PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
FLEXIBLE VARIABLE ANNUITY ("FVA") CONTRACT
Issued by Principal Mutual Life Insurance Company (the "Company")
Prospectus dated May 1, 1998
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 May 1, 1998, 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 22 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.
<PAGE>
TABLE OF CONTENTS
Page
Glossary of Special Terms .................................... 3
Expense Table and Example..................................... 4
Summary .................................................... 5
Condensed Financial Information............................... 6
Description of Principal Mutual Life
Insurance Company ............................................ 7
Principal Mutual Life Insurance
Company Separate Account B ................................... 7
Mutual Funds.................................................. 8
Surplus Distribution at Sole
Discretion of the Company .................................... 8
The Contract ................................................. 8
Purchasing a Contract...................................... 8
Purchase Payment Limitations............................. 9
Allocation of Purchase Payments.......................... 9
Right to Examine the Contract............................ 9
Exchange Credit.......................................... 9
Prior to the Retirement Date............................... 10
Determining the Accumulated
Value of the Contract.................................... 10
Allocation of Purchase Payments.......................... 10
Transfers................................................ 10
Automatic Portfolio Rebalancing.......................... 11
Telephone Services....................................... 11
Total and Partial Surrenders............................. 11
Benefit Payable on Death of
Annuitant or Owner....................................... 12
After the Retirement Date.................................. 13
Retirement Date ......................................... 13
Benefit Options ......................................... 13
Death of Annuitant or Other Payee........................ 14
Charges and Deductions ....................................... 15
Annual Fee................................................. 15
Mortality and Expense Risks Charge ........................ 15
Transaction Fee............................................ 15
Premium Taxes ............................................. 15
Surrender Charge........................................... 15
Administrative Expense Charge.............................. 16
Page
Special Provisions for Group or
Sponsored Arrangements........................................ 16
Fixed Account................................................. 17
General Description ....................................... 17
Fixed Account Value ....................................... 17
Fixed Account Transfers, Total
and Partial Surrenders..................................... 17
General Provisions ........................................... 17
The Contract............................................... 17
Postponement of Payments................................... 18
Misstatement of Age or Sex
and Other Errors........................................... 18
Assignment ................................................ 18
Change of Owner............................................ 18
Beneficiary................................................ 18
Reports.................................................... 18
Rights Reserved by the Company................................ 18
Distribution of the Contract.................................. 19
Performance Calculation....................................... 19
Voting Rights................................................. 19
Federal Tax Matters........................................... 20
Non-Qualified Contracts.................................... 20
Required Distributions for
Non-Qualified Contracts.................................... 20
IRA, SEP, SAR/SEP, SIMPLE-IRA
and ROTH IRA............................................... 21
Withholding................................................ 21
Mutual Fund Diversification................................ 21
State Regulation.............................................. 21
Legal Opinions................................................ 21
Legal Proceedings............................................. 21
Registration Statement........................................ 21
Other Variable Annuity Contracts.............................. 21
Independent Auditors.......................................... 22
Financial Statements.......................................... 22
Contractholders' Inquiries.................................... 22
Table of Contents of the Statement
of Additional Information..................................... 22
Appendix A.................................................... 22
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.
<PAGE>
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
<CAPTION>
Transaction Expenses
Sales Load Imposed on Purchases
(as a percentage of Purchase Payments) None
Surrender Charge (as a percentage Number of Completed Contract Years Since Surrender Charge Applied to all Purchase
of amount surrendered) Purchase Payment was made Payments Received in that Contract Year
<S> <C>
0 (year of Purchase Payment) 6%
1 6%
2 6%
3 5%
4 4%
5 3%
6 2%
7 and later 0%
</TABLE>
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%
<TABLE>
Annual Expenses of Accounts
(as a percentage of average net assets)
<CAPTION>
Management Total Account
Fees Other Expenses Annual Expenses
<S> <C> <C> <C>
Aggressive Growth Account .80% .02% .82%
Asset Allocation Account .80% .09% .89%
Balanced Account .59% .02% .61%
Bond Account .50% .02% .52%
Capital Value Account .46% .01% .47%
Government Securities Account .50% .02% .52%
Growth Account .49% .01% .50%
International Account .74% .13% .87%
International SmallCap Account 1.20% .06% 1.26%(c)
MicroCap Account 1.00% .06% 1.06%(c)
MidCap Account .62% .02% .64%
MidCap Growth Account .90% .06% .96%(c)
Money Market Account .50% .05% .55%
Real Estate Account .90% .06% .96%(c)
SmallCap Account .85% .06% .91%(c)
SmallCap Growth Account 1.00% .06% 1.06%(c)
SmallCap Value Account 1.10% .06% 1.16%(c)
Utilities Account .60% .06% .66%(c)
</TABLE>
(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.
(c) Estimated Expenses.
<PAGE>
<TABLE>
EXAMPLE
<CAPTION>
Separate Account Division 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C> <C>
If you surrender your contract at the Aggressive Growth Division $83 $120 $148 $243
end of the applicable time period: Asset Allocation Division $84 $122 $151 $251
Balanced Division $81 $114 $137 $221
You would pay the following Bond Division $80 $112 $133 $212
expenses on a $1,000 investment, Capital Value Division $80 $110 $130 $207
assuming 5% annual return on assets: Government Securities Division $80 $112 $133 $212
Growth Division $80 $111 $132 $210
International Division $84 $122 $150 $249
International SmallCap Division $87 $133 N\A N\A
MicroCap Division $85 $127 N\A N\A
MidCap Division $81 $115 $139 $225
MidCap Growth Division $84 $124 N\A N\A
Money Market Division $81 $113 $134 $215
Real Estate Division $84 $124 N\A N\A
SmallCap Division $84 $123 N\A N\A
SmallCap Growth Division $85 $127 N\A N\A
SmallCap Value Division $82 $130 N\A N\A
Utilities Division $82 $116 N\A N\A
If you annuitize at the end of the Aggressive Growth Division $21 $66 $113 $243
applicable time period or do not Asset Allocation Division $22 $68 $117 $251
surrender your contract: Balanced Division $19 $59 $102 $221
Bond Division $18 $57 $98 $212
Capital Value Division $18 $55 $95 $207
You would pay the following Government Securities Division $18 $57 $98 $212
expenses on a $1,000 investment, Growth Division $18 $56 $97 $210
assuming 5% annual return on assets: International Division $22 $67 $116 $249
International SmallCap Division $26 $79 N\A N\A
MicroCap Division $24 $73 N\A N\A
MidCap Division $20 $60 $104 $225
MidCap Growth Division $23 $70 N\A N\A
Money Market Division $19 $58 $99 $215
Real Estate Division $23 $70 N\A N\A
SmallCap Division $22 $69 N\A N\A
SmallCap Growth Division $24 $73 N\A N\A
SmallCap Value Division $25 $76 N\A N\A
Utilities Division $20 $61 N\A N\A
</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."
<PAGE>
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"), Roth 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, ("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."
<PAGE>
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)
<S> <C> <C> <C>
Aggressive Growth Division
Year Ended December 31
1997 18.340 23.689 6,077
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
1997 13.260 15.478 3,134
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
1997 13.708 15.966 6,717
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
1997 12.275 13.408 5,017
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
1997 16.261 20.642 9,320
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
1997 11.969 13.049 5,946
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
1997 14.411 18.070 7,898
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
1997 13.347 14.795 7,316
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
1997 15.405 18.676 9,820
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
1997 11.027 11.463 2,752
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
</TABLE>
(1) Commenced operations on June 16, 1994.
<PAGE>
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.
The Board of Directors of the Company has approved a Plan of Reorganization (the
"Plan") pursuant to which the Company will adopt a mutual insurance holding
company structure. The Plan was approved by the owners of annuity contracts and
life insurance policies issued by the Company and has been submitted to the
Commissioner of Insurance of the State of Iowa (the "Iowa Commissioner") for
approval.
Under the Plan, the Company will form a mutual insurance holding company named
"Principal Mutual Holding Company" and will convert to a stock life insurance
company. As part of such conversion, the Company will change its name to
"Principal Life Insurance Company" ("Principal Life"). Principal Mutual Holding
Company will be the ultimate parent company in the family of companies known as
the Principal Financial Group(R).
Because the Company currently is a mutual life insurance company, Owners have,
in addition to contract rights related to the Contract, certain membership
interests in the Company, consisting principally of the right to vote on the
election of directors of the Company and on other matters and the right to
receive distributions of the Company's surplus upon liquidation or dissolution
of the Company. The Plan will preserve but separate these contract rights and
membership interests. Contract rights will remain with Principal Life, and
Owners on the date the Plan becomes effective (the "Effective Date") will
automatically become members of Principal Mutual Holding Company and such
Owner's membership interests in the Company will be extinguished. Under the
terms of the Plan, the membership interests of members of Principal Mutual
Holding Company will consist principally of the right to vote on the election of
directors of Principal Mutual Holding Company and on other matters and to
receive distributions of Principal Mutual Holding Company's assets upon
liquidation or dissolution of Principal Mutual Holding Company. Owners of
Contracts issued by Principal Life after the Effective Date also will
automatically become members of Principal Mutual Holding Company. The Plan will
not, in any way, increase premium payments or reduce Contract benefits, values,
guarantees or other Contract obligations owed to Owners. Contract obligations
will be the responsibility of Principal Life.
The Company believes that adoption of the Plan will result in a corporate
structure that, among other things, will provide the Company with flexibility in
raising capital through various means that are not currently available to it,
including stock offerings. Any initial offering of voting stock to third parties
will be subject to the approval of the Iowa Commissioner. Although there are no
current plans to offer voting stock, in the event voting stock was sold to third
parties, it is possible that the interests of such third party shareholders and
Owners could diverge on certain issues. The Company, however, believes that such
shareholders and Owners will generally have a greater commonality of interests
than the potential for conflict and will endeavor to minimize the occurrence of
such conflicts and to operate the companies in the best interests of all
constituencies.
The Effective Date is scheduled to be July 1, 1998, but the Iowa Commissioner
must first approve the Plan. In addition, insurance regulatory authorities in
each state must issue an amendment to the Company's Certificate of Authority (to
reflect the name change from Principal Mutual Life Insurance Company to
Principal Life Insurance Company) and must approve the forms which support the
Contract. Should the Effective Date be other than July 1, 1998 or if states
other than Iowa have not completed action by that date, the Company will notify
existing Owners and others by supplementing this prospectus. Contracts issued on
or after the Effective Date will be issued by Principal Life, will not be
participating and will not be eligible to participate in any distribution of
divisible surplus (see "Surplus Distribution at Sole Discretion of the
Company"). As Owner of a Contract issued after the Effective Date, you will be a
member of Principal Mutual Holding Company as described above.
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 $63.2 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 nineteen 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
life 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 eighteen Accounts available for investment are as
follows: Aggressive Growth, Asset Allocation, Balanced, Bond, Capital Value,
Government Securities, Growth, International, International SmallCap, MicroCap,
MidCap, MidCap Growth, Money Market, Real Estate, SmallCap, SmallCap Growth,
SmallCap Value and Utilities. Not all Accounts are available in all states. A
current list of which Accounts are available in your state may be obtained from
an authorized agent of the Company. 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"), Roth 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
The death benefit paid to the deceased's Beneficiary will be the greater
of the standard death benefit or the annual enhanced death benefit, if
elected.
a. Standard Death Benefit
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) Highest Accumulated Value 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.
b. Annual Enhanced Death Benefit
Definition The Company also offers an optional death benefit, the
Annual Enhanced Death Benefit Rider. Under this rider, if the
original annuitant or original owner dies prior to the Retirement
date, the death benefit payable to the deceased's Beneficiary is the
greater of:
(1) The Standard Death Benefit (described above); or
(2) An annual increasing death benefit, based on Purchase Payments
(accumulated at 5%) less any partial surrenders and Surrender
Charges incurred (accumulated at 5%) until the later of either
the Contract Anniversary following the original Owner's or
original Annuitant's age 75 birthday or five years from the
effective date of the rider; or
(3) The highest Accumulated Value on a Contract Anniversary
(increased for subsequent Purchase Payments and decreased for
partial surrenders and Surrender Charges incurred) until the
later of the Contract Anniversary following the original Owner's
or original Annuitant's age 75 birthday or five years from the
effective date of the rider.
Lock-In Feature At the later of the Contract Anniversary following
the original Owner's or original Annuitant's age 75 birthday or five
years after issue ("Lock-In Date"), the Annual Enhanced Death Benefit
amount will be locked-in and will only increase by Purchase Payments
made since the Lock-In Date, less any partial surrenders and
Surrender Charges incurred since the Lock-In Date. The Lock-In will
not prevent the death benefit from increasing further as provided
under the Standard Death Benefit provision in your Contract.
Rider charges will continue to be deducted on a quarterly basis to
keep the Annual Enhanced Death Benefit locked in.
After the Lock-In Date, once the Standard Death Benefit equals the
Annual Enhanced Death Benefit, this Rider will terminate. You will be
charged for the Annual Enhanced Death Benefit Rider based on the
number of days from the beginning of the calendar quarter until the
Rider is terminated.
Charges The current charge for the Annual Enhanced Death Benefit
Rider is deducted through the redemption of units from your
Contract's Accumulated Value at the end of each calendar quarter. The
redemption of units from the Owner's Fixed Account value and/or
interest in a Division will be made in the same ratio as each Account
bears to the Owner's Accumulated Value.
Once terminated, this Rider cannot be reinstated. (In Florida this
Rider may be reinstated upon proof acceptable to the Company of the
good health of original Owner or original Annuitant. This proof must
be sent to Company's home office.)
c. Payment of Death Benefit
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 or, after July 1, 1998, age 90
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.
Except for the Fixed Income Benefit Option, the mortality risk borne by
the Company is 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 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, Roth 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 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
Surrender Charge
Applied to all Purchase
Years since Purchase Payments Received in
Payment made that Contract Year
2 years or less 6%
more than 2 years, up to 3 years 5%
more than 3 years, up to 4 years 4%
more than 4 years, up to 5 years 3%
more than 5 years, up to 6 years 2%
more than 7 years 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 the later of the 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 later of 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 not to
exceed 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 minimum transfer amount is $100 (or, if
less, the entire amount of the Fixed Account Value). 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 of the Aggressive Growth, Asset Allocation, Balanced, Bond,
Capital Value, Government Securities, Growth, International, MidCap and Money
Market 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 International SmallCap, MicroCap, MidCap Growth, Real Estate, SmallCap,
SmallCap Growth, SmallCap Value and Utilities Divisions of the Separate Account
were not offered until May 1, 1998. Performance data for these Divisions will be
calculated utilizing standardized performance formulas and will show performance
since the inception date of such Division.
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. In addition, in certain states the Contract may be used for
conversion of an existing IRA funded with a fixed annuity contract issued by the
Company into a ROTH-IRA. The surrender charge that would otherwise be imposed on
surrenders from the fixed annuity will be waived. The number of years that
assets were in the fixed annuity contract will be credited to the new Contract
for calculation of Surrender Charge. If an existing IRA is funded with this
Contract is surrendered and the proceeds converted into ROTH-IRA funded with a
fixed annuity contract issued by the Company, the surrender charges which would
otherwise be imposed under this Contract will be waived. This conversion
privilege is not available in New Jersey.
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 an
Account to meet the diversification requirements could result in tax liability
to non-qualified contractholders.
The investment opportunities of the Accounts 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.
<PAGE>
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
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 ........................... 7
Financial Statements...................................... 8
The Principal Financial Group(R)
Report of Independent Auditors ........................... 25
Financial Statements...................................... 26
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.
<PAGE>
PART B
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
FLEXIBLE VARIABLE ANNUITY ("FVA") CONTRACT
Statement of Additional Information
dated May 1, 1998
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 May 1, 1998.
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
<PAGE>
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................................. 7
Financial Statements........................................... 8
The Principal Financial Group(R)
Report of Independent Auditors................................. 25
Financial Statements........................................... 26
<PAGE>
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
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 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 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 December 31, 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 23.16 26.45(1) 26.45(1) 29.16 27.21(1) 27.21(1)
Asset Allocation Division 10.72 11.93(1) 11.93(1) 16.72 12.96(1) 12.96(1)
Balanced Division 10.46 10.64 11.56 16.46 11.17 11.56
Bond Division 3.27 6.46 8.25 9.23 7.08 8.25
Capital Value Division 20.94 15.89 13.80 26.94 16.33 13.80
Government Securities Division 3.08 5.38 8.00 9.02 6.02 8.00
Growth Division 19.39 16.62(2) 16.62(2) 25.39 17.52(2) 17.52(2)
International Division 4.85 10.24(2) 10.242) 10.85 11.28(2) 11.28(2)
MidCap Division 15.23 16.28 16.83 21.23 16.72 16.83
Money Market Division -1.69 2.48 4.28 3.95 3.19 4.28
</TABLE>
(1) Period from June 1, 1994 through December 31, 1997.
(2) Period from May 2, 1994 through December 31, 1997.
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
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
[formerly Common Stock], Emerging Growth, Government Securities, Growth, Money
Market and World Divisions) as of December 31, 1997, 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, 1997, 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, 1997, 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 LLP
Des Moines, Iowa
February 6, 1998
Principal Mutual Life Insurance
Company Separate Account B
Statement of Net Assets
December 31, 1997
Assets
Investments:
Aggressive Growth Division:
Principal Aggressive Growth Fund, Inc.
- 8,837,189 shares at net asset value of
$16.29 per share (cost - $130,476,835) $ 143,957,816
Asset Allocation Division:
Principal Asset Allocation Fund, Inc.
- 4,062,978 shares at net asset value of
$11.94 per share (cost - $47,157,543) 48,511,958
Balanced Division:
Principal Balanced Fund, Inc.
- 8,194,665 shares at net asset value
of $15.51 per share (cost - $119,970,977) 127,099,255
Bond Division:
Principal Bond Fund, Inc.
- 6,238,528 shares at net asset value of $11.78 per
share (cost - $72,060,219) 73,489,868
Capital Accumulation Division:
Principal Capital Accumulation Fund, Inc.
- 7,779,594 shares at net asset value
of $34.61 per share (cost - $229,832,981) 269,251,746
Emerging Growth Division:
Principal Emerging Growth Fund, Inc.
- 5,753,822 shares at net
asset value of $35.47 per share (cost - $160,618,242) 204,088,063
Government Securities Division:
Principal Government Securities Fund, Inc.
- 8,661,755 shares at net
asset value of $10.72 per share (cost - $90,494,835) 92,854,016
Growth Division:
Principal Growth Fund, Inc.
- 9,634,743 shares at net asset value of $17.21 per
share (cost - $127,634,315) 165,813,925
Money Market Division:
Principal Money Market Fund, Inc.
- 41,680,409 shares at net asset value (cost)
of $1.00 per share 41,680,409
World Division:
Principal World Fund, Inc.
- 8,736,413 shares at net asset value of $13.90 per
share (cost - $108,352,082) 121,436,154
==================
Net assets $1,288,183,210
==================
<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 6,076,848 $23.69 $ 143,957,816
Asset Allocation Division:
Contracts in accumulation period:
The Principal Variable Annuity 3,134,106 15.48 48,511,958
Balanced Division:
Contracts in accumulation period:
Personal Variable 1,774,584 1.59 2,825,449
Premier Variable 10,616,578 1.60 17,024,170
The Principal Variable Annuity 6,717,196 15.97 107,249,636
-----------------
-----------------
127,099,255
Bond Division:
Contracts in accumulation period:
Personal Variable 487,134 1.37 669,514
Premier Variable 4,008,632 1.38 5,548,762
The Principal Variable Annuity 5,017,212 13.41 67,271,592
-----------------
-----------------
73,489,868
Capital Accumulation Division:
Currently payable annuity contracts:
Bankers Flexible Annuity 4,940 27.86 137,623
Pension Builder Plus - Rollover IRA 58,464 5.79 338,216
Contracts in accumulation period:
Bankers Flexible Annuity 253,763 27.86 7,072,314
Pension Builder Plus 1,623,560 5.25 8,527,296
Pension Builder Plus - Rollover IRA 337,900 5.79 1,957,469
Personal Variable 3,443,348 2.35 8,089,748
Premier Variable 21,339,196 2.38 50,737,614
The Principal Variable Annuity 9,319,979 20.64 192,391,466
-----------------
-----------------
269,251,746
Emerging Growth Division:
Contracts in accumulation period:
Personal Variable 1,477,705 1.87 2,756,807
Premier Variable 9,535,648 1.88 17,916,711
The Principal Variable Annuity 9,820,491 18.68 183,414,545
-----------------
-----------------
204,088,063
</TABLE>
<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 630,389 $ 2.04 $ 1,285,125
Pension Builder Plus - Rollover IRA 191,639 2.15 412,091
Personal Variable 1,815,860 1.41 2,568,214
Premier Variable 7,686,485 1.43 11,002,038
The Principal Variable Annuity 5,945,573 13.05 77,586,548
---------------
---------------
92,854,016
Growth Division:
Contracts in accumulation period:
Personal Variable 1,575,071 1.76 2,776,351
Premier Variable 11,441,482 1.78 20,311,716
The Principal Variable Annuity 7,898,308 18.07 142,725,858
---------------
---------------
165,813,925
Money Market Division:
Contracts in accumulation period:
Pension Builder Plus 419,049 1.89 791,079
Pension Builder Plus - Rollover IRA 15,736 1.97 30,919
Personal Variable 1,056,335 1.22 1,288,642
Premier Variable 6,514,874 1.24 8,043,427
The Principal Variable Annuity 2,752,166 11.46 31,526,342
---------------
---------------
41,680,409
World Division:
Contracts in accumulation period:
Personal Variable 1,014,143 1.51 1,528,673
Premier Variable 7,683,950 1.52 11,665,158
The Principal Variable Annuity 7,315,787 14.80 108,242,323
---------------
---------------
121,436,154
===============
Net assets $1,288,183,210
===============
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statement of Operations
Year ended December 31, 1997
Aggressive Asset
Growth Allocation Balanced
Combined Division Division Division
----------------------------------------------------------------
----------------------------------------------------------------
Investment income
Income:
<S> <C> <C> <C> <C>
Dividends $ 26,459,170 $ 312,225 $1,077,121 $ 3,376,218
Capital gains distributions 56,985,223 18,029,173 4,384,438 7,773,294
----------------------------------------------------------------
----------------------------------------------------------------
83,444,393 18,341,398 5,461,559 11,149,512
Expenses:
Mortality and expense risks 11,823,513 1,304,906 483,755 1,111,972
Administration charges 428,566 70,552 5,431 23,650
Contingent sales charges 910,028 90,527 33,143 70,179
----------------------------------------------------------------
----------------------------------------------------------------
13,162,107 1,465,985 522,329 1,205,801
----------------------------------------------------------------
----------------------------------------------------------------
Net investment income 70,282,286 16,875,413 4,939,230 9,943,711
Realized and unrealized gains on investments
Net realized gains on investments 5,671,902 464,006 63,749 453,888
Change in net unrealized appreciation/
depreciation of investments 102,587,382 9,210,372 744,626 4,610,751
----------------------------------------------------------------
================================================================
Net increase in net assets resulting from
operations $ 178,541,570 $ 26,549,791 $5,747,605 $ 15,008,350
================================================================
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Capital Emerging Government
Bond Accumulation Growth Securities Growth Money Market World
Division Division Division Division Division Division Division
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$4,339,765 $ 4,842,536 $ 1,294,027 $5,339,599 $ 1,759,897 $2,092,152 $2,025,630
- 18,095,200 4,080,946 994 992,232 - 3,628,946
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
4,339,765 22,937,736 5,374,973 5,340,593 2,752,129 2,092,152 5,654,576
711,411 2,217,279 1,927,784 951,497 1,503,368 439,153 1,172,388
10,673 148,936 65,058 30,496 32,657 15,637 25,476
49,219 157,869 148,402 79,876 103,766 92,239 84,808
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
771,303 2,524,084 2,141,244 1,061,869 1,639,791 547,029 1,282,672
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
3,568,462 20,413,652 3,233,729 4,278,724 1,112,338 1,545,123 4,371,904
110,974 2,848,843 507,365 274,681 452,453 - 495,943
1,830,541 27,562,078 26,108,957 2,797,737 27,128,828 - 2,593,492
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
$5,509,977 $ 50,824,573 $ 29,850,051 $7,351,142 $ 28,693,619 $1,545,123 $7,461,339
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statements of Changes in Net Assets
Aggressive Asset
Growth Allocation Balanced
Combined Division Division 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>
<TABLE>
<CAPTION>
Capital Emerging Government Money
Bond Accumulation Growth Securities Growth Market World
Divison Division Divison Division 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>
<TABLE>
<CAPTION>
Principal Mutual Life Insurance
Company Separate Account B
Statements of Changes in Net Assets (continued)
Aggressive Asset
Growth Division Allocation Balanced
Combined Division Division
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1997 $ 806,097,603 $ 72,827,189 $30,022,679 $ 75,478,532
Increase (decrease) in net assets
Operations:
Net investment income 70,282,286 16,875,413 4,939,230 9,943,711
Net realized gains on investments 5,671,902 464,006 63,749 453,888
Change in net unrealized appreciation/
depreciation of investments 102,587,382 9,210,372 744,626 4,610,751
--------------------------------------------------------------------
--------------------------------------------------------------------
Net increase in net assets resulting from
operations 178,541,570 26,549,791 5,747,605 15,008,350
Changes from principal transactions:
Purchase payments, less sales charges, per
payment fees and applicable premium taxes 627,937,841 59,917,348 16,705,667 53,714,866
Contract terminations (55,874,169) (3,178,242) (1,163,611) (4,281,984)
Death benefit payments (4,316,597) (405,803) (51,804) (958,828)
Flexible withdrawal option payments (7,524,649) (555,143) (424,697) (1,011,471)
Transfer payments to other contracts (256,636,172) (11,197,324) (2,323,881) (10,850,210)
Annuity payments (42,217) - - -
--------------------------------------------------------------------
--------------------------------------------------------------------
Increase (decrease) in net assets from principal
transactions 303,544,037 44,580,836 12,741,674 36,612,373
--------------------------------------------------------------------
--------------------------------------------------------------------
Total increase 482,085,607 71,130,627 18,489,279 51,620,723
--------------------------------------------------------------------
====================================================================
Net assets at December 31, 1997 $ 1,288,183,210 $ 143,957,816 $48,511,958 $ 127,099,255
====================================================================
See accompanying notes.
</TABLE>
<TABLE>
Capital Emerging Government Money
Bond Accumulation Growth Securities Growth Market World
Division Division Division Division Division Division Division
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$51,156,727 $164,206,061 $122,287,543 $80,421,152 $ 98,430,386 $ 40,738,362 $ 70,528,972
3,568,462 20,413,652 3,233,729 4,278,724 1,112,338 1,545,123 4,371,904
110,974 2,848,843 507,365 274,681 452,453 - 495,943
1,830,541 27,562,078 26,108,957 2,797,737 27,128,828 - 2,593,492
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
5,509,977 50,824,573 29,850,051 7,351,142 28,693,619 1,545,123 7,461,339
29,283,340 88,457,676 71,186,197 25,613,735 53,502,269 172,161,862 57,394,881
(2,130,683) (18,056,258) (6,477,064) (5,656,444) (4,866,079) (6,125,231) (3,938,573)
(265,662) (501,663) (451,603) (615,089) (543,121) (189,873) (333,151)
(880,841) (965,075) (790,604) (1,128,199) (731,944) (598,084) (438,591)
(9,182,990) (14,671,351) (11,516,457) (13,132,281) (8,671,205) (165,851,750) (9,238,723)
- (42,217) - - - - -
- ------------------------------------------------------------------------------------------------------------------
16,823,164 54,221,112 51,950,469 5,081,722 38,689,920 (603,076) 43,445,843
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
22,333,141 105,045,685 81,800,520 12,432,864 67,383,539 942,047 50,907,182
- ------------------------------------------------------------------------------------------------------------------
==================================================================================================================
$73,489,868 $269,251,746 $204,088,063 $92,854,016 $165,813,925 $ 41,680,409 $121,436,154
==================================================================================================================
</TABLE>
Principal Mutual Life Insurance
Company Separate Account B
Notes to Financial Statements
December 31, 1997
1. Investment and Accounting Policies
Principal Mutual Life Insurance Company Separate Account B (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,
1997.
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.
Use of Estimates in the Preparation of Financial Statements
The preparation of Separate Account B's 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 financial statements and accompanying notes.
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 $32,396 and $1,078, respectively, during the year ended December 31,
1997.
Pension Builder Plus and Pension Builder Plus - Rollover IRA 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 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 $202,742, $28,880, and
$80,841, respectively, during the year ended December 31, 1997.
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% of
the asset value of each contract. A contingent sales charge of up to 5% may be
deducted from withdrawals from an investment account 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 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 $116,668, $43,044, and
$41,157, respectively, during the year ended December 31, 1997.
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% 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 $491,751 and $12,365, respectively, during the year ended December
31, 1997. 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 $10,979,956, $838,104,
and $293,125, respectively, during the year ended December 31, 1997.
3. Federal Income Taxes
The 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 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, 1997
----------------------------------------------------------------------
Units Amount Units Amount
Purchased Purchased Redeemed Redeemed
----------------------------------------------------------------------
----------------------------------------------------------------------
Aggressive Growth Division:
<S> <C> <C> <C> <C>
The Principal Variable Annuity 2,866,842 $ 78,258,746 760,825 $ 16,802,497
Asset Allocation Division:
The Principal Variable Annuity 1,151,186 22,167,226 281,079 4,486,322
Balanced Division:
Personal Variable 1,121,294 1,881,609 362,119 541,564
Premier Variable 6,824,153 11,562,751 3,674,287 5,395,069
The Principal Variable Annuity 2,815,600 51,420,018 759,885 12,371,661
----------------------------------------------------------------------
----------------------------------------------------------------------
10,761,047 64,864,378 4,796,291 18,308,294
Bond Division:
Personal Variable 345,135 485,073 132,143 174,058
Premier Variable 2,547,619 3,651,845 1,151,236 1,516,914
The Principal Variable Annuity 2,004,124 29,486,187 858,968 11,540,507
----------------------------------------------------------------------
----------------------------------------------------------------------
4,896,878 33,623,105 2,142,347 13,231,479
Capital Accumulation Division:
Bankers Flexible Annuity - 683,529 29,544 773,974
Pension Builder Plus 68,140 1,235,130 1,982,927 8,819,318
Pension Builder Plus - Rollover IRA 1,995 221,006 181,779 925,026
Personal Variable 1,387,651 3,539,847 858,885 1,776,616
Premier Variable 8,035,489 21,108,357 4,658,141 9,954,051
The Principal Variable Annuity 3,744,285 84,607,543 691,613 14,511,663
----------------------------------------------------------------------
----------------------------------------------------------------------
13,237,560 111,395,412 8,402,889 36,760,648
Emerging Growth Division:
Personal Variable 979,972 1,752,787 332,091 581,993
Premier Variable 6,044,928 10,752,356 2,231,491 3,852,324
The Principal Variable Annuity 3,406,355 64,056,027 870,634 16,942,655
----------------------------------------------------------------------
----------------------------------------------------------------------
10,431,255 76,561,170 3,434,216 21,376,972
Government Securities Division:
Pension Builder Plus 23,169 $ 118,925 570,707 $ 1,099,325
Pension Builder Plus - Rollover IRA
617 24,244 208,339 426,973
Personal Variable 633,713 990,854 754,202 1,021,076
Premier Variable 2,966,089 4,655,507 2,792,797 3,804,557
The Principal Variable Annuity 1,669,224 25,164,798 1,166,357 15,241,951
----------------------------------------------------------------------
----------------------------------------------------------------------
5,292,812 30,954,328 5,492,402 21,593,882
Growth Division:
Personal Variable 1,072,567 1,734,898 311,356 500,397
Premier Variable 7,226,323 11,858,111 2,587,048 4,197,408
The Principal Variable Annuity 2,442,934 42,661,389 633,196 11,754,335
----------------------------------------------------------------------
----------------------------------------------------------------------
10,741,824 56,254,398 3,531,600 16,452,140
Money Market Division:
Pension Builder Plus 285,405 558,229 456,641 845,039
Pension Builder Plus - Rollover IRA
2,628 7,254 13,813 27,122
Personal Variable 6,785,344 8,146,664 6,570,220 7,839,434
Premier Variable 32,145,080 39,119,749 31,009,540 37,413,932
The Principal Variable Annuity 11,093,609 126,422,118 11,270,301 127,186,440
----------------------------------------------------------------------
----------------------------------------------------------------------
50,312,066 174,254,014 49,320,515 173,311,967
World Division:
Personal Variable 759,933 1,208,340 233,106 354,907
Premier Variable 5,217,093 8,423,719 1,831,269 2,787,221
The Principal Variable Annuity 3,256,925 53,417,398 738,451 12,089,582
----------------------------------------------------------------------
----------------------------------------------------------------------
9,233,951 63,049,457 2,802,826 15,231,710
----------------------------------------------------------------------
======================================================================
118,925,421 $711,382,234 80,964,990 $ 337,555,911
======================================================================
</TABLE>
<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
----------------------------------------------------------------------
----------------------------------------------------------------------
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
Common Stock 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
Government Securities Division:
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>
Purchases include reinvested dividends and capital gains. Mortality adjustments
are included in purchases and redemptions, as applicable.
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.
5. Net Assets
Net assets at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
Accumulated Net
Net Unrealized
Unit Investment Appreciation
Combined Transactions Income of Investments
----------------------------------------------------------------------
Aggressive Growth Division:
<S> <C> <C> <C> <C>
The Principal Variable Annuity $ 143,957,816 $ 108,890,994 $21,585,841 $ 13,480,981
Asset Allocation Division:
The Principal Variable Annuity 48,511,958 40,247,801 6,909,742 1,354,415
Balanced Division:
Personal Variable 2,825,449 2,519,909 187,228 118,312
Premier Variable 17,024,170 15,053,670 1,082,488 888,012
The Principal Variable Annuity 107,249,636 89,193,848 11,933,834 6,121,954
----------------------------------------------------------------------
----------------------------------------------------------------------
127,099,255 106,767,427 13,203,550 7,128,278
Bond Division:
Personal Variable 669,514 640,323 26,316 2,875
Premier Variable 5,548,762 5,227,610 243,569 77,583
The Principal Variable Annuity 67,271,592 60,752,616 5,160,785 1,349,191
----------------------------------------------------------------------
----------------------------------------------------------------------
73,489,868 66,620,549 5,439,670 1,429,649
Capital Accumulation Division:
Bankers Flexible Annuity 7,209,937 4,264,632 591,008 2,354,297
Pension Builder Plus 8,527,296 6,093,197 338,019 2,096,080
Pension Builder Plus - Rollover IRA 2,295,685 1,572,298 146,933 576,454
Personal Variable 8,089,748 6,277,077 519,933 1,292,738
Premier Variable 50,737,614 38,321,310 3,492,172 8,924,132
The Principal Variable Annuity 192,391,466 143,480,187 24,736,215 24,175,064
----------------------------------------------------------------------
----------------------------------------------------------------------
269,251,746 200,008,701 29,824,280 39,418,765
Emerging Growth Division:
Personal Variable 2,756,807 2,291,146 40,448 425,213
Premier Variable 17,916,711 14,378,199 326,697 3,211,815
The Principal Variable Annuity 183,414,545 138,974,347 4,607,405 39,832,793
----------------------------------------------------------------------
----------------------------------------------------------------------
204,088,063 155,643,692 4,974,550 43,469,821
Government Securities Division:
Pension Builder Plus 1,285,125 1,213,588 22,100 49,437
Pension Builder Plus - Rollover IRA 412,091 392,360 7,875 11,856
Personal Variable 2,568,214 2,429,363 85,654 53,197
Premier Variable 11,002,038 10,292,437 440,378 269,223
The Principal Variable Annuity 77,586,548 69,356,911 6,254,169 1,975,468
----------------------------------------------------------------------
----------------------------------------------------------------------
92,854,016 83,684,659 6,810,176 2,359,181
Growth Division:
Personal Variable $ 2,776,351 $ $ 20,876 $ 469,224
2,286,251
Premier Variable 20,311,716 16,189,532 218,455 3,903,729
The Principal Variable Annuity 142,725,858 107,312,599 1,606,602 33,806,657
----------------------------------------------------------------------
165,813,925 125,788,382 1,845,933 38,179,610
Money Market Division:
Pension Builder Plus 791,079 784,580 6,499 -
Pension Builder Plus - Rollover IRA 30,919 30,241 678 -
Personal Variable 1,288,642 1,282,189 6,453 -
Premier Variable 8,043,427 7,979,328 64,099 -
The Principal Variable Annuity 31,526,342 31,250,687 275,655 -
-------------------------------------------------------------------
-------------------------------------------------------------------
41,680,409 41,327,025 353,384 -
World Division:
Personal Variable 1,528,673 1,402,339 47,855 78,479
Premier Variable 11,665,158 10,404,975 403,057 857,126
The Principal Variable Annuity 108,242,323 91,434,654 4,659,202 12,148,467
----------------------------------------------------------------------
----------------------------------------------------------------------
121,436,154 103,241,968 5,110,114 13,084,072
----------------------------------------------------------------------
======================================================================
$1,288,183,210 $1,032,221,198 $96,057,240 $ 159,904,772
======================================================================
</TABLE>
6. Year 2000 Issues (Unaudited)
Like other investment funds, financial and business organizations and
individuals around the world, Separate Account B could be adversely affected if
the computer systems used by Principal Mutual and other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. In 1996, Principal Mutual completed its assessment of the Year
2000 impact on its systems, procedures, customers and business processes. At
December 31, 1997, management estimates that approximately 95% of the identified
modifications have been completed for its Year 2000 project. System testing,
using an isolated test environment, will begin early in 1998. Ultimate project
completion is targeted for early 1999, which is prior to any anticipated impact
on Principal Mutual operations.
The date on which Principal Mutual believes it will complete the Year 2000
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events. Principal Mutual also
recognizes there are outside influences and dependencies relative to its Year
2000 effort, over which it has little or no control. However, Principal Mutual
is putting effort into ensuring these considerations will have minimal impact.
These would include the continued availability of certain resources, third-party
modification plans and many other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ from those
anticipated.
<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(R) (the Company) as of December 31, 1997 and
1996, and the related consolidated statements of operations, equity and cash
flows for each of the three years in the period ended December 31, 1997. 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(R) at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Des Moines, Iowa
January 30, 1998
<PAGE>
The Principal Financial Group(R)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------------------------------------------
(In Millions)
Revenue
<S> <C> <C> <C>
Premiums and annuity and other considerations $4,668 $5,121 $5,243
Policy and contract charges 658 555 491
Net investment income 2,922 2,869 2,741
Net realized capital gains 219 436 122
Commissions and other income 199 150 143
------------------------------------------
Total revenue 8,666 9,131 8,740
Expenses
Benefits, claims and settlement expenses 5,632 6,087 6,142
Dividends to policyowners 299 299 307
Operating expenses 2,040 1,915 1,740
------------------------------------------
------------------------------------------
Total expenses 7,971 8,301 8,189
------------------------------------------
Income before income taxes 695 830 551
Income taxes 241 304 207
------------------------------------------
==========================================
Net income $ 454 $ 526 $ 344
==========================================
See accompanying notes.
</TABLE>
<PAGE>
The Principal Financial Group(R)
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
December 31
1997 1996
---------------------------
---------------------------
(In Millions)
Assets
<S> <C> <C>
Debt securities, available-for-sale $21,546 $21,974
Equity securities, available-for-sale 1,273 1,023
Mortgage loans 13,286 12,409
Real estate 2,632 2,474
Policy loans 749 736
Other investments 130 102
Cash and cash equivalents 546 271
Accrued investment income 457 464
Deferred acquisition costs 1,057 1,058
Property held for Company use 232 222
Separate account assets 23,627 17,218
Other assets 1,519 1,191
---------------------------
===========================
Total assets $67,054 $59,142
===========================
===========================
Liabilities
Contractholder funds $23,179 $23,194
Future policy benefits and claims 11,239 10,575
Other policyowner funds 314 454
Policyowner dividends payable 444 447
Debt 459 399
Income taxes currently payable 298 283
Deferred income taxes 803 623
Separate account liabilities 23,560 17,166
Other liabilities 1,474 1,347
---------------------------
---------------------------
Total liabilities 61,770 54,488
Equity
Surplus 4,257 3,803
Net unrealized gains on available-for-sale securities 1,038 860
Foreign currency translation adjustment, net (11) (9)
---------------------------
---------------------------
Total equity 5,284 4,654
---------------------------
===========================
Total liabilities and equity $67,054 $59,142
===========================
See accompanying notes.
</TABLE>
<PAGE>
The Principal Financial Group(R)
Consolidated Statements of Equity
<TABLE>
<CAPTION>
Net Unrealized Foreign Currency
Gains on Translation
Available-for-Sale Adjustment, net Total Equity
Surplus Securities
---------------------------------------------------------------
(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 patterns:
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 patterns:
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
Net income 454 - - 454
Increase in unrealized appreciation on debt
securities, available-for-sale - 197 - 197
Increase in unrealized appreciation on equity
securities, available-for-sale, including
seed money in separate accounts - 118 - 118
Adjustments for assumed changes in
amortization patterns:
Deferred acquisition costs - (44) - (44)
Unearned revenue reserves - 4 - 4
Provision for deferred income taxes - (97) - (97)
Change in foreign currency translation
adjustment, net - - (2) (2)
===============================================================
Balances at December 31, 1997 $4,257 $1,038 $(11) $5,284
===============================================================
See accompanying notes.
</TABLE>
<PAGE>
The Principal Financial Group(R)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------------------------------------
(In Millions)
Operating activities
<S> <C> <C> <C>
Net income $ 454 $ 526 $ 344
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred acquisition costs 170 178 145
Additions to deferred acquisition costs (213) (215) (206)
Accrued investment income 7 15 6
Contractholder and policyowner liabilities and dividends 1,657 240 523
Current and deferred income taxes 96 20 93
Net realized capital gains (219) (436) (122)
Depreciation and amortization expense 117 112 74
Other (393) (230) 440
------------------------------------
------------------------------------
Net adjustments 1,222 (316) 953
------------------------------------
Net cash provided by operating activities 1,676 210 1,297
Investing activities Available-for-sale securities:
Purchases (7,827) (11,762) (13,195)
Sales 7,493 8,949 9,333
Maturities 1,204 2,796 2,485
Mortgage loans acquired or originated (9,925) (2,955) (2,837)
Mortgage loans sold or repaid 8,977 1,619 1,702
Real estate acquired (309) (166) (143)
Real estate sold 198 253 38
Net change in policy loans (13) (25) (28)
Net change in property held for Company use (11) (18) (23)
Net change in other investments (38) (74) (12)
------------------------------------
Net cash used in investment activities (251) (1,383) (2,680)
Financing activities
Issuance of debt 75 43 21
Principal repayments of debt (28) (29) (71)
Proceeds of short-term borrowings 5,089 1,451 990
Repayment of short-term borrowings (4,974) (1,282) (990)
Investment contract deposits 4,134 7,496 6,756
Investment contract withdrawals (5,446) (6,530) (5,310)
------------------------------------
Net cash provided by (used in) financing activities (1,150) 1,149 1,396
------------------------------------
Net increase (decrease) in cash and cash equivalents 275 (24) 13
Cash and cash equivalents at beginning of year 271 295 282
------------------------------------
====================================
Cash and cash equivalents at end of year $ 546 $ 271 $ 295
====================================
See accompanying notes.
</TABLE>
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements
December 31, 1997
1. Nature of Operations and Significant Accounting Policies
Description of Business
The Principal Financial Group(R) (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.
Pending Reorganization
On September 18, 1997, the board of directors adopted a Plan of Reorganization
whereby Principal Mutual will form a new mutual insurance holding company
(Principal Mutual Holding Company) and convert to a stock life insurance company
(Principal Life Insurance Company). All of the shares of Principal Life
Insurance Company will be issued initially to Principal Mutual Holding Company
through two newly formed intermediate holding companies, and there are no
current plans to offer the stock of Principal Life Insurance Company or its
parent companies to third parties. The reorganization will not become effective
unless approved by policyowners and regulatory authorities. The reorganization
itself will not have a material financial impact on the Company.
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 $1.1 billion at December
31, 1997 and $1.5 billion at December 31, 1996, and total revenues were $294
million in 1997, $349 million in 1996 and $320 million in 1995. During 1997,
1996 and 1995, the Company included $19 million, $(3) million and $(9) million,
respectively, in net investment income representing the Company's share of
current year net income (losses) of the unconsolidated entities.
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(R)
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 through 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
also 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(R)
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. Valuation allowances are
established when indicators of impairment are present and the undiscounted cash
flows to be generated by the real estate fall below 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
net investment 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 has used 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 on deposit 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(R)
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. 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. Premiums from these products 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.
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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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.
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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Guaranty-fund Assessments
Guaranty-fund assessments are accrued when the Company receives notice that an
amount is payable to a guaranty fund. The Company also accrues for possible
guaranty-fund assessments for which notices have not been received and for which
the Company does not anticipate receiving a premium tax credit.
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 for foreign
subsidiaries and certain other transactions are reported as a component of
equity. Other translation adjustments for foreign currency transactions that
affect cash flows are reported in current operations.
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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
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
1997 1996
-----------------------------
Property held for Company use $302 $285
Accumulated depreciation (70) (63)
=============================
Property held for Company use, net $232 $222
=============================
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
1997 1996
----------------------------
Goodwill $165 $135
Accumulated amortization (16) (22)
----------------------------
Goodwill, net 149 113
Other intangible assets, net 74 34
----------------------------
Total intangible assets $223 $147
============================
Mortgage servicing rights of $432 million and $272 million at December 31, 1997
and 1996, 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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
1. Nature of Operations and Significant Accounting Policies (continued)
Reclassifications
Certain reclassifications have been made to the 1995 and 1996 consolidated
financial statements to conform to the 1997 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.
The cost, gross unrealized gains and losses and fair value of debt and equity
securities available-for-sale as of December 31, 1997 and 1996, are as follows
(in millions):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
---------------------------------------------------------------
December 31, 1997
Bonds:
<S> <C> <C> <C> <C>
United States Government and agencies $ 337 $ 1 $ - $ 338
States and political subdivisions 449 15 2 462
Corporate - public 4,014 224 18 4,220
Corporate - private 12,478 856 30 13,304
Mortgage-backed securities 3,124 99 3 3,220
---------------------------------------------------------------
---------------------------------------------------------------
20,402 1,195 53 21,544
Redeemable preferred stocks 2 - - 2
===============================================================
Total debt securities $20,404 $1,195 $53 $21,546
===============================================================
Total equity securities $ 639 $ 664 $30 $ 1,273
===============================================================
December 31, 1996
Bonds:
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
===============================================================
</TABLE>
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
The cost and fair value of debt securities available-for-sale at December 31,
1997, by expected maturity, are as follows (in millions):
Cost Fair Value
--------------------------
--------------------------
Due in one year or less $ 1,433 $ 1,444
Due after one year through five years 6,286 6,522
Due after five years through ten years 5,421 5,767
Due after ten years 4,133 4,586
--------------------------
--------------------------
17,273 18,319
Mortgage-backed and other securities without
a single maturity date 3,131 3,227
--------------------------
==========================
Total $20,404 $21,546
==========================
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):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Debt securities available-for-sale $1,589 $1,608 $1,603
Equity securities available-for-sale 39 33 41
Mortgage loans 1,138 1,078 1,008
Real estate 350 356 317
Policy loans 50 49 48
Cash and cash equivalents 9 15 8
Other 109 60 24
------------------------------------------
------------------------------------------
3,284 3,199 3,049
Less investment expenses (362) (330) (308)
------------------------------------------
==========================================
Net investment income $2,922 $2,869 $2,741
==========================================
</TABLE>
<PAGE>
The Principal Financial Group(R)
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):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
-------------------------------------------
Debt securities, available-for-sale:
<S> <C> <C> <C>
Gross gains $ 82 $121 $144
Gross losses (43) (73) (40)
Equity securities, available-for-sale:
Gross gains 132 451 40
Gross losses (26) (5) (9)
Mortgage loans 6 (4) 3
Real estate 64 14 6
Other 4 (68) (22)
===========================================
Net realized capital gains $219 $436 $122
===========================================
</TABLE>
Proceeds from sales of investments (excluding call and maturity proceeds) in
debt securities were $5.0 billion, $7.8 billion and $6.5 billion in 1997, 1996
and 1995, respectively. Gross gains of $48 million, $76 million and $93 million
and gross losses of $43 million, $69 million and $35 million in 1997, 1996 and
1995, respectively, were realized on those sales.
Of the 1997, 1996 and 1995 proceeds, $4.0 billion, $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 $29 million, $64 million and $66 million and
gross losses of $10 million, $53 million and $17 million in 1997, 1996 and 1995,
respectively, were realized on sales of mortgage-backed securities. At December
31, 1997, the Company had security purchases payable totaling $266 million
relating to the purchases of mortgage-backed securities at forward dates.
Prior to 1996, 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(R)
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 cumulative amount
of net unrealized gains on available-for-sale securities is as follows (in
millions):
<TABLE>
<CAPTION>
December 31
1997 1996
-----------------------------
<S> <C> <C>
Unrealized appreciation on debt securities, available-for-sale $1,142 $945
Unrealized appreciation on equity securities, available-for-sale,
including seed money in separate accounts 639 521
Adjustments for assumed changes in amortization patterns:
Deferred acquisition costs (204) (160)
Unearned revenue reserves 21 17
Provision for deferred income taxes (560) (463)
=============================
Net unrealized gains on available-for-sale securities $1,038 $860
=============================
</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, 1997 and 1996, 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
--------------- ----------------
1997 1996 1997 1996
----------------------- -----------------------
----------------------- -----------------------
Pacific 28% 30% Industrial 33% 35%
South Atlantic 24 22 Retail 33 34
North Central 16 17 Office 29 28
Mid Atlantic 14 15 Other 5 3
South Central 9 7
New England 5 5
Mountain 4 4
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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
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
1997 1996
-------------------------
Balance at beginning of year $121 $115
Provision for losses 8 16
Releases due to write-downs, sales and foreclosures (8) (10)
=========================
Balance at end of year $121 $121
=========================
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.
The Company was servicing approximately 371,000 and 328,000 residential mortgage
loans with aggregate principal balances of approximately $29.1 billion and $24.4
billion at December 31, 1997 and 1996, respectively. In connection with these
mortgage servicing activities, the Company held funds in trust for others
totaling approximately $210 million and $175 million at December 31, 1997 and
1996, 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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
2. Investments (continued)
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
1997 1996
-----------------------------
Real estate $2,985 $2,743
Accumulated depreciation (353) (269)
=============================
Real estate, net $2,632 $2,474
=============================
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 $1.2 billion and $1.4 billion at
December 31, 1997 and 1996, respectively. The Company is committed to providing
additional mortgage financing for such joint ventures aggregating $120 million
at December 31, 1997.
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 ($36
million at December 31, 1997, and $148 million at December 31, 1996) 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, 1997 and 1996, were $1,037 million and $970 million,
respectively, and the credit exposure at December 31, 1997 and 1996 was $21
million and $15 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 six years and three
years at December 31, 1997 and 1996, respectively. The net amount payable or
receivable from
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
3. Derivatives Held or Issued for Purposes Other Than Trading (continued)
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, 1997, the Company had various foreign currency
exchange agreements with maturities ranging from 1998 to 2018, with an aggregate
notional amount involved of approximately $410 million and the credit exposure
was $17 million. At December 31, 1996, such maturities ranged from 1997 to 2018
with an aggregate notional amount of approximately $373 million and a credit
exposure of $9 million. The average unexpired term of the swaps was
approximately seven years at both December 31, 1997 and 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 both December 31, 1997 and 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 in the
Company's consolidated statements of financial position.
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
1997 1996 1995
-----------------------------------------
Balance at beginning of year $ 800 $ 810 $ 824
Incurred:
Current year 2,723 3,051 3,179
Prior years (21) (29) (5)
-----------------------------------------
-----------------------------------------
Total incurred 2,702 3,022 3,174
Payments:
Current year 2,235 2,535 2,654
Prior years 497 497 534
-----------------------------------------
Total payments 2,732 3,032 3,188
-----------------------------------------
Balance at end of year:
Current year 476 516 525
Prior years 294 284 285
-----------------------------------------
=========================================
Total balance at end of year $ 770 $ 800 $ 810
=========================================
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
4. Accident and Health Reserves (continued)
The activity summary in the liability for unpaid accident and health claims
shows a decrease of $21 million, $29 million and $5 million to the December 31,
1996, 1995 and 1994 liability for unpaid accident and health claims,
respectively, arising in prior years. Such liability adjustments, which affected
current operations during 1997, 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 trends have been considered in establishing the current year liability for
unpaid accident and health claims.
5. Debt
The components of debt as of December 31, 1997 and December 31, 1996 are as
follows (in millions):
December 31
1997 1996
-----------------------------
7.875% notes payable, due 2024 $199 $199
8% notes payable, due 2044 99 99
Mortgages and other notes payable 161 101
=============================
Total debt $459 $399
=============================
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 each of the years ended December 31, 1997, 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 mortgages and other 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, 1997 range
from $1 million to $10.7 million per development with interest rates generally
ranging from 6.6% to 8.0%. Outstanding principal balances as of December 31,
1996 range from $1 million to $9 million per development with interest rates
generally ranging from 5.9% to 7.7%.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
5. Debt (continued)
At December 31, 1997, future annual maturities of debt are as follows (in
millions):
1998 $ 79
1999 20
2000 3
2001 3
2002 3
Thereafter 351
----------
==========
Total future maturities of debt $459
==========
Cash paid for interest for 1997, 1996 and 1995 was $63 million, $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 $225 million and $15 million at December
31, 1997 and 1996, respectively, and other outstanding borrowings from certain
financing transactions of $154 million at December 31, 1996. These outstanding
borrowings are included in other liabilities in the consolidated statements of
financial position.
6. Income Taxes
The Company's income tax expense (benefit) is as follows (in millions):
Year ended December 31
1997 1996 1995
----------------------------------------
Current income taxes:
Federal $144 $145 $104
State and foreign 3 (1) 5
Realized capital gains 11 210 41
----------------------------------------
Total current income taxes 158 354 150
Deferred income taxes 83 (50) 57
========================================
Total income taxes $241 $304 $207
========================================
The Company's provision for income taxes may not have the customary relationship
of taxes to income. Differences 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 are generally due to inherent differences between income for financial
reporting purposes and income for tax purposes, and the establishment of
adequate provisions for any challenges of the tax filings and tax payments to
the various taxing jurisdictions.
<PAGE>
The Principal Financial Group(R)
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 is currently completing 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
1997 1996
-----------------------------
Deferred income tax liabilities $1,259 $1,110
Deferred income tax assets 456 487
=============================
Deferred income taxes, net $ 803 $ 623
=============================
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 1997, 1996 and 1995 was $143 million, $285 million
and $99 million, respectively.
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.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
The pension plans' combined funded status, reconciled to amounts recognized in
the consolidated statements of financial position and consolidated statements of
operations, is as follows (in millions):
<TABLE>
<CAPTION>
December 31
1997 1996
------------------------------
------------------------------
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested benefit obligation $515 $482
==============================
==============================
Accumulated benefit obligation $525 $495
==============================
==============================
Plan assets at fair value, primarily affiliated mutual funds
and investment contracts of the Company $980 $841
Projected benefit obligation 700 732
------------------------------
Plan assets in excess of projected benefit obligation 280 109
Unrecognized net gains and funding different from that assumed and from
changes in assumptions (182) (29)
Unrecognized prior service cost 14 17
Unrecognized net transition asset (49) (60)
------------------------------
==============================
Prepaid pension asset $ 63 $ 37
==============================
</TABLE>
Net periodic pension cost (income) included the following components (in
millions):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Service cost $ 41 $ 38 $ 25
Interest cost on projected benefit obligation 52 46 39
Actual return on plan assets (128) (118) (144)
Net amortization and deferral 40 42 79
---------------------------------------------
=============================================
Total net periodic pension cost (income) $ 5 $ 8 $ (1)
=============================================
</TABLE>
The weighted-average assumed discount rate used in determining the projected
benefit obligation was 7.25% at both December 31, 1997 and 1996, and 7% at
December 31, 1995. 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
1997, 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 9.5% for those trusts not subject to income taxes
in each year. The assumed rate of increase in future compensation levels varies
by age for both the qualified and non-qualified pension plans.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
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, to a maximum of $9,500 annually to the plans in both 1997 and
1996, and $9,240 in 1995. The Company matches the participant's contribution at
a 50% contribution rate up to a maximum Company contribution of 2% of the
participant's compensation. The Company contributed $15 million in 1997, $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 the employee's date of hire 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.
The postretirement plans' combined funded status, reconciled to amounts
recognized in the consolidated statements of financial position and consolidated
statements of operations, is as follows (in millions):
<TABLE>
<CAPTION>
December 31
1997 1996
-------------------------------
Plan assets at fair value, primarily affiliated mutual funds and
<S> <C> <C>
investment contracts of the Company $300 $247
Accumulated postretirement benefit obligation:
Retirees (84) (87)
Eligible employees (33) (38)
Active employees not eligible to retire (97) (93)
-------------------------------
-------------------------------
Total accumulated postretirement benefit obligation (214) (218)
-------------------------------
-------------------------------
Excess of plan assets over accumulated postretirement benefit obligation
86 29
Unrecognized net gains and funding different from that assumed and from
changes in assumptions (53) (10)
Unrecognized net transition obligation 12 17
-------------------------------
===============================
Postretirement benefit asset $ 45 $ 36
===============================
</TABLE>
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
7. Employee and Agent Benefits (continued)
The net periodic postretirement benefit cost included the following components
(in millions):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
----------------------------------------------
----------------------------------------------
<S> <C> <C> <C>
Service cost $12 $12 $ 7
Interest cost on accumulated postretirement benefit cost
16 15 14
Actual return on plan assets (41) (32) (43)
Amortization of transition obligation 4 4 4
Net amortization of gains and losses 25 19 34
==============================================
Total net periodic postretirement benefit cost $16 $18 $16
==============================================
</TABLE>
The weighted-average assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at both December 31, 1997 and 1996,
and 7% at December 31, 1995. 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 1997, 1996 and 1995, the expected long-term rates of return on plan
assets were approximately 5% (after estimated income taxes) for those trusts
subject to income taxes and approximately 8% for those trusts not subject to
income taxes in each year. 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 9% in 1997, declines to 8.5% in
2002 and then declines to an ultimate rate of 6% in 2030. 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, 1997
would increase by 27.7% ($45 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, 1997 by 24% ($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(R)
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):
<TABLE>
<CAPTION>
Year ended
December 31
1997 1996 1995
----------------------------------------------
----------------------------------------------
Premiums and annuity and other considerations:
<S> <C> <C> <C>
Direct $4,601 $5,034 $5,171
Assumed 106 116 99
Ceded (39) (29) (27)
==============================================
Net premiums and annuity and other considerations $4,668 $5,121 $5,243
==============================================
==============================================
Benefits, claims and settlement expenses:
Direct $5,596 $6,003 $6,070
Assumed 102 109 99
Ceded (66) (25) (27)
==============================================
Net benefits, claims and settlement expenses $5,632 $6,087 $6,142
==============================================
</TABLE>
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 $344 million in 1997, $310 million in
1996 and $260 million in 1995. At December 31, 1997, future minimum annual
rental commitments under these noncancelable operating leases are as follows (in
millions):
1998 $ 274
1999 241
2000 201
2001 162
2002 117
Thereafter 448
-------------
=============
Total future minimum lease receipts $1,443
=============
<PAGE>
The Principal Financial Group(R)
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 both 1997 and 1996, and $69
million in 1995. At December 31, 1997, future minimum annual rental commitments
under these noncancelable operating leases are as follows (in millions):
1998 $ 44
1999 35
2000 26
2001 19
2002 14
Thereafter 22
-----------
Total future minimum lease payments $160
===========
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
December 31, 1997 and 1996, approximately $6 million and $15 million,
respectively, is accrued 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(R)
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 counterparties. 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, cash
and cash equivalents and accrued investment income in the accompanying
consolidated statements of financial position approximate 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(R)
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, 1997 and 1996, are as follows (in millions):
<TABLE>
<CAPTION>
1997 1996
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------- ----------------------------
--------------------------- ----------------------------
Assets (liabilities)
<S> <C> <C> <C> <C>
Debt securities (see Note 2) $21,546 $21,546 $21,974 $21,974
Equity securities (see Note 2) 1,273 1,273 1,023 1,023
Mortgage loans 13,286 14,291 12,409 12,823
Policy loans 749 749 736 736
Other investments 130 130 102 102
Cash and cash equivalents 546 546 271 271
Accrued investment income 457 457 464 464
Investment-type insurance contracts (22,115) (22,637) (22,196) (22,158)
Debt (459) (486) (399) (427)
</TABLE>
11. Statutory Insurance Financial Information
Principal Mutual, the largest member of The Principal Financial Group(R),
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. Currently "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.
The NAIC is in the process of codifying statutory accounting practices
(Codification), the result of which is expected to constitute the only source of
"prescribed" statutory accounting practices. Accordingly, that project, which is
expected to be approved by the NAIC in 1998, will likely change, to some extent,
prescribed statutory accounting practices and may result in changes to the
accounting practices that Principal Mutual uses to prepare its statutory-basis
financial statements. Codification will require adoption by the various states
before it becomes the prescribed statutory basis of accounting for insurance
companies domiciled within those states. The impact on Principal Mutual's 1997
statutory surplus has not yet been determined at this time.
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
11. Statutory Insurance Financial Information (continued)
Life/Health insurance companies are subject to certain risk-based capital (RBC)
requirements as specified by the NAIC. Under those requirements, the amount of
capital and surplus maintained by a life/health insurance company is to be
determined based on the various risk factors related to it. At December 31,
1997, Principal Mutual meets the RBC requirements.
The following summary reconciles the assets and equity at December 31, 1997,
1996 and 1995, and net income for the years ended December 31, 1997, 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, 1997
As reported in accordance with statutory accounting practices
<S> <C> <C> <C>
- unconsolidated $63,957 $2,811 $432
Additions (deductions):
Unrealized gain on debt securities available-for-sale 1,176 1,176 -
Other investment adjustments 853 1,141 27
Adjustments to insurance reserves and dividends (173) (131) (41)
Deferral of policy acquisition costs 1,057 1,057 43
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications - (643) 7
Other - net 184 171 (14)
=========================================
As reported in these consolidated GAAP financial statements $67,054 $5,284 $454
=========================================
December 31, 1996
As reported in accordance with statutory accounting practices
- unconsolidated $56,837 $2,504 $415
Additions (deductions):
Unrealized gain on debt securities available-for-sale 964 964 -
Other investment adjustments 355 901 53
Adjustments to insurance reserves and dividends (156) (115) (41)
Deferral of policy acquisition costs 1,058 1,058 38
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications (6) (493) 60
Other - net 90 133 1
-----------------------------------------
=========================================
As reported in these consolidated GAAP financial statements $59,142 $4,654 $526
=========================================
</TABLE>
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
11. Statutory Insurance Financial Information (continued)
<TABLE>
<CAPTION>
Assets Equity Net Income
-----------------------------------------
December 31, 1995
As reported in accordance with statutory accounting practices
<S> <C> <C> <C>
- unconsolidated $51,268 $2,208 $263
Additions (deductions):
Unrealized gain on debt securities available-for-sale 1,553 1,553 -
Other investment adjustments 228 911 60
Adjustments to insurance reserves and dividends (128) (28) (7)
Deferral of policy acquisition costs 937 937 61
Surplus note reclassification as debt - (298) -
Provision for deferred federal income taxes and other tax
reclassifications (9) (770) (20)
Other - net 115 93 (13)
=========================================
As reported in these consolidated GAAP financial statements $53,964 $4,606 $344
=========================================
</TABLE>
12. Business Acquisitions and Disposition
During 1997, various acquisitions were made by certain of the Company's
subsidiaries at purchase prices aggregating $101 million. The acquisitions were
all accounted for using the purchase method and the results of operations of the
acquired businesses have been included in the financial statements of the
subsidiaries from the dates of acquisition. Such acquisitions increased total
assets at December 31, 1997 and total 1997 revenue of the subsidiaries by $459
million and $88 million, respectively.
During 1997, the Company terminated a portion of its group medical business and
helped insureds find replacement coverage. The Company has retained
responsibility for the payment of claims incurred on this business prior to the
effective date of the termination and has included an estimate of the ultimate
liability for these claims in its financial statements. Annual premiums related
to this business were approximately $380 million at date of transfer.
13. Subsequent Events
On November 3, 1997, the Company entered into a definitive agreement with
Coventry Corporation to effectively merge substantially all of the Company's
managed health care operations with Coventry Corporation, a previously
unaffiliated managed care company. The closing of the definitive agreement is
subject to regulatory approvals and various other conditions. The Company will
own 40% of a resulting new company, Coventry Health Care, Inc., which will be
publicly traded, and will recognize no gain or loss on the transaction.
Subsequent to closing, which is expected in the first quarter of 1998, the
Company will account for its investment in the new entity using the equity
method and will no longer consolidate the
<PAGE>
The Principal Financial Group(R)
Notes to Consolidated Financial Statements (continued)
13. Subsequent Events (continued)
transferred businesses. Total assets at December 31, 1997, and total revenues
and pretax loss for the year then ended, were approximately $419 million, $883
million and $(26) million, respectively, for the transferred businesses. The
Company also intends to enter into a reinsurance agreement on January 1, 2000
whereby Coventry Health and Life Insurance Company, a subsidiary of Coventry
Corporation, will reinsure a portion of the Company's traditional group
indemnity health insurance business in overlapping markets (1997 revenue of
approximately $550 million) at that time.
In December 1997, the Company signed a definitive agreement with EVEREN Capital
Corporation to sell Principal Securities Holding Corporation and its subsidiary,
Principal Financial Securities, Inc., an investment banking and stock brokerage
firm for $75 million. The transaction, which required regulatory approval,
closed in January 1998. Total assets of Principal Securities Holding Corporation
at December 31, 1997, and total revenues and pretax loss for the year then
ended, were approximately $91 million, $144 million and $(10) million,
respectively.
14. Year 2000 Issues (Unaudited)
In 1995, the Company began investigating the potential impact of the year 2000
on its systems, procedures, customers and business processes. Some changes began
immediately, while others waited for an assessment that was completed in 1996.
The Year 2000 assessment provided information used to determine what system
components must be changed or replaced to minimize the impact of the calendar
change from 1999 to 2000. The goal of the Company is to have its systems and
procedures function correctly, regardless of the current date on the calendar.
The Company will continue to use internal and external resources to modify,
replace, and test the Year 2000 modifications. Management estimates
approximately 95% of the identified modifications have been completed for its
Year 2000 project. System testing, using an isolated test environment, will
begin early in 1998. Ultimate project completion is targeted for early 1999,
which is prior to any anticipated impact on Company operations. The total cost
for the project is estimated to be $20 million, with the costs being expensed as
incurred until completion.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events. The Company
also recognizes there are outside influences and dependencies relative to its
Year 2000 effort, over which it has little or no control. However, the Company
is putting effort into ensuring these considerations will have minimal impact.
These would include the continued availability of certain resources, third-party
modification plans and many other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ from those
anticipated.
RF 581 B-7
