Registration No. 33-74232
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____ _____
Post-Effective Amendment No. __6__ __X__
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. ___ _____
(Check appropriate box or boxes)
Principal Mutual Life Insurance Company Separate Account B
- --------------------------------------------------------------------------------
(Exact Name of Registrant)
Principal Mutual Life Insurance Company
- --------------------------------------------------------------------------------
(Name of Depositor)
The Principal Financial Group, Des Moines, Iowa 50392
- --------------------------------------------------------------------------------
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (515) 248-3842
M. D. Roughton, The Principal Financial Group, Des Moines, Iowa 50392
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
_____ immediately upon filing pursuant to paragraph (b) of Rule 485
__X__ on December 29, 1997 pursuant to paragraph (b) of Rule 485
_____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
_____ on (date) pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
_____ This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
<PAGE>
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
FLEXIBLE VARIABLE ANNUITY ("FVA") CONTRACT
Registration Statement on Form N-4
Cross Reference Sheet
Form N-4 Item Caption in Prospectus
Part A
1. Cover Page Principal Mutual Life
Insurance Company Separate
Account B Flexible Variable
Annuity ("FVA") Contract
2. Definitions Glossary of Special Terms
3. Synopsis Expense Table and Example,
Summary
4. Condensed Financial Performance Calculation,
Information Independent Auditors,
Financial Statements
5. General Description of Summary, Description of
Registrant Principal Mutual Life
Insurance Company, Principal
Mutual Life Insurance Company
Separate Account B, Voting
Rights, Mutual Funds
6. Deductions Summary, Charges and
Deductions, Annual Fee,
Mortality and Expense Risks
Charge, Transaction Fee,
Premium Taxes, Surrender
Charge, Administrative Expense
Charge, Distribution of the
Contract
7. General Description of Summary, The Contract,
Variable Annuity Contract Purchasing a Contract,
Purchase Payment Limitations,
Allocation of Purchase Payment
Right to Examine the Contract,
Exchange Credit,
Prior to the Retirement Date,
Determining the Accumulated
Value of the Contract,
Allocation of Purchase Payments
and Transfers, Total and
Partial Surrenders, Benefit
Payable on Death of
Annuitant or Owner, After the
Retirement Date, Retirement
Date, Benefit Options, Death
of Annuitant or Other Payee,
Principal Mutual Life
Insurance Company Separate
Account B, General Provisions,
Rights Reserved by the Company,
Contractholders' Inquiries
8. Annuity Period After the Retirement Date,
Retirement Date, Benefit
Options
9. Death Benefit Benefit Payable on Death of
Annuitant or Owner, Death of
Annuitant or Payee, Federal
Tax Matters, Non-Qualified
Contracts, Required
Distributions for Non-Qualified
Contracts
10. Purchase and Contract Value Summary, The Contract,
Purchasing a Contract, Purchase
Payment Limitations, Allocation
of Purchase Payments, Right
to Examine the Contract, Prior
to the Retirement Date,
Determining the Accumulated
Value of the Contract,
Allocation of Purchase Payments
and Transfers, Postponement of
Payments, Distribution of the
Contract
11. Redemptions Summary, Benefit Options,
Total and Partial Surrenders,
Postponement of Payments
12. Taxes Summary, Benefit Options,
Federal Tax Matters,
Non-Qualified Contracts,
Required Distributions for
Non-Qualified Contracts, IRA,
SEP, SAR/SEP and SIMPLE-IRA,
Withholding, Mutual Fund
Diversification
13. Legal Proceedings Legal Proceedings
14. Table of Contents of the Table of Contents of the
Statement of Additional Statement of Additional
Information Information
Part B Statement of Additional
Information
Caption**
15. Cover Page Principal Mutual Life
Insurance Company Separate
Account B Flexible Variable
Annuity ("FVA") Contract
16. Table of Contents Table of Contents
17. General Information and None
History
18. Services Independent Auditors**,
Independent Auditors
19. Purchase of Securities Summary**, Allocation of
Being Offered Purchase Payments and
Transfers**, Distribution
of the Contract**
20. Underwriters Summary**, Distribution of the
Contract**
21. Calculation of Performance Calculation of Yield and
Data Total Return
22. Annuity Payments Benefit Options**
23. Financial Statements Financial Statements
** Prospectus caption given where appropriate.
<PAGE>
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
FLEXIBLE VARIABLE ANNUITY ("FVA") CONTRACT
Issued by Principal Mutual Life Insurance Company (the "Company")
Prospectus dated December 29, 1997
This Prospectus concisely sets forth information about Principal Mutual Life
Insurance Company Separate Account B and the Flexible Variable Annuity Contract
(the "Contract") that an investor ought to know before investing. It should be
read and retained for future reference.
Contributions to the Contract are not deposits or obligations of, or guaranteed
by or endorsed by any bank nor are contributions to the Contract federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other governmental agency.
Additional information about the Contract, including a Statement of Additional
Information, dated December 29, 1997, has been filed with the Securities and
Exchange Commission. The Statement of Additional Information is incorporated by
reference into this Prospectus. The table of contents of the Statement of
Additional Information appears on page 29 of this Prospectus. A copy of the
Statement of Additional Information can be obtained, free of charge, upon
request by writing or telephoning:
Variable Annuity
The Principal Financial Group
P.O. Box 9382
Des Moines, IA 50306-9382
Telephone: 1-800-247-9988
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.
This Prospectus is valid only when accompanied by the current prospectus for the
Principal Variable Contracts Fund, Inc. These prospectuses should be kept for
future reference.
TABLE OF CONTENTS
Page
Glossary of Special Terms .............................................. 3
Expense Table and Example............................................... 5
Summary ............................................................... 6
Condensed Financial Information......................................... 9
Description of Principal Mutual Life Insurance Company ................. 9
Principal Mutual Life Insurance Company Separate Account B ............. 10
Mutual Funds............................................................ 10
Surplus Distribution at Sole Discretion of the Company ................. 11
The Contract ........................................................... 11
Purchasing a Contract................................................ 11
Purchase Payment Limitations....................................... 11
Allocation of Purchase Payments.................................... 12
Right to Examine the Contract...................................... 12
Exchange Credit.................................................... 12
Prior to the Retirement Date......................................... 13
Determining the Accumulated Value of the Contract.................. 13
Allocation of Purchase Payments.................................... 14
Transfers.......................................................... 14
Automatic Portfolio Rebalancing.................................... 15
Telephone Services................................................. 15
Total and Partial Surrenders....................................... 15
Benefit Payable on Death of Annuitant or Owner..................... 16
After the Retirement Date............................................ 17
Retirement Date ................................................... 17
Benefit Options ................................................... 17
Death of Annuitant or Other Payee.................................. 19
Charges and Deductions ................................................. 19
Annual Fee........................................................... 19
Mortality and Expense Risks Charge .................................. 19
Transaction Fee...................................................... 20
Premium Taxes ....................................................... 20
Surrender Charge..................................................... 20
Administrative Expense Charge........................................ 21
Special Provisions for Group or Sponsored Arrangements............... 21
Fixed Account........................................................... 22
General Description ................................................. 22
Fixed Account Value ................................................. 22
Fixed Account Transfers, Total and Partial Surrenders................ 22
General Provisions ..................................................... 23
The Contract......................................................... 23
Postponement of Payments............................................. 23
Misstatement of Age or Sex and Other Errors.......................... 24
Assignment .......................................................... 24
Change of Owner...................................................... 24
Beneficiary.......................................................... 24
Reports ............................................................... 24
Rights Reserved by the Company.......................................... 24
Distribution of the Contract............................................ 25
Performance Calculation................................................. 25
Voting Rights........................................................... 26
Page
Federal Tax Matters..................................................... 26
Non-Qualified Contracts.............................................. 26
Required Distributions for Non-Qualified Contracts................... 27
IRA, SEP, SAR/SEP and SIMPLE-IRA..................................... 27
Withholding.......................................................... 28
Mutual Fund Diversification.......................................... 28
State Regulation........................................................ 28
Legal Opinions.......................................................... 28
Legal Proceedings....................................................... 28
Registration Statement.................................................. 28
Other Variable Annuity Contracts........................................ 29
Independent Auditors.................................................... 29
Financial Statements.................................................... 29
Contractholders' Inquiries.............................................. 29
Table of Contents of the Statement of Additional Information............ 29
Appendix A.............................................................. 30
This Prospectus does not constitute an offer of, or solicitation of any offer to
acquire, any interest in the Contract in any jurisdiction in which such an offer
or solicitation may not lawfully be made. No person is authorized to give any
information or to make any representations in connection with the Contract other
than those contained in this Prospectus.
GLOSSARY OF SPECIAL TERMS
Account -- Series or portfolio of a Mutual Fund in which a Separate Account
Division invests.
Accumulated Value -- An amount equal to the Fixed Account Value plus the
Separate Account Value.
Anniversary -- The same date and month of each year following the Contract Date.
Annual Fee -- A charge deducted once each Contract Year prior to the Retirement
Date, either on the last day of the Contract Year or the date the Contract is
surrendered in full (a total redemption).
Annuitant -- The person, including any Joint Annuitant, on whose life the
Benefit Option payment is based. This person may or may not be the Owner.
Benefit Option -- The options described in the Benefit Options section of this
Prospectus.
Contract Date -- The date the contract is issued as shown on the current Data
Page of the contract.
Contract Year -- The one-year period beginning on the Contract Date and ending
one day before the Anniversary and any subsequent one-year period beginning on
an Anniversary.
Example: If the Contract Date is June 5, 2000, the first Contract Year ends
on June 4, 2001, and the first Anniversary falls on June 5, 2001. The
second Contract Year ends on June 4, 2002, and the second Anniversary falls
on June 5, 2002, etc.
Critical Need -- The Owner's or Annuitant's confinement to a Health Care
Facility, Terminal Illness diagnosis or Total and Permanent Disability.
Division -- A part of the Separate Account to which Purchase Payments may be
allocated which invests in shares of an account of a Mutual Fund. The value of
an investment in a Division is variable and not guaranteed. Division may
sometimes be referred to as a Subaccount.
Fixed Account -- An account to which Purchase Payments may be allocated which
earns guaranteed interest.
Fixed Account Value -- The amount of an Owner's Accumulated Value which is in
the Fixed Account.
Health Care Facility -- A licensed hospital or inpatient nursing facility
providing daily medical treatment and keeping daily medical records for each
patient (not primarily providing just residency or retirement care). This does
not include a facility that primarily provides drug or alcohol treatment, or a
facility owned or operated by the Owner or Annuitant or a member of their
immediate families.
Internal Revenue Code -- The Internal Revenue Code of 1986, as amended, and
regulations thereunder. Reference to the Internal Revenue Code means such Code
or the corresponding provisions of any subsequent revenue code and any
regulations thereunder.
Joint Annuitant -- An additional Annuitant. The Joint Annuitants must be husband
and wife, and must be named as Owner and Joint Owner. Any reference to the
Annuitant's death means the death of the last surviving Annuitant.
(Joint Annuitants are not permitted in New Jersey, New York or Pennsylvania.)
Joint Owners -- An Owner who has an undivided interest with the right of
survivorship in this contract with another Owner. The Joint Owners must be
husband and wife, and must be named as Annuitant and Joint Annuitant. Any
reference to the Owner's death means the death of the last surviving Owner.
Joint ownership is not available for Contracts issued to residents of New
Jersey, Pennsylvania or New York.
Mutual Fund -- A registered open-end investment company in which a Division
invests.
Net Investment Factor -- The factor used to determine the change in the value of
a Unit during a Valuation Period.
Notice -- Any form of written communication received by the Company at its home
office or in another form approved in advance by the Company.
Owner -- The person, including any Joint Owner, who owns all rights and
privileges of this contract. If the Owner is not a natural person, the Owner
must be an entity with its own taxpayer identification number.
Purchase Payments -- The gross amount contributed to the Contract less any
applicable premium taxes or similar governmental assessments.
Retirement Date -- The date the Owner's Accumulated Value is applied, under a
Benefit Option, to make income payments.
Separate Account B -- An account established by the Company under Iowa law to
receive Purchase Payments under the Contract and other contracts issued by the
Company. It is divided into Divisions, each of which invests in shares of an
Account of a Mutual Fund. Divisions may be added, eliminated or combined in the
future.
Separate Account Value -- The amount of an Owner's Accumulated Value in all the
Divisions of the Separate Account.
Surrender Charge -- The charge deducted upon any partial or total surrender of
the Contract before the Retirement Date.
Terminal Illness -- A sickness or injury that results in the Owner's or
Annuitant's life expectancy being 12 months or less from the date notice to
receive a distribution from the Contract is provided to the Company.
Total and Permanent Disability -- A disability that occurs after the Contract
Date and that qualifies the Owner or Annuitant to receive Social Security
disability benefits.
Transaction Fee -- A charge deducted due to unscheduled partial surrenders from
the Contract after the first such surrender in a Contract Year and from
unscheduled transfers from a Separate Account Division after the twelfth such
transfer in a Contract Year.
Unit -- The accounting measure used to calculate the value of the Separate
Account Value prior to the Retirement Date.
Unit Value -- A measure used to determine the value of an investment in a
Division.
Valuation Date -- The date as of which the net asset value of a Mutual Fund is
determined.
Valuation Period -- The period of time between when the net asset value of a
Mutual Fund is determined on one Valuation Date and when such value is
determined on the next following Valuation Date.
EXPENSE TABLE AND EXAMPLE
The following tables depict fees and expenses applicable to the Contract.
The example below should not be considered a representation of past or future
expenses; actual expenses may be greater or less than those shown.
See "Charges and Deductions."
<TABLE>
EXPENSE TABLE
<S> <C>
Transaction Expenses
Sales Load Imposed on Purchases
(as a percentage of Purchase Payments) None
Surrender Charge (as a percentage
of amount surrendered)
Number of Completed Contract Years Since Surrender Charge Applied to all Purchase
Purchase Payment was made Payments Received in that Contract Year
0 (year of Purchase Payment) 6%
1 6%
2 6%
3 5%
4 4%
5 3%
6 2%
7 and later 0%
Transaction Fee (a) No fee on first unscheduled partial surrender during a
Contract Year; $30 on each unscheduled surrender thereafter.
Annual Contract Fee The lesser of $30 or 2% of the Accumulated Value.
Separate Account Annual Expenses (b)
(as a percentage of average account value)
Mortality and Expense Risks Fees 1.25%
Other Separate Account Expenses 0
------
Total Separate Account Annual
Expenses 1.25%
Annual Expenses of Accounts
(as a percentage of average net assets)
</TABLE>
Management Total Account
Fees Other Expenses Annual Expenses
Aggressive Growth Account .80% .05% .85%
Asset Allocation Account .80% .07% .87%
Balanced Account .60% .03% .63%
Bond Account .50% .03% .53%
Capital Value Account .48% .01% .49%
Government Securities Account .50% .02% .52%
Growth Account .50% .02% .52%
International Account .75% .15% .90%
MidCap Account .64% .02% .66%
Money Market Account .50% .06% .56%
(a) $30 transaction fee will be assessed on each unscheduled transfer after
the twelfth such transfer during a Contract Year.
(b) The Company has reserved the right to assess a daily administrative
charge at a nominal annual rate of .15% of the average daily net assets
of each Division of the Separate Account.
<TABLE>
<CAPTION>
EXAMPLE
Separate Account Division 1 Year 3 Years 5 Years 10 Years
- -------------------------------------------- ----------
<S> <C> <C> <C> <C> <C>
If you surrender your contract at the end Aggressive Growth Division $83 $121 $149 $246
of the applicable time period: Asset Allocation Division $84 $122 $150 $248
Balanced Division $81 $115 $138 $223
You would pay the following Bond Division $80 $112 $133 $213
expenses on a $1,000 investment, Capital Value Division $80 $111 $131 $208
assuming 5% annual return on assets: Government Securities Division $80 $112 $133 $212
Growth Division $80 $112 $133 $212
International Division $84 $123 $151 $251
MidCap Division $82 $116 $140 $227
Money Market Division $81 $113 $135 $216
If you annuitize at the end of the Aggressive Growth Division $22 $67 $114 $246
applicable time period or do not Asset Allocation Division $22 $67 $115 $248
---
surrender your contract: Balanced Division $19 $60 $103 $223
Bond Division $18 $57 $98 $213
Capital Value Division $18 $56 $96 $208
You would pay the following Government Securities Division $18 $57 $98 $212
expenses on a $1,000 investment, Growth Division $18 $57 $98 $212
assuming 5% annual return on assets: International Division $22 $68 $117 $251
MidCap Division $20 $61 $105 $227
Money Market Division $19 $58 $100 $216
</TABLE>
The purpose of the above table is to assist the Owner in understanding the
various costs and expenses that an Owner will bear directly or indirectly. The
table reflects expenses of the Separate Account as well as the expenses of the
Accounts in which the Separate Account invests. In certain circumstances, state
premium taxes will also be applicable. See "Charges and Deductions."
SUMMARY
The following summary should be read in conjunction with the detailed
information in this Prospectus. This Prospectus generally describes only the
portion of the Contract involving the Separate Account. For a brief description
of the Fixed Account, please refer to the heading "Fixed Account" in this
Prospectus.
The Flexible Variable Annuity Contract (also known as the Principal Variable
Annuity Contract) (the "Contract") described in this Prospectus is designed to
provide individuals with retirement benefits in connection with (1) Individual
Retirement Annuity plans or programs ("IRA Plans"), Simplified Employee Pension
Plans ("SEPs"), Salary Reduction Simplified Employee Pension Plans ("SAR/SEPs")
and Savings Incentive Match Plan for Employees ("SIMPLE") IRAs adopted pursuant
to Section 408 of the Internal Revenue Code and (2) non-qualified retirement
plans.
Minimum Investment Amount
For Contracts issued in connection with non-qualified retirement plans, the
initial Purchase Payment must be at least $2,500. The initial Purchase Payment
for all other Contracts must be at least $1,000. The minimum subsequent
investment is $100. A $100 monthly minimum for initial and subsequent
investments is available for Contracts to which Purchase Payments are made on a
monthly basis through a payroll deduction plan or through an account of bank or
similar financial institution under an Automatic Investment Program. Forms and
preauthorized check agreements to establish an Automatic Investment Program are
available from Princor Financial Services Corporation. For Contracts which are
issued in connection with a retirement plan covering more than four people, the
initial and subsequent monthly Purchase Payment under each Contract must at all
times average at least $100 and in no case be less than $50. The Company
reserves the right to terminate a Contract and distribute the Accumulated Value,
less any applicable charges, if no Purchase Payments are paid during two
consecutive calendar years and the Accumulated Value or total Purchase Payments
less partial surrenders and applicable surrender charges is less than $2,000.
See "Purchase Payment Limitations."
The initial Purchase Payment is allocated, as specified by the Owner in the
Contract application, among one or more of the Divisions of the Separate
Account, or to the Fixed Account, or to both. Subsequent Purchase Payments are
allocated in the same way, or pursuant to different allocation percentages that
the Owner may subsequently specify.
Separate Account Investment Options
Each of the Divisions of the Separate Account invests in shares of a
corresponding Account in the Principal Variable Contracts Fund, Inc. The
Accumulated Value in each of the Divisions of the Separate Account will vary to
reflect the investment experience of each of the corresponding Accounts as well
as deductions for certain charges.
Each Account has a separate and distinct investment objective and is managed by
Principal Management Corporation, (formerly known as Princor Management
Corporation)("Manager"). For providing investment management services to the
Accounts of the Principal Variable Contracts Fund, Inc.(the "Fund"), the Manager
receives fees from each Account based on the average daily net assets of the
Account. Each Account also bears most of its other expenses. A full description
of Accounts and their investment objectives, policies and risks can be found in
the current Prospectus for the Principal Variable Contracts Fund, Inc., which
accompanies this Prospectus.
Transfers
Subject to restrictions described in this Prospectus, an Owner can transfer all
or part of the Accumulated Value among the Contract's investment options prior
to the Retirement Date. Transfers from one Division to another or into the Fixed
Account can be made by the Owner on an unscheduled or scheduled basis. Owners
may transfer limited amounts once each Contract Year from the Fixed Account to
the Separate Account or may elect to make scheduled monthly transfers.
Total or Partial Surrenders
All or part of the Accumulated Value of a Contract may be surrendered by the
Owner prior to the Retirement Date. Amounts surrendered may be subject to a
Surrender Charge and total surrenders will be subject to the Annual Fee, if
applicable. The Surrender Charge does not apply to certain withdrawals including
the withdrawal during any Contract Year of an amount not to exceed the greater
of the earnings in the Contract or 10% of the Purchase Payments otherwise
subject to the Surrender Charge. See "Total and Partial Surrenders," "Surrender
Charge" and "Annual Fee." Particular attention should be paid to the tax
implications of any surrender, including possible penalties for premature
distributions. See "Federal Tax Matters."
Charges and Deductions
The Company deducts daily charges at a rate of 1.25% per year of the value of
the average net assets of the Separate Account for the mortality and expense
risks it assumes. The Company has reserved the right to assess a daily charge at
a rate of .15% per year of the value of the average net assets in the Separate
Account to cover certain administrative expenses. See "Mortality and Expense
Risks Charge" and "Administrative Expense Charge."
To permit investment of the entire Purchase Payment, the Company does not deduct
sales charges at the time of investment. However, a Surrender Charge is imposed
on certain total or partial surrenders of the Contract to help defray expenses
relating to the sale of the Contract, including commissions to registered
representatives and other promotional expenses. Certain amounts may be
surrendered without the imposition of any Surrender Charge.
See "Surrender Charge."
There is also an Annual Fee for Contract administration and maintenance. This
charge is the lesser of $30 or 2% of the Owner's Accumulated Value (subject to
any applicable state law limitations) and is deducted on each Anniversary and
upon total surrender of the Contract. This charge is not deducted during the
Benefit Option period. The Company currently waives the Annual Fee for Contracts
that have an Accumulated Value on the last day of the Contract Year of at least
$30,000.
Certain states and other jurisdictions impose premium taxes or similar
assessments upon the Company, either at the time Purchase Payments are made or
when the Accumulated Value is surrendered or applied under a Benefit Option. The
Company reserves the right to deduct an amount from Purchase Payments or
Accumulated Value to cover such taxes or assessments, if any, when applicable.
Benefit Option Payments
The Contract provides several types of fixed payment Benefit Options to
Annuitants or their Beneficiaries. The Owner has considerable flexibility in
choosing the Retirement Date. However, the tax implications of distributions
must be carefully considered, including the possibility of penalties for
commencing benefits either too soon or too late. See "Benefit Options" and
"Federal Tax Matters."
Death Benefit
In the event that the Annuitant or Owner dies prior to the Retirement Date, an
enhanced death benefit is payable to the Beneficiary of the Contract. The death
benefit may be paid as either a single sum cash benefit or under a Benefit
Option. See "Benefit Payable on Death of Annuitant or Owner." In the event the
Annuitant dies on or after the Retirement Date, the Beneficiary will receive
only any continuing payments which may be provided by the Benefit Option in
effect.
Right to Examine the Contract
The Owner has a right to examine the Contract. The Owner can cancel the Contract
by delivering or mailing it, together with a written request, to the Company's
home office or to the sales representative through whom it was purchased, before
the close of business on the tenth day (or such later date as provided by
applicable state law) after receipt of the Contract. If these items are sent by
mail, properly addressed and postage prepaid, they will be deemed to be received
by the Company on the date postmarked. The Company will return either all
Purchase Payments made, without interest or appreciation, or the Accumulated
Value of the Contract, whichever is required by applicable state law.
Tax Implications
The tax implications for Owners, Annuitants and Beneficiaries can be quite
important. A brief discussion of some of these is set out under "Federal Tax
Matters" in this Prospectus, but such discussion is not comprehensive.
Therefore, an Owner should consider these matters carefully and consult a
qualified tax advisor before making Purchase Payments or taking any other action
in connection with the Contract. Failure to do so could result in serious
adverse tax consequences which might otherwise have been avoided.
Questions and Other Communications
Any question about procedures or the Contract should be directed to a sales
representative, or the Company's home office: Variable Annuity, The Principal
Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382; 1-800-247-9988.
Purchase Payments and written requests should be mailed or delivered to the same
home office address. All communications should include the Contract number, the
Owner's name and, if different, the Annuitant's name.
Any Purchase Payment or other communication, except a cancellation notice
described above under "Right to Examine the Contract," is deemed received at the
Company's home office on the actual date of receipt there in proper form unless
received (1) after the close of regular trading on the New York Stock Exchange,
or (2) on a date that is not a Valuation Date. In either of these two cases, the
date of receipt will be deemed to be the next Valuation Date.
Total or Partial Surrenders
An Owner may withdraw cash from the Contract at any time prior to the Retirement
Date subject to any charges that may be applied. See "Total and Partial
Surrenders." Note that withdrawals before age 59 1/2 may involve an income tax
penalty. See "Federal Tax Matters."
CONDENSED FINANCIAL INFORMATION
Financial statements are included in the Statement of Additional
Information. Following are Unit Values for the Flexible Variable Annuity
Contract for the periods ended December 31.
<TABLE>
<CAPTION>
Accumulation Unit Value Number of Accumulation Units
Beginning End Outstanding at End of Period
of period of period (in thousands)
Aggressive Growth Division
Year Ended December 31
<S> <C> <C> <C>
1996 14.503 18.340 3,971
1995 10.184 14.503 1,324
Period Ended December 31, 1994 (1) 10.075 10.184 362
Asset Allocation Division
Year Ended December 31
1996 11.891 13.260 2,264
1995 9.978 11.891 912
Period Ended December 31, 1994 (1) 10.075 9.978 303
Balanced Division
Year Ended December 31
1996 12.270 13.708 4,661
1995 9.972 12.270 1,373
Period Ended December 31, 1994 (1) 10.266 9.972 370
Bond Division
Year Ended December 31
1996 12.143 12.275 3,872
1995 10.064 12.143 1,401
Period Ended December 31, 1994 (1) 10.050 10.064 301
Capital Value Division
Year Ended December 31
1996 13.333 16.261 6,267
1995 10.234 13.333 2,232
Period Ended December 31, 1994 (1) 10.328 10.234 699
Government Securities Division
Year Ended December 31
1996 11.728 11.969 5,443
1995 9.973 11.728 2,023
Period Ended December 31, 1994 (1) 10.133 9.973 572
Growth Division
Year Ended December 31
1996 12.970 14.411 6,089
1995 10.454 12.970 2,619
Period Ended December 31, 1994 (1) 10.336 10.454 764
International Division
Year Ended December 31
1996 10.804 13.347 4,797
1995 9.582 10.804 2,146
Period Ended December 31, 1994 (1) 9.624 9.582 936
MidCap Division
Year Ended December 31
1996 12.880 15.405 7,285
1995 10.108 12.880 3,059
Period Ended December 31, 1994 (1) 10.157 10.108 973
Money Market Division
Year Ended December 31
1996 10.628 11.027 2,929
1995 10.194 10.628 1,370
Period Ended December 31, 1994 (1) 10.027 10.194 702
<FN>
(1) Commenced operations on June 16, 1994.
</FN>
</TABLE>
DESCRIPTION OF PRINCIPAL MUTUAL LIFE INSURANCE COMPANY (The "Company")
Principal Mutual Life Insurance Company is a mutual life insurance company with
its home office at The Principal Financial Group, Des Moines, Iowa 50306,
telephone number 515-247-5111. It was originally incorporated under the laws of
the State of Iowa in 1879 as Bankers Life Association, changed its name to
Bankers Life Company in 1911 and changed its name to Principal Mutual Life
Insurance Company in 1986. It is a member of The Principal Financial Group, a
diversified family of insurance and financial services corporations.
Principal Mutual Life Insurance Company is authorized to do business in the 50
states of the United States, the District of Columbia, the Commonwealth of
Puerto Rico, and the Canadian Provinces of Alberta, British Columbia, Manitoba,
Ontario and Quebec. The Company offers a full range of products and services for
businesses, groups and individuals including individual insurance, pension plans
and group/employee benefits. The Company has ranked in the upper one percent of
life insurers in assets and premium income and has consistently received
excellent ratings from the major rating firms based upon the Company's
claims-paying ability. The Company has $56.8 billion in assets under management
and serves more than 9.7 million individuals and their families.
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
Separate Account B was established on January 12, 1970 pursuant to a resolution
(as amended) of the Executive Committee of the Board of Directors of the
Company. Under Iowa insurance laws and regulations the income, gains or losses,
whether or not realized, of Separate Account B are credited to or charged
against the assets of Separate Account B without regard to the other income,
gains or losses of the Company. Although the assets of Separate Account B equal
to the reserves and liabilities arising under the contracts issued thereunder
will not be charged with any liabilities arising out of any other business
conducted by the Company, the reverse is not true. Hence, all obligations
arising under the Contract, including the promise to make payments under the
Benefit Options, are general corporate obligations of the Company.
Separate Account B was registered on July 17, 1970 with the Securities and
Exchange Commission as a unit investment trust under the Investment Company Act
of 1940, as amended. Such registration does not involve supervision by the
Commission of the investments or investment policies of Separate Account B.
The Company is taxed as an insurance company under the Internal Revenue Code.
The operations of Separate Account B are part of the total operations of the
Company but are treated separately for accounting and financial statement
purposes and are considered separately in computing the Company's tax liability.
Separate Account B is not affected by federal income taxes paid by the Company
with respect to its other operations, and under existing federal income tax law,
investment income and capital gains attributable to Separate Account B are not
taxed. The Company reserves the right to charge Separate Account B with, and to
create a reserve for, any tax liability which the Company determines may result
from maintenance of Separate Account B. To the best of the Company's knowledge,
there is no current prospect of any such liability.
There are currently eleven Divisions in Separate Account B. The assets of
Divisions are invested exclusively in shares of a corresponding Account of the
Principal Variable Contracts Fund, Inc. New Divisions may be added and made
available to Owners of the Contract. Divisions may also be eliminated from the
Separate Account. Some of these Accounts also offer their shares to variable
annuity separate accounts of the Company and to variable annuity and variable
life separate accounts of unaffiliated insurance companies.
MUTUAL FUNDS
The Divisions of Separate Account B currently invest exclusively in shares of an
Account of the Fund. The ten Accounts available for investment are as follows:
Aggressive Growth, Asset Allocation, Balanced , Bond, Capital Value, Government
Securities, Growth, International, MidCap and Money Market. A full description
of the Accounts, their investment policies and restrictions, their charges, the
risks attendant to investing in them, and other aspects of their operations is
contained in the Prospectus for the Fund accompanying this Prospectus and in the
Statement of Additional Information for the Fund referred to therein. Additional
copies of these documents may be obtained from a sales representative or from
the Company's home office.
The Principal Variable Contracts Fund, Inc. is a diversified, open-end
investment management company, typically known as a Mutual Fund. The Manager for
the Fund is Principal Management Corporation. Some of the Accounts of the Fund
are also used to fund variable life insurance contracts issued by the Company.
The Fund's Board of Directors will monitor events in order to identify any
material irreconcilable conflicts between the interests of the variable annuity
contract owners and life insurance policyowners that may develop and to
determine what action, if any, should be taken in response thereto. If it
becomes necessary for any separate account to replace shares of any Account with
another investment, the Account may have to liquidate securities on a
disadvantageous basis. See "Eligible Purchasers and Purchase of Shares" in the
Fund prospectus for a discussion of the potential risks associated with "mixed
funding."
The Company purchases and redeems shares of the Accounts for the Separate
Account at their net asset value without the imposition of any sales or
redemption charges. Such shares represent interests in the Accounts available
for investment by the Separate Account. Each Account corresponds to one of the
Divisions of the Separate Account. The assets of each Account are separate from
the others and each Account's performance has no effect on the investment
performance of any other Account.
Any dividend or capital gain distributions attributable to the Contract are
automatically reinvested in shares of the Account from which they are received
at that Account's net asset value on the date paid. Such dividends and
distributions will have the effect of reducing the net asset value of each share
of the corresponding Account and increasing, by an equivalent value, the number
of shares outstanding of that Account. However, the value of the interests of
Owners in the corresponding Division will not change as a result of any such
dividends and distributions.
SURPLUS DISTRIBUTION AT SOLE DISCRETION OF THE COMPANY
It is not anticipated that any divisible surplus will ever be distributable to
these Contracts in the future because the Contracts are not expected to result
in a contribution to the divisible surplus of the Company. However, if any
distribution of divisible surplus is made, it will be made to Owners in the form
of cash.
THE CONTRACT
The Contract described in this Prospectus is designed to provide individuals
with retirement benefits in connection with (1) Individual Retirement Annuity
plans or programs ("IRA Plans"), Simplified Employee Pension Plans ("SEPs") and
Salary Reduction Simplified Employee Pension Plans ("SAR/SEPs") and Savings
Incentive Match Plan for Employees ("SIMPLE") IRAs adopted pursuant to Section
408 of the Internal Revenue Code and (2) non-qualified retirement plans. The
Contract provides for the accumulation of values on a fixed and variable basis
and the payment of annuity benefits in the form of Benefit Options on a fixed
basis.
A. Purchasing a Contract
Persons wishing to purchase a Contract must complete an application and
make an initial Purchase Payment. Receipt of the Initial Purchase Payment
at the time of application is not required in connection with SEPs. The
application is forwarded to the Company for processing. Acceptance is
subject to underwriting and suitability rules and procedures. The Company
reserves the right to reject any application or any Purchase Payment if, in
the view of the Company, the Company's underwriting and suitability rules
and procedures are not satisfied.
Purchase Payments which are remitted through an employer for multiple
employee-Owner/Annuitants must also be accompanied by information
identifying the proper Contracts and accounts to be credited with Purchase
Payments.
If the application can be accepted in the form received, the initial
Purchase Payment will be credited within two Valuation Dates after the
later of receipt of the application or receipt of the initial Purchase
Payment at the Company's home office. If the initial Purchase Payment
cannot be credited within five Valuation Dates after receipt because the
application or other issuing requirements are incomplete, the initial
Purchase Payment will be returned unless the applicant consents to our
retaining the initial Purchase Payment and crediting it within two
Valuation Dates after the necessary requirements are fulfilled.
The date that the Contract is issued is the Contract Date. The Contract
Date is the date used to determine Contract Years, regardless of when the
Contract is delivered. The crediting of investment experience in the
Separate Account, or a fixed rate of return in the Fixed Account, begins as
of the Contract Date, even if that date is delayed due to underwriting or
administrative requirements.
Generally, additional Purchase Payments will be accepted at any time after
the Contract Date and prior to the Retirement Date, as long as the
Annuitant is living. Purchase Payments (together with any required
information identifying the proper Contracts and accounts to be credited
with Purchase Payments) must be delivered to the Company's home office.
Additional Purchase Payments are credited to the Contract and added to the
Accumulated Value as of the end of the Valuation Period in which they are
received.
1. Purchase Payment Limitations
For Contracts issued in connection with non-qualified retirement Plans,
the initial Purchase Payment must be at least $2,500. The initial
Purchase Payment for all other Contracts must be at least $1,000. The
minimum subsequent investment is $100. A $100 monthly minimum for
initial and subsequent investments is available for Contracts to which
Purchase Payments are made on a monthly basis through an account of a
bank or similar financial institution under an Automatic Investment
Program. Forms and preauthorized check agreements to establish an
Automatic Investment Program are available from Princor Financial
Services Corporation. For Contracts which are issued in connection with
a retirement plan covering more than four people, the initial and
subsequent monthly Purchase Payments under each Contract must at all
times average at least $100 and in no case be less than $50. The
Company reserves the right to increase the minimum amount for each
Purchase Payment to not more than $1,000. The Company reserves the
right to terminate a Contract and distribute the Accumulated Value,
less any applicable charges, if no premiums are paid during two
consecutive calendar years and the Accumulated Value or total Purchase
Payments less partial surrenders and applicable surrender charges is
less than $2,000. The Company will notify the Owner of its intent to
exercise this right and provide the Owner a 60 day period to increase
the Accumulated Value to $2,000.
The total of all Purchase Payments may not exceed $2,000,000 without
the Company's prior approval. In New Jersey, after the first Contract
Year, the total of Purchase Payments made during a Contract Year may
not exceed $100,000.
2. Allocation of Purchase Payments
The initial Purchase Payment is allocated, as specified by the Owner in
the Contract application, among one or more of the Divisions of the
Separate Account, or to the Fixed Account, or to both. Subsequent
Purchase Payments are allocated in the same way, or pursuant to
different allocation percentages that the Owner may subsequently
specify. Allocations to the Fixed Account are not allowed if the Fixed
Account Value immediately after the allocation exceeds $1,000,000,
except with our prior approval.
Some states require the Company to return the initial Purchase Payment
to an Owner who reconsiders the decision to purchase the Contract
within a certain time period. See "Right to Examine the Contract."
Initial Purchase Payments for a Contract issued in one of the states in
the following table are allocated to the Money Market Division until 15
days (20 days for Contracts issued in the State of Idaho) after the
Contract Date at which time they are reallocated in accordance with the
Owner's allocation instructions.
States in Which Purchase Payments are Returned
Colorado Kentucky North Carolina
Connecticut* Louisiana Oklahoma
Georgia Maryland Rhode Island
Hawaii Michigan South Carolina
Idaho Missouri Utah
Indiana Nebraska Washington
* Purchase Payments are refunded if the Contract is cancelled prior to
its delivery, otherwise the account value is refunded.
3. Right to Examine the Contract
Under state law, the Owner has the right to examine the Contract. The
right is often referred to as a "free look" period. The "free look"
period is 10 days after the date the contract is delivered to the Owner
in all states except as follows:
a. Contracts issued in California to Owners age 60 and over have a
30 day "free look" period;
b. Contracts issued in Colorado have a 15 day "free look" period;
and
c. Contracts issued in Idaho and North Dakota have a 20 day "free
look" period.
The Owner can cancel the Contract by delivering or mailing it, together
with a written request, to the Company's home office or to the sales
representative through whom it was purchased, before the close of
business on the last day of the "free look" period. If these items are
sent by mail, properly addressed and postage prepaid, they will be
deemed to be received by the Company on the date postmarked for the
purpose of determining whether the "free look" period has elapsed. If
the Purchase Payments are allocated to the Money Market Division as
described above under "Allocation of Purchase Payments," the Company
will return the greater of the Contract's value or Purchase Payments
paid if the Contract is cancelled. Otherwise, the Company will return
the Accumulated Value of the Contract.
4. Exchange Credit
Owners of Single Premium Deferred Annuities ("SPDA") and Single Premium
Deferred Annuity Plus ("SPDA+") contracts that have been issued by the
Company and are within at least eight months of the eighth Contract
Year may transfer the accumulated value, free of surrender charge, to
the Contract described in this Prospectus. In addition, the Company
will add an amount as an Exchange Credit. Currently, the amount of the
Exchange Credit is one percent (1%) of the SPDA or SPDA+ surrender
value. The amount of the Exchange Credit is subject to change. The
Company reserves the right to terminate this Exchange Credit program.
In making the decision as to whether to make an exchange, the Owner
should carefully review the SPDA contract or the SPDA+ contract and
this Prospectus as the charges and provisions of the contracts differ.
If the existing SPDA or SPDA+ contract is currently eligible for waiver
of Surrender Charge due to critical need, similar riders may not be
available under this Contract.
To initiate an exchange, the Company must receive 1) an application
for the Contract; 2) a surrender form for the existing SPDA/SPDA+
contract; 3) a replacement form (based on state written) and 4) an
Annuity Exchange Request and Release Form. The exchange will become
effective upon receipt of completed items listed above and acceptance
of the application. The transaction will be valued at the end of the
Valuation Period in which the Company receives all the necessary
documentation at its home office.
The Exchange Credit is allocated among the Divisions of the Separate
Account or to the Fixed Account, or both, in the same ratio as the
Purchase Payment. The credit is treated as additional income for income
tax purposes. If the Owner exercises the right to return the Contract
during the "free look" period, the amount returned is reduced by any
credit applied. See "Right to Examine the Contract".
B. Prior to the Retirement Date
1. Determining the Accumulated Value of the Contract
The Owner's Accumulated Value is the total of any Separate Account
Value plus any Fixed Account Value under the Contract. For a discussion
of how Fixed Account Value is calculated, see "Fixed Account."
There is no guaranteed minimum Separate Account Value. The Separate
Account Value will reflect the investment experience of the chosen
Divisions of the Separate Account, all Purchase Payments made, any
partial surrenders, and all charges assessed in connection with the
Contract. Therefore, the Separate Account Value changes from Valuation
Period to Valuation Period. To the extent Accumulated Value is
allocated to the Separate Account, the Owner bears the entire
investment risk.
A Contract's Separate Account Value is based on Unit Values, which are
determined on each Valuation Date. The value of a Unit for a Division
on any Valuation Date is equal to the previous value of that Division's
Unit multiplied by that Division's Net Investment Factor (discussed
directly below) for the Valuation Period ending on that Valuation Date.
Net Purchase Payments applied to a given Division will be used to
purchase Units at the Unit Value of that Division next determined after
receipt of a Purchase Payment. See "Allocation of Purchase Payments and
Transfers."
At the end of any Valuation Period, a Contract's Separate Account Value
in a Division is equal to:
o The number of Units in the Division; times
o The value of one Unit for that Division.
The number of Units in each Division is equal to:
o The initial Units purchased on the Contract Date; plus
o Units purchased at the time that additional Purchase Payments are
allocated to the Division; plus
o Units purchased through transfers from another Division or from
the Fixed Account; less
o Units redeemed to pay for the portion of any partial surrenders
allocated to the Division; less
o Units redeemed as part of a transfer to another Division or to
the Fixed Account; less
o Units redeemed to pay charges under the Contract.
Net Investment Factor. Each Net Investment Factor is the quantitative
measure of the investment performance of each Division of Separate
Account B. For any specified Valuation Period the Net Investment
Factor for a Division for a Contract is equal to
(a) the quotient obtained by dividing (i) the net asset value of
a share of the underlying Account as of the end of the
Valuation Period, plus the per share amount of any dividend
or other distribution made by the Account during the
Valuation Period (less an adjustment for taxes, if any) by
(ii) the net asset value of a share of the Account as of the
end of the immediately preceding Valuation Period,
reduced by
(b) a mortality and expense risks charge in an amount equal to a
simple interest rate for the number of days within the
Valuation Period equivalent to an annual rate of 1.25%. The
Company has reserved the right to assess a daily
administrative expense charge at an annual rate of up to
.15% of the value of the average Separate Account net
assets. If and to the extent such a charge is assessed, such
charge will be included in the calculation of the Net
Investment Factor in the same manner as the mortality and
expense risks charge.
The amount of any taxes referred to in subparagraph (a) above
(currently none) and the amounts derived from applying the rate
specified in subparagraph (b) above will be accrued daily and will be
transferred from Separate Account B at the discretion of the Company.
2. Allocation of Purchase Payments
Allocation of Purchase Payments. In the application for a Contract, the
Owner can allocate Purchase Payments, or portions thereof, to the
available Divisions of the Separate Account or to the Fixed Account, or
both. Percentages must be in whole numbers and the total allocation
must equal 100%. The percentage allocations for future Purchase
Payments may be changed, without charge, at any time by sending a
written request to the Company's home office or by telephone as
described below. Changes in the allocation of future Purchase Payments
will be effective at the end of the Valuation Period in which the
Company receives the Owner's request.
3. Transfers
Unscheduled Transfers. Transfers of amounts from one available Division
of the Separate Account to another or into the Fixed Account can be
made by the Owner. A transfer from a Division of the Separate Account
to the Fixed Account may not be made if a transfer from the Fixed
Account to a Division of the Separate Account has been made within the
six-month period prior to the date of the requested transfer to the
Separate Account or if immediately after the transfer to the Fixed
Account the Owner's Fixed Account Value exceeds $1 million. The amount
to be transferred may be stated as a dollar amount or as a percentage
of the Separate Account Value of the Division from which the transfer
is to be made. The amount transferred from each Division must equal or
exceed the lesser of $100 or 100% of the Owner's interest in the
Division. Transfers may be completed by sending a written request to
the Company at its home office, or by telephone as described below.
All or part of the values in one or more Divisions of the Separate
Account may be transferred at one time. Transfers from the Fixed
Account are restricted on both amount and timing. See "Fixed Account
Transfers, Total and Partial Surrenders." Transfers from a Division of
the Separate Account will be executed and values will be determined in
connection with the transfers as of the end of the Valuation Period in
which the Company receives the transfer request. There is a $30 charge
on unscheduled transfers after the twelfth such transfer during a
Contract year. For this purpose, all transfers between and among the
Divisions of the Separate Account and the Fixed Account will be treated
as one transfer, if all the transfer requests are made at the same time
as part of one request. The Company also reserves the right to reject
transfer instructions provided by a person providing them for multiple
contracts.
Scheduled Transfers. The owner may elect to have automatic transfers
completed on a periodic basis from any Division of the Separate
Account. Scheduled transfers are available from a Division only if the
value of the Separate Account Value in such Division equals or exceeds
$5,000. An Owner may establish scheduled transfers by sending a written
request to the Company at its home office or by telephone as described
below. Scheduled transfers will be completed on a monthly, quarterly,
semi-annual or annual basis on the date (other than the 29th, 30th or
31st) specified by the Owner. If the requested date is not a Valuation
Date, the transfer will be completed on the next valuation date
following such specified date. Scheduled transfers of the dollar amount
specified by the Owner (minimum of $100) will continue until the
Separate Account Value in the Division from which such transfers are
made is exhausted or until the Owner notifies the Company to
discontinue such transfers. The Company reserves the right to limit the
number of Divisions from which transfers will be made simultaneously,
but in no event will such limitation be less than two Divisions.
4. Automatic Portfolio Rebalancing
Automatic Portfolio Rebalancing (APR) allows you to maintain a specific
percentage of your contract values in each account over time. You may
elect APR at the time of application or after the Contract has been
issued.
For example, a customer may elect APR and choose to rebalance so 50 %
of policy values are in the Capital Value Division and 50 % are in the
Money Market Division. At the end of the specified period, 60 % of the
values may be invested in the Capital Value Division, with the
remaining 40 % invested in the Money Market Division. By rebalancing,
units from the Capital Value Division are redeemed and applied as
purchase payments to the Money Market Division so 50 % of the contract
values are once again invested in each division.
APR is not available for values in the Fixed Account. You may elect APR
only if you have not arranged for scheduled transfers from the same
divisions.
APR transfers will not begin until the expiration of the "free look"
period (see "Right to Examine the Contract"). There will be no charge
for APR transfers. These transfers will not be considered as
unscheduled transfers in determining any transfer fee.
You may rebalance through APR quarterly, semi-annually, or annually
based on a calendar year or contract year. In addition, you may
rebalance on a one-time basis by completing a form and submitting it to
the Company home office or by calling 1-800-247-9988 (if telephone
privileges apply). The transfers will be made at the end of the next
Valuation Period after the APR instruction is received by the Company.
5. Telephone Services
Unless telephone transaction services (where allowed by state law) are
declined on the application for a Contract, or at any subsequent time
the Owner notifies the Company in writing to remove telephone
transaction services, changes in the allocation of future Purchase
Payments and transfers may be made pursuant to telephone instructions,
subject to the above terms. The telephone transactions may be exercised
by telephoning 1-800-247-9988. Telephone transfer requests must be
received by the close of the New York Stock Exchange on a day when the
Company is open for business to be effective that day. Requests made
after that time or on a day when the Company is not open for business
will be effective the next business day. Although neither the Separate
Account nor the Company is responsible for the authenticity of
telephone transaction requests, the right is reserved to refuse to
accept telephone requests when in the opinion of the Company it seems
prudent to do so. The Owner bears the risk of loss caused by fraudulent
telephone instructions the Company reasonably believes to be genuine.
The Company will employ reasonable procedures to assure telephone
instructions are genuine and if such procedures are not followed, the
Company may be liable for losses due to unauthorized or fraudulent
transactions. Such procedures include recording all telephone
instructions, requesting personal identification information such as
the caller's name, daytime telephone number, social security number
and/or birthdate and sending a written confirmation of the transaction
to the Owner's address of record. Owners may obtain additional
information and assistance by telephoning the toll free number.
Telephone instructions received from any joint contract owner will be
binding on all contract owners. The Company may modify or terminate
telephone transfer procedures at any time.
You may obtain contract information from our Direct Dial system between
7:00 am and 9:00 pm, Central time, Monday through Saturday. Through
this automated telephone system, you can obtain information about unit
values and contract values, initiate certain changes to your contract,
change your Personal Identification Number (PIN), or speak directly to
a customer service representative. The telephone number is
1-800-247-9988. As with other telephone services, instructions received
via our Direct Dial system will be binding on all contractowners.
6. Total and Partial Surrenders
Total Surrenders. The Owner may surrender all of the cash surrender
value at any time during the life of the Annuitant and prior to the
Retirement Date by a written request sent to the Company's home office.
The Company reserves the right to require that the Contract be returned
to the Company prior to making payment, although this will not affect
the determination of the amount of the cash surrender value. Cash
surrender value is the Accumulated Value at the end of the Valuation
Period during which the written request for the total surrender is
received by the Company at its home office, less any applicable
Surrender Charge, Annual Fee and Transaction Fee. For discussion of
these charges and the circumstances under which they apply, see "Annual
Fee," "Surrender Charge," and "Transaction Fee."
The written consent of all collateral assignees and irrevocable
beneficiaries of a non-qualified Contract must be obtained prior to any
total surrender. Surrenders from the Separate Account will generally be
paid within seven days of the date of receipt by the Company's home
office of the written request, or such earlier date as required by law.
Postponement of payments may occur, however, in certain circumstances.
See "Postponement of Payments."
Since the Owner assumes the investment risk with respect to amounts
allocated to the Separate Account, and because certain surrenders are
subject to a Surrender Charge, the amount paid upon total surrender of
the cash surrender value (taking into account any prior partial
surrenders) may be more or less than the total Purchase Payments made.
Unscheduled Partial Surrenders. At any time prior to the Retirement
Date and during the lifetime of the Annuitant, the Owner may surrender
a portion of the Fixed Account Value and/or the Separate Account Value
by sending a written request to the Company's home office. The minimum
unscheduled partial surrender amount is $100 and the Accumulated Value
of the Contract must be $5,000 or more immediately after the partial
surrender. The Company reserves the right to increase the minimum
$5,000 remaining Accumulated Value but in no event will it exceed
$10,000.
In order for a request to be processed, the Owner must specify the
dollar amount of the Accumulated Value to surrender. The amount
surrendered will be deducted from the Owner's Fixed Account Value
and/or interest in a Division according to the surrender allocation
percentages provided by the Owner.
Percentages may be either zero or any whole number and must total 100%.
The Company will surrender Units from the Separate Account and/or
dollar amounts from the Fixed Account so that the total amount of the
partial surrender equals the dollar amount of the partial surrender
request plus any applicable Surrender Charge. The partial surrender
will be effective at the end of the Valuation Period in which the
Company receives the written request for partial surrender at its home
office. Payments will generally be made within seven days of the
effective date of such request or such earlier date as required by law,
although certain delays are permitted. See "Postponement of Payments."
Scheduled Partial Surrenders. The owner may elect to have partial
surrenders completed on a periodic basis from any Division of the
Separate Account and/or Fixed Account. Scheduled partial surrenders
(sometimes referred to as a "Flexible Withdrawal Option") are available
only if the value of the Accumulated Value is at least $5,000 at the
time the surrenders begin. Scheduled partial surrenders may be
established by the Owner by providing written notice to the Company at
the Company's home office. The Owner may specify monthly, quarterly,
semi-annual or annual partial surrenders to be completed on any date
other than 29th, 30th or 31st. If the specified date is not a Valuation
Date, surrenders will be completed on the next Valuation Date following
such specified date. Partial surrenders will continue until the
Accumulated Value is exhausted or until the Owner notifies the Company
to discontinue the scheduled surrenders.
The Internal Revenue Code provides that a penalty tax will be imposed
on certain premature surrenders. For a discussion of this and other tax
implications of total and partial surrenders, including withholding
requirements, see "Federal Tax Matters."
7. Benefit Payable on Death of Annuitant or Owner
If the Annuitant or Owner dies prior to the Retirement Date, a death
benefit will be paid to the deceased's Beneficiary. The amount of the
death benefit will be the greater of:
(1) the Accumulated Value on the date the Company receives
Notice (including proof) of death; or
(2) total Purchase Payments less any partial surrenders (and
Surrender Charges incurred) as of the date the Company
receives Notice (including proof) of death; or
(3) the death benefit that was in effect on any prior
Anniversary that is divisible equally by seven, plus any
Purchase Payments and less any partial surrenders (and
Surrender Charges incurred) made after that Anniversary.
The death benefit generally will be paid within seven days after the
Company receives Notice (including proof) of death and written
instructions as to the manner of payment to the Beneficiary, or such
earlier date as required by law. Under certain circumstances, payment
of the death benefit may be postponed. See "Postponement of Payments."
The death benefit will be paid according to benefit instructions
provided by the deceased. If benefit instructions have not been
provided the death benefit will be paid upon receipt of a written
request for settlement method. The Company will pay interest (at an
annual rate equal to or greater than 3% or such other rate required by
state law) on the death benefit from the date it receives proof of
death (or such other date required by state law) until the date of
payment or until the date the death benefit is applied under a Benefit
Option.
If the Owner dies before the Annuitant and the Owner's Beneficiary is
the surviving spouse, the Company will continue the Contract with the
spouse as the new Owner unless the spouse elects to receive the death
benefit. If benefit instructions have not been provided, the
Beneficiary may (a) receive a single sum payment, which terminates the
Contract, or (b) select a Benefit Option. If the beneficiary selects a
Benefit Option, he or she will have all the rights and privileges of an
Annuitant under the Contract. If the Beneficiary desires a Benefit
Option, the election should be made within 60 days of the date the
death benefit becomes payable. Failure to make a timely election can
result in unfavorable tax consequences. For further information, see
"Federal Tax Matters."
We accept any of the following as proof of death: a certified copy of a
death certificate; a copy of a certified decree of a court of competent
jurisdiction as to the finding of death; a written statement by a
medical doctor who attended the deceased at the time of death; or any
other proof satisfactory to us.
If the Owner dies before the Annuitant and before the Retirement Date
with respect to a Contract not issued in connection with retirement
plans qualified under Section 408 of the Internal Revenue Code, certain
additional requirements are mandated by the Internal Revenue Code,
which are discussed under "Required Distributions for Non-Qualified
Contracts." It is imperative that written notice of the death of the
Owner be promptly transmitted to the Company at its home office, so
that arrangements can be made for distribution of the entire interest
in the Contract to the Beneficiary in a manner that satisfies the
Internal Revenue Code requirements. Failure to satisfy these
requirements may result in the Contract not being treated as an annuity
for federal income tax purposes, which could have adverse tax
consequences.
C. After the Retirement Date
1. Retirement Date
The Owner may specify a Retirement Date in the application. The
Retirement Date marks the beginning of the period during which an
Annuitant receives Benefit Option payments under the Contract. The
Company may not permit a Retirement Date which is on or after the later
of the Annuitant's 85th birthday or ten years after the Contract Date
(but no later than age 88 in Pennsylvania and age 85 in New York).
Depending on the type of retirement arrangement in connection with
which a Contract is issued, amounts that are distributed either too
soon or too late may be subject to penalty taxes under the Internal
Revenue Code. See "Federal Tax Matters." Owners should consider this
carefully in selecting or changing a Retirement Date.
The Owner may change the Retirement Date with the Company's prior
approval, by written request any time prior to the issuance of a
supplementary contract which provides a Benefit Option. The new
Retirement Date must be any Anniversary on or before the maximum
Retirement Date.
2. Benefit Options
The Company currently offers only fixed Benefit Option payments;
variable Benefit Option payments are not currently offered. If the
Accumulated Value at the end of the Valuation Period which contains the
Retirement Date is less than $5,000 or if the amount applied under a
Benefit Option would result in a periodic payment below the Company's
minimum requirements in effect at that time, the Company may pay the
entire Accumulated Value, without the imposition of any charges, in a
single sum payment to the Annuitant or other properly designated payee
and cancel the Contract. Otherwise, the Company will apply the
Accumulated Value to provide a fixed Benefit Option.
Benefit Option payments will be made as elected by the Owner on a
monthly, quarterly, semi-annual or annual basis to the Annuitant or
other properly-designated payee. The dollar amount of any Benefit
Option payment is specified during the entire period of payments
according to the provisions of the Benefit Option selected. There is no
right to make any total or partial surrender after Benefit Option
payments commence.
The amount of each Benefit Option payment will depend on the amount of
Accumulated Value applied to the Benefit Option, the form of Benefit
Option selected and, for Benefit Options other than Fixed Income
described below, the age of the Annuitant. The amount of each Benefit
Option payment ordinarily will be higher for a male Annuitant than for
a female Annuitant with an otherwise identical Contract. This is
because, statistically, females tend to have longer life expectancies
than males. However, there will be no differences between male and
female Annuitants in any jurisdiction where such differences are not
permitted. The Company will also make available Contracts with no such
differences in connection with certain employer-sponsored benefit
plans. Employers should be aware that, under most such plans, Contracts
that make distinctions based on gender are prohibited by law.
The Owner may select a Benefit Option form or change a previous
selection by written request, which must be received by the Company on
or before the Retirement Date. If no Benefit Option form is chosen by
the Owner, the Company automatically applies a Life Income Benefit
Option (described below), with payments guaranteed for 10 years. If an
Annuitant and Joint Annuitant have been designated under the Contract,
payments will be made pursuant to a Joint and Full Survivor Income
Benefit Option (described below) with payments guaranteed for 10 years,
unless otherwise elected. Tax laws and regulations may impose further
restrictions on Benefit Options.
The following Benefit Options are available:
Fixed Income. Payments of a fixed amount or payments for a fixed
period of at least 5 years but not more than 30 years, are made as
of the first day of each payment period starting with the
Retirement Date. Payments will stop after all guaranteed payments
are made.
Life Income. Payments are made as of the first day of each payment
period during the Annuitant's life, starting with the Retirement
Date. No payments will be made after the Annuitant dies. It is
possible for the payee to receive only one payment under this
option if the Annuitant dies before the second payment is due.
Life Income with Payments Guaranteed for a Period of 5 to 20
Years. Payments are made as of the first day of each payment
period starting on the Retirement Date. Payments will continue as
long as the Annuitant lives. If the Annuitant dies before all of
the guaranteed payments have been made, the Company will continue
installments of the guaranteed payments to the Beneficiary.
Joint and Full Survivor Income with Payments Guaranteed for a
Period of 10 Years. Payments are made as of the first day of each
payment period starting with the Retirement Date. Payments will
continue as long as either the Annuitant or the Joint Annuitant is
alive. If the Annuitant and Joint Annuitant die before all of the
guaranteed payments have been made, the Company will continue
installments of the guaranteed payments to the Beneficiary.
Joint and Two-Thirds Survivor Life Income. Payments are made as of
the first day of each payment period starting with the Retirement
Date. Payments will continue as long as either the Annuitant or
the Joint Annuitant is alive. If either the Annuitant or the Joint
Annuitant dies, payments will continue to the survivor at
two-thirds the original amount. Payments will stop when both the
Annuitant and Joint Annuitant have died. It is possible for the
payee or payees under this option to receive only one payment if
both Annuitants die before the second payment is due.
Other Benefit Options may be made available with the Company's
approval.
In order to avoid tax penalties, distributions from any Contract that
is not a non-qualified contract must begin no later than April 1st
following the calendar year in which the Owner attains age 70 1/2. The
minimum distribution requirement is a distribution in equal or
substantially equal amounts over the Owner's life or over the joint
lives of the Owner and Owner's designated beneficiary, or a period not
extending beyond the Owner's life expectancy, or the joint life
expectancy of the Owner and Owner's designated beneficiary. In
addition, distribution payments must be made at least annually. Tax
penalties may also apply at the Owner's death on certain excess
accumulations. Owners should consider potential tax penalties with
their tax advisors when electing a Benefit Option or taking other
distributions from the Contract.
3. Death of Annuitant or Other Payee
Under the Benefit Options offered by the Company, the amounts, if any,
payable on the death of the Annuitant during the Benefit Option payment
period are the continuation of payments for any remaining guarantee
period or for the life of any Joint Annuitant. In all cases, the person
entitled to receive payments also receives any rights and privileges
under the Benefit Option.
Additional rules applicable to such distributions under Non-Qualified
Contracts are described under "Required Distributions for Non-Qualified
Contracts." Though the rules there described do not apply to Contracts
issued in connection with IRAs, SEPs, SAR/SEPs or SIMPLE-IRAs, similar
rules apply to the plans, themselves.
CHARGES AND DEDUCTIONS
An Annual Fee, a mortality and expense risks charge and, in certain
circumstances, a Transaction Fee and state premium taxes are deducted under the
Contract. Also, in certain circumstances, a Surrender Charge may be deducted
from certain cash withdrawals before the Retirement Date. The Company has also
reserved the right to assess a daily Administrative Expense Charge.
There are also deductions from and expenses paid out of the assets of the
Accounts which are described in the Fund prospectus.
A. Annual Fee
An Annual Fee equal to the lesser of $30 or 2% of the Owner's Accumulated
Value is deducted on the day before each Contract Anniversary prior to the
Retirement Date. (This charge will be lower to the extent legally required
in some states.) The Annual Fee will be deducted from either the Fixed
Account Value or the Owner's interest in a Separate Account Division,
whichever has the greatest value on the date the fee is deducted. If the
Contract is fully surrendered, the full amount of the Annual Fee will be
deducted at the time of surrender. The Annual Fee currently does not apply
to Contracts that have an Accumulated Value of at least $30,000 on the day
before the Contract Anniversary. This charge is to help cover
administrative costs such as those incurred in issuing Contracts,
establishing and maintaining the records relating to Contracts, making
regulatory filings and furnishing confirmation notices, voting materials
and other communications, providing computer, actuarial and accounting
services, and processing Contract transactions. The Company does not
anticipate any profit from this charge.
B. Mortality and Expense Risks Charge
The Company will assess each Division of the Separate Account with a daily
charge for mortality and expense risks at a nominal annual rate of 1.25% of
the average daily net assets of the Separate Account. This charge is
assessed only prior to the Retirement Date. The Company guarantees not to
increase this charge for the duration of the Contract. This charge is
assessed daily when determining the value of an accumulation Unit.
The mortality risk borne by the Company arises from its obligation to make
Benefit Options payments (determined in accordance with the annuity tables
and other provisions contained in the Contract) for the full life of all
Annuitants regardless of how long all Annuitants or any individual
Annuitant might live. This undertaking assures that neither an Annuitant's
own longevity, nor an improvement in life expectancy generally, will have
any adverse effect on the Benefit Option payments the Annuitant will
receive under the Contract. This, therefore, relieves the Annuitant of the
risk that he or she will outlive the funds accumulated for retirement. The
Benefit Option tables contained in the Contract are based on the Annuity
Mortality 1983 Table a. These tables are guaranteed for the life of the
Contract.
In addition, the Company bears a mortality risk in that it guarantees to
pay a death benefit in a single sum (which may also be taken in the form of
a Benefit Option) upon the death of an Annuitant or Owner prior to the
Retirement Date. No Surrender Charge is imposed upon the payment of a death
benefit, which places a further mortality risk on the Company.
The expense risk assumed is that actual expenses incurred in connection
with issuing and administering the Contracts will exceed the limits on
administrative charges set in the Contracts.
If the mortality and expense risks charge is insufficient to cover the
costs assumed, the loss will be borne by the Company. Conversely, if the
amount deducted proves more than sufficient, the excess will be profit to
the Company. The Company expects a profit from the mortality and expense
risks charge.
C. Transaction Fee
A Transaction Fee of $30 applies to each unscheduled partial surrender
after the first such surrender made during a Contract Year. The Company
will charge a $30 Transaction Fee to each unscheduled transfer from a
Division after the twelfth such transfer in a Contract Year. The
Transaction Fee will be deducted from the Fixed Account Value and/or the
Owner's interest in a Separate Account Division from which the amount is
surrendered or transferred, on a pro rata basis.
D. Premium Taxes
The Company has reserved the right to deduct amounts to cover any premium
taxes that are imposed by states or other jurisdictions, when applicable.
Any such deduction will be made from either a Purchase Payment when
received by the Company, or the Accumulated Value when surrendered (in
whole or part) or applied under a Benefit Option.
E. Surrender Charge
No sales charge is collected or deducted at the time Purchase Payments are
applied under a Contract. A Surrender Charge will be assessed on certain
total or partial surrenders. The amounts obtained from the Surrender Charge
will be used to partially defray expenses incurred in the sale of the
Contract, including commissions and other promotional or distribution
expenses associated with the marketing of the Contract. If the Surrender
Charge is insufficient to cover the actual cost of distribution, such costs
will be paid from the Company's General Account assets, which will include
profit, if any, derived from the mortality and expense risks charge.
The Surrender Charge for any full or partial surrender is a percentage of
the Purchase Payments withdrawn or surrendered which were received by us
during the seven completed Contract Year period prior to the withdrawal or
surrender. The applicable percentage which is applied to the sum of the
Purchase Payments paid during each Contract Year, is determined in
accordance with the following table.
TABLE OF SURRENDER CHARGES
Number of Completed Contract Years Surrender Charge Applied to all Purchase
Since Purchase Payment was Paid Payments Received in that Contract Year
0-2 6%
3 5%
4 4%
5 3%
6 2%
7 and later 0%
For this purpose, it is assumed that amounts are withdrawn in the following
order: (1) From Purchase Payments received by the Company more than seven
completed Contract Years prior to the withdrawal or surrender; (2) From the
Free Surrender Privilege described below (from contract earnings first, if
any, and then from Purchase Payments on a first-in, first-out basis); and
(3) From Purchase Payments received by the Company within the seven
completed Contract Year period prior to the withdrawal or surrender on a
first-in first-out basis. There is no Surrender Charge, under these
guidelines, on withdrawals of Purchase Payments made more than seven
completed Contract Years prior to the withdrawal or surrender, nor are
there Surrender Charges imposed on withdrawals of the Free Surrender
Privilege.
No surrender charge will be imposed where prohibited by state law,
including:
a) State of New Jersey - no surrender charge will be imposed upon
full surrender on or after Annuitant's age 64 or 4 years after the
Contract Date.
b) State of Washington - no surrender charge will be imposed upon
full surrender on or after the Annuitant's age 70 or 10 years
after the Contract date.
Waiver of the Surrender Charge. The Surrender Charge will not apply:
1. To any amount applied under a Benefit Option;
2. To the payment of a Death Benefit, but the Surrender Charge will
apply to Purchase Payments made by the participant's surviving
spouse after the participant's date of death occurring on or after
July 1, 1996;
3. To any amount distributed to satisfy the minimum distribution
requirement of Sec. 401(a)9 of the Internal Revenue Code;
4. Where permitted by state law, to a withdrawal made after the first
Anniversary as a result of the Owner's or Annuitant's Critical
Need provided that:
(a) the Owner or Annuitant to which the Critical Need applies is
the original Owner or Annuitant;
(b) the Critical Need did not exist prior to the Contract Date;
and
(c) if the Critical Need is Confinement to a Health Care
Facility, the confinement must continue for at least 60
consecutive days after Contract Date and the withdrawal must
occur within 90 days after confinement ends. No additional
Purchase Payments may be made to the Contract if the Company
waives the Surrender Charge due to a Critical Need.
5. To the Free Surrender Privilege which is an amount surrendered
during a Contract Year in an amount not to exceed the greater of:
(a) Earnings in the Contract (Earnings = Accumulated Value less
unsurrendered Purchase Payments as of the surrender date);
or
(b) 10% of the Purchase Payments still subject to the Surrender
Charge, decreased by any partial surrenders since the last
Anniversary.
6. To any amount transferred from the Contract to a Single Premium
Immediate Annuity issued by the Company after the seventh Contract
Year.
7. To any amount transferred from a Contract used to fund an IRA to
another annuity contract issued by the Company to fund an IRA of
the participant's spouse when the distribution is made pursuant to
a divorce decree.
F. Administrative Expense Charge
The Company reserves the right to assess each Division of the Separate
Account with a daily charge at a nominal annual rate of .15% of the average
daily net assets of the Division. This charge would be imposed only prior
to the Retirement Date. The daily Administrative Expense Charge would be
assessed to help cover administrative expenses such as those described
under "Annual Fee." The daily Administrative Expense Charge, like the
Annual Fee, is designed to defray expenses actually incurred, without
profit. Even if the Administrative Expense Charge was imposed, the total
anticipated revenues from both charges are not expected to exceed the
actual administrative costs incurred by the Company.
G. Special Provisions for Group or Sponsored Arrangements
Where permitted by state insurance laws, Contracts may be purchased under
group or sponsored arrangements, as well as on an individual basis. A
"group arrangement" includes a program under which a trustee, employer or
similar entity purchases Contracts covering a group of individuals on a
group basis. A "sponsored arrangement" includes a program under which an
employer permits group solicitation of its employees or an association
permits group solicitation of its members for the purchase of Contracts on
an individual basis.
The charges and deductions described above may be reduced for Contracts
issued in connection with group or sponsored arrangements. Such
arrangements may include sales without or reduced mortality and expense
risk charges and/or without annual fees and/or Surrender Charges. The
Company will reduce the above charges and deductions in accordance with its
rules in effect as of the date an application for a Contract is approved.
To qualify for such a reduction, a group or sponsored arrangement must
satisfy certain criteria as to, for example, size of the group, expected
number of participants and anticipated purchase payments from the group.
Generally, the sales contacts and effort, administrative costs and
mortality cost per Contract vary based on such factors as the size of the
group or sponsored arrangements, the purposes for which Contracts are
purchased and certain characteristics of its members. The amount of
reduction and the criteria for qualification will reflect the reduced sales
effort and administrative costs resulting from, and the different mortality
experience expected as a result of, sales to qualifying groups and
sponsored arrangements.
The Company may modify from time to time, on a uniform basis, both the
amounts of reductions and the criteria for qualification. Reductions in
these charges will not be unfairly discriminatory against any person,
including the affected contract owners and all other contract owners with
contracts funded by the Separate Account.
FIXED ACCOUNT
Owners may allocate Purchase Payments and transfer amounts from the Separate
Account to the Fixed Account, in which case such amounts are held in the General
Account of the Company. Because of exemptive and exclusionary provisions,
interests in the Fixed Account have not been registered under the Securities Act
of 1933 and the General Account has not been registered as an investment company
under the Investment Company Act of 1940. Accordingly, neither the Fixed Account
nor any interests therein are subject to the provisions of these acts and, as a
result, the staff of the Securities and Exchange Commission has not reviewed the
disclosures in this Prospectus relating to the Fixed Account. Disclosures
regarding the Fixed Account may, however, be subject to certain generally
applicable provisions of the federal securities laws relating to the accuracy
and completeness of statements made in prospectuses. This Prospectus is
generally intended to serve as a disclosure document only for the aspects of the
Contract involving the Separate Account and contains only selected information
regarding the Fixed Account. More information regarding the Fixed Account may be
obtained from the Company's home office or from a sales representative.
General Description
The Company's obligations with respect to the Fixed Account are supported by the
Company's General Account. Subject to applicable law, the Company has sole
discretion over the investment of the assets in the General Account.
The Company guarantees that Purchase Payments allocated to the Fixed Account
will accrue interest at a guaranteed interest rate. In no event will the
guaranteed interest rate be less than 3% compounded annually. Each Purchase
Payment or amount transferred to the Fixed Account earns interest at the
guaranteed rate in effect on the date it is received or transferred. This rate
applies to each Purchase Payment or amount transferred until the end of the
Contract Year.
Each Anniversary the Company declares a renewal interest rate that is guaranteed
and applies to the Fixed Account Value in existence at that time. This rate
applies until the end of the Contract Year. Interest is earned daily and
compounded annually at the end of each Contract Year. Once credited, such
interest will be guaranteed and will become part of the Accumulated Value in the
Fixed Account from which deductions for fees and charges may be made.
Charges under the Contract are the same as when the Separate Account is being
used, except that the 1.25% per year charged for mortality and expense risks
and, if applicable, the .15% per year charged for administrative expenses are
not imposed on amounts of Accumulated Value in the Fixed Account.
Fixed Account Value
The Contract's Fixed Account Value on any Valuation Date is the sum of the
Purchase Payments allocated to the Fixed Account, plus any transfers from the
Separate Account, plus interest credited to the Fixed Account, less any
surrenders, Surrender Charges, Annual Fees or Transaction Fees allocated to the
Fixed Account or transfers to the Separate Account.
Fixed Account Transfers, Total and Partial Surrenders
Amounts in the Fixed Account are generally subject to the same rights and
limitations and will be subject to the same charges as are amounts allocated to
the Divisions of the Separate Account with respect to total and partial
surrenders. See "Total and Partial Surrenders."
Transfers out of the Fixed Account have special limitations. No transfers from
the Fixed Account may be made after the Retirement Date. Prior to the Retirement
Date, Owners may transfer part or all of the Accumulated Value from the Fixed
Account to the Separate Account in one of two ways, a single transfer or
pursuant to scheduled transfers, both of which are described below. An Owner may
not make both a single transfer and scheduled transfers during the same Contract
Year.
Single Transfer. A single transfer in an amount not to exceed 25% of
the Owner's Fixed Account Value as of the later of the Contract Date or
the last Anniversary, may be made each Contract Year during the 30-day
period following the Contract Date or Anniversary. A transfer request
must be made by the owner within such 30-day period. An Owner may
transfer up to the entire Fixed Account Value if the Owner's Fixed
Account Value is less than $1,000 or the renewal interest rate declared
for the Owner's Fixed Account Value is more than one percentage point
lower than the average of the Owner's total Fixed Account Value
earnings for the preceding Contract Year. The Company will notify the
Owner if the renewal interest rate falls to that threshold. The minimum
transfer amount is $100 (or, if less, the entire amount of the Fixed
Account Value).
Scheduled Transfers. The Owner may elect to have automatic transfers
completed on a monthly basis from the Fixed Account to any Division of
the Separate Account. Scheduled transfers are available from the Fixed
Account only if the Owner's Fixed Account Value equals or exceeds
$5,000 at the time scheduled transfers are initiated. (The Company
reserves the right to change that amount but it will never exceed
$10,000.) An Owner may establish scheduled transfers by sending a
written request to the Company at its home office or by telephone.
Scheduled transfers will be completed on a monthly basis on the date
(other than the 29th, 30th or 31st) specified by the Owner. If the
requested date is not a Valuation Date, the transfer will be completed
on the next valuation date following such specified date. Scheduled
monthly transfers of an amount equal to 2% of the Owner's Fixed Account
Value at the beginning of the Contract Year or current value will
continue until the Fixed Account Value is exhausted or until the Owner
notifies the Company to discontinue the scheduled transfers. The
beginning of the Contract Year value will be used to calculate the 2%
unless the Owner specifies current value. If the Owner discontinues the
scheduled transfers, transfers may not begin again without the
Company's prior approval.
GENERAL PROVISIONS
The Contract
The Contract, copies of any applications, amendments, riders, or endorsements
attached to the Contract, the Contract current data page, and copies of any
supplemental applications, amendments, endorsements, or revised Contract pages
or Contract data pages which are mailed to the Owner are the entire Contract.
Only the Company's corporate officers can agree to change or waive any
provisions of a Contract. Any change or waiver must be in writing and signed by
one of these representatives of the Company.
Postponement of Payments
Any total or partial surrender to be made from the Contract will be made within
seven days after acceptable Notice for such payment is received by the Company,
or such earlier date as required by law. However, payment of any amount upon
total surrender, partial surrender, death, or the transfer to or from a Division
of the Separate Account may be deferred during any period when the right to
redeem Mutual Fund shares is suspended as permitted under provisions of the
Investment Company Act of 1940, as amended. The right to redeem shares may be
suspended 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 Mutual Fund of securities owned by it is not
reasonably practicable or (ii) it is not reasonably practicable for the Mutual
Fund to fairly determine the value of its net assets; or (c) the Commission by
order so permits for the protection of security holders. If any deferment of a
surrender is in effect and has not been cancelled by written notification to the
Company within the period of deferment, the amount to be withdrawn shall be
determined as of the first Valuation Date following expiration of the permitted
deferment, and the surrender will be made within seven days thereafter.
The Company may also defer for up to 15 days the payment of any amount
attributable to a Purchase Payment made by check to allow the check reasonable
time to clear. The Company may also defer payment of surrender proceeds payable
out of the Fixed Account for a period of up to 6 months.
Misstatement of Age or Sex and Other Errors
If the age or , where applicable, gender of the Annuitant has been misstated,
any amount payable will be that which would have been purchased at the correct
age and gender. If the Company has made any overpayments because of incorrect
information about age or gender, or any error or miscalculation, it will deduct
the overpayment from the next payment or payments due. Underpayments are added
to the next payment.
Assignment
Ownership of a non-qualified contract may be assigned. The Company assumes no
responsibility for the validity of any assignment. An assignment or pledge of a
Contract may have adverse tax consequences. See "Federal Tax Matters."
An assignment must be made in writing and filed with the Company at its home
office. Owner, Annuitant and Beneficiary rights are subject to any assignment of
record at the Company's home office. Any amount paid to an assignee will be
treated as a partial surrender and will be paid in a single sum.
Change of Owner
The Owner may change ownership of the Contract at any time. A request to change
ownership must be in writing and must be approved by the Company. After the
Company approves of the change, the change is effective as of the date the
written request for the change was signed by the Owner. The waiver of the
Contingent Deferred Sales Charge for withdrawals made due to a Critical Need of
the Owner, is not available if Ownership is changed. See "Surrender Charge."
Beneficiary
Before the Retirement Date and while the Annuitant is living, the Owner may name
or change the Owner's or Annuitant's Beneficiary or a successor Beneficiary by
sending a written request of the change to the Company. Under certain retirement
programs, however, spousal consent may be required to name or change a
Beneficiary, and the right to name a Beneficiary other than the spouse may be
subject to applicable tax laws and regulations. The Company is not responsible
for the validity of any change. A change will take effect as of the date it is
signed but will not affect any payments made or action taken before the Company
receives and approves the written request. The Company also needs the consent of
any irrevocably named person before making a requested change.
If no Beneficiary designated as the Annuitant's Beneficiary is living at the
time of the Annuitant's death, any benefits otherwise payable under the Contract
to the Beneficiary will be paid to the Owner, if living, otherwise to the
Annuitant's estate. If a Beneficiary dies while receiving payments under the
Contract, and if no other Beneficiary is then living, any remaining benefits
owed under the Contract will be paid to such Beneficiary's estate.
Reports
We will mail to the Owner at the last known address of record a statement of the
Owner's current Accumulated Value at least once each year prior to the
Retirement Date and any reports required by any applicable law or regulation.
After the Retirement Date, any reports will be mailed to the person receiving
Benefit Option payments, rather than to the Owner.
Quarterly statements reflecting purchases and surrenders occurring during the
quarter as wall as balance of units owned and account values.
RIGHTS RESERVED BY THE COMPANY
The Company reserves the right to make certain changes if, in its judgement,
they would best serve the interests of Owners and Annuitants or would be
appropriate in carrying out the purpose of the Contract. Any changes will be
made only to the extent and in the manner permitted by applicable laws. Also,
when required by law, the Company will obtain the Owner's approval of the
changes and approval from any appropriate regulatory authority. Such approval
may not be required in all cases, however. Examples of the changes the Company
may make include:
o To transfer any assets in any Division to another Division, or to the
Fixed Account; or to add, combine or eliminate Divisions in the
Separate Account.
o To substitute the shares of an Account for the Account shares held in
any Division:
1) if shares of an Account are no longer available for investment;
or
2) if in the Company's judgement, investment in an Account becomes
inappropriate considering the purposes of the Separate Account.
DISTRIBUTION OF THE CONTRACT
The Contract, which is continuously offered, will be sold primarily by persons
who are insurance agents of or brokers for the Company authorized by applicable
law to sell life and other forms of personal insurance and variable annuities.
In addition, these persons will usually be registered representatives of Princor
Financial Services Corporation, The Principal Financial Group, Des Moines, Iowa
50392-0200, a broker-dealer registered under the Securities Exchange Act of 1934
and a member of the National Association of Securities Dealers, Inc. Princor
Financial Services Corporation, the principal underwriter, is paid 6.5% of
Purchase Payments by Principal Mutual Life Insurance Company for the
distribution of the Contract. The Contract may also be sold through other
selected broker-dealers registered under the Securities Exchange Act of 1934 or
firms that are exempt from such registration. Princor Financial Services
Corporation is also the principal underwriter for various registered investment
companies organized by the Company. Princor Financial Services Corporation is a
wholly-owned subsidiary of Principal Holding Company. Principal Holding Company
is a holding company and a wholly-owned subsidiary of the Company.
PERFORMANCE CALCULATION
The Separate Account may publish advertisements containing information
(including graphs, charts, tables and examples) about the performance of one or
more of its Divisions. The Contract was not offered prior to June 16, 1994.
However, shares in which Divisions of the Separate Account invest were offered
prior to that date. Thus, the Separate Account may publish advertisements
containing information about the hypothetical performance of one or more of its
Divisions for this Contract had the Contract been issued on or after the date
the Account in which such Division invests was first offered. The hypothetical
performance from the date of inception of the Account in which the Division
invests is derived by reducing the actual performance of the underlying Account
by the fees and charges of the Contract as if it had been in existence. The
yield and total return figures described below will vary depending upon market
conditions, the composition of the underlying Account's portfolios and operating
expenses. These factors and possible differences in the methods used in
calculating yield and total return should be considered when comparing the
Separate Account performance figures to performance figures published for other
investment vehicles. The Separate Account may also quote rankings, yields or
returns as published by independent statistical services or publishers and
information regarding performance of certain market indices. Any performance
data quoted for the Separate Account represents only historical performance and
is not intended to indicate future performance. For further information on how
the Separate Account calculates yield and total return figures, see the
Statement of Additional Information.
From time to time the Separate Account advertises its Money Market Division's
"yield" and "effective yield" for these Contracts. Both yield figures are based
on historical earnings and are not intended to indicate future performance. The
"yield" of the Division refers to the income generated by an investment in the
Division over a seven-day period (which period will be stated in the
advertisement). 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 Division is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. Neither yield quotation
reflects a sales load deducted from Purchase Payments which, if included, would
reduce the "yield" and "effective yield."
In addition, from time to time, the Separate Account will advertise the "yield"
for certain other Divisions for the Contract. The "yield" of a Division is
determined by annualizing the net investment income per unit for a specific,
historical 30-day period and dividing the result by the ending maximum offering
price of the unit for the same period. This yield quotation does not reflect a
contingent deferred sales charge which, if included, would reduce the "yield."
Also, from time to time, the Separate Account will advertise the average annual
total return of its various Divisions. The average annual total return for any
of the Divisions 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 Contract value. In this calculation the ending value is
reduced by a Surrender Charge that decreases from 6% to 0% over a period of 7
years. The Separate Account may also advertise total return figures of its
Divisions for a specified period that do not take into account the Surrender
Charge in order to illustrate the change in the Division's unit value over time.
See "Charges and Deductions" and "Surrender Charge."
VOTING RIGHTS
The Company shall vote Account shares held in Separate Account B at regular and
special meetings of shareholders of each Account, but will follow voting
instructions received from Owners of the Contract whose Accumulated Value
includes amounts invested in the corresponding Division of the Separate Account.
The number of Account shares as to which an Owner has the voting interest will
be determined by the Company as of a date which will not be more than ninety
days prior to the meeting of the Account, and voting instructions will be
solicited by written communication at least ten days prior to the meeting. The
number of Account shares held in Separate Account B which are attributable to
the Owner's interest in each Division is determined by dividing the value of the
Owner's interest in that Division by the net asset value of one share of the
underlying Account. Account shares for which Owners are entitled to give voting
instructions, but for which none are received, and shares of the Account owned
by the Company will be voted in the same proportion as the aggregate shares for
which voting instructions have been received.
Proxy material will be provided to each Owner together with an appropriate form
which may used to give voting instructions to the Company.
If the Company determines pursuant to applicable law that Account shares held in
Separate Account B need not be voted pursuant to instructions received from
Owners, then the Company may vote Account shares held in Separate Account B in
its own right.
FEDERAL TAX MATTERS
The following description is a general summary of the tax rules, primarily
related to federal income taxes, which in the opinion of the Company are
currently in effect. These rules are based on laws, regulations and
interpretations which are subject to change at any time. This summary is not
comprehensive and is not intended as tax advice. Federal estate and gift tax
considerations, as well as state and local taxes, may also be material. Owners
should consult a qualified tax adviser as to the tax implications of taking
action under a Contract or related retirement plan.
Non-Qualified Contracts
Section 72 of the Internal Revenue Code ("Code") governs the taxation of
annuities in general. Purchase Payments made under non-qualified contracts are
not excludible or deductible from the gross income of the Owner or any other
person. However, any increase in the Accumulated Value of a non-qualified
contract resulting from the investment performance of the Separate Account or
interest credit to the Fixed Account is generally not taxable to the Owner or
other payee until received by him or her, as surrender proceeds, death benefit
proceeds, or otherwise. The exception to this rule is that, generally, Owners
who are not natural persons are immediately taxed on any increase in the
Accumulated Value. However, this exception does not apply in all cases.
The following discussion applies generally to Contracts owned by natural
persons.
In general, surrenders or partial surrenders under Contracts are taxed as
ordinary income to the extent of the accumulated income or gain under the
Contract. If an Owner assigns or pledges any part of the value of a Contract,
the value so pledged or assigned is taxed to the Owner as ordinary income to the
same extent as a partial withdrawal.
With respect to Benefit Options payments, although the tax consequences may vary
depending on the option elected under the Contract, until the investment in the
Contract is recovered, generally only the portion of the payment that represents
the amount by which the Accumulated Value exceeds the "investment in the
contract" will be taxed. In general, an Annuitant's or other payee's "investment
in the contract" is the aggregate amount of Purchase Payments made by him or
her. After the "investment in the contract" is recovered, the full amount of any
additional Benefit Option payments is taxable. Prior to recovery of the
"investment in the contract," there is no tax on the amount of each payment
which bears the same ratio to such payment that the "investment in the contract"
bears to the total expected return under the Contract. The remainder of each
Benefit Option payment is taxable. The taxable portion of a distribution is
taxed as ordinary income.
For purposes of determining the amount of taxable income resulting from
distributions, all Contracts and other annuity contracts issued by the Company
or its affiliates to the same Owner within the same calendar year will be
treated as if they were a single contract.
With respect to IRAs or IRA rollovers, there is a 10% penalty under the Code on
the taxable portion of a "premature distribution." Generally, an amount is a
"premature distribution" unless the distribution is (1) made on or after the
Owner reaches age 59 1/2, (2) made to a Beneficiary on or after death of the
Owner, (3) made upon the disability of the Owner, (4) part of a series of
substantially equal periodic payments for the life or life expectancy of the
Owner or the Owner and Beneficiary (5) made to pay medical expenses, (6) for
certain unemployment expenses, (7) for first home purchases (up to $10,000) or
8) for higher education expenses. Premature distributions may result, for
example, from an early Retirement Date, any early surrender, partial surrender
or assignment of a Contract or the death of an Annuitant who is not the Owner
prior to the Owner attaining age 59 1/2.
With respect to SIMPLE-IRAs, in place of the above 10% penalty on premature
distributions, there is a 25% penalty on distributions made within two years of
the initial contribution unless the distribution is made for one or more of the
reasons listed in the preceding paragraph.
A transfer of ownership of a Contract, or designation of an Annuitant or other
payee who is not also the Owner, may result in a certain income or gift tax
consequences to the Owner that are beyond the scope of this discussion. An Owner
contemplating any transfer or assignment of a Contract should contact a
competent tax advisor with respect to the potential tax effects of such
transactions.
Required Distributions for Non-Qualified Contracts
In order for a non-qualified contract to be treated as an annuity contract for
federal income tax purposes, Section 72(s) of the Code requires (a) if the
person receiving payments dies on or after the Retirement Date but prior to the
time the entire interest in the Contract has been distributed, the remaining
portion of such interest will be distributed at least as rapidly as under the
method of distribution being used as of the date of that person's death; and (b)
if any Owner dies prior to the Retirement Date, the entire interest in the
Contract will be distributed (1) within five years after the date of that
Owner's death or (2) as annuity payments which will begin within one year of
that Owner's death and which will be made over the life of the Owner's
designated Beneficiary or over a period not extending beyond the life expectancy
of that Beneficiary. However, if the Owner's designated Beneficiary is the
surviving spouse of the Owner, the Contract may be continued with the surviving
spouse deemed to be the new Owner for purposes of Section 72(s). Where the Owner
or other person receiving payments is not a natural person, the required
distributions provided for in Section 72(s) apply upon the death of the primary
Annuitant.
Generally, unless the Beneficiary elects otherwise, the above requirements will
be satisfied prior to the Retirement Date by paying the death benefit in a
single sum, subject to proof of the Owner's death. The Beneficiary, however, may
elect by written request to receive a Benefit Option instead of a lump sum
payment. However, if the election is not made within 60 days of the date the
single sum death benefit otherwise becomes payable, the IRS may disregard the
election for tax purposes and tax the Beneficiary as if a single sum payment had
been made.
IRA, SEP, SAR/SEP, SIMPLE-IRA and ROTH-IRA
The Contract may be used to fund IRAs, SEPs, SAR/SEPs , SIMPLE-IRAs and
ROTH-IRAs. The tax rules applicable to Owners, Annuitants and other payees vary
according to the type of plan and the terms and conditions of the plan itself.
In general, Purchase Payments made under a retirement program recognized under
the Code by or on behalf of an individual are excludible from the individual's
gross income for tax purposes prior to the Retirement Date. The portion, if any,
of any Purchase Payment made by or on behalf of an individual under a Contract
that is not excluded from the individuals' gross income for tax purposes
constitutes the individual's "investment in the contract." Aggregate deferrals
under all plans at the employee's option may be subject to limitations. The tax
implications of these plans are further discussed in the Statement of Additional
Information under the heading "Taxation Under Certain Retirement Plans."
Withholding
Benefit Option payments and other amounts received under the Contract are
subject to income tax withholding unless the recipient elects not to have taxes
withheld. The amounts withheld will vary among recipients depending on the tax
status of the individual and the type of payments from which taxes are withheld.
Notwithstanding the recipient's election, withholding may be required with
respect to certain payments to be delivered outside the United States. Moreover,
special "backup withholding" rules may require the Company to disregard the
recipient's election if the recipient fails to supply the Company with a "TIN"
or taxpayer identification number (social security number for individuals), or
if the Internal Revenue Service notifies the Company that the TIN provided by
the recipient is incorrect.
Mutual Fund Diversification
The United States Treasury Department has adopted regulations under Section
817(h) of the Code which establishes standards of diversification for the
investment underlying the Contracts. Under this Code Section, Separate Account B
investments must be adequately diversified in order for the increase in the
value of non-qualified contracts to receive tax-deferred treatment. In order to
be adequately diversified, the portfolio of each underlying Account must, as of
the end of each calendar quarter or within 30 days thereafter, have no more than
55% of its assets invested in any one investment, 70% in any two investments,
80% in any three investments and 90% in any four investments. Failure of a Fund
to meet the diversification requirements could result in tax liability to
non-qualified contractholders.
The investment opportunities of the Funds could conceivably be limited by
adhering to the above diversification requirements. This would affect all
Owners, including those Owners of contracts for whom diversification is not a
requirement for tax-deferred treatment.
STATE REGULATION
The Company is subject to the laws of the State of Iowa governing insurance
companies and to regulation by the Insurance Department of the State of Iowa. An
annual statement in a prescribed form must be filed by March 1 in each year
covering the operations of the Company for the preceding year and its financial
condition on December 31st of such year. Its books and assets are subject to
review or examination by the Commissioner of Insurance of the State of Iowa or
his representatives at all times, and a full examination of its operations is
conducted periodically by the National Association of Insurance Commissioners.
Iowa law and regulations also prescribe permissible investments, but this does
not involve supervision of the investment management or policy of the Company.
In addition, the Company is subject to the insurance laws and regulations of
other states and jurisdictions in which it is licensed to operate. Generally,
the insurance departments of these states and jurisdictions apply the laws of
the state of domicile in determining the field of permissible investments.
LEGAL OPINIONS
Legal matters applicable to the issue and sale of the Contracts, including the
right of the Company to issue Contracts under Iowa Insurance Law, have been
passed upon by Gregg R. Narber, Senior Vice President and General Counsel.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which Separate Account B is a party or
which would materially affect Separate
Account B.
REGISTRATION STATEMENT
This Prospectus omits some information contained in the Statement of Additional
Information (or Part B of the Registration Statement) and Part C of the
Registration Statement which the Company has filed with the Securities and
Exchange Commission. The 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 Princor Financial Services Corporation. You may obtain a copy of
Part C of the Registration Statement filed with the Securities and Exchange
Commission, Washington, D.C. from the Commission upon payment of the prescribed
fees.
OTHER VARIABLE ANNUITY CONTRACTS
The Company currently offers other Variable Annuity Contracts that participate
in Separate Account B. In the future, additional group or individual variable
annuity contracts may be designated by the Company as participating in Separate
Account B.
INDEPENDENT AUDITORS
The financial statements of Principal Mutual Life Insurance Company Separate
Account B and the consolidated financial statements of The Principal Financial
Group(R) (comprised of Principal Mutual Life Insurance Company and its
subsidiaries) which are included in the Statement of Additional Information have
been audited by Ernst & Young LLP, independent auditors, for the periods
indicated in their reports thereon which appear in the Statement of Additional
Information.
FINANCIAL STATEMENTS
The consolidated financial statements of The Principal Financial Group(R)
(comprised of the Company and its subsidiaries) which are included in the
Statement of Additional Information should be considered only as bearing on the
ability of the Company to meet its obligations under the Contract. They should
not be considered as bearing on the investment performance of the assets held in
the Separate Account.
CONTRACTHOLDERS' INQUIRIES
Contractholders' inquiries should be directed to: Variable Annuity, The
Principal Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382,
1-800-247-9988.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
The table of contents for the Statement of Additional Information is
provided below.
TABLE OF CONTENTS
Page
Independent Auditors ................................................. 3
Calculation of Yield and Total Return ................................ 3
Taxation Under Certain Retirement Plans................................. 4
Principal Mutual Life Insurance Company Separate Account B
Report of Independent Auditors .................................... 6
Financial Statements............................................... 7
The Principal Financial Group(R)
Report of Independent Auditors ....................................24
Financial Statements...............................................25
To obtain a copy of the Statement of Additional Information, free of charge,
write or telephone:
Variable Annuity
The Principal Financial Group
P.O. Box 9382
Des Moines, Iowa 50306-9382
Telephone: 1-800-247-9988
APPENDIX A
The Company hereby offers to exchange the Contract described in this Prospectus
("PVA Contract") for certain outstanding Pension Builder Plus Variable Annuity
Contracts ("Pension Builder Plus Contracts") issued in connection with
Individual Retirement Annuity ("IRA") plans or programs, including SEPs and
SAR-SEPs (but excluding employer-sponsored IRAs) adopted pursuant to Section 408
of the Internal Revenue Code or for such Pension Builder Plus Contracts the
withdrawals from which may be transferred to the Contract described in this
prospectus to fund an IRA. The Company reserves the right to terminate this
exchange offer at any time. In considering whether to accept the exchange offer
you should consult the Pension Builder Plus Contract Prospectus since the
provisions and charges of the Pension Builder Plus Contract differ from those of
the PVA Contract.
The Pension Builder Plus Contract may be exchanged at net asset value for the
PVA Contract. To effect an exchange, the Company must receive from you (1) a
completed application for the PVA Contract, (2) a written request and release
for the exchange, and (3) the Pension Builder Plus Contract to be exchanged. The
exchange will become effective as of the close of the Valuation Period in which
all of these three items are received by the Company at its home office. A
Participant's Investment Account Value of the Pension Builder Plus Contract will
be determined as of the time the exchange becomes effective and will be
transferred to the PVA Contract. No surrender charge otherwise applicable to the
Pension Builder Plus Contract will apply to the surrender affecting the
exchange. The PVA Contract's contingent deferred sales charge will be computed
as if prior Purchase Payments for the Pension Builder Plus Contract have been
made for the PVA Contract on the date of issue of the Pension Builder Plus
Contract. The contingent deferred sales charge for additional Purchase Payments
made under the PVA Contract after the transfer of the Accumulated Value from the
Pension Builder Plus Contract will be computed based on the number of years that
the additional Purchase Payments to which the withdrawal is attributed has been
credited under the PVA Contract, as provided in this Prospectus.
Summary of Differences between Contracts
The Pension Builder Plus Contract and the PVA Contract differ substantially, as
summarized below. There may be additional differences important to you and the
prospectuses of both contracts should be reviewed carefully before making the
exchange.
Contingent Deferred Sales Charge. The contingent deferred sales charge under the
PVA Contract applies to all Purchase Payments received during any Contract Year.
The contingent deferred sales charge for the Pension Builder Plus Contract is
based upon the number of Contribution Years a Participant has been covered under
the Contract (rather than on the year in which the Contribution was made). Thus,
for certain Participants of the Pension Builder Plus Contracts, new Purchase
Payments made after accepting the exchange offer would be subject to the
contingent deferred sales charge under the PVA Contract, but new Purchase
Payments made under the Pension Builder Plus Contract would not have been
subject to such a charge, or would have been subject to a lesser charge had the
offer been rejected.
The contingent deferred sales charge of the PVA Contract will be waived under
all of the circumstances under which the contingent deferred sales charge to the
Pension Builder Plus Contract would be waived and, in addition the PVA
Contract's charge does not apply to:
1. any amount distributed to satisfy the minimum distribution
requirements of Section 401(a)9 of the Internal Revenue Code;
2. where permitted by state law, to a withdrawal made after the
first Anniversary as a result of the Owner's or Annuitant's
Critical Need, as described in this Prospectus; and
3. to the Free Surrender Privilege as defined in this Prospectus.
Annual Fee versus Administration Charge. The PVA Contract is subject to an
Annual Fee equal to the lesser of $30 or 2% of the Owner's Accumulated Value.
The Annual Fee currently does not apply to Contracts that have an Accumulated
Value of at least $30,000. In addition, the Company has reserved the right to
assess each Division of the Separate Account with a daily administrative expense
charge at an annual rate of .15% of the average daily net assets of the
Division. This charge is not currently imposed. The Pension Builder Plus
Contract is subject to annual Administration Charge equal to $25 plus an amount
equal to .5% of the first $50,000 of the value of all Investment Accounts of the
Participant under the Contract. Thus, the maximum annual Administration Charge
under the Pension Builder Plus Variable Annuity Contract is $275.
Mortality and Expense Risks Charge. The annual mortality and expense risks
charge of the PVA Contract is equal to 1.25% of the average daily net assets of
the Separate Account. The mortality and expense risks charges applicable to the
Pension Builder Plus Contract are 1.4965% (1.0001% for Rollover Individual
Retirement Annuities) of the average daily net assets.
Death Benefit. The benefit payable on death of the annuitant or owner of the PVA
Contract is the greater of :
1. the Accumulated Value on the date the Company receives Notice of
death; or
2. Total Purchase Payments less any partial surrenders and Surrender
Charges as of the date the Company receives Notice of death; or
3. the death benefit that was in effect on any prior anniversary
that is divisible equally by 7, plus any Purchase Payments and
less any partial surrenders made after that Anniversary.
The death benefit payable under the Pension Builder Plus Contract is equal to
the market value of a Participant's Investment Account Values as of the date the
Company receives proof of death. The PVA Contract's death benefit thus will be
at least equal to, and perhaps greater than, that of the Pension Builder Plus
Contract.
Right to Examine after Exchange
Persons who, under the terms of this exchange offer, exchange their Pension
Builder Plus Contract for the PVA Contract and subsequently revoke the PVA
Contract within the time permitted, as described in the section of this
Prospectus captioned "Right to Examine the Contract," will have their Pension
Builder Plus Contract automatically reinstated as of the date of revocation. The
refunded amount will be applied as the new current Accumulated Value under the
reinstated Contract, which may be more or less than it would have been had no
exchange and reinstatement occurred. The refunded amount will be allocated
initially among the Divisions of the reinstated Pension Builder Plus Contract in
the same proportion that the value in each Division bore to the transferred
Accumulated Value on the date of the exchange of the PVA Contract. For purposes
of calculating any contingent deferred sales charge under the reinstated Pension
Builder Plus Contract, the reinstated Contract will be deemed to have been
issued and to have received past Purchase Payments as if there had been no
exchange.
PART B
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
FLEXIBLE VARIABLE ANNUITY ("FVA") CONTRACT
Statement of Additional Information
dated December 29, 1997
This Statement of Additional Information provides information about
Principal Mutual Life Insurance Company Separate Account B Flexible
Variable Annuity (the "Contract") in addition to the information that is
contained in the Contract's Prospectus, dated December 29,1997.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus, a copy of which can be obtained
free of charge by writing or telephoning:
Variable Annuity
The Principal Financial Group
P.O. Box 9382
Des Moines Iowa 50306-9382
Telephone: 1-800-247-9988
TABLE OF CONTENTS
Independent Auditors ............................................. 3
Calculation of Yield and Total Return............................. 3
Taxation Under Certain Retirement Plans........................... 4
Principal Mutual Life Insurance Company Separate Account B
Report of Independent Auditors............................ 6
Financial Statements...................................... 7
The Principal Financial Group(R)
Report of Independent Auditors............................ 24
Financial Statements...................................... 25
INDEPENDENT AUDITORS
Ernst & Young LLP, Des Moines, Iowa, serve as independent auditors for Principal
Mutual Life Insurance Company Separate Account B and The Principal Financial
Group and perform audit and accounting services for Separate Account B and the
The Principal Financial Group.
CALCULATION OF YIELD AND TOTAL RETURN
The Separate Account may publish advertisements containing information
(including graphs, charts, tables and examples) about the performance of one or
more of its Divisions.
The Contract was not offered prior to June 16, 1994. However, the Divisions
invest in Accounts of the Principal Variable Contracts Fund, Inc. These Accounts
correspond to open-end investment companies ("mutual funds") which, effective
January 1, 1998, were reorganized into the Accounts of the Principal Variable
Contracts Fund, Inc. as follows:
Old Mutual Fund Name New Corresponding Account Name
-------------------- ------------------------------
Principal Aggressive Growth Fund, Inc. Aggressive Growth Account
Principal Asset Allocation Fund, Inc. Asset Allocation Account
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal Money Market Fund, Inc. Money Market Account
Principal World Fund, Inc. International Account
The Accounts (under their former names) were offered prior to the date the
Contract was available. Thus, the Separate Account may publish advertisements
containing information about the hypothetical performance of one or more of its
Divisions for this Contract had the contract been issued on or after the date
the Account in which such Division invests was first offered. The hypothetical
performance from the date of inception of the Account in which the Division
invests is derived by reducing the actual performance of the underlying Account
by the fees and charges of the Contract as if it had been in existence. The
yield and total return figures described below will vary depending upon market
conditions, the composition of the underlying Account's portfolios and operating
expenses. These factors and possible differences in the methods used in
calculating yield and total return should be considered when comparing the
Separate Account performance figures to performance figures published for other
investment vehicles. The Separate Account may also quote rankings, yields or
returns as published by independent statistical services or publishers and
information regarding performance of certain market indices. Any performance
data quoted for the Separate Account represents only historical performance and
is not intended to indicate future performance.
From time to time the Account advertises its Money Market Division's "yield" and
"effective yield" for these Contracts. Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the Division refers to the income generated by an investment under
the contract in the Division over a seven-day period (which period will be
stated in the advertisement). 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 division is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. Neither yield quotation
reflects a sales load deducted from purchase payments which, if included, would
reduce the "yield" and "effective yield."
In addition, from time to time, the Separate Account will advertise the "yield"
for certain other Divisions for the Contract. The "yield" of a Division is
determined by annualizing the net investment income per unit for a specific,
historical 30-day period and dividing the result by the ending maximum offering
price of the unit for the same eriod. This yield quotation does not reflect a
contingent deferred sales charge which, if included, would reduce the "yield."
Also, from time to time, the Separate Account will advertise the average annual
total return of its various Divisions. The average annual total return for any
of the Divisions 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 contract value. In this calculation the ending value is
reduced by a contingent deferred sales charge that decreases from 6% to 0% over
a period of 7 years. The Separate Account may also advertise total return
figures for its Divisions for a specified period that does not take into account
the sales charge in order to illustrate the change in the Division's unit value
over time. See "Charges and Deductions" in the Prospectus for a discussion of
contingent deferred sales charges.
Following are the hypothetical average annual total returns for the period
ending June 30, 1997 assuming the contract had been offered as of the effective
dates of the underlying Accounts in which the Divisions invest:
<TABLE>
<CAPTION>
With Contingent Deferred Without Contingent
Sales Charge Deferred Sales Charge
Division One Year Five Year Ten Year One Year Five Year Ten Year
- ------------------------------ -------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Aggressive Growth Division 19.86 25.66(1) 25.66(1) 25.86 26.66(1) 26.66(1)
Asset Allocation Division 12.06 12.03(1) 12.03(1) 18.06 13.30(1) 13.30(1)
Balanced Division 11.84 10.76 11.20(2) 17.84 11.28 11.20(2)
Bond Division 1.76 6.06 8.01(2) 7.62 6.69 8.01(2)
Capital Value Division 20.82 15.11 10.44 26.82 15.57 10.44
Government Securities Division 1.39 4.83 7.49 7.22 5.48 7.49
Growth Division 16.42 16.03(3) 16.03(3) 22.42 17.17(3) 17.17(3)
International Division 23.98 13.72(3) 13.72(3) 29.98 14.91(3) 14.91(3)
MidCap Division 16.47 18.56 16.71(2) 22.47 18.96 16.71(2)
Money Market Division -1.81 2.25 4.35 3.82 2.97 4.35
<FN>
(1) Period from June 1, 1994 through June 30, 1997.
(2) Period from December 18, 1987 through June 30, 1997.
(3) Period from May 2, 1994 through June 30, 1997.
</FN>
</TABLE>
TAXATION UNDER CERTAIN RETIREMENT PLANS
INDIVIDUAL RETIREMENT ANNUITIES
Purchase Payments. Individuals may make contributions for individual retirement
annuity ("IRA") Contracts. Deductible contributions for any year may be made up
to the lesser of $2,000 or 100% of compensation for individuals who (1) are not
active participants in another retirement plan, (2) are unmarried and have
adjusted gross income of $40,000 or less, or (3) are married and have adjusted
gross income of $60,000 or less. Such individuals may establish an IRA for a
spouse who makes no contribution to an IRA for the tax year. The annual purchase
payments for both spouses' Contracts cannot exceed the lesser of $4,000 or 100%
of the working spouse's earned income, and no more than $2,000 may be
contributed to either spouse's IRA for any year. Individuals who are active
participants in other retirement plans and whose adjusted gross income (with
certain special adjustments) exceeds the cut-off point ($40,000 for unmarried,
$60,000 for married persons filing jointly, and $0 for married persons filing a
separate return) by less than $10,000 are entitled to make deductible IRA
contributions in proportionately reduced amounts. For example, a married
individual who is an active participant in another retirement plan and files a
separate tax return is entitled to a partial IRA deduction if the individual's
adjusted gross income is less than $10,000, and no IRA deduction if his or her
adjusted gross income is equal to or greater than $10,000. Individuals whose
spouse is an active participant in other retirement plans and whose combined
adjusted gross income exceeds the cutoff point of $150,000 by less than $10,000
are entitled to make deductible IRA contributions in proportionately reduced
amounts.
An individual may make non-deductible IRA contributions to the extent of the
excess of (1) the lesser of $2,000 ($4,000 in the case of a spousal IRA) or 100%
of compensation over (2) the IRA deductible contributions made with respect to
the individual.
An individual may not make any contribution to his/her own IRA for the year in
which he/she reaches age 70 1/2 or for any year thereafter.
Taxation of Distributions. Distributions from IRA Contracts are taxed as
ordinary income to the recipient, although special rules exist for the tax-free
return of non-deductible contributions. In addition, taxable distributions
received under an IRA Contract prior to age 59 1/2 are subject to a 10% penalty
tax in addition to regular income tax. Certain distributions are exempted from
this penalty tax, including distributions following the owner's death or
disability if the distribution is paid as part of a series of substantially
equal periodic payments made for the life (or life expectancy) of the Owner or
the joint lives (or joint life expectancies) of Owner and the Owner's designated
Beneficiary; distributions to pay medical expenses; distributions for certain
unemployment expenses; distributions for first home purchases (up to $10,000)
and distributions for higher education expenses.
Required Distributions. Generally, distributions from IRA Contracts must
commence not later than April 1 of the calendar year following the calendar year
in which the employee attains age 70 1/2, and such distributions must be made
over a period that does not exceed the life expectancy of the employee (or the
employee and Beneficiary). A penalty tax of 50% would be imposed on any amount
by which the minimum required distribution in any year exceeded the amount
actually distributed in that year. In addition, in the event that the employee
dies before his or her entire interest in the Contract has been distributed, the
employee's entire interest must be distributed in accordance with rules similar
to those applicable upon the death of the Contract Owner in the case of a
non-qualified contract, as described in the Prospectus.
Tax-Free Rollovers. The Code permits the taxable portion of funds to be
transferred in a tax-free rollover from a qualified employer pension,
profit-sharing, annuity, bond purchase or tax-deferred annuity plan to an IRA
Contract if certain conditions are met, and if the rollover of assets is
completed within 60 days after the distribution from the qualified plan is
received. A direct rollover of funds may avoid a 20% federal tax withholding
generally applicable to qualified plans or tax-deferred annuity plan
distributions. In addition, not more frequently than once every twelve months,
amounts may be rolled over tax-free from one IRA to another, subject to the
60-day limitation and other requirements. The once-per-year limitation on
rollovers does not apply to direct transfers of funds between IRA custodians or
trustees.
SIMPLIFIED EMPLOYEE PENSION PLANS AND SALARY REDUCTION SIMPLIFIED EMPLOYEE
PENSION PLANS
Purchase Payments. Under Section 408(k) of the Code, employers may establish a
type of IRA plan referred to as a simplified employee pension plan (SEP).
Employer contributions to a SEP cannot exceed the lesser of $24,000 or 15% or
the employee's earned income. Employees of certain small employers may have
contributions made to the salary reduction simplified employee pension plan
("SAR/SEP") on their behalf on a salary reduction basis. These salary reduction
contributions may not exceed $10,000 in 1998, which is indexed for inflation.
Employees of tax-exempt organizations and state and local government agencies
are not eligible for SAR/SEPs. SAR/SEPs may not be established after December
31, 1996.
Taxation of Distributions. Generally, distribution payments from SEPs and
SAR/SEPs are subject to the same distribution rules described above for IRAs.
Required Distributions. SEPs and SAR/SEPs are subject to the same minimum
required distribution rules described above for IRAs.
Tax-Free Rollovers. Generally, rollovers and direct transfers may be made to and
from SEPs and SAR/SEPs in the same manner as described above for IRAs, subject
to the same conditions and limitations.
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE IRA)
Purchase Payments. Under Section 408(p) of the Code, employers may establish a
type of IRA plan known as a Simple IRA. Employees may have contributions made to
the SIMPLE IRA on a salary reduction basis. These salary reduction contributions
may not exceed $6,000 in 1998, which is indexed for inflation. Total salary
reduction contributions are limited to $10,000 per year for any employee who
makes salary reduction contributions to more than one plan. Employers are
required to contribute to the SIMPLE IRA, which contributions may not exceed the
lesser of: (1) The amount of salary deferred by the employee, (2) 3% of the
employee's compensation, or (3) $6,000, if the employer contributes on a
matching basis; or the lesser of: (1) 2% of the employee's compensation, or (2)
$3,200, if the employer makes non-elective contributions. An employer may not
make contributions to both a SIMPLE IRA and another retirement plan for the same
calendar year.
Taxation of Distributions. Generally, distribution payments from SIMPLE IRAs are
subject to the same distribution rules described above for IRAs, except that
distributions made within two years of the date of an employee's first
participation in a SIMPLE IRA of an employer are subject to a 25% penalty tax
instead of the 10% penalty tax discussed previously.
Required Distributions. SIMPLE IRAs are subject to the same minimum required
distribution rules described above for IRAs.
Tax-Free Rollovers. Direct transfers may be made among SIMPLE IRAs in the same
manner as described above for IRAs, subject to the same conditions and
limitations. Rollovers from SIMPLE IRAs are permitted after two years have
elapsed from the date of an employee's first participation in a SIMPLE IRA of
the employer. Rollovers to SIMPLE IRAs from other plans are not permitted.
ROTH INDIVIDUAL RETIREMENT ANNUITIES (ROTH IRA)
Purchase Payments. Under Section 408A of the Code, Individuals may make
nondeductible contributions to Roth IRA contracts up to $2,000. This
contribution amount must be reduced by the amount of any contributions made to
other IRAs for the benefit of the Roth IRA owner. The maximum $2,000
contribution is phased out for single taxpayers with adjusted gross income
between $95,000 and $110,000 and for joint filers with adjusted gross income
between $150,000 and $160,000. If taxable income is recognized on the regular
IRA, an IRA owner with adjusted gross income of less than $100,000 may convert a
regular IRA into a Roth IRA. If the conversion is made in 1998, IRA income
recognized may be spread over four years. Otherwise, all IRA income will need to
be recognized in the year of conversion. No IRS 10% tax penalty will apply to
the conversion.
Taxation of Distribution. Qualified distributions are received income-tax free
by the Roth IRA owner, or beneficiary in case of the Roth IRA owner's death. A
qualified distribution is any distribution made after five years if the IRA
owner is over age 59 1/2, dies, becomes disabled, or uses the funds for
first-time home buyer expenses at the time of distribution. The five year period
for converted amounts begins from the year of the conversion.
<PAGE>
Report of Independent Auditors
The Board of Directors
Principal Mutual Life Insurance Company
We have audited the accompanying consolidated statements of financial position
of The Principal Financial Group (the Company) as of December 31, 1996 and
1995, and the related consolidated statements of operations, equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Principal
Financial Group at December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1996 the
Company adopted certain accounting changes to conform with generally accepted
accounting principles for mutual life insurance enterprises, and retroactively
restated the 1995 financial statements for the change.
/s/ Ernst & Young
Des Moines, Iowa
February 7, 1997
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statement of Net Assets
December 31, 1996
Assets
Investments:
Aggressive Growth Division:
Principal Aggressive Growth Fund, Inc. - 5,015,647 shares at net asset
<S> <C>
value of $14.52 per share (cost - $68,556,580) $ 72,827,189
Asset Allocation Division:
Principal Asset Allocation Fund, Inc. - 2,615,216 shares at net asset
value of $11.48 per share(cost - $29,412,890) 30,022,679
Balanced Division:
Principal Balanced Fund, Inc. - 5,227,046 shares at net asset value
of $14.44 per share (cost - $72,961,005) 75,478,532
Bond Division:
Principal Bond Fund, Inc. - 4,515,157 shares at net asset value
of $11.33 per share (cost - $51,557,619) 51,156,727
Capital Accumulation Division:
Principal Capital Accumulation Fund, Inc. - 5,502,884 shares at net
asset value of $29.84 per share (cost - $152,349,374) 164,206,061
Emerging Growth Division:
Principal Emerging Growth Fund, Inc. - 4,111,887 shares at net
asset value of $29.74 per share (cost - $104,926,679) 122,287,543
Government Securities Division:
Principal Government Securities Fund, Inc. - 7,800,306 shares at
net asset value of $10.31 per share (cost - $80,859,708) 80,421,152
Growth Division:
Principal Growth Fund, Inc. - 7,137,809 shares at net asset
value of $13.79 per share (cost - $87,379,604) 98,430,386
Money Market Division:
Principal Money Market Fund, Inc. - 40,738,362 shares at net
asset value (cost) of $1.00 per share 40,738,362
World Division:
Principal World Fund, Inc. - 5,416,972 shares at net asset value
of $13.02 per share (cost - $60,038,392) 70,528,972
=====================
Net assets $806,097,603
=====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statement of Net Assets (continued)
Unit
Units Value
------------------- ------------
------------------- ------------
Net assets are represented by:
Aggressive Growth Division:
Contracts in accumulation period:
<S> <C> <C> <C>
The Principal Variable Annuity 3,970,831 $18.34 $ 72,827,189
Asset Allocation Division:
Contracts in accumulation period:
The Principal Variable Annuity 2,263,999 13.26 30,022,679
Balanced Division:
Contracts in accumulation period:
Personal Variable 1,015,409 1.36 1,379,720
Premier Variable 7,466,712 1.37 10,195,711
The Principal Variable Annuity 4,661,481 13.71 63,903,101
---------------------
---------------------
75,478,532
Bond Division:
Contracts in accumulation period:
Personal Variable 274,142 1.25 342,860
Premier Variable 2,612,249 1.26 3,283,167
The Principal Variable Annuity 3,872,056 12.28 47,530,700
---------------------
---------------------
51,156,727
Capital Accumulation Division:
Currently payable annuity contracts:
Bankers Flexible Annuity 8,376 21.75 182,179
Pension Builder Plus - Rollover IRA 62,760 4.54 285,099
Contracts in accumulation period:
Bankers Flexible Annuity 279,871 21.75 6,087,431
Pension Builder Plus 3,538,347 4.15 14,676,410
Pension Builder Plus - Rollover IRA 513,388 4.54 2,332,142
Personal Variable 2,914,582 1.84 5,361,512
Premier Variable 17,961,848 1.86 33,366,293
The Principal Variable Annuity 6,267,307 16.26 101,914,995
---------------------
---------------------
164,206,061
Emerging Growth Division:
Contracts in accumulation period:
Personal Variable 829,824 1.53 1,269,228
Premier Variable 5,722,211 1.54 8,795,394
The Principal Variable Annuity 7,284,770 15.41 112,222,921
---------------------
---------------------
122,287,543
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statement of Net Assets (continued)
Unit
Units Value
------------------- ------------
Net assets are represented by (continued):
Government Securities Division:
Contracts in accumulation period:
<S> <C> <C> <C>
Pension Builder Plus 1,177,927 $ 1.87 $ 2,208,125
Pension Builder Plus - Rollover IRA 399,361 1.97 785,763
Personal Variable 1,936,349 1.29 2,496,826
Premier Variable 7,513,193 1.30 9,783,076
The Principal Variable Annuity 5,442,706 11.97 65,147,362
---------------------
---------------------
80,421,152
Growth Division:
Contracts in accumulation period:
Personal Variable 813,860 1.40 1,137,156
Premier Variable 6,802,207 1.40 9,551,201
The Principal Variable Annuity 6,088,570 14.41 87,742,029
---------------------
---------------------
98,430,386
Money Market Division:
Contracts in accumulation period:
Pension Builder Plus 590,285 1.83 1,077,889
Pension Builder Plus - Rollover IRA 26,921 1.89 50,788
Personal Variable 841,211 1.17 981,411
Premier Variable 5,379,334 1.18 6,337,610
The Principal Variable Annuity 2,928,858 11.03 32,290,664
---------------------
---------------------
40,738,362
World Division:
Contracts in accumulation period:
Personal Variable 487,316 1.35 658,659
Premier Variable 4,298,126 1.36 5,838,045
The Principal Variable Annuity 4,797,313 13.35 64,032,268
---------------------
---------------------
70,528,972
=====================
Net assets $806,097,603
=====================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statement of Operations
Year ended December 31, 1996
Aggressive Asset Allocation
Growth Division Division Balanced Division
Combined
---------------- ----------------- ------------------ ------------------
---------------- ----------------- ------------------ ------------------
Investment income
Income:
<S> <C> <C> <C> <C>
Dividends $18,172,373 $ 509,777 $ 856,100 $1,925,027
Capital gains distributions 32,450,453 6,549,914 1,528,766 3,811,144
---------------- ----------------- ------------------ ------------------
---------------- ----------------- ------------------ ------------------
50,622,826 7,059,691 2,384,866 5,736,171
Expenses:
Mortality and expense risks 6,754,861 566,830 267,227 552,989
Administration charges 522,693 28,925 3,394 9,695
Contingent sales charges 379,429 25,052 18,520 20,237
---------------- ----------------- ------------------ ------------------
---------------- ----------------- ------------------ ------------------
7,656,983 620,807 289,141 582,921
---------------- ----------------- ------------------ ------------------
---------------- ----------------- ------------------ ------------------
Net investment income 42,965,843 6,438,884 2,095,725 5,153,250
Realized and unrealized gains (losses) on investments
Net realized gains on investments 11,061,913 1,143,445 188,720 98,838
Change in net unrealized appreciation/
depreciation of investments 32,048,646 3,397,775 206,378 1,366,906
---------------- ----------------- ------------------ ------------------
================ ================= ================== ==================
Net increase in net assets resulting from operations
$86,076,402 $10,980,104 $2,490,823 $6,618,994
================ ================= ================== ==================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Capital Emerging Growth Government Money Market
Bond Division Accumulation Division Securities Growth Division Division World Division
Division Division
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
$2,883,564 $ 2,824,460 $ 889,099 $4,377,421 $1,130,290 $1,648,495 $ 1,128,140
- 17,683,076 1,921,631 - 236,417 - 719,505
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
2,883,564 20,507,536 2,810,730 4,377,421 1,366,707 1,648,495 1,847,645
454,051 1,416,717 980,616 758,402 808,416 396,012 553,601
3,582 318,880 36,468 66,615 17,437 29,567 8,130
22,229 97,937 41,369 47,306 41,516 39,803 25,460
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
479,862 1,833,534 1,058,453 872,323 867,369 465,382 587,191
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
2,403,702 18,674,002 1,752,277 3,505,098 499,338 1,183,113 1,260,454
84,385 7,614,291 1,000,612 266,471 216,275 - 448,876
(906,639) 1,107,485 12,364,939 (1,358,430) 7,137,078 - 8,733,154
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
- ----------------- ------------------- ----------------- ----------------- ---------------- ---------------- -----------------
$1,581,448 $27,395,778 $15,117,828 $2,413,139 $7,852,691 $1,183,113 $10,442,484
================= =================== ================= ================= ================ ================ =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statements of Changes in Net Assets
Aggressive Asset Allocation
Combined Growth Division Division Balanced Division
---------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1995 $177,884,053 $ 3,684,502 $ 3,025,421 $ 3,819,712
Increase (decrease) in net assets
Operations:
Net investment income 16,691,109 1,912,227 549,562 899,632
Net realized gains (losses) on investments 2,865,382 448,426 74,402 103,410
Change in net unrealized appreciation/ depreciation
of investments 31,314,846 912,921 490,584 1,347,509
---------------- ----------------- ------------------ ------------------
---------------- ----------------- ------------------ ------------------
Net increase in net assets resulting from operations
50,871,337 3,273,574 1,114,548 2,350,551
Changes from principal transactions:
Purchase payments, less sales charges, per payment
fees and applicable premium taxes 283,284,033 14,908,019 7,493,760 17,579,517
Contract terminations (51,871,322) (147,494) (76,769) (243,855)
Death benefit payments (616,609) (111,616) (30,363) (22,485)
Flexible withdrawal option payments (591,573) (23,563) (12,654) (56,396)
Transfer payments to other contracts (112,300,367) (2,385,375) (672,843) (2,164,022)
Annuity payments (48,233) - - -
---------------- ----------------- ------------------ ------------------
---------------- ----------------- ------------------ ------------------
Increase (decrease) in net assets from principal
transactions 117,855,929 12,239,971 6,701,131 15,092,759
---------------- ----------------- ------------------ ------------------
---------------- ----------------- ------------------ ------------------
Total increase 168,727,266 15,513,545 7,815,679 17,443,310
---------------- ----------------- ------------------ ------------------
================ ================= ================== ==================
Net assets at December 31, 1995 $346,611,319 $19,198,047 $10,841,100 $21,263,022
================ ================= ================== ==================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Capital Emerging Government Money Market
Bond Division Accumulation Growth Division Securities Growth Division Division World Division
Division Division
- ------------------ -------------------- ---------------- ----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$ 3,056,349 $ 89,730,411 $ 9,965,696 $30,273,698 $ 8,101,324 $17,109,486 $ 9,117,454
806,529 8,803,011 354,473 2,021,914 479,398 656,604 207,759
50,961 1,908,275 241,047 (303,527) 254,149 - 88,239
679,932 12,768,964 5,294,039 3,801,338 3,955,502 - 2,064,057
- ------------------ --------------------- ---------------- ----------------- ---------------- ---------------- ------------------
- ------------------ --------------------- ---------------- ----------------- ---------------- ---------------- ------------------
1,537,422 23,480,250 5,889,559 5,519,725 4,689,049 656,604 2,360,055
15,702,412 37,285,598 28,874,128 24,062,104 29,628,926 92,190,303 15,559,266
(274,508) (34,074,636) (420,250) (9,547,633) (428,438) (6,320,639) (337,100)
(44,089) (80,185) (14,885) (129,425) (44,665) (97,824) (41,072)
(73,005) (87,530) (52,968) (96,784) (50,522) (85,680) (52,471)
(1,275,948) (12,547,912) (2,056,332) (4,638,749) (3,992,441) (81,142,762) (1,423,983)
- (48,233) - - - - -
- ------------------ --------------------- ---------------- ----------------- ---------------- ---------------- ------------------
- ------------------ --------------------- ---------------- ----------------- ---------------- ---------------- ------------------
14,034,862 (9,552,898) 26,329,693 9,649,513 25,112,860 4,543,398 13,704,640
- ------------------ --------------------- ---------------- ----------------- ---------------- ---------------- ------------------
- ------------------ --------------------- ---------------- ----------------- ---------------- ---------------- ------------------
15,572,284 13,927,352 32,219,252 15,169,238 29,801,909 5,200,002 16,064,695
- ------------------ --------------------- ---------------- ----------------- ---------------- ---------------- ------------------
================== ===================== ================ ================= ================ ================ ==================
$18,628,633 $103,657,763 $42,184,948 $45,442,936 $37,903,233 $22,309,488 $25,182,149
================== ===================== ================ ================= ================ ================ ==================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statements of Changes in Net Assets (continued)
Aggressive Asset Allocation
Combined Growth Division Division Balanced Division
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1996 $346,611,319 $19,198,047 $10,841,100 $21,263,022
Increase (decrease) in net assets
Operations:
Net investment income 42,965,843 6,438,884 2,095,725 5,153,250
Net realized gains on investments 11,061,913 1,143,445 188,720 98,838
Change in net unrealized appreciation/ depreciation
of investments 32,048,646 3,397,775 206,378 1,366,906
------------------ ----------------- ------------------ -----------------
------------------ ----------------- ------------------ -----------------
Net increase in net assets resulting from operations
86,076,402 10,980,104 2,490,823 6,618,994
Changes from principal transactions:
Purchase payments, less sales charges, per payment
fees and applicable premium taxes 694,702,137 55,392,385 19,059,581 52,586,838
Contract terminations (66,787,528) (1,366,444) (1,010,182) (1,643,846)
Death benefit payments (668,045) (2,653) - (126,235)
Flexible withdrawal option payments (3,510,262) (159,580) (189,515) (377,428)
Transfer payments to other contracts (250,275,882) (11,214,670) (1,169,128) (2,842,813)
Annuity payments (50,538) - - -
------------------ ----------------- ------------------ -----------------
------------------ ----------------- ------------------ -----------------
Increase in net assets from principal transactions
373,409,882 42,649,038 16,690,756 47,596,516
------------------ ----------------- ------------------ -----------------
------------------ ----------------- ------------------ -----------------
Total increase 459,486,284 53,629,142 19,181,579 54,215,510
------------------ ----------------- ------------------ -----------------
================== ================= ================== =================
Net assets at December 31, 1996 $806,097,603 $72,827,189 $30,022,679 $75,478,532
================== ================= ================== =================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Capital Emerging Growth Government Money Market
Bond Division Accumulation Division Securities Growth Division Division World Division
Division Division
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
$18,628,633 $103,657,763 $ 42,184,948 $45,442,936 $37,903,233 $ 22,309,488 $25,182,149
2,403,702 18,674,002 1,752,277 3,505,098 499,338 1,183,113 1,260,454
84,385 7,614,291 1,000,612 266,471 216,275 - 448,876
(906,639) 1,107,485 12,364,939 (1,358,430) 7,137,078 - 8,733,154
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
1,581,448 27,395,778 15,117,828 2,413,139 7,852,691 1,183,113 10,442,484
38,496,000 82,813,992 73,546,898 53,225,139 59,193,247 219,306,074 41,081,983
(1,339,557) (38,943,389) (2,654,193) (10,402,344) (3,020,145) (4,638,362) (1,769,066)
(137,325) (44,752) (23,654) (97,177) (49,795) (155,982) (30,472)
(515,754) (358,969) (309,539) (698,302) (305,373) (433,930) (161,872)
(5,556,718) (10,263,824) (5,574,745) (9,462,239) (3,143,472) (196,832,039) (4,216,234)
- (50,538) - - - - -
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
30,946,646 33,152,520 64,984,767 32,565,077 52,674,462 17,245,761 34,904,339
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
32,528,094 60,548,298 80,102,595 34,978,216 60,527,153 18,428,874 45,346,823
- ------------------ ------------------ ------------------- ----------------- ----------------- ------------------ ------------------
================== ================== =================== ================= ================= ================== ==================
$51,156,727 $164,206,061 $122,287,543 $80,421,152 $98,430,386 $ 40,738,362 $70,528,972
================== ================== =================== ================= ================= ================== ==================
</TABLE>
<PAGE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements
December 31, 1996
1. Investment and Accounting Policies
Principal Mutual Life Insurance Company Separate Account B is a segregated
investment account of Principal Mutual Life Insurance Company (Principal Mutual)
and is registered under the Investment Company Act of 1940 as a unit investment
trust, with no stated limitations on the number of authorized units. As directed
by eligible contractholders, Separate Account B invests solely in shares 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 Money
Market Fund, Inc., and Principal World Fund, Inc., diversified open-end
management investment companies organized by Principal Mutual. Investments are
stated at the closing net asset values per share on December 31, 1996.
The average cost method is used to determine realized gains and losses on
investments. Dividends are taken into income on an accrual basis as of the
ex-dividend date.
After December 31, 1996, Principal Mutual no longer accepted contributions for
Pension Builder Plus contracts. Contractholders are being given the option of
withdrawing their funds or transferring to another contract. In addition,
Principal Mutual no longer accepts contributions for Bankers Flexible Annuity
contracts.
2. Expenses
Principal Mutual is compensated for the following expenses:
Bankers Flexible Annuity Contracts - Mortality and expense risks assumed by
Principal Mutual are compensated for by a charge equivalent to an annual rate of
0.48% of the asset value of each contract. An annual administration charge of $7
for each participant's account is deducted as compensation for administrative
expenses. The mortality and expense risk and annual administration charges
amounted to $29,412 and $1,281, respectively, during the year ended December 31,
1996. A sales charge of up to 7% was deducted from each contribution made on
behalf of each participant. The sales charge was deducted from the contributions
by Principal Mutual prior to their transfer to Separate Account B.
Pension Builder Plus Contracts - Mortality and expense risks assumed by
Principal Mutual are compensated for by a charge equivalent to an annual rate of
1.4965% (1.0001% for a Rollover Individual Retirement Annuity) of the asset
value of each contract. A contingent sales charge of up to 7% may be deducted
from withdrawals made during the first 10 years of a contract, except for death
or permanent disability. An annual administration charge will be deducted
ranging from a minimum of $25 to a maximum of $275 depending upon a
<PAGE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
2. Expenses (continued)
participant's investment account values and the number of participants under the
retirement plan and their participant investment account value. The charges for
mortality and expense risks, contingent sales, and annual administration
amounted to $553,979, $70,529, and $345,900, respectively, during the year ended
December 31, 1996.
Personal Variable Contracts - Mortality and expense risks assumed by Principal
Mutual are compensated for by a charge equivalent to an annual rate of 0.64%
(0.55% through June 30, 1996) of the asset value of each contract. A contingent
sales charge of up to 5% may be deducted from withdrawals from an investment
account which correlates to a plan participant made during the first seven years
from the date the first contribution which relates to such participant is
accepted by Principal Mutual. This charge does not apply to withdrawals made
from investment accounts which correlate to a plan participant as a result of
the plan participant's death or permanent disability. An annual administration
charge of $31 (1995 - $31) for each participant's account plus 0.35% of the
annual average balance of investment account values which correlate to a plan
participant will be deducted on a quarterly basis. The charges for mortality and
expense risks, contingent sales and annual administration amounted to $68,986,
$42,892, and $27,281, respectively, during the year ended December 31, 1996.
Premier Variable Contracts - Mortality and expense risks assumed by Principal
Mutual are compensated for by a charge equivalent to an annual rate of 0.42%
(0.33% through June 30, 1996) of the asset value of each contract. An annual
administration charge of $300 for each contract account plus .35% of the annual
average balance of investment account values under the contract will be billed
or deducted on a quarterly basis. The charges for mortality expense risks and
annual administration amounted to $261,025 and $9,158, respectively, during the
year ended December 31, 1996. There were no contingent sales charges provided
for in these contracts.
The Principal Variable Annuity - Mortality and expense risks assumed by
Principal Mutual are compensated for by a charge equivalent to an annual rate of
1.25% of the asset value of each contract. A contingent sales charge of up to 6%
may be deducted from the withdrawals made during the first six years of a
contract, except for death, annuitization, permanent disability, confinement in
a health care facility, or terminal illness. An annual administration charge of
the lessor of two percent of the accumulated value or $30 is deducted at the end
of the contract year. Principal Mutual reserves the right to charge an
additional administrative fee of up to 0.15% of the asset value of each
Division. This fee is currently being waived. The mortality expense risks,
contingent sales, and annual administration amounted to $5,841,459, $266,007,
and $139,074, respectively, during the year ended December 31, 1996.
<PAGE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
3. Federal Income Taxes
Operations of Separate Account B are a part of the operations of Principal
Mutual. Under current practice, no federal income taxes are allocated by
Principal Mutual to the operations of Principal Mutual Life Insurance Company
Separate Account B.
4. Purchases and Sales of Investment Securities
The aggregate units and cost of purchases and proceeds from sales of investments
were as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1996
----------------------------------------------------------------------------
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
-------------- ----------------- ------------------ -----------------
-------------- ----------------- ------------------ -----------------
Aggressive Growth Division:
<S> <C> <C> <C> <C>
The Principal Variable Annuity 3,416,591 $ 62,452,075 769,423 $ 13,364,153
Asset Allocation Division:
The Principal Variable Annuity 1,544,152 21,444,448 191,810 2,657,967
Balanced Division:
Personal Variable 900,014 1,242,103 211,977 272,089
Premier Variable 5,270,554 7,416,331 1,120,817 1,444,677
The Principal Variable Annuity 3,548,083 49,664,576 259,759 3,856,478
-------------- ----------------- ------------------ -----------------
-------------- ----------------- ------------------ -----------------
9,718,651 58,323,010 1,592,553 5,573,244
Bond Division:
Personal Variable 285,136 369,062 112,030 138,062
Premier Variable 1,952,308 2,549,386 547,808 675,630
The Principal Variable Annuity 3,045,208 38,461,117 574,453 7,215,525
-------------- ----------------- ------------------ -----------------
-------------- ----------------- ------------------ -----------------
5,282,652 41,379,565 1,234,291 8,029,217
Capital Accumulation Division:
Bankers Flexible Annuity 11,898 852,606 58,526 965,050
Pension Builder Plus 613,448 4,544,826 7,042,406 27,014,157
Pension Builder Plus - Rollover IRA
34,576 622,428 1,641,455 6,423,138
Personal Variable 1,293,441 2,795,547 715,206 1,184,726
Premier Variable 6,804,423 15,405,949 3,666,783 6,140,022
The Principal Variable Annuity 4,618,190 79,100,172 582,660 9,767,913
-------------- ----------------- ------------------ -----------------
-------------- ----------------- ------------------ -----------------
13,375,976 103,321,528 13,707,036 51,495,006
Emerging Growth Division:
Personal Variable 716,271 1,017,826 174,386 241,556
Premier Variable 4,583,657 6,499,991 757,309 1,081,357
The Principal Variable Annuity 4,746,934 68,839,812 521,488 8,297,672
-------------- ----------------- ------------------ -----------------
-------------- ----------------- ------------------ -----------------
10,046,862 76,357,629 1,453,183 9,620,585
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
Year ended December 31, 1996
--------------------------------------------------------------------------------
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
------------------ --------------------- ------------------ --------------------
Government Securities Division:
<S> <C> <C> <C> <C>
Pension Builder Plus 224,490 $ 525,632 2,784,796 $ 5,186,539
Pension Builder Plus - Rollover IRA
1,918 49,120 1,374,538 2,618,548
Personal Variable 723,523 1,041,512 676,962 867,506
Premier Variable 3,069,889 4,387,401 2,715,719 3,448,465
The Principal Variable Annuity 4,181,060 51,598,893 761,477 9,411,325
------------------ --------------------- ------------------ --------------------
------------------ --------------------- ------------------ --------------------
8,200,880 57,602,558 8,313,492 21,532,383
Growth Division:
Personal Variable 713,466 950,832 177,314 234,080
Premier Variable 5,218,991 6,959,663 1,276,677 1,711,826
The Principal Variable Annuity 3,810,008 52,649,457 340,777 5,440,246
------------------ --------------------- ------------------ --------------------
------------------ --------------------- ------------------ --------------------
9,742,465 60,559,952 1,794,768 7,386,152
Money Market Division:
Pension Builder Plus 172,768 392,894 909,680 1,654,451
Pension Builder Plus - Rollover IRA 35 13,779 412,615 760,905
Personal Variable 3,693,865 4,468,236 3,995,717 4,765,060
Premier Variable 31,816,273 36,988,147 29,395,716 33,985,887
The Principal Variable Annuity 16,446,056 179,091,511 14,887,402 161,359,390
------------------ --------------------- ------------------ --------------------
------------------ --------------------- ------------------ --------------------
52,128,997 220,954,567 49,601,130 202,525,693
World Division:
Personal Variable 423,219 522,642 95,601 114,884
Premier Variable 3,372,385 4,182,033 746,605 929,782
The Principal Variable Annuity 3,081,130 38,224,953 429,786 5,720,169
------------------ --------------------- ------------------ --------------------
------------------ --------------------- ------------------ --------------------
6,876,734 42,929,628 1,271,992 6,764,835
------------------ --------------------- ------------------ --------------------
================== ===================== ================== ====================
120,333,960 $745,324,960 79,929,678 $328,949,235
================== ===================== ================== ====================
</TABLE>
<PAGE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
<TABLE>
<CAPTION>
Year ended December 31, 1995
-------------------------------------------------------------------------------
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
------------------ -------------------- ------------------ --------------------
------------------ -------------------- ------------------ --------------------
Aggressive Growth Division:
<S> <C> <C> <C> <C>
The Principal Variable Annuity 1,162,971 $16,957,154 201,095 $ 2,804,956
Asset Allocation Division:
The Principal Variable Annuity 678,626 8,127,343 70,172 876,650
Balanced Division:
Personal Variable 334,553 385,447 11,639 14,109
Premier Variable 4,677,390 5,246,438 1,485,326 1,592,984
The Principal Variable Annuity 1,080,849 12,976,336 78,060 1,008,737
------------------ -------------------- ------------------ --------------------
------------------ -------------------- ------------------ --------------------
6,092,792 18,608,221 1,575,025 2,615,830
Bond Division:
Personal Variable 123,065 148,020 22,243 25,730
Premier Variable 1,840,967 2,123,674 663,884 722,145
The Principal Variable Annuity 1,184,200 14,349,589 83,479 1,032,017
------------------ -------------------- ------------------ --------------------
------------------ -------------------- ------------------ --------------------
3,148,232 16,621,283 769,606 1,779,892
Capital Accumulation Division:
Bankers Flexible Annuity (2,074) 586,673 26,790 484,160
Pension Builder Plus 1,177,659 6,843,608 7,859,266 22,762,416
Pension Builder Plus - Rollover IRA 1,886,220 1,378,668 5,357,391 11,244,730
Personal Variable 1,106,595 1,748,682 408,298 529,070
Premier Variable 9,404,706 13,956,170 8,547,118 10,455,522
The Principal Variable Annuity 1,739,038 22,863,899 206,288 2,651,689
------------------ -------------------- ------------------ --------------------
------------------ -------------------- ------------------ --------------------
15,312,144 47,377,700 22,405,151 48,127,587
Emerging Growth Division:
Personal Variable 292,833 348,128 18,735 22,981
Premier Variable 2,320,114 2,651,113 543,652 613,426
The Principal Variable Annuity 2,252,301 26,559,212 165,780 2,237,880
------------------ -------------------- ------------------ --------------------
------------------ -------------------- ------------------ --------------------
4,865,248 29,558,453 728,167 2,874,287
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
4. Purchases and Sales of Investment Securities (continued)
Year ended December 31, 1995
-------------------------------------------------------------------------------
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
------------------ -------------------- ------------------ --------------------
Government Securities Division:
<S> <C> <C> <C> <C>
Pension Builder Plus 586,364 $ 1,344,275 2,795,319 $ 4,747,357
Pension Builder Plus - Rollover IRA 117,394 407,431 2,462,194 4,357,297
Personal Variable 724,111 966,857 408,940 483,072
Premier Variable 4,015,136 5,118,317 3,286,750 3,736,310
The Principal Variable Annuity 1,576,129 18,708,169 125,206 1,549,586
------------------ -------------------- ------------------ --------------------
------------------ -------------------- ------------------ --------------------
7,019,134 26,545,049 9,078,409 14,873,622
Growth Division:
Personal Variable 288,529 338,347 15,831 18,761
Premier Variable 3,384,751 3,805,395 634,749 707,988
The Principal Variable Annuity 2,193,600 26,238,189 338,161 4,062,924
------------------ -------------------- ------------------ --------------------
------------------ -------------------- ------------------ --------------------
5,866,880 30,381,931 988,741 4,789,673
Money Market Division:
Pension Builder Plus 259,307 585,027 928,805 1,623,965
Pension Builder Plus - Rollover IRA 73,307 206,073 1,861,305 3,275,611
Personal Variable 4,808,023 5,271,738 4,407,096 4,786,833
Premier Variable 19,308,743 21,221,953 18,140,572 19,805,796
The Principal Variable Annuity 6,262,716 65,784,577 5,594,373 58,377,161
------------------ -------------------- ------------------ --------------------
------------------ -------------------- ------------------ --------------------
30,712,096 93,069,368 30,932,151 87,869,366
World Division:
Personal Variable 147,751 154,436 9,257 10,003
Premier Variable 2,079,728 2,137,579 544,500 566,419
The Principal Variable Annuity 1,337,260 13,699,818 126,959 1,503,012
------------------ -------------------- ------------------ --------------------
------------------ -------------------- ------------------ --------------------
3,564,739 15,991,833 680,716 2,079,434
------------------ -------------------- ------------------ --------------------
================== ==================== ================== ====================
78,422,862 $303,238,335 67,429,233 $168,691,297
================== ==================== ================== ====================
</TABLE>
Purchases include reinvested dividends and capital gains.
Money Market purchases include transactions where investment allocations are not
known at the time of the deposit. Redemptions reflect subsequent allocations to
directed investment divisions.
<PAGE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
5. Net Assets
Net assets at December 31, 1996 consisted of the following:
Net Unrealized
Appreciation
Accumulated Net (Depreciation)
Combined Unit Transactions Investment Income of Investments
------------------ ------------------ ------------------- --------------------
Aggressive Growth Division:
<S> <C> <C> <C> <C>
The Principal Variable Annuity $ 72,827,189 $ 61,520,104 $ 7,036,476 $ 4,270,609
Asset Accumulation Division:
The Principal Variable Annuity 30,022,679 26,903,818 2,509,072 609,789
Balanced Division:
Personal Variable 1,379,720 1,256,243 98,597 24,880
Premier Variable 10,195,711 9,039,835 790,665 365,211
The Principal Variable Annuity 63,903,101 56,916,021 4,859,644 2,127,436
------------------ ------------------ ------------------- --------------------
------------------ ------------------ ------------------- --------------------
75,478,532 67,212,099 5,748,906 2,517,527
Bond Division:
Personal Variable 342,860 337,692 16,621 (11,453)
Premier Variable 3,283,167 3,137,358 188,841 (43,032)
The Principal Variable Annuity 47,530,700 45,146,759 2,730,348 (346,407)
------------------ ------------------ ------------------- --------------------
------------------ ------------------ ------------------- --------------------
51,156,727 48,621,809 2,935,810 (400,892)
Capital Accumulation Division:
Bankers Flexible Annuity 6,269,610 1,223,652 3,467,049 1,578,909
Pension Builder Plus 14,676,410 9,061,050 3,383,150 2,232,210
Pension Builder Plus - Rollover IRA 2,617,241 1,601,037 608,334 407,870
Personal Variable 5,361,512 4,111,369 797,887 452,256
Premier Variable 33,366,293 24,904,371 5,188,107 3,273,815
The Principal Variable Annuity 101,914,995 85,550,057 12,453,311 3,911,627
------------------ ------------------ ------------------- --------------------
------------------ ------------------ ------------------- --------------------
164,206,061 126,451,536 25,897,838 11,856,687
Emerging Growth Division:
Personal Variable 1,269,228 1,106,793 19,852 142,583
Premier Variable 8,795,394 7,458,640 186,583 1,150,171
The Principal Variable Annuity 112,222,921 94,053,742 2,101,069 16,068,110
------------------ ------------------ ------------------- --------------------
------------------ ------------------ ------------------- --------------------
122,287,543 102,619,175 2,307,504 17,360,864
Government Securities Division:
Pension Builder Plus 2,208,125 1,895,024 305,297 7,804
Pension Builder Plus - Rollover IRA 785,763 663,396 128,582 (6,215)
Personal Variable 2,496,826 2,321,860 205,773 (30,807)
Premier Variable 9,783,076 8,955,630 855,616 (28,170)
The Principal Variable Annuity 65,147,362 61,690,559 3,837,971 (381,168)
------------------ ------------------ ------------------- --------------------
------------------ ------------------ ------------------- --------------------
80,421,152 75,526,469 5,333,239 (438,556)
</TABLE>
<PAGE>
<TABLE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements (continued)
5. Net Assets (continued)
Net Unrealized
Appreciation
Accumulated Net (Depreciation)
Combined Unit Transactions Investment Income of Investments
------------------ ------------------ ------------------- --------------------
Growth Division:
<S> <C> <C> <C> <C>
Personal Variable $ 1,137,156 $ 1,039,273 $ 10,425 $ 87,458
Premier Variable 9,551,201 8,421,782 136,389 993,030
The Principal Variable Annuity 87,742,029 76,959,897 811,838 9,970,294
------------------ ------------------ ------------------- --------------------
98,430,386 86,420,952 958,652 11,050,782
Money Market Division:
Pension Builder Plus 1,077,889 985,117 92,772 -
Pension Builder Plus - Rollover IRA 50,788 46,119 4,669 -
Personal Variable 981,411 975,322 6,089 -
Premier Variable 6,337,610 6,303,955 33,655 -
The Principal Variable Annuity 32,290,664 32,119,647 171,017 -
------------------ ------------------ ------------------- --------------------
------------------ ------------------ ------------------- --------------------
40,738,362 40,430,160 308,202 -
World Division:
Personal Variable 658,659 565,011 12,253 81,395
Premier Variable 5,838,045 4,891,233 136,780 810,032
The Principal Variable Annuity 64,032,268 53,176,031 1,257,084 9,599,153
------------------ ------------------ ------------------- --------------------
------------------ ------------------ ------------------- --------------------
70,528,972 58,632,275 1,406,117 10,490,580
------------------ ------------------ ------------------- --------------------
================== ================== =================== ====================
$806,097,603 $694,338,397 $54,441,816 $57,317,390
================== ================== =================== ====================
</TABLE>
Report of Independent Auditors
Board of Directors and Participants
Principal Mutual Life Insurance Company
We have audited the accompanying statement of net assets of Principal Mutual
Life Insurance Company Separate Account B (comprising, respectively, the
Aggressive Growth, Asset Allocation, Balanced, Bond, Capital Accumulation,
Emerging Growth, Government Securities, Growth, Money Market and World
Divisions) as of December 31, 1996, and the related statements of operations for
the year then ended, and changes in net assets for each of the two years in the
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1996, by correspondence with
the transfer agent. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Principal Mutual Life Insurance
Company Separate Account B at December 31, 1996, and the results of its
operations for the year then ended, and the changes in its net assets for each
of the two years in the period then ended, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young
Des Moines, Iowa
February 7, 1997
<PAGE>
The Principal Financial Group
Consolidated Statements of Operations
Year ended December 31
1996 1995*
----------------------------
----------------------------
(In Millions)
Revenue
Premiums and annuity and other considerations $5,121 $5,243
Policy and contract charges 655 580
Net investment income 2,780 2,693
Net realized capital gains 436 122
Commissions and other income 150 143
----------------------------
Total revenue 9,142 8,781
Expenses
Benefits, claims and settlement expenses 6,087 6,142
Dividends to policyowners 299 307
Operating expenses 1,926 1,781
----------------------------
----------------------------
Total expenses 8,312 8,230
----------------------------
Income before income taxes 830 551
Income taxes 304 207
----------------------------
============================
Net income $ 526 $ 344
============================
* As restated. See Note 1.
See accompanying notes.
<PAGE>
The Principal Financial Group
Consolidated Statements of Financial Position
December 31
1996 1995*
------------------------
------------------------
(In Millions)
Assets
Debt securities, available-for-sale $21,974 $21,837
Equity securities, available-for-sale 1,023 1,446
Mortgage loans 12,409 11,380
Real estate 2,474 2,263
Policy loans 736 711
Other investments 68 79
Cash and cash equivalents 271 295
Accrued investment income 464 479
Deferred acquisition costs 1,058 938
Property held for Company use 222 210
Separate account assets 17,218 12,957
Other assets 1,225 1,369
------------------------
========================
Total assets $59,142 $53,964
========================
========================
Liabilities
Contractholder funds $23,194 $22,465
Future policy benefits and claims 10,575 10,058
Other policyowner funds 454 476
Policyowner dividends payable 447 455
Debt 399 361
Income taxes currently payable 283 214
Deferred income taxes 623 930
Separate account liabilities 17,166 12,891
Other liabilities 1,347 1,508
------------------------
------------------------
Total liabilities 54,488 49,358
Equity
Surplus 3,803 3,277
Net unrealized gains on available- securities 860 1,336
Foreign currency translation adjustment, net (9) (7)
------------------------
------------------------
Total equity 4,654 4,606
------------------------
========================
Total liabilities and equity $59,142 $53,964
========================
* As restated. See Note 1.
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
The Principal Financial Group
Consolidated Statements of Equity
Net Unrealized
Gains on Foreign Currency
Available-for-Sale Translation
Surplus Securities Adjustment, net Total Equity
---------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Balances at January 1, 1995* $2,933 $ 48 $(6) $2,975
Net income 344 - - 344
Increase in unrealized appreciation on debt
securities available-for-sale - 1,834 - 1,834
Increase in unrealized appreciation on equity
securities available-for-sale - 411 - 411
Adjustments for assumed changes in
amortization pattern:
Deferred acquisition costs - (315) - (315)
Unearned revenue reserves - 52 - 52
Provision for deferred income taxes - (694) - (694)
Change in foreign currency translation
adjustment, net - - (1) (1)
---------------------------------------------------------------
Balances at December 31, 1995 3,277 1,336 (7) 4,606
Net income 526 - - 526
Decrease in unrealized appreciation on debt
securities available-for-sale - (543) - (543)
Decrease in unrealized appreciation on equity
securities available-for-sale - (262) - (262)
Adjustments for assumed changes in
amortization pattern:
Deferred acquisition costs - 83 - 83
Unearned revenue reserves - (11) - (11)
Provision for deferred income tax benefit - 257 - 257
Change in foreign currency translation
adjustment, net - - (2) (2)
---------------------------------------------------------------
===============================================================
Balances at December 31, 1996 $3,803 $ 860 $(9) $4,654
===============================================================
* As restated. See Note 1.
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Principal Financial Group
Consolidated Statements of Cash Flows
Year ended December 31
1996 1995*
-----------------------------
-----------------------------
(In Millions)
Operating activities
<S> <C> <C>
Net income $526 $344
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of deferred acquisition costs 178 145
Additions to deferred acquisition costs (215) (206)
Accrued investment income 15 6
Contractholder and policyowner liabilities and dividends 240 523
Current and deferred income taxes 20 93
Net realized capital gains (436) (122)
Depreciation and amortization expense 112 97
Other (230) 437
-----------------------------
-----------------------------
Net adjustments (316) 973
-----------------------------
Net cash provided by operating activities 210 1,317
Investing activities
Available-for-sale securities:
Purchases (11,762) (13,195)
Sales 8,949 9,333
Maturities 2,796 2,485
Mortgage loans acquired or originated (2,955) (2,837)
Mortgage loans sold or repaid 1,619 1,702
Real estate acquired (166) (143)
Real estate sold 253 38
Net change in policy loans (25) (28)
Net change in property held for company use (18) (44)
Net change in other investments (74) (11)
-----------------------------
Net cash used in investment activities (1,383) (2,700)
Financing activities
Issuance of debt 43 21
Principal repayments of debt (29) (71)
Proceeds of short-term borrowings 1,451 990
Repayment of short-term-borrowings (1,282) (990)
Investment contract deposits 7,496 6,756
Investment contract withdrawals (6,530) (5,310)
-----------------------------
Net cash provided by financing activities 1,149 1,396
-----------------------------
Net increase (decrease) in cash and cash equivalents (24) 13
Cash and cash equivalents at beginning of year 295 282
-----------------------------
=============================
Cash and cash equivalents at end of year $ 271 $ 295
=============================
* As restated. See Note 1.
See accompanying notes.
</TABLE>
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements
December 31, 1996
1. Nature of Operations and Significant Accounting Policies
Description of Business
The Principal Financial Group (the Company), comprised of Principal Mutual
Life Insurance Company (Principal Mutual) and its subsidiaries, is a diversified
financial services organization engaged in the marketing and management of life
insurance, annuity, health, pension and other financial products and services,
primarily in the United States.
Basis of Presentation
The accompanying consolidated financial statements of the Company and its
majority-owned subsidiaries have been prepared in conformity with generally
accepted accounting principles (GAAP). Less than majority-owned entities in
which the Company has at least a 20% interest are reported on the equity basis
in the consolidated statements of financial position as other investments. All
significant intercompany accounts and transactions have been eliminated.
Total assets of the unconsolidated entities amounted to $1.5 billion at December
31, 1996 and $1.7 billion at December 31, 1995, and total revenues were $349
million in 1996 and $320 million in 1995. During 1996 and 1995, the Company
included $(3) million and $(9) million, respectively, in net investment income
representing the Company's share of current year net losses of the
unconsolidated entities.
Accounting Changes
Prior to 1996, the Company prepared its financial statements in conformity with
reporting practices prescribed or permitted by the Insurance Division of the
Department of Commerce of the State of Iowa. Such practices were considered GAAP
for mutual life insurance companies through 1995. Financial Accounting Standards
Board (FASB) Interpretation (FIN) No. 40, Applicability of Generally Accepted
Accounting Principles to Mutual Life Insurance and Other Enterprises, as
amended, which is effective for 1996 annual financial statements, no longer
permits statutory-basis financial statements to be described as being prepared
in conformity with GAAP.
Accordingly, the Company has adopted GAAP, including various accounting
pronouncements but primarily Statement of Financial Accounting Standards (SFAS)
No. 120, Accounting and Reporting by Mutual Life Insurance Enterprises and by
Insurance Enterprises for Certain Long-Duration Participating Contracts and
Statement of Position (SOP) 95-1, Accounting for Certain Insurance Activities of
Mutual Life Insurance Enterprises, which address the accounting for
long-duration and short-duration insurance and reinsurance contracts, including
all participating business.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Pursuant to the requirements of FIN No. 40, SFAS No. 120 and SOP 95-1, the
effect of the changes from the statutory basis to GAAP accounting have been
applied retroactively and the previously issued 1995 financial statements have
been restated for the change. The effect of the changes applicable to years
prior to January 1, 1995, has been presented as a restatement of equity as
follows (in millions):
Equity at January 1, 1995, as previously reported $1,927
Adjustment for the cumulative effect on prior years of
retroactively adopting GAAP 1,048
---------------
===============
Equity at January 1, 1995, as restated $2,975
===============
The adoption of GAAP had the effect of increasing net income for 1996 and 1995
by approximately $111 million and $81 million, respectively.
Future Application of Accounting Standards
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125
provides consistent accounting standards for securitizations and other transfers
of financial assets, determines when financial assets (liabilities) should be
considered sold (settled) and removed from the statement of financial position,
and determines when related revenues and expenses should be recognized. SFAS No.
125 is generally effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996.
SFAS No. 125 was subsequently amended in December 1996 by SFAS No. 127, Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125. SFAS No.
127 deferred for one year the effective date for transfers and servicing of
repurchase agreements, dollar rolls, securities lending, secured borrowings and
collateral and similar transactions. These Statements will be applicable to the
Company. Management believes that they will not have a significant impact on the
Company's consolidated financial statements.
Use of Estimates in the Preparation of Financial Statements
The preparation of the Company's consolidated financial statements and
accompanying notes requires management to make estimates and assumptions that
affect the amounts reported and disclosed. These estimates and assumptions could
change in the future as more information becomes known, which could impact the
amounts reported and disclosed in the consolidated financial statements and
accompanying notes.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Significant Risks
The following is a description of the most significant risks facing diversified
financial service organizations and how the Company mitigates those risks:
Legal or regulatory risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will create additional expenses not
anticipated by the insurer in pricing its products. The Company mitigates this
risk by offering a wide range of products and operating throughout the United
States and the world, thus reducing its exposure to any single product or
jurisdiction, and also by employing underwriting practices which identify and
minimize the adverse impact of this risk.
Credit risk is the risk that issuers of securities owned by the Company or
borrowers on mortgage loans on real estate will default or that other parties
that owe the Company money, will not pay. The Company minimizes this risk by
adhering to a conservative investment strategy, by maintaining sound credit and
collection policies and by providing for any amounts deemed uncollectible.
Interest rate risk is the risk that interest rates will change and cause a
decrease in the value of the Company's investments. This change in rates may
cause certain interest-sensitive products to become uncompetitive or may cause
disintermediation. The Company mitigates this risk by charging fees for
policyowners' contract terminations, by offering products that transfer this
risk to the purchaser and by attempting to match the maturity schedule of its
assets with the expected payout of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would have to
borrow funds or sell assets prior to maturity and potentially recognize a gain
or loss.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity date of three months or less when purchased.
Investments
Investments in debt and equity securities are classified as available-for-sale
and, accordingly, are carried at fair value. (See Note 10 for policies related
to the determination of fair value.) The cost of debt securities is adjusted for
amortization of premiums and accrual of discounts, both computed using the
interest method. The cost of debt and equity securities is adjusted for declines
in value that are other than temporary. For the loan-backed and structured
securities included in the bond portfolio, the Company recognizes income using a
constant effective yield based on currently anticipated prepayments as
determined by broker-dealer surveys or internal estimates and the estimated
lives of the securities.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Investment real estate is reported at cost less accumulated depreciation. Such
real estate is carried net of valuation allowances when indicators of impairment
are present and the undiscounted cash flows to be generated by the real estate
exceed carrying amounts. Properties acquired through loan foreclosures are
recorded at fair market value at the time of foreclosure or receipt of deed in
lieu of foreclosure. This becomes the new cost basis of the real estate and is
subject to further potential carrying amount reductions as a result of
depreciation and quarterly valuation determinations. Changes in the valuation
allowance are charged or credited to income. Depreciation expense is computed
primarily on the basis of accelerated and straight-line methods over the
estimated useful lives of the assets. Real estate expected to be disposed is
carried at the lower of cost or fair value, less cost to sell.
Commercial and residential mortgage loans are reported at cost adjusted for
amortization of premiums and accrual of discounts, computed using the interest
method, and net of valuation allowances. Any changes in the valuation allowances
are reported as realized gains (losses) on investments. The Company measures
impairment based upon the present value of expected cash flows discounted at the
loan's effective interest rate. If foreclosure is probable, the measurement of
impairment is based upon the fair value of the collateral.
Net realized capital gains and losses on investments are determined using the
specific identification basis.
Policy loans and other investments are primarily reported at cost.
Futures and Forward Contracts and Interest Rate and Equity Swaps (Derivatives)
The Company uses financial futures contracts, forward purchase commitments and
interest rate swaps to hedge risks associated with interest rate fluctuations
and uses equity swaps to hedge risks associated with market fluctuations of
certain unaffiliated common stocks. Realized capital gains and losses on both
those contracts that hedge risks associated with interest rate fluctuations and
equity swaps are recognized in the period incurred.
Contractholder and Policyowner Liabilities
Contractholder and policyowner liabilities (contractholder funds, future policy
benefits and claims and other policyowner funds) include reserves for investment
contracts and reserves for universal life, limited payment, participating and
traditional life insurance policies. Investment contracts are contractholders'
funds left with the Company and generally include reserves for pension and
annuity contracts. Reserves on investment contracts are equal to the cumulative
deposits less any applicable charges plus credited interest.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Reserves for universal life insurance contracts are equal to cumulative premiums
less charges plus credited interest which represents the account balances that
accrue to the benefit of the policyowners, excluding surrender charges. Reserves
for non-participating term life insurance contracts are computed on a basis of
assumed investment yield, mortality, morbidity and expenses, including a
provision for adverse deviation, which generally vary by plan, year of issue and
policy duration. Investment yield is based on the Company's experience.
Mortality, morbidity and withdrawal rate assumptions are based on experience of
the Company and are periodically reviewed against both industry standards and
experience.
Reserves for participating life insurance contracts are based on the net level
premium reserve for death and endowment policy benefits. This net level premium
reserve is calculated based on dividend fund interest rate and mortality rates
guaranteed in calculating the cash surrender values described in the contract.
Some of the Company's policies and contracts require payment of fees in advance
for services that will be rendered over the estimated lives of the policies and
contracts. These payments are established as unearned revenue reserves upon
receipt and included in other policyowner funds in the consolidated statements
of financial position. These unearned revenue reserves are amortized to
operations over the estimated lives of these policies and contracts.
The liability for unpaid accident and health claims is an estimate of the
ultimate net cost of reported and unreported losses not yet settled. This
liability is estimated using actuarial analyses and case basis evaluations.
Although considerable variability is inherent in such estimates, the Company
believes that the liability for unpaid claims is adequate. These estimates are
continually reviewed and, as adjustments to this liability become necessary,
such adjustments are reflected in current operations.
Recognition of Premiums, Fees and Benefits
Traditional individual life and health insurance products include those products
with fixed and guaranteed premiums and benefits, and consist principally of
whole life and term life insurance policies and certain immediate annuities with
life contingencies. Life insurance premiums and immediate annuity premiums are
recognized as premium revenue when due.
Group life and health insurance premiums are generally recorded as premium
revenue over the term of the coverage. Some group contracts allow for premiums
to be adjusted to reflect emerging experience. Such adjusted premiums are
recognized in the period that the related experience emerges. Fees for contracts
providing claim processing or other administrative services are recorded over
the period the service is provided.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Related policy benefits and expenses for individual and group life and health
insurance products are associated with earned premiums and result in the
recognition of profits over the expected lives of the policies and contracts.
Universal life-type policies are insurance contracts with terms that are not
fixed and guaranteed. Amounts received as payments for such contracts are not
reported as premium revenues. Revenues for universal life-type insurance
contracts consist of policy charges for the cost of insurance, policy initiation
and administration, surrender charges and other fees that have been assessed
against policy account values. Policy benefits and claims that are charged to
expense include interest credited to contracts and benefit claims incurred in
the period in excess of related policy account balances.
Investment contracts do not subject the Company to risks arising from
policyowner mortality or morbidity, and consist primarily of Guaranteed
Investment Contracts (GICs) and certain deferred annuities. Amounts received as
payments for investment contracts are established as investment contract
liability balances and are not reported as premium revenues. Revenues for
investment contracts consist of investment income and policy administration
charges. Investment contract benefits that are charged to expense include
benefit claims incurred in the period in excess of related investment contract
liability balances and interest credited to investment contract liability
balances.
Deferred Acquisition Costs
Commissions and other costs (underwriting, issuance and agency expenses) that
vary with and are primarily related to the acquisition of new and renewal
insurance policies and investment contract business are capitalized to the
extent recoverable. Acquisition costs that are not deferrable and maintenance
costs are charged to operations as incurred.
Deferred acquisition costs for universal life-type insurance contracts and
participating life insurance policies and investment contracts are being
amortized over the lives of the policies and contracts in relation to the
emergence of estimated gross profit margins. This amortization is adjusted
retrospectively when estimates of current or future gross profits and margins to
be realized from a group of products and contracts are revised. The deferred
acquisition costs of non-participating term life insurance policies are being
amortized over the premium-paying period of the related policies using
assumptions consistent with those used in computing policyowner liabilities.
Deferred acquisition costs are subject to recoverability testing at the time of
policy issue and loss recognition testing at the end of each accounting period.
Deferred acquisition costs would be written off to the extent that it is
determined that future policy premiums and investment income or gross profit
margins would not be adequate to cover related losses and expenses.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Reinsurance
The Company enters into reinsurance agreements with other companies in the
normal course of business. The Company may assume reinsurance from or cede
reinsurance to other companies. Reinsurance premiums, expenses, recoveries and
reserves related to reinsured business are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms of
the reinsurance contracts, reported on a gross basis. The Company is
contingently liable with respect to reinsurance ceded to other companies in the
event the reinsurer is unable to meet the obligations it has assumed.
Separate Accounts
The separate account assets and liabilities presented in the consolidated
financial statements represent the fair market value of funds that are
separately administered by the Company for contracts with equity, real estate
and fixed-income investments. The separate account contract owner, rather than
the Company, bears the investment risk of these funds. The separate account
assets are legally segregated and are not subject to claims that arise out of
any other business of the Company. The Company receives a fee for
administrative, maintenance and investment advisory services that is included in
the consolidated statements of operations. Deposits, net investment income and
realized and unrealized capital gains and losses on the separate accounts are
not reflected in the consolidated statements of operations.
Income Taxes
The Company files a consolidated income tax return that includes all of its
qualifying subsidiaries and has a policy of allocating income tax expenses and
benefits to companies in the group based upon pro rata contribution of taxable
income or operating losses. The Company is taxed at corporate rates on taxable
income based on existing tax laws. Current income taxes are charged or credited
to operations based upon amounts estimated to be payable or recoverable as a
result of taxable operations for the current year. Deferred income taxes are
provided for the tax effect of differences in the financial reporting and income
tax bases of assets and liabilities and net operating losses using enacted
income tax rates and laws. The effect on deferred tax assets and deferred tax
liabilities of a change in tax rates is recognized in operations in the period
in which the change is enacted.
Foreign Exchange
The Company's foreign subsidiaries' statements of financial position and
operations are translated at the current exchange rates and average exchange
rates for the year, respectively. Resulting translation adjustments are reported
as a component of equity. Other translation adjustments for foreign currency
transactions that affect cash flows are reported in current operations.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Pension and Postretirement Benefits
The Company accounts for its pension benefits and postretirement benefits other
than pension (medical, life insurance and long-term care) using the full accrual
method.
Property Held for Company Use
Property held for Company use includes home office properties and related
leasehold improvements. Property held for Company use is shown in the
consolidated statements of financial position at cost less allowances for
accumulated depreciation. Provisions for depreciation of property held for
Company use are computed principally on the straight-line method over the
estimated useful lives of the assets. Property held for Company use and related
accumulated depreciation are as follows (in millions):
December 31
1996 1995
-----------------------------
Property held for Company use $285 $266
Accumulated depreciation (63) (56)
=============================
Property held for Company use, net $222 $210
=============================
Other Assets
Intangible assets are included in other assets in the consolidated statements of
financial position. The cost of acquired subsidiaries in excess of the fair
value of the net assets (i.e., goodwill) and other intangible assets (primarily
customer lists and institutional customer relationships) have been recorded in
connection with acquisitions. These assets are amortized on a straight-line
basis primarily over 40 years with the exception of assets acquired after 1995
which are amortized over ten years. The carrying amount of goodwill and other
intangible assets is reviewed periodically for indicators of impairment in
value. Intangible assets and related accumulated amortization are as follows (in
millions):
December 31
1996 1995
-----------------------------
Goodwill $135 $113
Accumulated amortization (22) (31)
-----------------------------
Goodwill, net 113 82
Other intangible assets, net 34 56
-----------------------------
Total intangible assets $147 $138
=============================
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Mortgage servicing rights of $272 million and $176 million at December 31, 1996
and 1995, respectively, are included in other assets in the consolidated
statements of financial position and represent the cost of purchasing or
originating the right to service mortgage loans. These costs are capitalized and
amortized to operations over the estimated remaining lives of the underlying
loans using the interest method and taking into account appropriate prepayment
assumptions. Capitalized mortgage servicing rights are periodically assessed for
impairment, which is recognized in the consolidated statements of operations
during the period in which impairment occurs by establishing a corresponding
valuation allowance.
Other assets are reported primarily at cost.
Reclassifications
Certain reclassifications have been made to the 1995 financial statements to
conform to the 1996 consolidated presentation.
2. Investments
Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, securities are generally classified as available-for-sale,
held-to-maturity, or trading. The Company has classified its entire debt
securities portfolio as available-for-sale, although it is generally the
Company's intent to hold these securities to maturity. The Company has also
classified all equity securities as available-for-sale. Securities classified as
available-for-sale are reported at fair value in the consolidated statements of
financial position with the related unrealized holding gains and losses on such
available-for-sale securities reported as a separate component of equity after
adjustments for related changes in deferred acquisition costs, unearned revenue
reserves and deferred income taxes.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The cost, gross unrealized gains and losses and fair value of debt and equity
securities available-for-sale as of December 31, 1996 and 1995, are as follows
(in millions):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
---------------------------------------------------------------
December 31, 1996
Bonds:
<S> <C> <C> <C> <C>
United States Government and agencies $ 246 $ 1 $ 1 $ 246
States and political subdivisions 303 13 - 316
Corporate - public 4,487 200 15 4,672
Corporate - private 12,876 737 25 13,588
Mortgage-backed securities 3,112 60 27 3,145
---------------------------------------------------------------
---------------------------------------------------------------
21,024 1,011 68 21,967
Redeemable preferred stocks 5 2 - 7
===============================================================
Total debt securities $21,029 $1,013 $68 $21,974
===============================================================
Total equity securities $ 502 $ 536 $15 $ 1,023
===============================================================
December 31, 1995
Bonds:
United States Government and agencies $ 294 $ 4 $ - $ 298
States and political subdivisions 281 19 - 300
Corporate - public 4,467 328 16 4,779
Corporate - private 12,211 1,081 57 13,235
Mortgage-backed securities 3,085 134 4 3,215
---------------------------------------------------------------
---------------------------------------------------------------
20,338 1,566 77 21,827
Redeemable preferred stocks 11 1 2 10
===============================================================
Total debt securities $20,349 $1,567 $79 $21,837
===============================================================
Total equity securities $ 663 $ 794 $11 $ 1,446
===============================================================
</TABLE>
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The cost and fair value of debt securities available-for-sale at December 31,
1996, by expected maturity, are as follows (in millions):
Cost Fair Value
----------------------
----------------------
Due in one year or less $ 1,290 $ 1,314
Due after one year through five years 6,486 6,720
Due after five years through ten years 6,271 6,590
Due after ten years 3,865 4,198
----------------------
----------------------
17,912 18,822
Mortgage-backed and other securities without
a single maturity date 3,117 3,152
----------------------
======================
Total $21,029 $21,974
======================
The above summarized activity is based on expected maturities. Actual maturities
may differ because borrowers may have the right to call or pre-pay obligations.
Major categories of net investment income are summarized as follows (in
millions):
Year ended December 31
1996 1995
-----------------------------
Debt securities available-for-sale $1,608 $1,603
Equity securities available-for-sale 33 41
Mortgage loans 922 1,008
Real estate 338 162
Policy loans 49 48
Cash and cash equivalents 15 8
Other 60 24
-----------------------------
-----------------------------
3,025 2,894
Less investment expenses (245) (201)
-----------------------------
=============================
Net investment income $2,780 $2,693
=============================
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The major components of realized capital gains (losses) on investments are
summarized as follows (in millions):
Year ended December 31
1996 1995
-----------------------------
Debt securities, available-for-sale:
Gross gains $121 $144
Gross losses (73) (40)
Equity securities, available-for-sale:
Gross gains 451 40
Gross losses (5) (9)
Mortgage loans (4) 3
Real estate 14 6
Other (68) (22)
=============================
Net realized capital gains $436 $122
=============================
Proceeds from sales of investments (excluding maturity proceeds) in debt
securities were $7.8 billion and $6.5 billion in 1996 and 1995, respectively.
Gross gains of $76 million and $93 million and gross losses of $69 million and
$54 million in 1996 and 1995, respectively, were realized on those sales. Of the
1996 and 1995 proceeds, $7.2 billion and $6.1 billion, respectively, relates to
sales of mortgage-backed securities.
The Company actively manages its mortgage-backed securities portfolio to control
prepayment risk. Gross gains of $64 million and $66 million and gross losses of
$53 million and $17 million in 1996 and 1995, respectively, were realized on
sales of mortgage-backed securities. At December 31, 1996, the Company had
security purchases payable totaling $331 million relating to the purchases of
mortgage-backed securities at forward dates.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The unrealized appreciation on investments in debt and equity securities
available-for-sale is reported as a separate component of equity, reduced by
adjustments to deferred acquisition costs and unearned revenue reserves that
would have been required as a charge or credit to operations had such amounts
been realized and a provision for deferred income taxes. The amount of net
unrealized gains on available-for-sale securities is as follows (in millions):
<TABLE>
<CAPTION>
December 31
1996 1995
-----------------------------
<S> <C> <C>
Unrealized appreciation on debt securities, available-for-sale $945 $1,488
Unrealized appreciation on equity securities, available-for-sale 521 783
Adjustments for assumed changes in amortization pattern:
Deferred acquisition costs (160) (243)
Unearned revenue reserves 17 28
Provision for deferred income taxes (463) (720)
=============================
Net unrealized gains on available-for-sale securities $860 $1,336
=============================
</TABLE>
Commercial mortgage loans and corporate private placement bonds originated or
acquired by the Company represent its primary areas of credit risk exposure. At
December 31, 1996 and 1995, the commercial mortgage portfolio is diversified by
geographic region and specific collateral property type as follows:
Geographic Distribution Property Type Distribution
December 31 December 31
----------------------- -----------------------
1996 1995 1996 1995
----------------------- -----------------------
----------------------- -----------------------
Pacific 30% 33% Industrial 35% 38%
South Atlantic 22 21 Retail 34 30
North Central 17 16 Office 28 29
Mid Atlantic 15 16 Other 3 3
South Central 7 6
New England 5 5
Mountain 4 3
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
Mortgage loans on real estate are considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to contractual terms of the loan agreement.
When the Company determines that a loan is impaired, a provision for loss is
established for the difference between the carrying amount of the mortgage loan
and the estimated value. Estimated value is based on either the present value of
the expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or fair value of the collateral. The
provision for losses is reported as realized gains (losses) on investments.
Mortgage loans deemed to be uncollectible are charged against the allowance for
losses and subsequent recoveries are credited to the allowance for losses. The
allowance for losses is maintained at a level believed adequate by management to
absorb estimated probable credit losses. Management's periodic evaluation of the
adequacy of the allowance for losses is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of the
underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. The evaluation is inherently subjective
as it requires estimating the amounts and timing of future cash flows expected
to be received on impaired loans that may change.
A summary of the changes in the mortgage loan allowance for losses is as follows
(in millions):
December 31
1996 1995
--------------------------
Balance at beginning of year $115 $127
Provision for losses 16 16
Releases due to write-downs, sales and foreclosures (10) (28)
==========================
Balance at end of year $121 $115
=======================
The corporate private placement bond portfolio is diversified by issuer and
industry. Restrictive bond covenants are monitored by the Company to regulate
the activities of issuers and control their leveraging capabilities.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The Company was servicing approximately 328,000 and 286,000 loans with aggregate
principal balances of approximately $24.4 and $19.9 billion at December 31, 1996
and 1995, respectively. In connection with these mortgage servicing activities,
the Company held funds in trust for others totaling approximately $175 million
and $145 million at December 31, 1996 and 1995, respectively. In connection with
its loan administration activities, the Company advances payments of property
taxes and insurance premiums and also advances principal and interest payments
to investors in advance of collecting funds from specific mortgagors. In
addition, the Company makes certain payments of attorney fees and other costs
related to loans in foreclosure. These amounts receivable are recorded, at cost,
as advances on serviced loans. Amounts advanced are considered in management's
evaluation of the adequacy of the allowance for loan loss.
Real estate includes properties directly owned by the Company that are generally
held for investment purposes. Real estate holdings and related accumulated
depreciation are as follows (in millions):
December 31
1996 1995
-----------------------------
Real estate $2,743 $2,481
Accumulated depreciation (269) (218)
=============================
Real estate, net $2,474 $2,263
=============================
Other investments include properties owned jointly with venture partners and
operated by the partners. Joint ventures in which the Company has an interest
have mortgage loans with the Company of $1.4 billion and $1.5 billion at
December 31, 1996 and 1995, respectively. The Company is committed to providing
additional mortgage financing for such joint ventures aggregating $146 million
at December 31, 1996.
Effective December 29, 1995, the Company entered into short-term equity swap
agreements to mitigate its exposure to declines in the value of about one-half
of its marketable common stock portfolio. Under the agreements, the return on
that portion of the Company's marketable common stock portfolio was swapped for
a fixed short-term interest rate. The equity swaps were terminated during 1996
and a realized loss of $81 million recorded. Common stocks of $633 million
associated with these equity swaps were sold during 1996 and a gain of $402
million recorded, resulting in a net realized gain of $321 million.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
3. Derivatives Held or Issued for Purposes Other Than Trading
The Company uses exchange-traded interest rate futures and forward contracts to
hedge against interest rate risks. The Company attempts to match the timing of
when interest rates are committed on insurance products and on new investments.
However, timing differences do occur and can expose the Company to fluctuating
interest rates. Interest rate futures and forward contracts are used to minimize
these risks. In these contracts, the Company is subject to the risk that the
counterparties will fail to perform and to the risks associated with changes in
the value of the underlying securities; however, such changes in value generally
are offset by opposite changes in the value of the hedged items. Futures
contracts are marked to market and settled daily, which minimizes the
counterparty risk. The notional amounts of futures and forward contracts ($148
million at December 31, 1996, and $303 million at December 31, 1995) represent
the extent of the Company's involvement but not the risk of loss.
The Company enters into interest rate swaps to minimize its exposure to
fluctuations in interest rates. The most common use is to modify the duration of
an asset or portfolio, a less common use is to convert a floating rate asset
into a fixed rate asset. The notional principal amounts of the swaps outstanding
at December 31, 1996 and 1995, were $970 million and $599 million, respectively,
and the credit exposure at December 31, 1996 and 1995 was $15 million and $8
million, respectively. The Company is exposed to credit loss in the event of
nonperformance of the counterparties. This credit risk is minimized by
purchasing such agreements from financial institutions with superior performance
records. The Company's current credit exposure on swaps is limited to the value
of interest rate swaps that have become favorable to the Company. The average
unexpired terms of the swaps were approximately three years at both December 31,
1996 and 1995, respectively. The net amount payable or receivable from interest
rate swaps is accrued as an adjustment to interest income. The Company's
interest rate swap agreements include cross-default provisions when two or more
swaps are transacted with a given counterparty.
The Company enters into currency exchange swap agreements to convert certain
foreign denominated fixed rate assets into U.S. dollar denominated fixed rate
assets and eliminate the exposure to future currency volatility on those
securities. At December 31, 1996, the Company had various foreign currency
exchange agreements with maturities ranging from 1997 to 2018, with an aggregate
notional amount involved of approximately $373 million and the credit exposure
was $9 million. The average unexpired term of the swaps was approximately seven
years at December 31, 1996.
The Company uses interest rate floors in hedging a portion of its portfolio of
mortgage servicing rights from prepayment risk associated with changes in
interest rates. At December 31, 1996, the Company had entered into interest rate
floors with a notional value of $1.3 billion. The floors provide for the receipt
of payments when interest rates are below predetermined interest rate levels.
The premiums paid for floors are included in other assets on the Company's
consolidated statements of financial position.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
4. Accident and Health Reserves
Activity in the liability for unpaid accident and health claims, which is
included with future policy benefits and claims in the consolidated statements
of financial position, is summarized as follows (in millions):
Year ended December 31
1996 1995
-----------------------------
Balance at beginning of year $ 810 $ 824
Incurred:
Current year 3,051 3,179
Prior years (29) (5)
-----------------------------
-----------------------------
Total incurred 3,022 3,174
Payments:
Current year 2,535 2,654
Prior years 497 534
-----------------------------
Total payments 3,032 3,188
-----------------------------
Balance at end of year:
Current year 516 525
Prior years 284 285
-----------------------------
=============================
Total balance at end of year $ 800 $ 810
=============================
The activity summary in the liability for unpaid accident and health claims
shows a decrease of $29 million and $5 million to the December 31, 1995 and 1994
liability for unpaid accident and health claims, respectively, arising in prior
years. Such liability adjustments, which affected current operations during 1996
and 1995, respectively, resulted from developed claims for prior years being
different than were anticipated when the liabilities for unpaid accident and
health claims were originally estimated. These favorable development trends have
been considered in establishing the current year liability for unpaid accident
and health claims.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
5. Debt
The components of debt as of December 31, 1996 and December 31, 1995 are as
follows (in millions):
December 31
1996 1995
------------------------------
7.875% notes payable, due 2024 $199 $199
8% notes payable, due 2044 99 99
Mortgages and other notes payable 101 63
==============================
Total debt $399 $361
==============================
On March 10, 1994, Principal Mutual issued $300 million of surplus notes,
including $200 million due March 1, 2024 at a 7.875% annual interest rate and
the remaining $100 million due March 1, 2044 at an 8% annual interest rate. No
affiliates of the Company hold any portion of the notes. The discount and direct
costs associated with issuing these notes are being amortized to expense over
their respective terms using the interest method. Each payment of interest and
principal on the notes, however, may be made only with the prior approval of the
Commissioner of Insurance of the State of Iowa (the Commissioner) and only to
the extent that Principal Mutual has sufficient surplus earnings to make such
payments. For both of the years ended December 31, 1996 and 1995, interest of
$24 million was approved by the Commissioner, paid and charged to expense.
Subject to Commissioner approval, the surplus notes due March 1, 2024 may be
redeemed at Principal Mutual's election on or after March 1, 2004 in whole or in
part at a redemption price of approximately 103.6% of par. The approximate 3.6%
premium is scheduled to gradually diminish over the following ten years. These
surplus notes may then be redeemed on or after March 1, 2014, at a redemption
price of 100% of the principal amount plus interest accrued to the date of
redemption.
In addition, subject to Commissioner approval, the notes due March 1, 2044 may
be redeemed at Principal Mutual's election on or after March 1, 2014, in whole
or in part at a redemption price of approximately 102.3% of par. The approximate
2.3% premium is scheduled to gradually diminish over the following ten years.
These notes may be redeemed on or after March 1, 2024, at a redemption price of
100% of the principal amount plus interest accrued to the date of redemption.
The other mortgages and notes payable are financings for real estate
developments. The Company has obtained loans with various lenders to finance
these developments. Outstanding principal balances as of December 31, 1996 range
from $1 million to $9 million with interest rates generally ranging from 5.9% to
7.7%.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
5. Debt (continued)
At December 31, 1996, future annual maturities of debt are as follows (in
millions):
1997 $ 29
1998 17
1999 2
2000 2
2001 2
Thereafter 347
----------
==========
Total future maturities of debt $399
==========
Cash paid for interest for 1996 and 1995 was $52 million and $50 million,
respectively.
The Company issues commercial paper periodically to meet its short-term
financing needs and also has credit facilities with various banks. The Company
had outstanding credit borrowings of $15 million at December 31, 1996 and other
outstanding borrowings of $154 million at December 31, 1996. These outstanding
borrowings are included in other liabilities in the consolidated statements of
financial position. There were no outstanding borrowings at December 31, 1995.
6. Income Taxes
The Company's income tax expense (benefit) is as follows (in millions):
Year ended December 31
1996 1995
-----------------------------
Current income taxes:
Federal $145 $104
State and foreign (1) 5
Realized capital gains 210 41
-----------------------------
Total current income taxes 354 150
Deferred income taxes (50) 57
=============================
Total income taxes $304 $207
=============================
Due to the inherent differences between income for financial reporting purposes
and income for tax purposes, the Company's provision for income taxes does not
have the customary relationship of taxes to income. This difference between the
prevailing corporate income tax rate of 35% times the pre-tax income and the
Company's effective tax rate on pre-tax income is generally due to the Company
making adequate provisions for any challenges of the tax filings and tax
payments to the various taxing jurisdictions.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
The Internal Revenue Service (the Service) has completed examination of the
consolidated federal income tax returns of Principal Mutual and affiliated
companies through 1992. The Service has commenced its examination for the years
1993 and 1994. The Company believes that there are adequate defenses against or
sufficient provisions for any challenges.
The Company's deferred income tax liabilities and assets are as follows (in
millions):
December 31
1996 1995
-----------------------------
Deferred income tax liabilities $1,110 $1,319
Deferred income tax assets 487 389
=============================
Deferred income taxes, net $ 623 $ 930
=============================
The Company's significant deferred income tax liabilities and assets relate to
unrealized gains on available-for-sale debt and equity securities, deferred
acquisition costs, unrealized joint venture losses, policy liabilities and
accruals and contractholder funds and claims, policyowner dividend liability,
prepaid postretirement benefits other than pension, other investment related
items and premiums and fees receivable. No valuation allowances have been
recognized against deferred tax assets.
The Company has not recognized deferred taxes related to the undistributed
earnings of certain foreign subsidiaries that are considered to be indefinitely
reinvested because the Company does not expect to repatriate these earnings. A
tax liability will be recognized when the Company expects distribution of those
earnings in the form of dividends, sale of the investment or otherwise.
Cash paid for income taxes in 1996 and 1995 was $285 million and $99 million,
respectively.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits
The Company has defined benefit pension plans covering substantially all of its
employees and certain agents. The employees and agents are generally first
eligible for the pension plans when they reach age 21. The pension benefits are
based on the years of service and generally the employee's or agent's average
annual compensation during the last five years of employment. Partial benefit
accrual of pension benefits is recognized from first eligibility until
retirement based on attained service divided by potential service to age 65 with
a minimum of 35 years of potential service. The Company's policy is to fund the
cost of providing pension benefits in the years that the employees and agents
are providing service to the Company. The Company's funding policy is to deposit
the actuarial normal cost and any change in unfunded accrued liability over a
30-year period as a percentage of compensation.
The pension plans' combined funded status, reconciled to amounts recognized in
the consolidated statements of financial position and consolidated statements of
operations as of and for the years ended December 31, 1996 and 1995, is as
follows (in millions):
December 31
1996 1995
------------
------------
Actuarial present value of benefit obligations:
Vested benefit obligation $482 $439
============
============
Accumulated benefit obligation $495 $464
============
============
Plan assets at fair value, primarily affiliated mutual funds
and investment contracts of the Company $841 $723
Projected benefit obligation 732 670
------------
Plan assets in excess of projected benefit obligation 109 53
Unrecognized net (gains) losses and funding different from
that assumed and from changes in assumptions (29) 41
Unrecognized prior service cost 17 1
Unrecognized net transition asset (60) (70)
------------
============
Prepaid pension asset $ 37 $ 25
============
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
Net periodic pension expense (income) included the following components (in
millions):
Year ended
December 31
1996 1995
-------------------------
Service cost $ 38 $ 25
Interest cost on projected benefit obligation 46 39
Actual return on plan assets (118) (144)
Net amortization and deferral 42 79
-------------------------
=========================
Total net periodic pension expense (income) $ 8 $ (1)
=========================
The weighted-average assumed discount rate used in determining the projected
benefit obligation was 7.25% and 7% at December 31, 1996 and 1995, respectively.
Some of the trusts holding the plan assets are subject to income taxes at a 35%
tax rate while others are not subject to income taxes. For both 1996 and 1995,
the expected long-term rates of return on plan assets were approximately 6%
(after estimated income taxes) for those trusts subject to income taxes and
approximately 10% for those trusts not subject to income taxes. The assumed rate
of increase in future compensation levels varies by age for both the qualified
and non-qualified pension plans.
In addition, the Company has defined contribution plans that are generally
available to all employees and agents who are age 21 or older and have completed
one year of service. Eligible participants may contribute up to 15% of their
compensation or up to $ 9,500 in 1996 and $9,240 in 1995 annually to the plans.
The Company matches the participant's contribution with a 50% contribution up to
a maximum contribution of 2% of the participant's compensation. The Company
contributed $13 million in 1996 and $11 million in 1995 to these defined
contribution plans.
The Company also provides certain health care, life insurance and long-term care
benefits for retired employees. Substantially all employees are first eligible
for these postretirement benefits when they reach age 57 and have completed ten
years of service with the Company. Partial benefit accrual of these health, life
and long-term care benefits is recognized from first eligibility until
retirement based on attained service divided by potential service to age 65 with
a minimum of 35 years of potential service. The Company's policy is to fund the
cost of providing retiree benefits in the years that the employees are providing
service to the Company. The Company's funding policy is to deposit the actuarial
normal cost and an accrued liability over a 30-year period as a percentage of
compensation.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
The postretirement plans' combined funded status, reconciled to amounts
recognized in the consolidated statements of financial position and consolidated
statements of operations as of and for the years ended December 31, 1996 and
1995, is as follows (in millions):
<TABLE>
<CAPTION>
December 31
1996 1995
-------------------------------
Plan assets at fair value, primarily affiliated mutual funds and
<S> <C> <C>
investment contracts of the Company $247 $208
Accumulated postretirement benefit obligation:
Retirees (87) (84)
Eligible employees (38) (39)
Active employees not eligible to retire (93) (89)
-------------------------------
-------------------------------
Total accumulated postretirement benefit obligation (218) (212)
-------------------------------
-------------------------------
Excess (deficiency) of plan assets over (under) accumulated
postretirement benefit obligation 29 (4)
Unrecognized net losses and funding different from that assumed and
from changes in assumptions (10) 20
Unrecognized net transition obligation 17 21
-------------------------------
===============================
Postretirement benefit asset $ 36 $ 37
===============================
</TABLE>
The net periodic postretirement benefit cost included the following components
(in millions):
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995
-------------------------------
-------------------------------
<S> <C> <C>
Service cost $12 $ 7
Interest cost on accumulated postretirement benefit cost 15 14
Actual return on plan assets (32) (43)
Amortization of transition obligation 4 4
Net amortization of gains and losses 19 34
===============================
Total net periodic postretirement benefit cost $18 $16
===============================
</TABLE>
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
The weighted-average assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% and 7% at December 31, 1996 and
1995, respectively. Some of the trusts holding the plan assets are subject to
income taxes at a 35% tax rate while others are not subject to income taxes. For
both 1996 and 1995, the expected long-term rates of return on plan assets were
approximately 6% (after estimated income taxes) for those trusts subject to
income taxes and approximately 9% for those trusts not subject to income taxes.
These rates of return on plan assets vary by benefit type and employee group.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligations starts at 11.5% in 1996, declines to 9.5% in
2001 and then declines to an ultimate rate of 6.5% in 2032. If the health care
cost trend rate assumptions were increased by 1% in each year, the accumulated
postretirement benefits obligation for health plans as of December 31, 1996
would increase by 19.5% ($33 million). The effect of this 1% increase would also
increase the aggregate of the service cost and interest cost components of the
net periodic postretirement benefit cost of health plans for the year ended
December 31, 1996 by 24.5% ($6 million).
8. Reinsurance
Reinsurance contracts do not relieve the Company from its obligations to
policyowners. Failure of reinsurers to honor their obligations could result in
losses to the Company. The Company evaluates the financial strength of potential
reinsurers and continually monitors the financial condition of present
reinsurers. The Company also monitors concentrations of credit risk arising from
similar geographic regions, activities or economic characteristics of the
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
8. Reinsurance (continued)
The effect of reinsurance on premiums and annuity and other considerations and
benefits, claims and settlement expenses is as follows (in millions):
Year ended
December 31
1996 1995
-------------------------
-------------------------
Premiums and annuity and other considerations:
Direct $5,034 $5,171
Assumed 116 99
Ceded (29) (27)
=========================
Net premiums and annuity and other considerations $5,121 $5,243
=========================
=========================
Benefits, claims and settlement expenses:
Direct $6,003 $6,070
Assumed 109 99
Ceded (25) (27)
=========================
Net benefits, claims and settlement expenses $6,087 $6,142
=========================
9. Other Commitments and Contingencies
The Company, as a lessor, leases industrial, office, retail and other wholly
owned investment real estate properties under various operating leases. Rental
income for all operating leases totaled $310 million in 1996 and $260 million in
1995. At December 31, 1996, future minimum annual rental commitments under these
noncancelable operating leases are as follows (in millions):
1997 $ 273
1998 240
1999 200
2000 161
2001 116
Thereafter 444
-------------
=============
Total future minimum lease receipts $1,434
=============
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
9. Other Commitments and Contingencies (continued)
The Company, as a lessee, leases office space, data processing equipment and
office furniture and equipment under various operating leases. Rental expense
for all operating leases totaled $73 million in 1996 and $69 million in 1995. At
December 31, 1996, future minimum annual rental commitments under these
noncancelable operating leases are as follows (in millions):
1997 $ 58
1998 42
1999 32
2000 21
2001 14
Thereafter 28
-----------
195
Less future sublease rental income 4
-----------
Total future minimum lease payments $191
===========
The Company is a defendant in various legal actions arising in the normal course
of its investment and insurance operations. In the opinion of management, any
losses resulting from the resolution of such actions would not have a material
effect on the Company's consolidated financial statements.
The Company is also subject to insurance guarantee laws in the states in which
it writes business. These laws provide for assessments against insurance
companies for the benefit of policyowners and claimants in the event of
insolvency of other insurance companies. The assessments may be partially
recovered through a reduction in future premium taxes in some states. At both
December 31, 1996 and 1995, approximately $15 million is reserved in other
liabilities in the consolidated statements of financial position for possible
guarantee fund assessments for which notices have not been received and the
Company does not anticipate receiving a premium tax credit.
10. Fair Value of Financial Instruments
The following discussion describes the methods and assumptions utilized by the
Company in estimating its fair value disclosures for financial instruments.
Certain financial instruments, particularly policyowner liabilities other than
investment contracts, are excluded from these fair value disclosure
requirements. The techniques utilized in estimating the fair values of financial
instruments are affected by the assumptions used, including discount rates and
estimates of the amount and timing of future cash flows. Care should be
exercised in deriving conclusions about the Company's business, its value or
financial position based on the fair value information of financial instruments
presented below. The estimates shown are not necessarily indicative of the
amounts that would be realized in a one-time, current market exchange of all of
the Company's financial instruments.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
10. Fair Value of Financial Instruments (continued)
The Company defines fair value as the quoted market prices for those instruments
that are actively traded in financial markets. In cases where quoted market
prices are not available, fair values are estimated using present value or other
valuation techniques. The fair value estimates are made at a specific point in
time, based on available market information and judgments about the financial
instrument, including estimates of timing, amount of expected future cash flows
and the credit standing of counterparts. Such estimates do not consider the tax
impact of the realization of unrealized gains or losses. In many cases, the fair
value estimates cannot be substantiated by comparison to independent markets. In
addition, the disclosed fair value may not be realized in the immediate
settlement of the financial instrument.
Fair values of public debt and equity securities have been determined by the
Company from public quotations, when available. Private placement securities and
other debt and equity securities are valued by discounting the expected total
cash flows. Market rates used are applicable to the yield, credit quality and
average maturity of each security.
Fair values of commercial mortgage loans are determined by discounting the
expected total cash flows using market rates that are applicable to the yield,
credit quality and maturity of each loan. Fair values of residential mortgage
loans are determined by a pricing and servicing model using market rates that
are applicable to the yield, rate structure, credit quality, size and maturity
of each loan.
The fair values for assets classified as policy loans, other investments and
cash and cash equivalents in the accompanying consolidated statements of
financial position approximates their carrying amounts.
The fair values of the Company's reserves and liabilities for investment-type
insurance contracts (insurance, annuity and other policy contracts that do not
involve significant mortality or morbidity risk and that are only a portion of
the policyowner liabilities appearing in the consolidated statements of
financial position) are estimated using discounted cash flow analyses (based on
current interest rates being offered for similar contracts with maturities
consistent with those remaining for the investment-type contracts being valued).
The fair values for the Company's insurance contracts (insurance, annuity and
other policy contracts that do involve significant mortality or morbidity risk),
other than investment-type contracts, are not required to be disclosed. The
Company does consider, however, the various insurance and investment risks in
choosing investments for both insurance and investment-type contracts.
Fair values for debt issues are estimated using discounted cash flow analysis
based on the Company's incremental borrowing rate for similar borrowing
arrangements.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
10. Fair Value of Financial Instruments (continued)
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1995, are as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------- ----------------------------
--------------------------- ----------------------------
Assets (liabilities)
<S> <C> <C> <C> <C>
Debt securities (see Note 2) $21,974 $21,974 $21,837 $21,837
Equity securities (see Note 2) 1,023 1,023 1,446 1,446
Mortgage loans 12,409 12,823 11,380 11,965
Policy loans 736 736 711 711
Other investments 68 68 79 79
Cash and cash equivalents 271 271 295 295
Investment-type insurance contracts (22,196) (22,158) (21,538) (21,960)
Debt (399) (427) (361) (401)
</TABLE>
11. Statutory Insurance Financial Information
Principal Mutual, the largest member of The Principal Financial Group,
prepares statutory financial statements in accordance with the accounting
practices prescribed or permitted by the Insurance Division of the Department of
Commerce of the State of Iowa. Prescribed statutory accounting practices include
a variety of publications of the National Association of Insurance Commissioners
as well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed. The impact of any permitted accounting practices on statutory
surplus is not material. The accounting practices used to prepare statutory
financial statements for regulatory filings differ in certain instances from
GAAP. Prescribed or permitted statutory accounting practices are used by state
insurance departments to regulate the Company.
<PAGE>
The Principal Financial Group
Notes to Consolidated Financial Statements (continued)
11. Statutory Insurance Financial Information (continued)
The following summary reconciles the assets and equity at December 31, 1996 and
1995, and net income for the years ended December 31, 1996 and 1995, in
accordance with statutory reporting practices prescribed or permitted by the
Insurance Division of the Department of Commerce of the State of Iowa (Principal
Mutual only) with that reported in these consolidated GAAP financial statements
(in millions):
<TABLE>
<CAPTION>
Assets Equity Net Income
-----------------------------------------
-----------------------------------------
December 31, 1996
As reported in accordance with statutory accounting practices
<S> <C> <C> <C>
- unconsolidated $56,837 $2,504 $415
Additions (deductions):
Unrealized gain on debt securities available-for-sale 964 964 -
Consolidation and basis changes of certain subsidiaries (259) (10) -
Adjustment for cash and cash equivalents (152) - -
Adjustment to record statutory non-admitted assets 52 52 -
Investment adjustments other than debt securities 766 911 53
Adjustments to insurance reserves (156) (238) (40)
Deferral of policy acquisition costs 1,058 1,058 38
Adjustments for pension and postretirement accounting 78 78 (17)
Surplus note reclassification as debt - (298) -
Adjustments to dividend liabilities - 123 (1)
Provision for deferred federal income taxes (6) (493) 60
Other - net (40) 3 18
-----------------------------------------
=========================================
As reported in these consolidated GAAP financial statements $59,142 $4,654 $526
=========================================
December 31, 1995
As reported in accordance with statutory accounting practices
- unconsolidated $51,268 $2,208 $263
Additions (deductions):
Unrealized gain on debt securities available-for-sale 1,553 1,553 -
Consolidation and basis changes of certain subsidiaries (95) (10) 64
Adjustment for cash and cash equivalents (245) 4 -
Adjustment to record statutory non-admitted assets 73 73 -
Investment adjustments other than debt securities 568 917 (4)
Adjustments to insurance reserves (128) (152) (8)
Deferral of policy acquisition costs 937 937 61
Adjustments for pension and postretirement accounting 66 66 (11)
Surplus note reclassification as debt - (298) -
Adjustments to dividend liabilities - 124 1
Provision for deferred federal income taxes (9) (770) (20)
Other - net (24) (46) (2)
-----------------------------------------
=========================================
As reported in these consolidated GAAP financial statements $53,964 $4,606 $344
=========================================
</TABLE>
GP 34571 B-9
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration Statement
(1) Part A:
Condensed Financial Information for the years ended
December 31, 1996 and 1995 and for the period beginning
June 16, 1994 and ended December 31, 1994.
(2) Part B:
Principal Mutual Life Insurance Company Separate
Account B:
Report of Independent Auditors.
Statement of Net Assets, December 31, 1996.
Statement of Operations for the year ended
December 31, 1996.
Statements of Changes in Net Assets for the years
ended December 31, 1996 and 1995.
Notes to Financial Statements.
The Principal Financial Group(R):
Report of Independent Auditors.
Consolidated Statements of Operations for the years
ended December 31, 1996 and 1995.
Consolidated Statements of Financial Position,
December 31, 1996 and 1995.
Consolidated Statements of Equity for the years
ended December 31, 1996 and 1995.
Consolidated Statements of Cash Flows for the
years ended December 31, 1996 and 1995.
Notes to Consolidated Financial Statements.
(b) Exhibits
(1) Board Resolution of Registrant (Filed 3/1/96)
(3a) Distribution Agreement (Filed 3/1/96)
(3b) Selling Agreement (File 3/1/96)
(4a) Form of Variable Annuity Contract (Filed 3/1/96)
(4b) Form of Variable Annuity Contract (Filed 3/1/96)
(5) Form of Variable Annuity Application (Filed 3/1/96)
(6a) Articles of Incorporation of the Depositor (Filed 3/1/96)
(6b) Bylaws of Depositor (Filed 3/1/96)
(9) Opinion of Counsel (Filed 3/1/96)
(10a) Consent of Ernst & Young LLP
(10b) Powers of Attorney (Filed 2/28/97)
(13a) Total Return Calculation
(13b) Annualized Yield for Separate Account B
(27) Financial Data Schedule for Separate Account B
Item 25. Officers and Directors of the Depositor
Principal Mutual Life Insurance Company is managed by a Board of
Directors which is elected by its policyowners. The directors and
executive officers of the Company, their positions with the Company,
including Board Committee memberships, and their principal business
address, are as follows:
DIRECTORS: Principal
Name, Positions and Offices Business Address
MARY VERMEER ANDRINGA Vermeer Manufacturing Company
Director Box 200
Member, Nominating Committee Pella, IA 50219-0200
RUTH M. DAVIS The Pymatuning Group, Inc.
Director Suite 570, 4900 Seminary Road
Member, Nominating Committee Alexandria, VA 22311
DAVID J. DRURY The Principal Financial Group
Director Des Moines, IA 50392
Chairman of the Board
Chief Executive Officer
Chair,Executive Committee
C. DANIEL GELATT, JR. NMT Corporation
Director 2004 Kramer Street
Member, Executive Committee La Crosse, WI 54603
Chair, Human Resources
Committee
G. DAVID HURD The Principal Financial Group
Director Des Moines, IA 50392
Member, Executive and
Nominating Committees
THEODORE M. HUTCHISON 4019 Oak Forest Drive
Director Des Moines, IA 50312
Member, Audit Comittee
CHARLES S. JOHNSON Pioneer Hi-Bred International, Inc.
Director 400 Locust, Ste. 700 Capital Square
Member, Audit Committee Des Moines, IA 50309
WILLIAM T. KERR Meredith Corporation
Director 1716 Locust St.
Member, Executive Committee Des Moines, IA 50309-3023
and Chair, Nominating
Committee
LEE LIU IES Industries Inc.
Director Post Office Box 351
Member, Executive and Cedar Rapids, IA 52406
Human Resources Committees
VICTOR. H. LOEWENSTEIN Egon Zehnder International
Director 55 East 59th Street
Member, Audit New York, NY 10022
Committee
RONALD D. PEARSON Hy-Vee, Inc.
Director 5820 Westown Parkway
Member, Human Resources West Des Moines, IA 50266
Committee
JOHN R. PRICE The Chase Manhattan Corporation
Director 270 Park Avenue - 44th Floor
Member, Nominating Committee New York, NY 10017
DONALD M. STEWART The College Board
Director 45 Columbus Avenue
Member, Human Resources New York, NY 10023-6992
Committee
ELIZABETH E. TALLETT Dioscor, Inc.
Director 48 Federal Twist Road
Chair, Audit Committee Stockton, NJ 08559
DEAN D. THORNTON 1602- 34 Court West
Director Seattle, WA 98199
Member, Audit Committee
FRED W. WEITZ Essex Meadows, Inc.
Director 800 Second Avenue, Suite 150
Member, Human Resources Des Moines, IA 50309
Committee
Executive Officers (Other than Directors):
JOHN E. ASCHENBRENNER Senior Vice President
RAY S. CRABTREE Executive Vice President
THOMAS J. GAARD Senior Vice President
MICHAEL H.GERSIE Senior Vice President
THOMAS J. GRAF Senior Vice President
J. BARRY GRISWELL Executive Vice President
RONALD E. KELLER Executive Vice President
GREGG R. NARBER Senior Vice President and
General Counsel
RICHARD L. PREY Senior Vice President
CHARLES E. ROHM Executive Vice President
CARL C. WILLIAMS Senior Vice President and Chief
Information Officer
Item 26. 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)
100.00% of shares outstanding of the International Emerging
Markets Portfolio, 50.72% of the shares outstanding of the
International Securities Portfolio, 100% of shares outstanding of
the International SmallCap Portfolio and 100.00% of the shares
outstanding of the Mortgage-Backed Securities Portfolio were
owned by Principal Mutual Life Insurance Company on November 17,
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 develops 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 27. Number of Contractowners - As of: October 10, 1997
(1) (2) (3)
Number of Plan Number of
Title of Class Participants Contractowners
-------------- -------------- --------------
BFA Variable Annuity Contracts 101 10
Pension Builder Contracts 1,298 1,669
Personal Variable Contracts 4,008 134
Premier Variable Contracts 16,349 257
Flexible Variable Annuity Contract 23,019 23,019
Item 28. Indemnification
None
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.,
Princor Limited Term Bond Fund, Inc., Principal International Emerging Markets
Fund, Inc., Principal International SmallCap 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)
Positions
and offices
Name and principal with principal
business address underwriter
Robert W. Baehr Marketing Services
The Principal Officer
Financial Group
Des Moines, IA 50392
Craig L. Bassett Treasurer
The Principal
Financial Group
Des Moines, IA 50392
Michael J. Beer Senior Vice President and
The Principal Chief Operating Officer
Financial Group
Des Moines, IA 50392
Mary L. Bricker Assistant Corporate
The Principal Secretary
Financial Group
Des Moines, IA 50392
Ray S. Crabtree Director
The Principal
Financial Group
Des Moines, IA 50392
David J. Drury Director
The Principal
Financial Group
Des Moines, IA 50392
Arthur S. Filean Vice President
The Principal
Financial Group
Des Moines, IA 50392
Paul N. Germain Assistant Vice President-
The Principal Operations
Financial Group
Des Moines, IA 50392
Michael H. Gersie Director
The Principal
Financial Group
Des Moines, IA 50392
Ernest H. Gillum Assistant Vice President-
The Principal Registered Products
Financial Group
Des Moines, IA 50392
William C. Gordon Insurance License Officer
The Principal
Financial Group
Des Moines, IA 50392
Thomas J. Graf Director
The Principal
Financial Group
Des Moines, IA 50392
J. Barry Griswell Director and
The Principal Chairman of the
Financial Group Board
Des Moines, IA 50392
Joyce N. Hoffman Vice President and
The Principal Corporate Secretary
Financial Group
Des Moines, IA 50392
Stephan L. Jones Director and
The Principal President
Financial Group
Des Moines, IA 50392
Ronald E. Keller Director
The Principal
Financial Group
Des Moines, IA 50392
John R. Lepley Senior Vice
The Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392
Gregg R. Narber Director
The Principal
Financial Group
Des Moines, IA 50392
Mark M. Oswald Compliance Officer
The Principal
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller-Mutual Funds
The Principal
Financial Group
Des Moines, IA 50392
Elizabeth R. Ring Controller
The Principal
Financial Group
Des Moines, IA 50392
Charles E. Rohm Director
The Principal
Financial Group
Des Moines, IA 50392
Michael D. Roughton Counsel
The Principal
Financial Group
Des Moines, IA 50392
Jean B. Schustek Product Compliance Officer-
The Principal Registered Products
Financial Group
Des Moines, IA 50392
Kyle R. Selberg Vice President-
The Principal Marketing
Financial Group
Des Moines, IA 50392
Susan R. Sorensen Marketing Officer
The Principal
Financial Group
Des Moines, IA 50392
Roger C. Stroud Assistant Director-
The Principal Marketing
Financial Group
Des Moines, IA 50392
(c) (1) (2)
Net Underwriting
Name of Principal Discounts and
Underwriter Commissions
Princor Financial $11,090,837.12
Services Corporation
(3) (4) (5)
Compensation on Brokerage
Redemption Commissions Compensation
0 0 0
Item 30. Location of Accounts and Records
All accounts, books or other documents of the Registrant are located
at the offices of the Depositor, The Principal Financial Group, Des
Moines, Iowa 50392.
Item 31. Management Services
Inapplicable
Item 32. Undertakings
The Registrant undertakes to file a post-effective amendment to this
registration statement as frequently as is necessary to ensure that
the audited financial statements in the registration statement are
never more than 16 months old for so long as payments under the
variable annuity contracts may be accepted.
The Registrant undertakes to include either (1) as part of any
application to purchase a contract offered by the prospectus, a space
that an applicant can check to request a Statement of Additional
Information, or (2) a post card or similar written communication
affixed to or included in the prospectus that the applicant can remove
to send for a Statement of Additional Information.
The Registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available
under this Form promptly upon written or oral request.
REPRESENTATION PURSUANT TO SECTION 26 OF THE INVESTMENT COMPANY ACT OF 1940
Principal Mutual Life Insurance Company represents the fees and charges deducted
under the Policy, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed by the
Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Principal Mutual Life Insurance
Company Separate Account B, certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of the Registration Statement and
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned thereto duly authorized in the City of Des Moines and
State of Iowa, on the 16th day of December, 1997.
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
(Registrant)
By: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
(Depositor)
/s/ David J. Drury
By ______________________________________________
David J. Drury
Chairman and Chief Executive Officer
Attest:
/s/ Joyce N. Hoffman
- -----------------------------------
Joyce N. Hoffman
Vice President and
Corporate Secretary
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
Signature Title Date
/s/ D. J. Drury Chairman and December 16, 1997
- -------------------- Chief Executive Officer
D. J. Drury
/s/ D. C. Cunningham Vice President and December 16, 1997
- -------------------- Controller (Principal
D. C. Cunningham Accounting Officer)
/s/ M. H. Gersie Senior Vice President December 16, 1997
- -------------------- (Principal Financial
M. H. Gersie Officer)
(M. V. Andringa)* Director December 16, 1997
- --------------------
M. V. Andringa
(R. M. Davis)* Director December 16, 1997
- --------------------
R. M. Davis
(C. D. Gelatt, Jr.)* Director December 16, 1997
- --------------------
C. D. Gelatt, Jr.
(G. D. Hurd)* Director December 16, 1997
- --------------------
G. D. Hurd
(T. M. Hutchison)* Director December 16, 1997
- --------------------
T. M. Hutchison
(C. S. Johnson)* Director December 16, 1997
- --------------------
C. S. Johnson
(W. T. Kerr)* Director December 16, 1997
- --------------------
W. T. Kerr
(L. Liu)* Director December 16, 1997
- --------------------
L. Liu
(V. H. Loewenstein)* Director December 16, 1997
- --------------------
V. H. Loewenstein
(R. D. Pearson)* Director December 16, 1997
- --------------------
R. D. Pearson
(J. R. Price)* Director December 16, 1997
- --------------------
J. R. Price, Jr.
(D. M. Stewart)* Director December 16, 1997
- --------------------
D. M. Stewart
(E. E. Tallett)* Director December 16, 1997
- --------------------
E. E. Tallett
(D. D. Thornton)* Director December 16, 1997
- --------------------
D. D. Thornton
(F. W. Weitz)* Director December 16, 1997
- --------------------
F. W. Weitz
*By /s/ David J. Drury
------------------------------------
David J. Drury
Chairman and Chief Executive Officer
Pursuant to Powers of Attorney
Previously Filed or Included Herein
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Independent
Auditors" and to the use of our reports dated February 7, 1997 (with respect to
Principal Mutual Life Insurance Company Separate Account B) and February 7, 1997
(with respect to The Principal Financial Group(R)), in Post-Effective Amendment
No. 6 to the Registration Statement (Form N-4 No. 33-74232) and related
Prospectus of Principal Mutual Life Insurance Company Separate Account B
Flexible Variable Annuity Contract.
/s/ Ernst & Young LLP
Des Moines, Iowa
December 16, 1997
SCHEDULE FOR COMPUTING TOTAL RETURN
FVA AGGRESSIVE GROWTH DIVISION
The hypothetical average annual total return quotations for 1 year ending on
December 31, 1996 and from June 1, 1994 to December 31, 1996 are computed by
finding the average annual compounded rates of return over the 1 year and period
that would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,5
or 10 year periods (or fractional portion thereof).
The above calculation includes all recurring fees that are charged to all
contractowner accounts and a contingent deferred sales charge subtracted
from the ending value.
The Division's average annual total returns for the 1 year
ending December 31, 1996 and period from June 1, 1994 to December 31,
1996 are calculated as follows:
1 YEAR
1000 (1+T)1 = 1,204.60
Solve for T
T = 20.46%
Period of June 1, 1994 through December 31, 1996
1000 (1+T)944/365 = 1,775.01
Solve for T
T = 24.84%
<PAGE>
SCHEDULE FOR COMPUTING TOTAL RETURN
FVA ASSET ALLOCATION DIVISION
The hypothetical average annual total return quotations for 1 year ending on
December 31, 1996 and from June 1, 1994 to December 31, 1996 are computed by
finding the average annual compounded rates of return over the 1 year and period
that would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,5
or 10 year periods (or fractional portion thereof).
The above calculation includes all recurring fees that are charged to all
contractowner accounts and a contingent deferred sales charge subtracted
from the ending value.
The Division's average annual total returns for the 1 year
ending December 31, 1996 and period from June 1, 1994 to December 31,
1996 are calculated as follows:
1 YEAR
1000 (1+T)1 = 1,055.20
Solve for T
T = 5.52%
Period of June 1, 1994 through December 31, 1996
1000 (1+T)944/365 = 1,265.74
Solve for T
T = 9.54%
<PAGE>
SCHEDULE FOR COMPUTING TOTAL RETURN
FVA BALANCED DIVISION
The hypothetical average annual total return quotations for 1 and 5 years ending
on December 31, 1996 and from December 18, 1987 (hypothetical inception of the
Division) to December 31, 1996 are computed by finding the average annual
compounded rates of return over the 1 and 5 years and period that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,5
or 10 year periods (or fractional portion thereof).
The above calculation includes all recurring fees that are charged to all
contractowner accounts and a contingent deferred sales charge subtracted
from the ending value.
The Division's average annual total returns for the 1 and 5 years
ending December 31, 1996 and period from December 18, 1987 to
December 31, 1996 are calculated as follows:
1 YEAR
1000 (1+T)1 = 1,057.30
Solve for T
T = 5.73%
5 YEARS
1000 (1+T)5 = 1,584.33
Solve for T
T = 9.64%
1Period of December 18, 1987 through December 31, 1996
1000 (1+T)3,301/365 = 2,524.07
Solve for T
T = 10.78%
<PAGE>
SCHEDULE FOR COMPUTING TOTAL RETURN
FVA BOND DIVISION
The hypothetical average annual total return quotations for 1 and 5 years ending
on December 31, 1996 and from December 18, 1987 (hypothetical inception of the
Division) to December 31, 1996 are computed by finding the average annual
compounded rates of return over the 1 and 5 years and period that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,5
or 10 year periods (or fractional portion thereof).
The above calculation includes all recurring fees that are charged to all
contractowner accounts and a contingent deferred sales charge subtracted
from the ending value.
The Division's average annual total returns for the 1 and 5 years
ending December 31, 1996 and period from December 18, 1987 to
December 31, 1996 are calculated as follows:
1 YEAR
1000 (1+T)1 = 956.30
Solve for T
T = -4.37%
5 YEARS
1000 (1+T)5 = 1,353.44
Solve for T
T = 6.24%
1Period of December 18, 1987 through December 31, 1996
1000 (1+T)3,301/365 = 2,037.89
Solve for T
T = 8.19%
<PAGE>
SCHEDULE FOR COMPUTING TOTAL RETURN
FVA CAPITAL VALUE DIVISION
The hypothetical average annual total return quotations for 1, 5 and 10 years
ending on December 31, 1996 are computed by finding the average annual
compounded rates of return over the 1, 5 and 10 years that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,5
or 10 year periods (or fractional portion thereof).
The above calculation includes all recurring fees that are charged to all
contractowner accounts and a contingent deferred sales charge subtracted
from the ending value.
The Division's average annual total returns for the 1, 5 and 10 years
ending December 31, 1996 are calculated as follows:
1 YEAR
1000 (1+T)1 = 1,159.60
Solve for T
T = 15.96%
5 YEARS
1000 (1+T)5 = 1,775.76
Solve for T
T = 12.17%
10 YEARS
1000 (1+T)10 = 3,018.24
Solve for T
T = 11.68%
<PAGE>
SCHEDULE FOR COMPUTING TOTAL RETURN
FVA MIDCAP DIVISION
The hypothetical average annual total return quotations for 1 and 5 years ending
on December 31, 1996 and from December 18, 1987 (hypothetical inception of the
Division) to December 31, 1996 are computed by finding the average annual
compounded rates of return over the 1 and 5 years and period that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,5
or 10 year periods (or fractional portion thereof).
The above calculation includes all recurring fees that are charged to all
contractowner accounts and a contingent deferred sales charge subtracted
from the ending value.
The Division's average annual total returns for the 1 and 5 years
ending December 31, 1996 and period from December 18, 1987 to
December 31, 1996 are calculated as follows:
1 YEAR
1000 (1+T)1 = 1,136.10
Solve for T
T = 13.61%
5 YEARS
1000 (1+T)5 = 1,987.86
Solve for T
T = 14.73%
1Period of December 18, 1987 through December 31, 1996
1000 (1+T)3,301/365 = 3,909.07
Solve for T
T = 16.27%
<PAGE>
SCHEDULE FOR COMPUTING TOTAL RETURN
FVA GOVERNMENT SECURITIES INCOME DIVISION
The hypothetical average annual total return quotations for 1 and 5 years ending
on December 31, 1996 and from April 9, 1987 (hypothetical inception of the
Division) to December 31, 1996 are computed by finding the average annual
compounded rates of return over the 1 and 5 years and period that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,5
or 10 year periods (or fractional portion thereof).
The above calculation includes all recurring fees that are charged to all
contractowner accounts and a contingent deferred sales charge subtracted
from the ending value.
The Division's average annual total returns for the 1 and 5 years
ending December 31, 1996 and period from April 9, 1987 to
December 31, 1996 are calculated as follows:
1 YEAR
1000 (1+T)1 = 965.40
Solve for T
T = -3.46%
5 YEARS
1000 (1+T)5 = 1,258.15
Solve for T
T = 4.70%
10 YEARS
1000 (1+T)3,554/365 = 1,984.05
Solve for T
T = 7.29%
<PAGE>
SCHEDULE FOR COMPUTING TOTAL RETURN
FVA GROWTH DIVISION
The hypothetical average annual total return quotations for 1 year ending on
December 31, 1996 and from May 1, 1994 (hypothetical inception of the Division)
to December 31, 1996 are computed by finding the average annual compounded rates
of return over the 1 year and period that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,5
or 10 year periods (or fractional portion thereof).
The above calculation includes all recurring fees that are charged to all
contractowner accounts and a contingent deferred sales charge subtracted
from the ending value.
The Division's average annual total returns for the 1 year
ending December 31, 1996 and period from May 1, 1994 to December 31,
1996 are calculated as follows:
1 YEAR
1000 (1+T)1 = 1,051.10
Solve for T
T = 5.11%
Period of May 1, 1994 through December 31, 1996
1000 (1+T)975/365 = 1,382.14
Solve for T
T = 12.88%
<PAGE>
SCHEDULE FOR COMPUTING TOTAL RETURN
FVA MONEY MARKET DIVISION
The hypothetical average annual total return quotations for 1, 5 and 10 years
ending on December 31, 1996 are computed by finding the average annual
compounded rates of return over the 1, 5 and 10 years that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,5
or 10 year periods (or fractional portion thereof).
The above calculation includes all recurring fees that are charged to all
contractowner accounts and a contingent deferred sales charge subtracted
from the ending value.
The Division's average annual total returns for the 1, 5 and 10 years
ending December 31, 1996 are calculated as follows:
1 YEAR
1000 (1+T)1 = 981.40
Solve for T
T = -1.86%
5 YEARS
1000 (1+T)5 = 1,111.13
Solve for T
T = 2.13%
10 YEARS
1000 (1+T)10 = 1,536.70
Solve for T
T = 4.39%
<PAGE>
SCHEDULE FOR COMPUTING TOTAL RETURN
FVA WORLD DIVISION
The hypothetical average annual total return quotations for 1 year ending on
December 31, 1996 and from May 1, 1994 (hypothetical inception of the Division)
to December 31, 1996 are computed by finding the average annual compounded rates
of return over the 1 year and period that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,5
or 10 year periods (or fractional portion thereof).
The above calculation includes all recurring fees that are charged to all
contractowner accounts and a contingent deferred sales charge subtracted
from the ending value.
The Division's average annual total returns for the 1 year
ending December 31, 1996 and period from May 1, 1994 to December 31,
1996 are calculated as follows:
1 YEAR
1000 (1+T)1 = 1,175.40
Solve for T
T = 17.54%
Period of May 1, 1994 through December 31, 1996
1000 (1+T)975/365 = 1,274.33
Solve for T
T = 9.50%
SCHEDULE FOR COMPUTING EFFECTIVE ANNUALIZED YIELD
FOR SEPARATE ACCOUNT B FLEX VARIABLE ANNUITY CONTRACT
MONEY MARKET DIVISION
The effective yield quotation based on the seven day period of 12/24/96 through
12/31/96 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 accumulation unit of the sub-account at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from result, according
to the following formula:
a - b - c
EFFECTIVE YIELD = (----------------------+1) ^ 365/7 -1
b
Where:
a = ending unit value
b = beginning unit value
c = expense factor for 7-day period
Separate Account B Flex Variable Annuity Contract's Effective Yield is as
follows:
EFFECTIVE YIELD =
11.0279079 - 11.0196146 - .0000058868
(((---------------------------------------) + 1) ^ 365/7) - 1 = 3.99782790439
11.0196146
EFFECTIVE YIELD = 4.00%
<PAGE>
SCHEDULE FOR COMPUTING ANNUALIZED YIELD
FOR SEPARATE ACCOUNT B FLEX VARIABLE ANNUITY CONTRACT
MONEY MARKET DIVISION
The yield quotation based on the seven day period of 12/24/96 through 12/31/96
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
accumulation unit of the sub-account at the beginning of the period, subtracting
a hypothetical charge reflecting deductions from contractowner 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 multiplying the base period return
by (365/7) according to the following formula:
a - b - c 365
YIELD = (-------------) x -----------
b 7
Where:
a = ending unit value
b = beginning unit value
c = expense factor for 7-day period
Separate Account B Flex Variable Annuity Contract's Yield is as follows:
YIELD =
11.0279079 - 11.0196146 - 0.0000058868 365
(((---------------------------------------) x ------- = 3.9214565868
11.01961466 7
YIELD = 3.92%
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 68556580
<INVESTMENTS-AT-VALUE> 72827189
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 72827189
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 3970831
<SHARES-COMMON-PRIOR> 1323663
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 72827189
<DIVIDEND-INCOME> 7059691
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (620807)
<NET-INVESTMENT-INCOME> 6438884
<REALIZED-GAINS-CURRENT> 1143445
<APPREC-INCREASE-CURRENT> 3397775
<NET-CHANGE-FROM-OPS> 10980104
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3416591
<NUMBER-OF-SHARES-REDEEMED> (769423)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 53629142
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 620807
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 29412890
<INVESTMENTS-AT-VALUE> 30022679
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 30022679
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 2263999
<SHARES-COMMON-PRIOR> 911657
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 30022679
<DIVIDEND-INCOME> 23874866
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (289141)
<NET-INVESTMENT-INCOME> 2095725
<REALIZED-GAINS-CURRENT> 188720
<APPREC-INCREASE-CURRENT> 206378
<NET-CHANGE-FROM-OPS> 2490823
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1544152
<NUMBER-OF-SHARES-REDEEMED> (191810)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 19181579
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 289141
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 72961005
<INVESTMENTS-AT-VALUE> 75478532
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 75478532
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 13143602
<SHARES-COMMON-PRIOR> 5017504
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 75478532
<DIVIDEND-INCOME> 5736171
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (582921)
<NET-INVESTMENT-INCOME> 5153250
<REALIZED-GAINS-CURRENT> 98838
<APPREC-INCREASE-CURRENT> 1366906
<NET-CHANGE-FROM-OPS> 6618994
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9718651
<NUMBER-OF-SHARES-REDEEMED> (1592553)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 54215510
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 582921
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 51557619
<INVESTMENTS-AT-VALUE> 51156727
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 51156727
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 6758447
<SHARES-COMMON-PRIOR> 2710086
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 51156727
<DIVIDEND-INCOME> 2883564
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (479862)
<NET-INVESTMENT-INCOME> 2403702
<REALIZED-GAINS-CURRENT> 84385
<APPREC-INCREASE-CURRENT> (906639)
<NET-CHANGE-FROM-OPS> 1581448
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5282652
<NUMBER-OF-SHARES-REDEEMED> (1234291)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 32528094
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 479862
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 152349374
<INVESTMENTS-AT-VALUE> 164206061
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 164206061
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 31546479
<SHARES-COMMON-PRIOR> 31877539
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 164206061
<DIVIDEND-INCOME> 20507536
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (1833534)
<NET-INVESTMENT-INCOME> 18674002
<REALIZED-GAINS-CURRENT> 7614291
<APPREC-INCREASE-CURRENT> 1107485
<NET-CHANGE-FROM-OPS> 27395778
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13375976
<NUMBER-OF-SHARES-REDEEMED> (13707036)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 60548298
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1833534
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 104926679
<INVESTMENTS-AT-VALUE> 122287543
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 122287543
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 13836805
<SHARES-COMMON-PRIOR> 5243126
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 122287543
<DIVIDEND-INCOME> 2810730
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (1058453)
<NET-INVESTMENT-INCOME> 1752277
<REALIZED-GAINS-CURRENT> 1000612
<APPREC-INCREASE-CURRENT> 12364939
<NET-CHANGE-FROM-OPS> 15117828
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10046862
<NUMBER-OF-SHARES-REDEEMED> (1453183)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 80102595
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1058453
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 87379604
<INVESTMENTS-AT-VALUE> 98430386
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 98430386
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 13704637
<SHARES-COMMON-PRIOR> 5756940
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 98430386
<DIVIDEND-INCOME> 1366707
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (867369)
<NET-INVESTMENT-INCOME> 499338
<REALIZED-GAINS-CURRENT> 216275
<APPREC-INCREASE-CURRENT> 7137078
<NET-CHANGE-FROM-OPS> 7852691
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9742465
<NUMBER-OF-SHARES-REDEEMED> (1794768)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 60527153
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 867369
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 80859708
<INVESTMENTS-AT-VALUE> 80421152
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 80421152
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 16469536
<SHARES-COMMON-PRIOR> 16582148
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 80421152
<DIVIDEND-INCOME> 4377421
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (872323)
<NET-INVESTMENT-INCOME> 3505098
<REALIZED-GAINS-CURRENT> 266471
<APPREC-INCREASE-CURRENT> (1358430)
<NET-CHANGE-FROM-OPS> 2413139
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8200880
<NUMBER-OF-SHARES-REDEEMED> (8313492)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 34978216
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 872323
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 40738362
<INVESTMENTS-AT-VALUE> 40738362
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 40738362
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 9766609
<SHARES-COMMON-PRIOR> 7238742
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 40738362
<DIVIDEND-INCOME> 1648495
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (465382)
<NET-INVESTMENT-INCOME> 1183113
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1183113
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 52128997
<NUMBER-OF-SHARES-REDEEMED> (49601130)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 18428874
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 465382
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 60038392
<INVESTMENTS-AT-VALUE> 70528972
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 70528972
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 9582755
<SHARES-COMMON-PRIOR> 3978013
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 70528972
<DIVIDEND-INCOME> 1847645
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (587191)
<NET-INVESTMENT-INCOME> 1260454
<REALIZED-GAINS-CURRENT> 448876
<APPREC-INCREASE-CURRENT> 8733154
<NET-CHANGE-FROM-OPS> 10442484
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6876734
<NUMBER-OF-SHARES-REDEEMED> (1271992)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 45346823
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 587191
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
