U.S. holidays, the Account's net asset
value could be significantly affected on days when shareholders have no access
to the Account.
Certain securities issued by companies in emerging market countries may
have more than one quoted valuation at any given point in time, sometimes
referred to as a "local" price and a "premium" price. The premium price is often
a negotiated price which may not consistently represent a price at which a
specific transaction can be effected. It is the policy of International Account
to value such securities at prices at which it is expected those shares may be
sold, and the Manager or any sub-adviser, is authorized to make such
determinations subject to such oversight by the Fund's Board of Directors as may
from time to time be necessary.
Money Market Account
The net asset value of shares of the Money Market Account is determined
at the same time and on the same days as each of the Growth-Oriented Accounts
and Income-Oriented Accounts as described above. The net asset value per share
for the Account is computed by dividing the total value of the Account's
securities and other assets, less liabilities, by the number of Account shares
outstanding.
All securities held by the Money Market Account will be valued on an
amortized cost basis. Under this method of valuation, a security is initially
valued at cost; thereafter, the Account assumes a constant proportionate
amortization in value until maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the security.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price that would be received upon sale of the security.
Use of the amortized cost valuation method by the Money Market Account
requires the Account to maintain a dollar weighted average maturity of 90 days
or less and to purchase only obligations that have remaining maturities of 397
days or less or have a variable or floating rate of interest. In addition, the
Account can invest only in "Eligible Securities" as that term is defined in
Regulations issued under the Investment Company Act of 1940 (see the Fund's
Prospectus for a more complete description) determined by the Board of Directors
to present minimal credit risks.
The Board of Directors has established procedures designed to stabilize,
to the extent reasonably possible, the Account's price per share as computed for
the purpose of sales and redemptions at $1.00. Such procedures include a
directive to the Manager to test price the portfolio or specific securities
thereof upon certain changes in the Treasury Bill auction interest rate for the
purpose of identifying possible deviations in the net asset value per share
calculated by using available market quotations or equivalents from $1.00 per
share. If such deviation exceeds 1/2 of 1%, the Board of Directors will promptly
consider what action, if any, will be initiated. In the event the Board of
Directors determines that a deviation exists which may result in material
dilution or other unfair results to shareholders, the Board will take such
corrective action as it regards as appropriate, including: the sale of portfolio
instruments prior to maturity; the withholding of dividends; redemptions of
shares in kind; the establishment of a net asset value per share based upon
available market quotations; or splitting, combining or otherwise recapitalizing
outstanding shares. The Account may also reduce the number of shares outstanding
by redeeming proportionately from shareholders, without the payment of any
monetary compensation, such value at $1.00 per share.
PERFORMANCE CALCULATION
Each of the Accounts may from time to time advertise its performance in
terms of total return. The figures used for total return and yield are based on
the historical performance of an Account, or its corresponding, predecessor
mutual fund, show the performance of a hypothetical investment and are not
intended to indicate future performance. Total return and yield will vary from
time to time depending upon market conditions, the composition of an Account's
portfolio and operating expenses. These factors and possible differences in the
methods used in calculating performance figures should be considered when
comparing an Account's performance to the performance of some other kind of
investment. The calculations of total return and yield for the Accounts do not
include the fees and charges of the separate accounts that invest in the
Accounts and, therefore, do not reflect the investment performance of those
separate accounts.
Each Account may also include in its advertisements performance rankings
and other performance-related information published by independent statistical
services or publishers, such as Lipper Analytical Services, Weisenberger
Investment Companies Services, Money Magazine, Forbes, The Wall Street Journal,
Barron's and Changing Times, and comparisons of the performance of an Account to
that of various market indices, such as the S&P 500 Index, Lehman Brothers GNMA
Index, Dow Jones Industrials Index, and the Salomon Brothers Investment Grade
Bond Index.
Total Return
When advertising total return figures, each of the Growth-Oriented
Accounts and Income-Oriented Accounts will include its average annual total
return for each of the one, five and ten year periods (or if shorter, the period
during which its corresponding predecessor fund's registration statement has
been in effect) that end on the last day of the most recent calendar quarter.
Average annual total return is computed by calculating the average annual
compounded rate of return over the stated period that would equate an initial
$1,000 investment to the ending redeemable value assuming the reinvestment of
all dividends and capital gains distributions at net asset value. In its
advertising, an Account may also include average annual total return for some
other period or cumulative total return for a specified period. Cumulative total
return is computed by dividing the ending redeemable value (assuming the
reinvestment of all dividends and capital gains distributions at net asset
value) by the initial investment.
The following table shows as of December 31, 1996 average annual total
return for each of the Accounts for the periods indicated:
Account 1-Year 5-Year 10-Year
- ---------------------- ------ ------ -------
Aggressive Growth 28.05% 28.05%(4) N/A
Asset Allocation 12.92% 12.95%(4) N/A
Balanced 13.13% 11.57% 12.16%(1)
Bond 2.36% 8.20% 9.55%(1)
Capital Value 23.50% 14.08% 13.08%
Government Securities 3.35% 6.68% 8.63%(2)
Growth 12.51% 16.12%(3) N/A
High Yield 13.13% 11.20% 9.89%(1)
International 25.09% 12.83%(3) N/A
MidCap 21.11% 16.64% 17.73%(1)
(1) Period beginning December 18, 1987 and ending December 31, 1996.
(2) Period beginning March 30, 1987 and ending December 31, 1996.
(3) Period beginning May 1, 1994 and ending December 31, 1996.
(4) Period beginning June 1, 1994 and ending December 31, 1996.
Yield
Money Market Account
The Money Market Account may advertise its yield and its effective yield.
Yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by (365/7) with the
resulting yield figure carried to at least the nearest hundredth of one percent.
As of December 31, 1996, the Money Market Account's yield was 5.00%. Because
realized capital gains or losses in an Account's portfolio are not included in
the calculation, the Account's net investment income per share for yield
purposes may be different from the net investment income per share for dividend
purposes, which includes net short-term realized gains or losses on the
Account's portfolio.
Effective yield is computed by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1 from the result. The resulting effective yield figure is carried to at least
the nearest hundredth of one percent. As of December 31, 1996, the Money Market
Account's effective yield was 5.13%.
The yield quoted at any time for the Money Market Account represents the
amount that was earned during a specific, recent seven-day period and is a
function of the quality, types and length of maturity of instruments in the
Account's portfolio and the Account's operating expenses. The length of maturity
for the portfolio is the average dollar weighted maturity of the portfolio. This
means that the portfolio has an average maturity of a stated number of days for
its issues. The calculation is weighted by the relative value of each
investment.
The yield for the Money Market Account will fluctuate daily as the income
earned on the investments of the Account fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. There is no guarantee that the net asset value or any stated
rate of return will remain constant. A shareholder's investment in the Account
is not insured. Investors comparing results of the Money Market Account with
investment results and yields from other sources such as banks or savings and
loan associations should understand these distinctions. Historical and
comparative yield information may, from time to time, be presented by the
Account.
TAX STATUS
It is the policy of each Account to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which
the Fund so qualifies, it will be exempt from federal income tax upon the amount
so distributed to investors.
For federal income tax purposes, capital gains and losses on futures
contracts or options thereon, index options or options traded on qualified
exchanges are generally treated at 60% long-term and 40% short-term. In
addition, an Account must recognize any unrealized gains and losses on such
positions held at the end of the fiscal year. An Account may elect out of such
tax treatment, however, for a futures or options position that is part of an
"identified mixed straddle" such as a put option purchased by the Account with
respect to a portfolio security. Gains and losses on figures and options
included in an identified mixed straddle will be considered 100% short-term and
unrealized gain or loss on such positions will not be realized at year end. The
straddle provisions of the Code may require the deferral of realized losses to
the extent that the Account has unrealized gains in certain offsetting positions
at the end of the fiscal year, and may also require recharacterization of all or
a part of losses on certain offsetting positions from short-term to long-term,
as well as adjustment of the holding periods of straddle positions.
The 1986 Tax Reform Act imposes an excise tax on mutual funds which fail
to distribute net investment income and capital gains by the end of the calendar
year in accordance with the provisions of the Act. The Fund intends to comply
with the Act's requirements and to avoid this excise tax.
GENERAL INFORMATION AND HISTORY
Following is a description of a reorganization completed by each of the
Funds on December 31, 1997. The terms of each reorganization were identical,
therefore, the description is intended to apply to each of the funds.
"Liquidating Corporation" as used below means each of the following funds, all
of which were incorporated in the State of Maryland:
Fund Date of Incorporation
---- ---------------------
Principal Aggressive Growth Fund 08/20/93
Principal Asset Allocation Fund 08/20/93
Principal Balanced Fund 11/26/86
Principal Bond Fund 11/26/86
Principal Capital Accumulation Fund 05/26/89
Principal Emerging Growth Fund 02/20/87
Principal Government Securities Fund 06/07/85
Principal Growth Fund 08/20/93
Principal High Yield Fund 12/02/86
Principal Money Market Fund 06/10/82
Principal World Fund 08/20/93
"Surviving Corporation" refers to Principal Variable Contract Fund, Inc.,
a Maryland Corporation, Incorporated on May 27, 1997.
On September 16, 1997, a majority of the outstanding shares of the
Liquidating Corporation approved a proposal to permit the Liquidating
Corporation to transfer all of its assets and liabilities to the Surviving
Corporation in accordance with an Agreement and Plan of Reorganization and
Liquidation dated July 1, 1997 (the "Agreement") between the Liquidating
Corporation and Surviving Corporation (the "Reorganization"). The Agreement was
authorized and approved by the Boards of Directors of the Liquidating
Corporation and the Surviving Corporation in accordance with the laws of
Maryland. The net asset values of the shares were unaffected by the
Reorganization.
The primary purpose for the Reorganization was to develop a "series
company" structure rather than a "multiple fund" structure for the Principal
Funds. Management of the Liquidating Corporation concluded that a series company
form would simplify the operation of and provide greater flexibility in managing
the investment medium used to fund the variable contracts that invested in the
Liquidating Corporation.
By approving the Plan, the shareholders of the Liquidating Corporation
authorized the Liquidating Corporation, as the sole shareholder of the
corresponding series of shares prior to the Reorganization to:
1. Elect as directors of the Surviving Corporation of all the
Liquidating Corporation's Directors at the time of the
Reorganization;
2. Ratify the selection of Ernst & Young LLP as the independent
auditors of the Surviving Corporation;
3. Approve the Management Agreement, Investment Service Agreement, and
Sub-Advisory Agreements for the Surviving Corporation; and
4. Approve the transactions required of the Surviving Corporation to
implement the Reorganization.
The shareholders also authorized the liquidation and dissolution of the
Liquidating Corporation
FINANCIAL STATEMENTS
The financial statements for the Accounts for the fiscal period
ended December 31, 1996 appearing in the Annual Report to Shareholders and the
report thereon of Ernst and Young LLP, independent auditors, appearing therein
are incorporated by reference in this Statement of Additional Information. The
Annual Report will be furnished, without charge, to investors who request copies
of the Statement of Additional Information.
APPENDIX A
Description of Bond Ratings:
Moody's Investors Service, Inc. Bond Ratings
Aaa:
Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa:
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A:
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa:
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba:
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa:
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or
interest. Ca:
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C:
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
CONDITIONAL RATING: Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals which
begin when facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of
condition.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its bond rating
system. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
SHORT-TERM NOTES: The four ratings of Moody's for short-term notes are MIG
1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality...but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk for having protection...and not
distinctly or predominantly speculative."
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess
of nine months. Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's Corporation's Debt Ratings:
A Standard & Poor's debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditor's rights.
AAA:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA:
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A:
Debt rated "A" has a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB:
Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher-rated categories.
BB, B, CCC, CC:
Debt rated "BB", "B", "CCC" and "CC" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.
While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C:
The rating "C" is reserved for income bonds on which no interest is being
paid.
D:
Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment
of debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise his own judgment with respect to
such likelihood and risk.
NR:
Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
Standard & Poor's, Commercial Paper Ratings
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest. Ratings are
applicable to both taxable and tax-exempt commercial paper. The four
categories are as follows:
A:
Issues assigned the highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Issues that possess
overwhelming safety characteristics will be given a "+" designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the highest designations.
B:
Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C:
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D:
This rating indicates that the issue is either in default or is expected to
be in default upon maturity.
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard
& Poor's by the issuer and obtained by Standard & Poor's from other sources
it considers reliable. The ratings may be changed, suspended, or withdrawn
as a result of changes in or unavailability of, such information.
Standard & Poor's rates notes with a maturity of less than three years as
follows:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be
given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration Statement
(1) Part A:
Financial Highlights for each of the four years in
the period ended December 31, 1996, for the period
from July 1, 1992 through December 31, 1992, for
each of the four years in the period ended June 30,
1992 and for the period from December 19, 1987
through June 30, 1988.
(2) Part B:
None
(b) Exhibits
(1a) Articles of Amendment (Filed 4/12/96)
(1b) Articles of Incorporation (Filed 4/12/96)
(2) Bylaws (Filed 4/12/96)
(5a) Management Agreement (Filed 4/12/96)
(5b) Investment Service Agreement (Filed 4/12/96)
(6) Distribution Agreement (Filed 4/12/96)
(8) Custody Agreement (Filed 4/12/96)
(9) Agreement and Plan of Reorganization and
Liquidation
(10) Opinion of Counsel (Filed 4/12/96)
(11) Consent of Independent Auditors
(12) Audited Financial Statements as of
December 31, 1996, including the Report of
Ernst & Young LLP, independent auditors for
the Registrant.
(13) Investment Letter (Filed 4/12/96)
(16) Total Return Performance Quotation
(Filed 4/12/96)
(27) Financial Data Schedule
Item 25. Persons Controlled by or Under Common Control with Depositor
Principal Mutual Life Insurance Company (incorporated as a
mutual life insurance company under the laws of Iowa);
Sponsored the organization of the following mutual funds,
some of which it controls by virtue of owning voting
securities:
Principal Asset Allocation Fund, Inc. (a Maryland
Corporation)100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company and its separate accounts on
October 8, 1997.
Principal Aggressive Growth Fund, Inc. (a Maryland Corporation)
100.0% of shares outstanding owned by Principal Mutual Life
Insurance Company and its separate accounts on October 8, 1997.
Princor Balanced Fund, Inc. (a Maryland Corporation) 0.88% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Principal Balanced Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on October 8, 1997.
Princor Blue Chip Fund, Inc. (a Maryland Corporation) 1.30% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Princor Bond Fund, Inc. (a Maryland Corporation) 1.43% of shares
outstanding owned by Principal Mutual Life Insurance Company on
October 8, 1997.
Principal Bond Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on October 8, 1997.
Princor Capital Accumulation Fund, Inc. (a Maryland
Corporation) 29.63% of outstanding shares owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Principal Capital Accumulation Fund, Inc. (a Maryland
Corporation)100.0% of outstanding shares owned by Principal
Mutual Life Insurance Company and its Separate Accounts on
October 8, 1997.
Princor Cash Management Fund, Inc. (a Maryland Corporation) 2.25%
of outstanding shares owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on October 8,
1997.
Princor Emerging Growth Fund, Inc. (a Maryland Corporation) 0.61%
of shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997
Principal Emerging Growth Fund, Inc. (a Maryland Corporation)
100.0% of shares outstanding owned by Principal Mutual Life
Insurance Company and its Separate Accounts on October 8, 1997.
Princor Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.40% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Principal Government Securities Fund, Inc. (a Maryland
Corporation) 100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company and its Separate Accounts on
October 8, 1997.
Princor Growth Fund, Inc. (a Maryland Corporation) 0.51% of
outstanding shares owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Principal Growth Fund, Inc. (a Maryland Corporation) 100.0% of
outstanding shares are owned by Principal Mutual Life Insurance
Company and its Separate Accounts on October 8, 1997.
Princor High Yield Fund, Inc. (a Maryland Corporation) 21.18% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Principal High Yield Fund, Inc. (a Maryland Corporation) 100.0%
of shares outstanding owned by Principal Mutual Life Insurance
Company and its Separate Accounts on October 8, 1997.
Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 86.90% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 82.32% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Princor Limited Term Bond Fund, Inc. (a Maryland Corporation)
50.89% of shares outstanding owned by Principal Mutual Life
Insurance Company on October 8, 1997.
Principal Money Market Fund, Inc. (a Maryland Corporation) 100.0%
of shares outstanding owned by Principal Mutual Life Insurance
Company and its Separate Accounts on October 8, 1997.
Principal Special Markets Fund, Inc. (a Maryland Corporation)
50.83% of the shares outstanding of the International Securities
Portfolio and 84.27% of the shares outstanding of the
Mortgage-Backed Securities Portfolio were owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Princor Tax-Exempt Bond Fund, Inc. (a Maryland Corporation) 0.57%
of shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Princor Tax-Exempt Cash Management Fund, Inc. (a Maryland
Corporation) 1.03% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Princor Utilities Fund, Inc. (a Maryland Corporation) 1.56% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Princor World Fund, Inc. (a Maryland Corporation) 23.36% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Principal World Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Subsidiaries organized and wholly-owned by Principal Mutual Life
Insurance Company:
a. Principal Holding Company (an Iowa Corporation) A holding
company wholly-owned by Principal Mutual Life Insurance
Company.
b. PT Asuransi Jiwa Principal Egalita Indonesia (an Indonesia
Corporation)
Subsidiaries wholly-owned by Principal Holding Company:
a. Petula Associates, Ltd. (an Iowa Corporation) a real estate
development company.
b. Patrician Associates, Inc. (a California Corporation) a real
estate development company.
c. Principal Development Associates, Inc. (a California
Corporation) a real estate development company.
d. Princor Financial Services Corporation (an Iowa Corporation)
a registered broker-dealer.
e. Invista Capital Management, Inc. (an Iowa Corporation) a
registered investment adviser.
f. Principal Marketing Services, Inc. (a Delaware Corporation)
a corporation formed to serve as an interface between
marketers and manufacturers of financial services products.
g. The Principal Financial Group, Inc. (a Delaware corporation)
a general business corporation established in connection
with the new corporate identity. It is not currently active.
h. Delaware Charter Guarantee & Trust Company (a Delaware
Corporation) a nondepository trust company.
i. Principal Securities Holding Corporation (a Delaware
Corporation) a holding company.
j. Principal Health Care, Inc. (an Iowa Corporation) a
developer and administrator of managed care systems.
k. Principal Financial Advisors, Inc. (an Iowa Corporation) a
registered investment advisor.
l. Principal Asset Markets, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
m. Principal Portfolio Services, Inc. (an Iowa Corporation) a
mortgage due diligence company.
n. Principal International, Inc. (an Iowa Corporation) a
company formed for the purpose of international business
development.
o. Principal Spectrum Associates, Inc. (a California
Corporation) a real estate development company.
p. Principal Commercial Advisors, Inc. (an Iowa Corporation) a
company that purchases, manages and sells commercial real
estate assets.
q. Principal FC, Ltd. (an Iowa Corporation) a limited purpose
investment corporation.
r. Principal Residential Mortgage, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
s. Equity FC, Ltd. (an Iowa Corporation) engaged in investment
transactions including limited partnership and limited
liability companies.
t. Principal L.L.C. (an Illinois Corporation) a limited
liability company.
Subsidiaries organized and wholly-owned by Princor Financial Services
Corporation:
a. Princor Management Corporation (an Iowa Corporation) a
registered investment advisor.
b. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange
Commission. It is not currently active.
Subsidiary wholly owned by Principal Securities Holding Corporation:
a. Principal Financial Securities, Inc. (a Delaware
Corporation) an investment banking and securities brokerage
firm.
Subsidiary wholly owned by Delaware Charter Guarantee & Trust Company:
a. Trust Consultants, Inc. (a California Corporation) a
Consulting and Administration of Employee Benefit Plans.
Subsidiaries organized and wholly-owned by Principal Health Care,
Inc.:
a. The Admar Group, Inc. (a Florida Corporation) a national
managed care service organization that developes and manages
preferred provider organizations.
b. Principal Health Care Management Corporation (an Iowa
Corporation) provide management services to health
maintenance organizations.
c. Principal Health Care of the Carolinas, Inc. (a North
Carolina Corporation) a health maintenance organization.
d. Principal Health Care of Delaware, Inc. (a Delaware
Corporation) a health maintenance organization.
e. Principal Health Care of Florida, Inc. (a Florida
Corporation) a health maintenance organization.
f. Principal Health Care of Georgia, Inc. (a Georgia
Corporation) a health maintenance organization.
g. Principal Health Care of Illinois, Inc. (an Illinois
Corporation) a health maintenance organization.
h. Principal Health Care of Indiana, Inc. (a Delaware
Corporation) a health maintenance organization.
i. Principal Health Care of Iowa, Inc. (an Iowa Corporation) a
health maintenance organization.
j. Principal Health Care of Kansas City, Inc. (a Missouri
Corporation) a health maintenance organization.
k. Principal Health Care of Louisiana, Inc. (a Louisiana
Corporation) a health maintenance organization.
l. Principal Health Care of the Mid-Atlantic, Inc. (a Virginia
Corporation) a health maintenance organization.
m. Principal Health Care of Nebraska, Inc. (a Nebraska
Corporation) a health maintenance organization.
n. Principal Health Care of Pennsylvania, Inc. (a Pennsylvania
Corporation) a health maintenance organization.
o. Principal Health Care of St. Louis, Inc. (a Delaware
Corporation) a health maintenance organization.
p. Principal Health Care of South Carolina, Inc. (A South
Carolina Corporation) a health maintenance organization.
q. Principal Health Care of Tennessee, Inc. (a Tennessee
Corporation) a health maintenance organization.
r. Principal Health Care of Texas, Inc. ( a Texas Corporation)
a health maintenance organization.
s. United Health Care Services of Iowa, Inc. (an Iowa
Corporation) a health maintenance organization.
Subsidiary owned by The Admar Group, Inc.:
a. Admar Corporation (a California Corporation) a managed care
services organization.
b. Admar Insurance Marketing, Inc. (a California Corporation) a
managed care services organization.
c. Benefit Plan Administrators, Inc. (a Colorado Corporation) a
managed care services organization.
d. SelectCare Management Co., Inc. (a California Corporation) a
managed care services organization.
e. Image Financial & Insurance Services, Inc. (a California
Corporation) a managed care services organization.
f. WM. G. Hofgard & Co., Inc. (a California Corporation) a
managed care services organization.
Subsidiaries owned by Principal International, Inc.:
a. Principal Insurance Company Limited (a Hong Kong
Corporation) sells insurance and pension products.
b. Principal International Argentina, S.A. (an Argentina
services corporation).
c. Principal International Asia Limited (a Hong Kong
Corporation) a corporation operating as a regional
headquarters for Asia.
d. Principal International de Chile, S.A. (a Chile
Corporation) a holding company.
e. Principal International Espana, S.A. de Seguros de Vida (a
Spain Corporation) a life insurance company.
f. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation) a life insurance company.
g. Qualitas Medica, S.A. (an Argentina HMO) a health
maintenance organization.
h. Afore Confia-Principal, S.a. de C.V. (a Mexico Corporation).
i. Zao Principal International (a Russia Corporation) inactive.
Subsidiaries owned by Principal International Argentina, S.A.:
a. Ethika-Jacaranda S.A. Administradora de Fondos de
Jubilaciones y Pensions (an Argentina company) a pension
company.
b. Princor Compania de Seguros de Retiro, S.A. (an Argentina
Corporation) an individual annuity/employee benefit company.
c. Prinlife Compania de Seguros de Vida, S.A. (an Argentina
Corporation) a life insurance company.
Subsidiary owned by Principal International de Chile, S.A.:
a. BanRenta Compania de Seguros de Vida, S.A. (a Chile
Corporation).
Subsidiary owned by Principal International Espana, S.A. de Seguros de
Vida:
a. Princor International Espana Sociedad Anonima de Agencia de
Seguros (a Spain Corporation) an insurance agency.
Subsidiary owned by Afore Confia-Principal, S.A. de C.V.:
a. Siefore Confia-Principal, S.A. de C.V. (a Mexico
Corporation) an investment fund company.
Item 26. Number of Holders of Securities - As of: September 30, 1997
(1) (2)
Title of Class Number of Holders
Principal High Yield Fund, Inc.
Common 2
Item 27. Indemnification
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, the Registrant may
indemnify the corporate representative against judgments, fines, penalties, and
amounts paid in settlement, and against expenses, including attorneys' fees, if
such expenses were actually incurred by the corporate representative in
connection with the proceeding, unless it is established that:
(i) The act or omission of the corporate representative was
material to the matter giving rise to the proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate dishonesty; or
(ii) The corporate representative actually received an improper
personal benefit in money, property, or services; or
(iii) In the case of any criminal proceeding, the corporate
representative had reasonable cause to believe that the act or
omission was unlawful.
If a proceeding is brought by or on behalf of the Registrant, however, the
Registrant may not indemnify a corporate representative who has been adjudged to
be liable to the Registrant. Under the Registrant's Articles of Incorporation
and Bylaws, directors and officers of Registrant are entitled to indemnification
by the Registrant to the fullest extent permitted under Maryland law and the
Investment Company Act of 1940. Reference is made to Article VI, Section 7 of
the Registrant's Articles of Incorporation, Article 12 of Registrant's Bylaws
and Section 2-418 of the Maryland General Corporation Law.
The Registrant has agreed to indemnify, defend and hold the Distributor,
its officers and directors, and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act of 1933, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act of 1933, or under common law or otherwise, arising out of or
based upon any untrue statement of a material fact contained in the Registrant's
registration statement or prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission made in conformity with
information furnished in writing by the Distributor to the Registrant for use in
the Registrant's registration statement or prospectus: provided, however, that
this indemnity agreement, to the extent that it might require indemnity of any
person who is also an officer or director of the Registrant or who controls the
Registrant within the meaning of Section 15 of the Securities Act of 1933, shall
not inure to the benefit of such officer, director or controlling person unless
a court of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent that such result would not be against public
policy as expressed in the Securities Act of 1933, and further provided, that in
no event shall anything contained herein be so construed as to protect the
Distributor against any liability to the Registrant or to its security holders
to which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of its duties,
or by reason of its reckless disregard of its obligations under this Agreement.
The Registrant's agreement to indemnify the Distributor, its officers and
directors and any such controlling person as aforesaid is expressly conditioned
upon the Registrant being promptly notified of any action brought against the
Distributor, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Registrant.
Item 28. Business or Other Connection of Investment Adviser
A complete list of the officers and directors of the investment adviser,
Princor Management Corporation, are set out below. This list includes some of
the same people (designated by an *), who are serving as officers and directors
of the Registrant. For these people the information as set out in the Statement
of Additional Information (See Part B) under the caption "Directors and Officers
of the Fund" is incorporated by reference.
Craig R. Barnes The Principal President and Director
Vice President Financial Group Invista Capital
Des Moines, Iowa Management, Inc.
50392
*Craig L. Bassett See Part B
Treasurer
*Michael J. Beer Same See Part B
Vice President and
Chief Operating Officer
Mary L. Bricker Same Counsel & Assistant
Assistant Corporate Corporate Secretary
Secretary Principal Mutual Life
Insurance Company
Ray S. Crabtree Same Executive Vice President
Director Principal Mutual Life
Insurance Company
David J. Drury Same Chief Executive Officer
Director and Chairman of the Board
Principal Mutual Life
Insurance Company
*Arthur S. Filean Same See Part B
Vice President
Paul N. Germain Same Assistant Vice President-
Assistant Vice President Operations
- Operations Princor Financial Services
Corporation
Michael H. Gersie Same Senior Vice President
Director Principal Mutual Life
Insurance Company
*Ernest H. Gillum Same See Part B
Assistant Vice President
- Registered Products
Thomas J. Graf Same Senior Vice President
Director Principal Mutual Life
Insurance Company
*J. Barry Griswell Same See Part B
Chairman of the Board
and Director
Joyce N. Hoffman Same Vice President and
Vice President and Corporate Secretary
Corporate Secretary Principal Mutual Life
Insurance Company
*Stephan L. Jones Same See Part B
Director and President
Ronald E. Keller Same Executive Vice President
Director Principal Mutual Life
Insurance Company
Gregg R. Narber Same Senior Vice President &
Director General Counsel
Principal Mutual Life
Insurance Company
Layne A. Rasmussen Same Controller
Controller - Mutual Funds Princor Financial Services
Corporation
Elizabeth R. Ring Same Controller
Controller Princor Financial Services
Corporation
*Michael D. Roughton Same See Part B
Counsel
Charles E. Rohm Same Executive Vice President
Director Principal Mutual Life
Insurance Company
Jean B. Schustek Same Product Compliance Officer
Product Compliance Officer Princor Financial Services
- Registered Products Corporation
Dewain A. Sparrgrove Same Vice President- Investment
Vice President Securities
Principal Mutual Life
Insurance Company
Princor Management Corporation serves as investment adviser and dividend
disbursing and transfer agent for, Principal Aggressive Growth Fund, Inc.,
Principal Asset Allocation Fund, Inc., Principal Balanced Fund, Inc., Principal
Bond Fund, Inc., Principal Capital Accumulation Fund, Inc., Principal Emerging
Growth Fund, Inc., Principal Government Securities Fund, Inc., Principal Growth
Fund, Inc., Principal High Yield Fund, Inc., Principal Money Market Fund, Inc.,
Principal Special Markets Fund, Inc., Principal World Fund, Inc., Princor
Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor Bond Fund, Inc.,
Princor Capital Accumulation Fund, Inc., Princor Cash Management Fund, Inc.,
Princor Emerging Growth Fund, Inc., Princor Government Securities Income Fund,
Inc., Princor Growth Fund, Inc., Princor High Yield Fund, Inc., Principal
International Emerging Markets Fund, Inc., Principal International SmallCap
Fund, Inc., Princor Limited Term Bond Fund, Inc., Princor Tax-Exempt Bond Fund,
Inc., Princor Tax-Exempt Cash Management Fund, Inc., Princor Utilities Fund,
Inc. and Princor World Fund, Inc. - funds sponsored by Principal Mutual Life
Insurance Company.
Item 29. Principal Underwriters
(a) Princor Financial Services Corporation, principal underwriter for
Registrant, acts as principal underwriter for, Principal Aggressive Growth Fund,
Inc., Principal Asset Allocation Fund, Inc., Principal Balanced Fund, Inc.,
Principal Bond Fund, Inc., Principal Capital Accumulation Fund, Inc., Principal
Emerging Growth Fund, Inc., Principal Government Securities Fund, Inc.,
Principal Growth Fund, Inc., Principal High Yield Fund, Inc., Principal Money
Market Fund, Inc., Principal Special Markets Fund, Inc., Principal World Fund,
Inc., Princor Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor Bond
Fund, Inc., Princor Capital Accumulation Fund, Inc., Princor Cash Management
Fund, Inc., Princor Emerging Growth Fund, Inc., Princor Government Securities
Income Fund, Inc., Princor Growth Fund, Inc., Princor High Yield Fund, Inc.,
Principal International Emerging Markets Fund, Inc., Principal International
SmallCap Fund, Inc., Princor Limited Term Bond Fund, Inc., Princor Tax-Exempt
Bond Fund, Inc., Princor Tax-Exempt Cash Management Fund, Inc., Princor
Utilities Fund, Inc., Princor World Fund, Inc. and for variable annuity
contracts participating in Principal Mutual Life Insurance Company Separate
Account B, a registered unit investment trust for retirement plans adopted by
public school systems or certain tax-exempt organizations pursuant to Section
403(b) of the Internal Revenue Code, Section 457 retirement plans, Section
401(a) retirement plans, certain non- qualified deferred compensation plans and
Individual Retirement Annuity Plans adopted pursuant to Section408 of the
Internal Revenue Code, and for variable life insurance contracts issued by
Principal Mutual Life Insurance Company Variable Life Separate Account, a
registered unit investment trust.
(b) (1) (2) (3)
Positions
and offices Positions and
Name and principal with principal offices with
business address underwriter registrant
Robert W. Baehr Marketing Services None
The Principal Officer
Financial Group
Des Moines, IA 50392
Craig L. Bassett Treasurer Treasurer
The Principal
Financial Group
Des Moines, IA 50392
Michael J. Beer Senior Vice President and Vice President
The Principal Chief Operating Officer
Financial Group
Des Moines, IA 50392
Mary L. Bricker Assistant Corporate None
The Principal Secretary
Financial Group
Des Moines, IA 50392
Ray S. Crabtree Director None
The Principal
Financial Group
Des Moines, IA 50392
David J. Drury Director None
The Principal
Financial Group
Des Moines, IA 50392
Arthur S. Filean Vice President Vice President
The Principal and Secretary
Financial Group
Des Moines, IA 50392
Paul N. Germain Assistant Vice President - None
The Principal Operations
Financial Group
Des Moines, IA 50392
Michael H. Gersie Director None
The Principal
Financial Group
Des Moines, IA 50392
Ernest H. Gillum Assistant Vice President - Assistant
The Principal Registered Products Secretary
Financial Group
Des Moines, IA 50392
Thomas J. Graf Director None
The Principal
Financial Group
Des Moines, IA 50392
William C. Gordon Insurance License Officer None
The Principal
Financial Group
Des Moines, IA 50392
J. Barry Griswell Director and Director and
The Principal Chairman of the Chairman of the
Financial Group Board Board
Des Moines, IA 50392
Joyce N. Hoffman Vice President and None
The Principal Corporate Secretary
Financial Group
Des Moines, IA 50392
Stephan L. Jones Director and Director and
The Principal President President
Financial Group
Des Moines, IA 50392
Ronald E. Keller Director Director
The Principal
Financial Group
Des Moines, IA 50392
John R. Lepley Senior Vice None
The Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392
Gregg R. Narber Director None
The Principal
Financial Group
Des Moines, IA 50392
Mark M. Oswald Compliance Officer None
The Principal
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller - None
The Principal Mutual Funds
Financial Group
Des Moines, IA 50392
Elizabeth R. Ring Controller None
The Principal
Financial Group
Des Moines, IA 50392
Charles E. Rohm Director None
The Principal
Financial Group
Des Moines, IA 50392
Michael D. Roughton Counsel Counsel
The Principal
Financial Group
Des Moines, IA 50392
Jean B. Schustek Product Compliance Officer - None
The Principal Registered Products
Financial Group
Des Moines, IA 50392
Kyle R. Selberg Vice President-Marketing None
The Principal
Financial Group
Des Moines, IA 50392
Susan R. Sorensen Marketing Officer None
The Principal
Financial Group
Des Moines, IA 50392
Roger C. Stroud Assistant Director - None
The Principal Marketing
Financial Group
Des Moines, IA 50392
(c) Inapplicable.
Item 30. Location of Accounts and Records
All accounts, books or other documents of the Registrant are located at the
offices of the Registrant and its Investment Adviser in the Principal Mutual
Life Insurance Company home office building, The Principal Financial Group, Des
Moines, Iowa 50392.
Item 31. Management Services
Inapplicable.
Item 32. Undertakings
Indemnification
Reference is made to Item 27 above, which discusses circumstances under
which directors and officers of the Registrant shall be indemnified by the
Registrant against certain liabilities and expenses incurred by them by reason
of being a director or officer of the Registrant.
Notwithstanding the provisions of Registrant's Articles of Incorporation
and Bylaws, the Registrant hereby makes the following undertaking:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant, in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person of the Registrant, in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue
Shareholder Communications
Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a director or directors when
requested in writing to do so by the holders of at least 10% of the Registrant's
outstanding shares of common stock and in connection with such meeting to comply
with the provisions of Section 16(c) of the Investment Company Act of 1940
relating to shareholder communications
Delivery of Annual Report to Shareholders
The registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant certifies that it meets all of the
requirments for effectiveness of this Registration Statement and has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Des Moines and State of
Iowa, on the 23rd day of October, 1997.
Principal High Yield Fund, Inc.
(Registrant)
By /s/ S. L. Jones
______________________________________
S. L. Jones
President and Director
Attest:
/s/ A. S. Filean
______________________________________
A. S. Filean
Vice President and Secretary
<PAGE>
Pursuant to the requirement of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
/s/ S. L. Jones
_____________________________ President and Director 10/23/97
S. L. Jones (Principal Executive Officer) __________
(J. B. Griswell)*
_____________________________ Director and 10/23/97
J. B. Griswell Chairman of the Board __________
/s/ M. J. Beer
_____________________________ Financial Officer (Principal 10/23/97
M. J. Beer Financial and Accounting Officer) __________
(J. D. Davis)*
_____________________________ Director 10/23/97
J. D. Davis __________
(R. W. Erhle)*
_____________________________ Director 10/23/97
R. W. Ehrle __________
(P. A. Ferguson)*
_____________________________ Director 10/23/97
P. A. Ferguson __________
(R. W. Gilbert)*
_____________________________ Director 10/23/97
R. W. Gilbert __________
(R. E. Keller)*
_____________________________ Director 10/23/97
R. E. Keller __________
(B. A. Lukavsky)*
_____________________________ Director 10/23/97
B. A. Lukavsky __________
(R. G. Peebler)*
_____________________________ Director 10/23/97
R. G. Peebler __________
*By /s/ S. L. Jones
_____________________________________
S. L. Jones
President and Director
Pursuant to Powers of Attorney
Previously Filed or Included
AGREEMENT AND PLAN OF
REORGANIZATION AND LIQUIDATION
This AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION is entered into
this ___ day of ______________________, 1997 by and between Principal Variable
Contract Fund, Inc., a Maryland Corporation (the "Surviving Corporation") and
Principal Aggressive Growth Fund, Inc., Principal Asset Allocation Fund, Inc.,
Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal High
Yield Fund, Inc., Principal Money Market Fund, Inc., and Principal World Fund,
Inc. (individually, a Liquidating Corporation; together the "Liquidating
Corporations").
WHEREAS, The Liquidating Corporations are open-end management investment
companies registered under the Investment Company Act of 1940, as amended (the
"1940 Act");
WHEREAS, The Liquidating Corporations have authorized capital stock
consisting of the following shares of common stock, par value $.01 per share:
Principal Aggressive Growth Fund, Inc.......................100 Million
Principal Asset Allocation Fund, Inc........................100 Million
Principal Balanced Fund, Inc................................100 Million
Principal Bond Fund, Inc....................................100 Million
Principal Capital Accumulation Fund, Inc....................100 Million
Principal Emerging Growth Fund, Inc.........................100 Million
Principal Government Securities Fund, Inc...................100 Million
Principal Growth Fund, Inc..................................100 Million
Principal High Yield Fund, Inc..............................100 Million
Principal Money Market Fund, Inc............................500 Million
Principal World Fund, Inc...................................100 Million
WHEREAS, the Surviving Corporation was organized as a Maryland Corporation
pursuant to Articles of Incorporation and is presently authorized to issue 1.5
billion shares, par value $0.01 per share, of a single class divisible into an
indefinite number of different series and will be operated as a "series company"
as provided by Rule 18f-2 under the 1940 Act;
WHEREAS, Liquidating Corporations desire to reorganize into separate series
of a single corporation through a reorganization within the meaning of Section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, each Liquidating Corporation desires generally to accomplish this
change by transferring all of its assets to the series of Surviving Corporation
corresponding to it in consideration for the assumption by the Surviving
Corporation of all of each Liquidating Corporation's liabilities and the
issuance to each Liquidating Corporation of shares of the series of Surviving
Corporation corresponding to it, which shares each Liquidating Corporation will
thereupon distribute pro rata to its shareholders in complete liquidation, all
in accordance with the procedures and subject to the terms and conditions of
this Agreement;
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties hereto agree as follows:
1. Plan of Reorganization and Liquidation.
(a) At the Closing each Liquidating Corporation will convey, transfer
and deliver to the Surviving Corporation all of its then existing
assets. In consideration thereof, the Surviving Corporation will
at the Closing (i) assume all of each Liquidating Corporation's
obligations and liabilities then existing, whether absolute,
accrued, contingent or otherwise, including without limitation,
all fees and expenses in connection with the transactions
contemplated hereby, and (ii) deliver to each Liquidating
Corporation a number of full and fractional shares of the
appropriate series of Surviving Corporation equal to the number of
each Liquidating Corporation's full and fractional shares then
outstanding.
(b) Upon consummation of the transactions described in paragraph (a)
of this Section 1, each Liquidating Corporation will liquidate and
the shares of the Surviving Corporation received by each
Liquidating Corporation will be distributed to its shareholders of
record as of the Closing Date, each shareholder to receive a
number of shares equal to the number of share then held by such
shareholder. Such liquidation and distribution will be accompanied
by the establishment of an open account on the share records of
the Surviving Corporation in the name of each shareholder of each
Liquidating Corporation and representing the respective pro rata
number of shares of the Surviving Corporation due such
shareholder.
(c) As soon as practicable after the Closing Date, each Liquidating
Corporation will take, in accordance with the Maryland General
Corporation Law, all steps as shall be necessary and proper to
effect a complete dissolution.
(d) Prior to the Closing and after each Liquidating Corporation has
taken the actions authorized pursuant to Section 3(e) hereof, the
shares of the Surviving Corporation heretofore held by each
Liquidating Corporation will be redeemed and canceled by the
Surviving Corporation.
2. Closing and Closing Date. The Closing will occur at 11:59 p.m. on
December 31, 1997, or at such other time and date as the parties may
mutually agree (the "Closing Date").
3. Conditions Precedent. The obligations of each Liquidating Corporation
and the Surviving Corporation to effectuate the Plan of Reorganization
and Liquidation shall be subject to the satisfaction of each of the
following conditions:
(a) Such authority and orders from the Securities and Exchange
Commission (the "Commission") and state securities commissions as
may be necessary to permit the parties to carry out the
transactions contemplated by this Agreement shall have been
received.
(b) One or more post-effective amendments to the Registration
Statement of Principal Capital Accumulation Fund, Inc. on Form
N-1A under the Securities Act of 1933 and the 1940 Act containing
(i) such amendments to such Registration Statement as are
determined by the Board of Directors of the Surviving Corporation
to be necessary and appropriate as a result of the Plan of
Reorganization and Liquidation and (ii) the adoption by the
Surviving Corporation as its own of such Registration Statement,
as so amended, shall have been filed with the Commission and such
post-effective amendment or amendments to the Registration
Statement shall have become effective, and no stop-order
suspending the effectiveness of the Registration Statement shall
have been issued, and no proceeding for that purpose shall have
been initiated or threatened by the Commission (and not withdrawn
or terminated).
(c) Each party shall have received an opinion of counsel in form and
substance satisfactory to it, relating to its authority to engage
in the transactions contemplated hereby and to the effect that
(i) this Agreement has been duly authorized, executed and
delivered by each Liquidating Corporation and the Surviving
Corporation and constitutes a legal, valid and binding agreement
of each such party in accordance with its terms; (ii) the shares
of the Surviving Corporation to be issued pursuant to the terms
of this Agreement, will be validly issued, fully paid and
non-assessable; and (iii) the Surviving Corporation is duly
organized and validly existing under the laws of the State of
Maryland.
(d) Each party shall have received an opinion of counsel to the
effect that the reorganization contemplated by this Agreement
qualifies as a "reorganization" under Section 368(a)(1)(F) of the
Code.
(e) A vote approving this Agreement and the reorganization
contemplated hereby shall have been adopted by at least a
majority of the outstanding shares of common stock of each
Liquidating Corporation entitled to vote at an annual or special
meeting and the shareholders of each Liquidating Corporation
shall have voted at such meeting to authorize each Liquidating
Corporation to vote, and each Liquidating Corporation shall have
voted, as the sole shareholder of its corresponding series of the
Surviving Corporation, to:
(1) elect the Directors of each Liquidating Corporation as
Directors of the Surviving Corporation;
(2) approve (i) a management agreement between the Surviving
Corporation and Princor Management, Inc. (the "Manager"),
(ii) an Investment Service Agreement between and among the
Manager, Principal Mutual Life Insurance Company ("Principal
Mutual") and the Surviving Corporation (the "Service
Agreement"), (iii) with respect to the Surviving
Corporation's Balanced, Capital Value, Government, Growth,
International and MidCap series, a Sub-Advisory Agreement
between and among the Manager, Invista Capital Management,
Inc. and the Surviving Corporation, and (iv) with respect to
the Surviving Corporation's Aggressive Growth and Asset
Allocation series, a Sub-Advisory Agreement between and
among the Manager, Morgan Stanley Asset Management, Inc. and
the Surviving Corporation (together, the "Advisory
Agreements"); and
(3) ratify the selection of Ernst & Young as the Surviving
Corporation's independent public accountants for the fiscal
year ending December 31, 1997.
(f) The Directors of the Surviving Corporation (and, to the extent
required by law, the Directors of the Surviving Corporation who
are not "interested persons" of the Surviving Corporation as
defined in the 1940 Act) shall have taken the following actions
at a meeting duly called for such purposes:
(1) approval of the Advisory Agreements;
(2) selection of Ernst & Young as the Surviving Corporation's
independent public accountants for the fiscal year ending
December 31, 1997;
(3) authorization of the issuance by the Surviving Corporation,
prior to the Closing, of a share of the Surviving
Corporation to each Liquidating Corporation in consideration
of the payment of $1.00 per share for the purpose of
enabling each Liquidating Corporation to vote on the matters
referred to in paragraph (e) of this Section 3;
(4) submission of the matters referred to in paragraph (e) of
this Section 3 to each Liquidating Corporation as the sole
shareholder of its corresponding series of the Surviving
Corporation; and
(5) authorization of the issuance by the Surviving Corporation
of shares at the Closing in exchange for the assets of each
Liquidating Corporation pursuant to the terms and provisions
of this Agreement.
At any time prior to the Closing, any of the foregoing conditions may
be waived by the Board of Directors of each Liquidating Corporation on
behalf of such Liquidating Corporation and the Directors of the
Surviving Corporation on behalf of the Surviving Corporation if, in
their judgment, such waiver will not have a material adverse effect on
the interests of the shareholders of such Liquidating Corporation.
4. Amendment. This Agreement may be amended at any time by action of the
Board of Directors of any Liquidating Corporation and the Directors of
the Surviving Corporation, notwithstanding approval thereof by the
shareholders of any Liquidating Corporation, provided that no
amendment shall have a material adverse effect on the interests of the
shareholders of any Liquidating Corporation unless approved by such
shareholders.
5. Termination. The Board of Directors of any Liquidating Corporation and
the Board of Directors of the Surviving Corporation may terminate this
Agreement and abandon the reorganization contemplated hereby,
notwithstanding approval thereof by the shareholders of any
Liquidating Corporation, at any time prior to the Closing, if
circumstances should develop that, in their judgment, make proceeding
with the plan inadvisable.
6. Governing Law. This Agreement shall be construed in accordance with
applicable federal law and the laws of the State of Maryland.
7. Further Assistance. The Liquidating Corporations and the Surviving
Corporation shall take further action as may be necessary or desirable
and proper to consummate the transactions contemplated hereby.
8. Entire Agreement. This Agreement embodies the entire agreement between
the parties and there are no agreements, understandings, restrictions
or warranties among the parties other than those set forth or provided
for herein.
9. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first above written.
Principal Aggressive Growth Fund, Inc.
Principal Asset Allocation Fund, Inc.
Principal Balanced Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Accumulation Fund, Inc.
Principal Emerging Growth Fund, Inc.
Principal Government Securities Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal Money Market Fund, Inc.
Principal World Fund, Inc.
As to each of the foregoing:
By:_________________________________
Title:_______________________________
Principal Variable Contracts Fund, Inc.
By:_________________________________
Title:________________________________
ERNST & YOUNG LLP Suite 3400 Phone: 515 243 2727
801 Grand Avenue
Des Moines, Iowa 50309-2764
Consent of Independent Auditors
The Board of Directors and Shareholders
Principal High Yield Fund, Inc.
We consent to the reference to our firm under the captions "Financial
Highlights" and "Additional Information - Financial Statements" in the
Prospectus in Part A and "Financial Statements" in Part B and to the
incorporation by reference in Part B of our report dated January 17, 1997 on the
financial statements and the financial highlights of Principal Aggressive Growth
Fund, Inc., Principal Asset Allocation Fund, Inc., Principal Balanced Fund,
Inc., Principal Bond Fund, Inc., Principal Capital Accumulation Fund, Inc.,
Principal Emerging Growth Fund, Inc., Principal Government Securities Fund,
Inc., Principal Growth Fund, Inc., Principal High Yield Fund, Inc., Principal
Money Market Fund, Inc., and Principal World Fund, Inc., in this Post Effective
Amendment No. 12 to Form N-1A Registration Statement under the Securities Act of
1933 (No. 33-14538) and this Amendment No. 12 to the Registration Statement
under the Investment Company Act of 1940 (No. 811-5175) of Principal High Yield
Fund, Inc.
/s/ Ernst & Young LLP
Des Moines, Iowa
October 21, 1997
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 12972448
<INVESTMENTS-AT-VALUE> 13432735
<RECEIVABLES> 291402
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 19746
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