Registration No. 33-44670
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____ _____
Post-Effective Amendment No._12__ __X__
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No._____ _____
(Check appropriate box or boxes)
Principal Mutual Life Insurance Company Separate Account B
- --------------------------------------------------------------------------------
(Exact Name of Registrant)
Principal Mutual Life Insurance Company
- --------------------------------------------------------------------------------
(Name of Depositor)
The Principal Financial Group, Des Moines, Iowa 50392
- --------------------------------------------------------------------------------
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (515) 248-3842
M. D. Roughton, The Principal Financial Group, Des Moines, Iowa 50392
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
___ immediately upon filing pursuant to paragraph (b) of Rule 485
_X_ on May 1, 1998 pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
___ on (date) pursuant to paragraph (a)(1) of Rule 485
___ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
___ on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
___ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
PREMIER VARIABLE - GROUP VARIABLE ANNUITY CONTRACTS
Registration Statement on Form N-4
Cross Reference Sheet
Form N-4 Item Caption in Prospectus
Part A
1. Cover Page Principal Mutual Life Insurance Company
Separate Account B Premier Variable (A Group
Variable Annuity Contract for Employer-
Sponsored Qualified and Non-Qualified
Retirement Plans)
2. Definitions Glossary of Special Terms
3. Synopsis Expense Table and Example, Summary
4. Condensed Financial Condensed Financial Information,
Information Independent Auditors
5. General Description Summary, Description of
of Registrant Principal Mutual Life Insurance
Company, Principal Mutual Life
Insurance Company Separate Account B,
Voting Rights
6. Deductions Expense Table and Example, Deductions Under the
Contracts, Mortality and Expense Risks Charge,
Other Expenses, Application Fee and Transfer
Fee, Contract Administrative Expense,
Recordkeeping Expense, Sales Charge,
Distribution of the Contract
7. General Description of Summary, The Contract, Contract Values
Variable Annuity Contract and Accounting Before Annuity Commencement
Date, Income Benefits, Payment on Death of
Plan Participant, Withdrawals and Transfers,
Other Contractual Provisions, Contractholders'
Inquiries
8. Annuity Period Income Benefits
9. Death Benefit Payment on Death of Plan Participant,
Federal Tax Status
10. Purchases and Contract Summary, The Contract, Contract Values and
Value Accounting Before Annuity Commencement
Date, Other Contractual Provisions,
Distribution of the Contract
11. Redemptions Summary, Income Benefits, Withdrawals and
Transfers
12. Taxes Summary, Principal Mutual Life Insurance Company
Separate Account B, Income Benefits,
Federal Tax Status
13. Legal Proceedings Legal Proceedings
14. Table of Contents of Table of Contents of the Statement
the Statement of of Additional Information
Additional Information
Part B Statement of Additional Information Caption**
15. Cover Page Principal Mutual Life Insurance Company
Separate Account B Premier Variable - A Group
Variable Annuity Contract for Employer
Sponsored Qualified and Non-Qualified
Retirement Plans Issued by Principal Mutual Life
Insurance Company
16. Table of Contents Table of Contents
17. General Information None
and History
18. Services Independent Auditors**
19. Purchase of Securities Summary**, Deductions Under
Being Offered the Contracts**, Withdrawals and Transfers**,
Distribution of the Contract**
20. Underwriters Summary**, Distribution of the Contract**,
Underwriting Commissions
21. Calculation of Calculation of Yield and Total Return
Performance Data
22. Annuity Payments Income Benefits**
23. Financial Statements Financial Statements
** Prospectus caption given where appropriate.
<PAGE>
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
PREMIER VARIABLE
(A Group Variable Annuity Contract
For Employer- Sponsored Qualified
And Non-Qualified Retirement Plans)
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, Premier Variable (a Group Variable
Annuity Contract) (the "Contract") that an investor ought to know before
investing. It should be read and retained for future reference.
Additional information about the Contracts, 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 30 of this Prospectus. A
copy of the Statement of Additional Information can be obtained, free of charge,
upon request by writing or telephoning:
Princor Financial Services Corporation
a Member of
The Principal Financial Group
Des Moines, IA 50392
Telephone: 1-800-633-1373
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 Principal Variable Contracts Fund, Inc. (the "Fund") which should be kept
for future reference.
TABLE OF CONTENTS
Page
Glossary of Special Terms ................................................. 3
Expense Table and Example ................................................. 5
Summary .................................................................. 7
Condensed Financial Information............................................ 9
Description of Principal Mutual Life Insurance Company .................... 10
Principal Mutual Life Insurance Company Separate Account B ................ 10
Deductions Under the Contract ............................................. 12
Mortality and Expense Risks Charge ................................... 12
Other Expenses............................................................. 12
Application Fee....................................................... 13
Contract Administration Expense....................................... 13
Recordkeeping Expense................................................. 13
Location Fee ......................................................... 14
Flexible Income Option Charge......................................... 14
Documentation Expense................................................. 15
Sales Charge ......................................................... 15
Special Services...................................................... 15
Surplus Distribution at Sole Discretion of the Company .................... 15
The Contract ............................................................. 15
Contract Values and Accounting Before Annuity Commencement Date ...... 16
Investment Accounts .............................................. 16
Unit Value ....................................................... 16
Net Investment Factor ............................................ 16
Hypothetical Example of Calculation of Unit Value for All
Divisions Except the Money Market Division................... 16
Hypothetical Example of Calculation of Unit Value for the Money
Market Division.............................................. 17
Income Benefits ...................................................... 17
Variable Annuity Payments......................................... 17
Selecting a Variable Annuity ................................ 17
Forms of Variable Annuities ................................. 17
Basis of Annuity Conversion Rates ........................... 18
Determining the Amount of the First Variable Annuity Payment. 19
Determining the Amount of the Second and Subsequent Monthly
Variable Annuity Payments ............................... 19
Hypothetical Example of Calculation of Variable Annuity
Payments ................................................ 19
Flexible Income Option............................................ 20
Payment on Death of Plan Participant.................................. 20
Prior to Annuity Purchase Date ................................... 20
Subsequent to Annuity Purchase Date .............................. 21
Withdrawals and Transfers ............................................ 21
Cash Withdrawals ................................................. 21
Transfers Between Divisions ...................................... 22
Transfers to the Contract ........................................ 22
Transfers to a Companion Contract ................................ 22
Special Situation Involving Alternate Funding Agents ............. 22
Postponement of Cash Withdrawal or Transfer ...................... 22
Loans............................................................. 23
Other Contractual Provisions ......................................... 23
Contribution Limits .............................................. 23
Assignment ....................................................... 23
Cessation of Contributions ....................................... 23
Substitution of Securities........................................ 23
Changes in the Contract .......................................... 23
Statement of Values........................................................ 24
Services Available by Telephone............................................ 24
Distribution of the Contract............................................... 24
Performance Calculation.................................................... 24
Page
Voting Rights ............................................................. 25
Federal Tax Status......................................................... 26
Taxes Payable by Owners of Benefits and Annuitants.................... 26
Tax-Deferred Annuity Plans........................................ 26
Public Employee Deferred Compensation Plans....................... 27
401(a) Plans...................................................... 27
Creditor-Exempt Non-Qualified Plans............................... 28
General Creditor Non-Qualified Plans.............................. 28
Fund Diversification.................................................. 29
State Regulation........................................................... 29
Legal Opinions............................................................. 30
Legal Proceedings.......................................................... 30
Registration Statement..................................................... 30
Independent Auditors....................................................... 30
Contractholders' Inquiries................................................. 30
Table of Contents of the Statement of Additional Information............... 30
This Prospectus does not constitute an offer of, or solicitation of any
offer to acquire, any interest or participation in the Contracts 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 Contracts other than those contained in this Prospectus.
GLOSSARY OF SPECIAL TERMS
Accont -- Series or portfolio of a Mutual Fund in which a Separte Account
Division invests.
Aggregate Investment Account Value -- The sum of the Investment Account Values
for Investment Accounts which correlate to a Plan Participant.
Annual Average Balance -- The total value at the beginning of the Deposit Year
of all Investment Accounts which correlate to a Plan Participant under the
contract and other Plan assets which correlate to a Plan Participant that are
not allocated to the contract or an Associated or Companion Contract but for
which the Company provides recordkeeping services ("Outside Assets"), adjusted
by the time weighted average of Contributions to, and withdrawals from,
Investment Accounts and Outside Assets (if any) which correlate to the Plan
Participant during the period.
Annuity Change Factor -- The factor used to determine the change in value of a
Variable Annuity in the course of payment.
Annuity Commencement Date -- The beginning date for Annuity Payments.
Annuity Premium -- The amount applied under the Contract to purchase an annuity.
Annuity Purchase Date -- The date an Annuity Premium is applied to purchase an
annuity.
Associated Contract -- An annuity contract issued by the Company to the same
Contractholder to fund the same or a comparable Plan as determined by the
Company.
Commuted Value -- The dollar value, as of a given date, of remaining Annuity
Payments. It is determined by the Company using the interest rate assumed in
determining the initial amount of monthly income and assuming no variation in
the amount of monthly payments after the date of determination.
Companion Contract -- An unregistered group annuity contract offering guaranteed
interest crediting rates and which is issued by the Company to the
Contractholder for the purpose of funding benefits under the Plan. The Company
must agree in writing that a contract is a Companion Contract.
Contract Date -- The date this contract is effective, as shown on the face page
of the contract.
Contract Year -- A period beginning on a Yearly Date and ending on the day
before the next Yearly Date.
Contractholder -- The entity to which the contract will be issued, which will
normally be an Employer, an association, or a trust established for the benefit
of Plan Participants and their beneficiaries.
Contributions -- Amounts contributed under the contract which are accepted by
the Company.
Deposit Year -- The twelve-month period ending on a day selected by the
Contractholder.
Division -- The part of Separate Account B which is invested in shares of an
Account of a Mutual Fund.
Employer -- The corporation, sole proprietor, firm, organization, agency or
political subdivision named as employer in the Plan and any successor.
Flexible Income Option -- A periodic distribution from the contract in an amount
equal to the minimum annual amount determined in accordance with the minimum
distribution rules of the Internal Revenue Code, or a greater amount as
requested by the Owner of Benefits.
Funding Agent -- An insurance company, custodian or trustee designated by the
Contractholder and authorized to receive any amount or amounts transferred from
the contract described in this Prospectus. Funding Agent will also mean
Principal Mutual Life Insurance Company where the Contractholder directs the
Company to transfer such amounts from the contract described in this Prospectus
to another group annuity contract issued by the Company to the Contractholder.
Internal Revenue Code ("Code") -- The Internal Revenue Code of 1986, as amended,
and the regulations thereunder. Reference to the Internal Revenue Code means
such Code or the corresponding provisions of any subsequent revenue code and any
regulations thereunder.
Investment Account -- An account that correlates to a Plan Participant
established under the contract for each type of Contribution and for each
Division in which the Contribution is invested.
Investment Account Value -- The value of an Investment Account for a Division
which on any date will be equal to the number of units then credited to such
account multiplied by the Unit Value of this series of contracts for that
Division for the Valuation Period in which such date occurs.
Mutual Fund -- A registered open-end investment company in which a Division of
Separate Account B invests.
Net Investment Factor -- The factor used to determine the change in Unit Value
of a Division during a Valuation Period.
Normal Income Form -- The form of benefit to be provided under the Plan if the
Owner of Benefits does not elect some other form. If the Plan does not specify a
Normal Income Form, the Normal Income Form shall be: (a) for an unmarried Plan
Participant, the single life with ten years certain annuity option described in
this Prospectus, or (b) for a married Plan Participant, the joint one-half
survivor annuity option described in this Prospectus.
Notification -- Any form of notice received by the Company at the Company's home
office and approved in advance by the Company including written forms,
electronic transmissions, telephone transmissions, facsimiles and photocopies.
Owner of Benefits -- The entity or individual that has the exclusive right to be
paid benefits and exercise rights and privileges pursuant to such benefits. The
Owner of Benefits is the Plan Participant under all contracts except contracts
used to fund General Creditor Non-Qualified Plans (see "Summary") wherein the
Contractholder is the Owner of Benefits.
Plan -- The plan established by the Employer in effect on the date the contract
is executed and as amended from time to time, which the Employer has designated
to the Company in writing as the Plan funded by the contract.
Plan Participant -- A person who is (i) a participant under the Plan, (ii) a
beneficiary of a deceased participant, or (iii) an alternate payee under a
Qualified Domestic Relations Order in whose name an Investment Account has been
established under this contract.
Qualified Domestic Relations Order -- A Qualified Domestic Relations Order as
defined in Internal Revenue Code Section 414 (p)(1)(A).
Quarterly Date -- The last Valuation Date of the third, sixth, ninth and twelfth
month of each Deposit Year.
Separate Account B -- A separate account established by the Company under Iowa
law to receive Contributions under the contract offered by this Prospectus and
other contracts issued by the Company. It is divided into Divisions, each of
which invest in a corresponding Account of the Principal Variable Contracts
Fund, Inc.
Termination of Employment -- A Plan Participant's termination of employment with
the Employer, determined under the Plan and as reported to the Company.
Total and Permanent Disability -- The condition of a Plan Participant when, as
the result of sickness or injury, the Plan Participant is prevented from
engaging in any substantial gainful activity and such total disability has been
continuous for a period of at least six months. For contracts sold in the state
of Pennsylvania, the term shall have the same meaning as defined in the Plan.
The Plan Participant must submit due proof thereof which is acceptable to the
Company.
Unit Value -- The value of a unit of a Division of Separate Account B.
Valuation Date -- The date as of which the net asset value of an Account is
determined.
Valuation Period -- The period between the time as of which the net asset value
of an Account is determined on one Valuation Date and the time as of which such
value is determined on the next following Valuation Date.
Variable Annuity Payments -- A series of periodic payments, the amounts of which
are not guaranteed but which will increase or decrease to reflect the investment
experience of the Capital Value Division of Separate Account B. Periodic
payments made pursuant to the Flexible Income Option are not Variable Annuity
Payments.
Variable Annuity Reserves -- The reserves held for annuities in the course of
payment for the contract.
Yearly Date -- The Contract Date and the same day of each year thereafter.
EXPENSE TABLE AND EXAMPLE
The following tables depict fees and expenses applicable to the aggregate
of all Investment Accounts that correlate to a Plan Participant established
under the contract. The purpose of the table is to assist the Owner of Benefits
in understanding the various costs and expenses that an Owner of Benefits will
bear directly or indirectly. The table reflects expenses of the Separate Account
as well as the expenses of the Account in which the Separate Account invests and
is based on expenses incurred during the fiscal year ended December 31, 1997.
The Example below which includes only mortality and expense risks charges and
expenses of the underlying Accounts, should not be considered a representation
of past or future expenses; actual expenses may be greater or lesser than those
shown. See "Deductions under the Contract."
EXPENSE TABLE
Transaction Expenses None
Annual Contract Fee None
Separate Account Annual Expenses
(as a percentage of average account value)
Mortality and Expense Risk Fees .42%
Annual Expenses of Accounts
(as a percentage of average net assets of the
following Accounts)
Management Other Total Accounts
Fees Expenses Annual Expenses
---------- -------- ---------------
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
MidCap Account .62 .02 .64
Money Market Account .50 .05 .55
The Expense Table depicts fees and expenses applicable to the Aggregate
Investment Account Values which correlate to a Plan Participant under the
Contract. It does not include expenses billed directly to and paid by the
Contractholder pursuant to a separate service and expense agreement with the
Contractholder. Except as noted below, the Contractholder must pay the following
expenses (subject to certain adjustments; see "Deductions Under the Contract"
and "Other Expenses"):
<TABLE>
<S> <C>
Application Fee $925 Application Fee.
Contract Administration Expenses* $650 for Standard Plans ($1,000 for custom or outside Plans)
+ the amount determined under the Annual Expense Table on page 14
(minimum of $750).
Recordkeeping Expenses* A graded scale starting at $34 per Plan Participant plus $1,366 (minimum of
$2,250 per Plan) (This charge may be deducted from Investment Accounts of
inactive Plan Participants.) (If the Company provides recordkeeping services for
plan assets other than assets under this contract or an Associated or Companion
Contract, the Contractholder must pay an outside asset recordkeeping charge that
varies depending on the number of Plan Participants to which such Outside Assets
correlate).
Location Fee (if applicable) $150 per quarter ($600 annually) for each additional employee group or location.
Flexible Income Option Charge $25 for each Plan Participant receiving benefits under the Flexible Income
Option (this charge may be deducted from Investment Accounts of inactive Plan
Participants).
Documentation Expenses $125 for initial setup or restatement. Additional costs apply for Custom-Written
(for Standard Plan) plans
Compensation to Registered Either 4.5% of the first $5,000 of annual Contributions grading down to .25%
of contributions in excess of $500,000 or 3.0% of the first $50,000 of annual
Contributions grading down to .25% of Contributions in excess of $3,000,000.
<FN>
* May be more or less depending on the number of Plan Participants and services performed by Company. See
"Other Expenses."
</FN>
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
Regardless of whether the Separate Account
Investment Accounts which Division 1 Year 3 Years 5 Years 10 Years
correlate to a Plan Participant -------------------- ------ ------- ------- --------
are surrendered at the end of
the applicable time period:
<S> <C> <C> <C> <C> <C>
The Owner of Benefits would Balanced $11 $33 $57 $126
pay the following expenses Bond $10 $30 $52 $115
on a $1,000 investment, Capital Value $9 $28 $49 $110
assuming a 5% annual return Government Securities $10 $30 $52 $115
on assets: Growth $9 $29 $51 $113
International $13 $41 $71 $156
MidCap $11 $34 $58 $129
Money Market $10 $31 $54 $119
</TABLE>
SUMMARY
The following summary should be read in conjunction with the detailed
information appearing elsewhere in this Prospectus.
Contract Offered
The group variable annuity contract offered by this Prospectus is issued by
the Company and designed to aid in retirement planning. The contract provides
for the accumulation of Contributions and the payment of Variable Annuity
Payments on a completely variable basis.
The contract is generally available to fund the following types of plans:
1. Tax Deferred Annuity Plans ("TDA Plan"). Annuity purchase plans adopted
pursuant to Section 403(b) of the Code by certain organizations that
qualify for tax-exempt status under Section 501(c)(3) of the Code or
are eligible public schools or colleges. TDA Contracts are issued to
Contractholders, which typically are such tax-exempt organizations or
an association representing such organization or its employees. Plan
Participants may obtain certain Federal income tax benefits provided
under Section 403(b) of the Code (see "Federal Tax Status").
2. Public Employee Deferred Compensation Plans ("PEDC Plan"). Public
Employee Deferred Compensation plans or programs adopted by a unit of a
state or local government and nonprofit organizations pursuant to
Section 457 of the Code. (See "Federal Tax Status"). Note: The contract
is not currently offered to fund governmental 457 Plans in the state of
New York.
3. Qualified Pension or Profit-Sharing Plans ("401(a) Plans"). Plans
adopted pursuant to Section 401(a) of the Code. Participants of 401(a)
Plans obtain income tax benefits provided under the Code as qualified
pension plans.
4. Creditor-Exempt or General Creditor Non-Qualified Plans
("Creditor-Exempt" or "General Creditor" Plan). Employer sponsored
savings, compensation or other plans the contributions for which are
made without Internal Revenue Code restrictions generally applicable to
qualified retirement plans. (See "Federal Tax Status").
The contract will be sold primarily by persons who are insurance agents of
or brokers for Principal Mutual Life Insurance Company. In addition, these
persons will usually be registered representatives of Princor Financial Services
Corporation, which acts as distributor for the Contract. See "Distribution of
the Contract."
Contributions
The contract prescribes no limits on the minimum Contribution which may be
made to an Investment Account. Plan Participant maximum Contributions are
discussed under "Federal Tax Status." Contributions may also be limited by the
Plan. The Company may also limit Contributions on 60-days notice.
All Contributions made pursuant to the Contract are allocated to one or
more Investment Accounts which correlate to a Plan Participant. An Investment
Account is established for each type of Contribution for each Division of the
Separate Account as directed by the Owner of Benefits. Currently, the Divisions
available under the Contract are: Balanced, Bond, Capital Value, Government
Securities, Growth, International, MidCap and Money Market. The Contractholder
may choose to limit the number of Divisions available to the Owner of Benefits,
but the Money Market Division may not be so restricted to the extent the
Division is necessary to permit the Company to allocate initial Contributions
and the Capital Value Division may not be so restricted to the extent the
Division is necessary to permit the Company to pay Variable Annuity Payments.
Additional Divisions may be added in the future. If no direction is provided for
a particular Contribution, such Contribution will be allocated to an Investment
Account which is invested in the Money Market Division.
Separate Account B
Each of the Divisions corresponds to one of the Accounts in which
Contributions may be invested. The objective of the contract is to provide a
return on amounts contributed that will reflect the investment experience of the
Accounts in which the Divisions to which Contributions are directed are
invested. The value of the Contributions accumulated in Separate Account B prior
to the Annuity Commencement Date will vary with the investment experience of the
Accounts.
Each of the Divisions invests only in shares of Accounts of the Principal
Variable Contracts Fund, Inc. as indicated in the table below.
Division Account
-------- -------
Balanced Division Balanced Account
Bond Division Bond Account
Capital Value Division Capital Value Account
Government Securities Division Government Securities Account
Growth Division Growth Account
International Division International Account
MidCap Division MidCap Account
Money Market Division Money Market Account
Distributions, Transfers, and Withdrawals
Variable Annuity Payments will be made on and after a Plan Participant's
Annuity Commencement Date. All Variable Annuity Payments will reflect the
performance of the Account underlying the Capital Value Division and therefore
the annuitant is subject to the risk that the amount of variable annuity
payments may decline. (See "Income Benefits.")
Generally, at any time prior to the Annuity Purchase Date, the Owner of
Benefits may transfer all or any portion of an Investment Account which
correlates to a Plan Participant to another available Investment Account
correlating to such Plan Participant. If a Companion Contract has been issued to
the Contractholder to fund the Plan, and if permitted by the Plan and Companion
Contract, amounts transferred from such Companion Contract may be invested in
this contract to establish Investment Accounts which correlate to a Plan
Participant at any time at least one month before the Annuity Commencement Date.
Similarly, if the Company has issued a Companion Contract to the Contractholder,
and if permitted by the Plan and the Companion Contract, the Owner of Benefits,
subject to certain limitations, may file a Notification with the Company to
transfer all or a portion of the Investment Account values which correlate to a
Plan Participant to the Companion Contract. (See "Withdrawals and Transfers.")
In addition, subject to any Plan limitations or any reduction for vesting
provided for in the Plan as to amounts available, the Owner of Benefits may
withdraw cash from the Investment Accounts that correlate to the Plan
Participant at any time prior to the Plan Participant's termination of
employment, disability, retirement or the Annuity Purchase Date subject to any
charges that may be applied. See "Withdrawals and Transfers." Note that
withdrawals before age 59 1/2 may involve an income tax penalty. See "Federal
Tax Status." No withdrawals are permitted after the Annuity Purchase Date.
CONDENSED FINANCIAL INFORMATION
Financial statements are included in the Statement of Additional
Information. Following are Unit Values for the Premier 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)
Balanced Division
Year Ended December 31
<S> <C> <C> <C> <C>
1997 $1.366 $1.603 10,617
1996 1.212 1.366 7,467
1995 .976 1.212 3,317
Period Ended December 31, 1994(1) 1.000 .976 125
Bond Division
Year Ended December 31
1997 1.257 1.384 4,009
1996 1.232 1.257 2,612
1995 1.012 1.232 1,208
Period Ended December 31, 1994(1) 1.000 1.012 31
Capital Value Division
Year Ended December 31
1997 1.858 2.378 21,339
1996 1.510 1.858 17,962
1995 1.148 1.510 14,824
1994 1.147 1.148 13,967
1993 1.067 1.147 7,980
1992(2) 1.000 1.067 84
Government Securities Division
Year Ended December 31
1997 1.302 1.431 7,686
1996 1.265 1.302 7,513
1995 1.066 1.265 7,159
1994 1.120 1.066 6,431
1993 1.021 1.120 2,553
1992(2) 1.000 1.021 40
Growth Division
Year Ended December 31
1997 1.404 1.775 11,441
1996 1.253 1.404 6,802
1995 1.001 1.253 2,860
Period Ended December 31, 1994(1) 1.000 1.001 110
International Division
Year Ended December 31
1997 1.358 1.518 7,684
1996 1.090 1.358 4,298
1995 .958 1.090 1,672
Period Ended December 31, 1994(1) 1.000 .958 137
MidCap Division
Year Ended December 31
1997 1.537 1.879 9,536
1996 1.274 1.537 5,722
1995 .991 1.274 1,896
Period Ended December 31, 1994(1) 1.000 .991 119
Money Market Division
Year Ended December 31
1997 1.181 1.237 6,515
1996 1.128 1.181 5,379
1995 1.072 1.128 2,959
1994 1.036 1.072 1,791
1993 1.013 1.036 901
1992(2) 1.000 1.013 2,969
<FN>
(1) Commenced operations on October 3, 1994.
(2) Commenced operations on July 15, 1992.
</FN>
</TABLE>
DESCRIPTION OF PRINCIPAL MUTUAL LIFE INSURANCE COMPANY (The "Company")
Principal Mutual Life Insurance Company is a mutual life insurance company
with its home office at The Principal Financial Group, Des Moines, Iowa 50392,
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,
Contractholders 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 Contractholders on the date the Plan becomes effective (the "Effective
Date") will automatically become members of Principal Mutual Holding Company and
such Contractholders' 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. Contractholders
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 Contractholders. Contract
obligations will be the responsiblity 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
Contractholders could diverge on certain issues. The Company, however, believes
that such shareholders and Contractholders 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 other liabilities arising under the contract, 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 Variable Annuity Payments, 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.
Separate Account B is divided into Divisions each of which invests only in
shares of an Account of the Principal Variable Contracts Fund, Inc. as indicated
in the table below.
Division Account
-------- -------
Balanced Division Balanced Account
Bond Division Bond Account
Capital Value Division Capital Value Account
Government Securities Division Government Securities Account
Growth Division Growth Account
International Division International Account
MidCap Division MidCap Account
Money Market Division Money Market Account
The Fund is a diversified, open-end management investment company. The
investment Manager for the Fund is Principal Management Corporation (the
"Manager"). The Accounts are also used to fund variable life insurance
contracts. See "Eligible Purchasers and Purchase of Shares" in the Fund's
prospectus for a discussion of the potential risks associated with "mixed
funding."
The investment objective of the Balanced Account is to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of the investment objective. In seeking to
achieve the investment objective, the Account invests primarily in growth and
income-oriented common stocks (including securities convertible into common
stocks), corporate bonds and debentures and short-term money market instruments.
The portions of the Account's total assets invested in equity securities, debt
securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Account's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities.
The investment objective of the Bond Account is to provide as high a level
of income as is consistent with preservation of capital and prudent investment
risk. In seeking to achieve the investment objective, the Account predominantly
invests in marketable fixed-income securities. Investments will be made
generally on a long-term basis, but the Account may make short-term investments
from time to time as deemed prudent by the Account's Manager. Longer maturities
typically provide better yields but will subject the Account to a greater
possibility of substantial changes in the values of its portfolio securities as
interest rates change.
The investment objective of the Capital Value Account is long-term capital
appreciation and growth of investment income. This Account invests primarily in
common stocks but may invest in other securities.
The Government Securities Account has an investment objective of a high
level of current income, liquidity and safety of principal. The Account seeks to
achieve this objective through the purchase of obligations issued or guaranteed
by the United States Government or its agencies, with up to 55% of the Account's
assets invested in Government National Mortgage Association Certificates ("GNMA
Certificates"). Account shares, however, are not guaranteed by the United States
Government. The value of the Account's investments fluctuates as interest rates
change. The value rises when rates decline and falls when rates increase.
Expected prepayments of mortgages included in a GNMA certificate can affect the
market value of the certificate, and actual prepayments can affect the return
ultimately received.
The objective of the Growth Account is growth of capital. Realization of
current income will be incidental to the objective of growth of capital. The
Account will invest primarily in common stocks, but it may invest in other
equity securities. In pursuit of the Account's investment objective, investments
will be made in securities which as a group appear to possess potential for
appreciation in market value. Common stocks chosen for investment may include
those of companies which have a record of sales and earnings growth that exceeds
the growth rate of corporate profits of the S&P 500 or which offer new products
or new services. The policy of investing in securities which have high potential
for growth of capital can mean that the assets of the Account may be subject to
greater risk than securities which do not have such potential.
The investment objective of the International Account is to seek long-term
growth of capital through investment in a portfolio of equity securities of
companies domiciled in any of the nations of the world. The Account intends that
its investments normally will be allocated among various countries. Although
there is no limitation on the percentage of assets that may be invested in any
one country or denominated in any one currency, the Account intends under normal
market conditions to have at least 65% of its assets invested in securities
issued by corporations of at least three countries, one of which may be the
United States. Investments may be made anywhere in the world, but it is expected
that primary consideration will be given to investing in the securities issued
by corporations of Western Europe, North America and Australasia (Australia,
Japan and Far East Asia) that have developed economies. Changes in investments
may be made as prospects change for particular countries, industries or
companies.
The objective of the MidCap Account is to achieve capital appreciation. The
strategy of this Account is to invest primarily in the common stocks and
securities (both debt and preferred stock) convertible into common stocks of
emerging and other growth-oriented companies that, in the judgment of the
Account's Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the MidCap Account may invest, for any period of time, in
any industry, in any kind of growth-oriented company, whether new and unseasoned
or well known and established.
The Money Market Account has an investment objective of obtaining maximum
current income available from short-term securities consistent with preservation
of principal and maintenance of liquidity by investing all of its assets in a
portfolio of money market instruments. This Account invests in United States
dollar denominated instruments having a maturity of 397 days or less that the
Manager, subject to the oversight of the Fund's board of directors, determines
present minimal credit risks and which at the time of acquisition are "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. See the Fund's prospectus for details. The value of the
investments held by this Account may fluctuate, although the net asset value per
share is normally expected to remain at $1.00. However, its yield will vary with
changes in short-term interest rates. Over the last two decades there has been a
general correlation between short-term interest rates and the cost of living,
but there has been no exact correlation and for some periods such rates have
declined while the cost of living has risen.
Additional information concerning these Accounts, including their
investment policies and restrictions, investment management fees and operating
expenses is given in the prospectus for the Fund. A Prospectus for the Principal
Variable Contracts Fund, Inc. is attached to and follows this Prospectus. It
should be read carefully in conjunction with this Prospectus before investing.
Each Division purchases shares of an Account at net asset value. In
addition, all distributions made by an Account with respect to shares held by
Divisions of Separate Account B are reinvested at net asset value in additional
shares of the same Account. Contract benefits are provided and charges are made
in effect by redeeming Account shares at net asset value. Values under the
Contract, both before and after the commencement of Variable Annuity Payments,
will increase or decrease to reflect the investment performance of the Accounts
and Owners of Benefits assume the risks of such change in values.
The Company is taxed as a life 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.
DEDUCTIONS UNDER THE CONTRACT
A mortality and expense risks charge is deducted under the contract. There
are also deductions from and expenses paid out of the assets of the Accounts.
These expenses are described in the Fund's prospectus.
A. Mortality and Expense Risks Charge
Variable Annuity Payments will not be affected by adverse mortality
experience or by any excess in the actual sales and administrative expenses
over the charges provided for in the contract. The Company assumes the
risks that (i) Variable Annuity Payments will continue for a longer period
than anticipated and (ii) the allowance for administration expenses in the
annuity conversion rates will be insufficient to cover the actual costs of
administration relating to Variable Annuity Payments. For assuming these
risks, the Company, in determining Unit Values and Variable Annuity
Payments, makes a charge as of the end of each Valuation Period against the
assets of Separate Account B held with respect to the contract. The charge
is equivalent to a simple annual rate of .42%. The Company does not believe
that it is possible to specifically identify that portion of the .42%
deduction applicable to the separate risks involved, but estimates that a
reasonable approximate allocation would be .28% for the mortality risks and
.14% for the expense risks. The mortality and expense risks charge may be
changed by the Company at any time by giving not less than 60-days prior
written notice to the Contractholder. However, the charge may not exceed
1.25% on an annual basis, and only one change may be made in any one-year
period. If the charge is insufficient to cover the actual costs of the
mortality and expense risk assumed, the financial loss will fall on the
Company; conversely, if the charge proves more than sufficient, the excess
will be a gain to the Company.
OTHER EXPENSES
The Contractholder is obligated to pay additional expenses associated with
the acquisition and servicing of the contract in accordance with the terms of a
Service and Expense Agreement between the Contractholder and the Company. These
expenses are not deductible from Investment Accounts which correlate to Plan
Participants, except that the recordkeeping expense and Flexible Income Option
charge attributable to inactive Plan Participants (Plan Participants who have
died, retired or terminated employment or who are Totally and Permanently
Disabled and alternate payees under a Qualified Domestic Relations Order) may at
the Contractholder's election be deducted from such Plan Participant's
Investment Account Values. The expenses which the Contractholder must pay if
applicable, include an application fee, transfer fee, contract administration
expense, recordkeeping expense, location fee, a Flexible Income Option charge,
documentation expense and in some cases a sales charge. As part of the Company's
policy of ensuring client satisfaction with the services it provides, the
Company may agree to waive the assessment of all or a portion of these expenses
or charges (except for the sales charge) in response to any reasonably-based
complaint from the Contractholder as to the quality of the services covered by
such expenses or charges that the Company is unable to rectify. These expenses
are described below:
A. Application Fee
A $925 application fee is charged to the Contractholder in the first
Contract Year. If a Companion Contract has been issued by the Company to
the Contractholder to fund the Plan, the application fee will be assessed
to the Companion Contract. The total application fee paid by the
Contractholder to obtain both contracts will not exceed $925. If the
Company has issued an Associated Contract to the Contractholder to fund an
employee benefit plan administered by the Company, the application fee for
the contract described in this prospectus will be waived by the Company.
B. Contract Administration Expense
The Contractholder must also pay a contract administration expense. The
contract administration expense is charged quarterly and is equal to
one-fourth of the amount derived by adding $650 ($1,000 for custom or
outside plans) to the amount calculated by multiplying the Quarter end
Balance at the end of each Deposit Year Quarter by the Annual Expense
percentage below. Quarter end Balance is the total of all Investment
Accounts under the contract and other Plan assets not allocated to the
contract or an Associated or Companion Contract ("Outside Assets") at the
end of each Deposit Year Quarter.
<TABLE>
<CAPTION>
Expense Percentage
Expense Percentage
Over But Not Over The Annual Expense Is: Top of Bracket
------------ ------------- --------------------------------- ------------------
<S> <C> <C> <C>
$ 0 $ 262,500 $750 minimum .002857
262,500 1,000,000 [.0020 x ending balance] + $225 .002225
1,000,000 5,000,000 [.0010 x ending balance] + $1,225 .001245
5,000,000 10,000,000 [.0005 x ending balance] + $3,725 .000873
10,000,000 30,000,000 [.0004 x ending balance] + $4,725 .000558
30,000,000 [.0003 x ending balance] + $7,725
</TABLE>
Example: Assume a $3,500,000 total fund at the end of the Quarter for a standard
plan. The contract administration charge is $1,343.75 derived as follows:
[.0010 x $3,500,000] + $1,225 = $4,725 + $650 = $5,375 / 4 = $1,343.75.
The contract administration expense is also charged if all Investment
Accounts which correlate to a Plan Participant are canceled during the
Deposit Year as a result of a withdrawal. The amount attributable to such
Investment Accounts is determined as described above but is pro-rated to
the date of cancellation.
The contract administration expense will be reduced by 10% if the Company
has issued an Associated Contract to the Contractowner.
The contract administration expense for an employer with both a
non-qualified plan in the contract offered under this prospectus and a
401(k) Plan in a Flexible Investment Annuity ("FIA") Contract (and which
meets our underwriting guidelines) will be calculated based on the quarter
end value of the investment accounts under both contracts (plus $750
annually for general creditor non-qualified plans or $1,000 for creditor
exempt plans) and the proportionate charge will be allocated to Plan
Participants in each contract.
C. Recordkeeping Expense
The Contractholder must also pay a recordkeeping expense. The quarterly
recordkeeping expense is one-fourth of the charge determined from the table
below. The amount of the charge is determined at the end of each quarter
based upon the number of Plan Participants, both active and inactive, for
whom there are Investment Accounts under the contract at the end of the
quarter.
Annual Expense (Benefit Report
Plan Participants Sent to the Contractholder)
----------------- ------------------------------------
1-19 $2,250
20-49 $34 per Plan Participant + $ 1,366
50-99 $31 per Plan Participant + $ 1,516
100-299 $28 per Plan Participant + $ 1,816
300-499 $23 per Plan Participant + $ 3,316
500 - 999 $19 per Plan Participant + $ 5,316
1,000 - 2,499 $14 per Plan Participant + $ 10,316
2,500 - 4,999 $12 per Plan Participant + $ 15,316
5,000 and over $10 per Plan Participant + $ 25,316
Example: Assume 600 Plan Participants with Benefit Reports sent to the
Contractholder: The expense is $16,716 [600 x $19 =
$11,400+$5,316 = $16,716] / 4 = $4,179. This would be $6.96
per Plan Participant, per quarter.
The recordkeeping expense is increased by $3 per Plan Participant if
benefit reports are mailed directly to Plan Participants' homes.
If, instead of quarterly benefit reports, the Company provides such reports
annually, the recordkeeping expense is reduced by 9%. Similarly, if such
reports are provided semi-annually, the recordkeeping expense is reduced by
6%. If such reports are provided on a monthly basis, the recordkeeping
expense is increased by 24%.
If the Company performs more (or less) than two 401(k)/401(m)
non-discrimination tests in a Deposit Year, the recordkeeping expense is
increase (reduced) by 3% for each additional test performed (or test not
performed).
The recordkeeping expense is reduced by 10% if Plan Contributions are
reported in the Company's standard format by modem. Effective on the first
day of the Deposit Year in 1999, this 10% reduction will be discontinued.
There will be an additional 5% charge is contributions are reported using
tape/diskette or an additional 10% charge if reported using paper.
Effective on the first day of the Deposit Year in 1998, a charge of $15
will be made to the account of plan participants who make investment
changes/transfers using paper rather than our toll-free number
(1-800-633-1373).
The recordkeeping expense for an employer with both a non-qualified plan in
the contract offered under this prospectus and a 401(k) plan in a FIA
contract will be determined at the point in scale reached under the 401(k)
plan.
If the initial Deposit Year is less than twelve months, an adjustment will
be made in the amount of the charge so that the full amount of the annual
charge per Plan Participant will be assessed during the year.
If all Investment Accounts attributable to a Plan Participant are canceled
during the Deposit Year as a result of a withdrawal, the unassessed portion
of the full annual charge attributable to the Plan Participant will be
charged.
If the Company provides recordkeeping services for Plan assets not
allocated to the contract or an Associated or Companion Contract ("Outside
Assets"), the Contractholder must pay an Outside Asset recordkeeping
expense. The annual charge is calculated based upon the following table.
Number of Plan Participants Outside Asset
with Outside Accounts Annual Recordkeeping
During the Quarter Expense
--------------------------- -----------------------------
1-25 $1,000 minimum
26-49 $15.30 per member + $614.70
50-99 $13.95 per member + $682.20
100-299 $12.60 per member + $817.20
300-499 $10.35 per member + $1,492.20
500-999 $8.55 per member + $2,392.20
1000-2499 $6.30 per member + $4,642.20
2500-4999 $5.40 per member + $6,842.20
5000 and over $4.50 per member + $11,392.20
The charge calculated in accordance with the above table will be increased
by 15% for the second and each additional Outside Asset for which the
Company provides recordkeeping services. One-fourth of the annual Outside
Asset Recordkeeping Charge will be billed on a quarterly basis. This charge
does not apply if the Outside Assets which correlate to the Plan
Participant consist solely of shares of mutual funds for which a subsidiary
of the Company serves as investment adviser.
The Contractholder may elect to have the recordkeeping expense attributable
to investments in this contract which correlate to inactive Plan
Participants deducted from the Investment Account Values of such Plan
Participants. In such case, the Company will reduce the charge if necessary
so that it will not exceed 1% of the Plan Participant's aggregate
Investment Account Values at the time the charge is made. The portion of
the charge attributable to a Plan Participant will be allocated to his or
her Investment Account in proportion to their relative value.
D. Location Fee
Contractholders may request the Company to provide services to groups of
employees at multiple locations. If the Company agrees to provide such
services, the Contractholder will be charged $150 on a quarterly basis for
each additional employee group or location.
E. Flexible Income Option Charge
An additional charge of $25 annually will be made for any Plan Participant
receiving benefits under the Flexible Income Option. The charge is added to
the portion of the recordkeeping expense attributable to such Plan
Participants. If the Contractowner has elected to deduct the recordkeeping
expense from the Investment Accounts of inactive Plan Participants, the
Flexible Income Option Charge will also be deducted from such accounts. If
a Plan Participant is receiving benefits under the Flexible Income Option
from a Companion Contract to which a Flexible Income Option Charge applies,
the charge will not apply to the contract described in this Prospectus.
F. Documentation Expense
The Company provides a sample Plan document and summary plan descriptions
to the Contractholder. The Contractholder will be billed $125 if the
Contractholder uses a Principal Mutual Standard Plan. If the Company
provides a sample custom-written Plan, the Contractholder will be billed
$700 for the initial Plan or for any restatement thereof, $300 for any
amendments thereto, and $500 for standard summary plan description
booklets. If the Contractholder adopts a Plan other than one provided by
the Company, a $900 charge will be made for summary plan description
booklets requested by the Contractholder, if any.
G. Sales Charge
A sales charge will be billed to and paid by the Contractholder according
to one of the following schedules:
Schedule A
Amount of Plan Amount Payable as a
Contributions Percent of Plan
in Each Deposit Year Contributions
---------------------- -------------------
The first $ 5,000 4.50%
The next 5,000 3.00
The next 5,000 1.70
The next 35,000 1.40
The next 50,000 0.90
The next 400,000 0.60
Excess over 500,000 0.25
Schedule B
Amount of Plan Amount Payable as
Contributions Percent of Plan
In Each Deposit Year Contributions
---------------------- -----------------
The first $ 50,000 3.00%
The next 50,000 2.00
The next 400,000 1.00
The next 2,500,000 0.50
Excess over 3,000,000 0.25
The applicable sales charge will be determined by the Company. The sales
charge described in Schedule B will apply for certain salary deferral
Plans. The sales charge described in Schedule A will apply if the Plan is
not a salary deferral Plan or if the Plan is a salary deferral Plan subject
to reduced sales expenses. The Contractholder will be notified of the
applicable sales charge prior to the issuance of the Contract.
Contributions made by the Contractholder to the contract described in this
prospectus, a Companion Contract or any Associated Contract will be
combined for purposes of applying the above sales charge schedules.
The Company will not charge a sales charge to Contractholders who acquire
the contract either: (1) directly from the Company upon a recommendation of
an independent pension consultant who charges a fee for its pension
consulting services and who receives no remuneration from the Company in
association with the sale of the contract; or (2) through registered
representatives of the Principal Underwriter who are also Group Insurance
Representative employees of the Company.
H. Special Services
If requested by the Contractholder, the Company may provide special
services not provided as part of the contract administration and
recordkeeping services. The Company will charge the Contractholder the cost
of providing such services.
SURPLUS DISTRIBUTION AT SOLE DISCRETION OF THE COMPANY
It is not anticipated that any divisible surplus will ever be distributable
to the contract in the future because the contract is 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 Investment
Accounts in the form of additional units.
THE CONTRACT
The contract will normally be issued to an Employer or association or a
trust established for the benefit of Plan Participants and their beneficiaries.
The Company will issue a pre-retirement certificate describing the benefits
under the contract to Plan Participants who reside in a state that requires the
issuance of such certificates. The initial Contribution which correlates to a
Plan Participant will be invested in the Division or Divisions that are chosen
as of the end of the Valuation Period in which such Contribution is received by
the Company at its home office in Des Moines, Iowa. If the allocation
instructions are late, or not completed, the Company will invest such
unallocated Contributions in the Money Market Division on the date such
Contributions are received. Subsequently, the Company will transfer all or a
portion of such Contributions as of the date complete allocation instructions
are received by the Company in accordance with the allocation specified therein.
After complete allocation instructions have been received by the Company, all
current and future Contributions will be allocated to the chosen Divisions as of
the end of the Valuation period in which such Contributions are received. If
complete allocation instructions are not received by the Company within 105 days
after the initial Contributions are allocated to the Money Market Division, the
Company will remit the Contributions plus any earnings thereon to the
Contractholder. The Contractholder may limit the number of Divisions available
to the Owner of Benefits, but the Money Market Division may not be so restricted
to the extent the Division is necessary to permit the Company to allocate
initial Contributions as described above and the Capital Value Division may not
be so restricted to the extent the Division is necessary to permit the Company
to pay Variable Annuity Payments.
A. Contract Values and Accounting Before Annuity Commencement Date
1. Investment Accounts
An Investment Account or Accounts correlating to a Plan Participant
will be established for each type of Contribution and for each Division
of Separate Account B in which such Contribution is invested.
Investment Accounts will be maintained until the Investment Account
Values are either (a) applied to effect Variable Annuity benefits, (b)
paid to the Owner of Benefits or the beneficiary, (c) transferred in
accordance with the provisions of the contract or (d) cancelled to pay
the recordkeeping expenses for a Plan Participant where Termination of
Employment, retirement or death has occurred or for an alternate payee
under a Qualified Domestic Relations Order.
Each Contribution will be allocated to the Division or Divisions
designated by the Notification on file with the Company and will result
in a credit of units to the appropriate Investment Account. The number
of units so credited will be determined by dividing the portion of the
Contributions allocated to the Division by the Unit Value for such
Division for the Valuation Period within which the Contribution was
received by the Company at its home office in Des Moines, Iowa.
2. Unit Value
The Unit Value for a Contract which participates in a Division of
Separate Account B determines the value of an Investment Account
consisting of contributions allocated to that Division. The Unit Value
for each Division for the contract is determined on each day on which
the net asset value of its underlying Account is determined. The Unit
Value for a Valuation Period is determined as of the end of that
period. The investment performance of the underlying Account and
deducted expenses affect the Unit Value.
For this series of contracts, the Unit Value for each Division will be
fixed at $1.00 for the Valuation Period in which the first amount of
money is credited to the Division. A Division's Unit Value for any
later Valuation Period is equal to its Unit Value for the immediately
preceding Valuation Period multiplied by the Net Investment Factor (see
below) for that Division for this series of contracts for the later
Valuation Period.
3. 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 this series of contracts 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, equal to a simple interest
rate for the number of days within the Valuation Period at an
annual rate of 0.42%.
The amounts derived from applying the rate specified in subparagraph
(b) above and the amount of any taxes referred to in subparagraph (a)
above will be accrued daily and will be transferred from Separate
Account B at the discretion of the Company.
4. Hypothetical Example of Calculation of Unit Value for All Divisions
Except the Money Market Division
The computation of the Unit Value may be illustrated by the following
hypothetical example. Assume that the current net asset value of an
Account share is $14.8000; that there were no dividends or other
distributions made by the Account and no adjustment for taxes since the
last determination; that the net asset value of an Account share last
determined was $14.7800; that the last Unit Value was $1.0185363; and
that the Valuation Period was one day. To determine the current Net
Investment Factor, divide $14.8000 by $14.7800 which produces 1.0013532
and deduct from this amount the mortality and expense risks charge of
0.0000090, which is the rate for one day that is equivalent to a simple
annual rate of 0.33%. The result, 1.0013442, is the current Net
Investment Factor. The last Unit Value ($1.0185363) is then multiplied
by the current Net Investment Factor (1.0013442) which produces a
current Unit Value of $1.0199054.
5. Hypothetical Example of Calculation of Unit Value for the Money Market
Division
The computation of the Unit Value may be illustrated by the following
hypothetical example. Assume that the current net asset value of an
Account share is $1.0000; that a dividend of .0328767 cents per share
was declared by the Account prior to calculation of the net asset value
of the Account share and that no other distributions and no adjustment
for taxes were made since the last determination; that the net asset
value of an Account share last determined was $1.0000; that the last
Unit Value was $1.0162734; and that the Valuation Period was one day.
To determine the current Net Investment Factor, add the current net
asset value ($1.0000) to the amount of the dividend ($.000328767) and
divide by the last net asset value ($1.0000), which when rounded to
seven places equals 1.0003288. Deduct from this amount the mortality
and expense risks charge of .0000090 (the proportionate rate for one
day based on a simple annual rate of 0.33%). The result (1.0003198) is
the current Net Investment Factor. The last Unit Value ($1.0162734) is
then multiplied by the current Net Investment Factor (1.0003198),
resulting in a current Unit Value of $1.0165984.
B. Income Benefits
Income Benefits consist of either monthly Variable Annuity Payments or
periodic payments made on a monthly, quarterly, semi-annual or annual basis
pursuant to the Flexible Income Option.
1. Variable Annuity Payments
The amount applied to provide Variable Annuity Payments must be at
least $1,750. Variable Annuity Payments will be provided by the
Investment Accounts which correlate to the Plan Participant held under
the Capital Value Division. Thus, if the Owner of Benefits elects
Variable Annuity Payments, any amounts that are to be used to provide
Variable Annuity Payments will be transferred to Investment Accounts
held under the Capital Value Division as of the last Valuation Date in
the month which begins two months before the Annuity Commencement Date.
After any such transfer, the value of the Capital Value Division
Investment Accounts will be applied on the Annuity Purchase Date to
provide Variable Annuity Payments. The Annuity Commencement Date, which
will be one month following the Annuity Purchase Date, will be the
first day of a month. Thus, if the Annuity Commencement Date is August
1, the Annuity Purchase Date will be July 1, and the date of any
transfers to a Capital Value Division Investment Account will be the
Valuation Date immediately preceding July 1.
The Annuity Commencement Date must be no later than April 1 of the
calendar year following the calendar year in which the Plan Participant
attains age 70 1/2. See "Federal Tax Status."
a. Selecting a Variable Annuity
Variable Annuity Payments will be made to an Owner of Benefits
beginning on the Annuity Commencement Date and continuing
thereafter on the first day of each month. An Owner of Benefits
may select an Annuity Commencement Date by Notification to the
Company. The date selected may be the first day of any month the
Plan allows which is at least one month after the Notification.
Generally, the Annuity Commencement Date cannot begin before the
Plan Participant is age 59 1/2, separated from service, or is
totally disabled. See "Federal Tax Status" for a discussion of
required distributions and the federal income tax consequences of
distributions.
At any time not less than one month preceding the desired Annuity
Commencement Date, an Owner of Benefits may, by Notification,
select one of the annuity options described below (see "Forms of
Variable Annuities"). If no annuity option has been selected at
least one month before the Annuity Commencement Date, and if the
Plan does not provide one, payments which correlate to an
unmarried Plan Participant will be made under the annuity option
providing Variable Life Annuity with Monthly Payments Certain for
Ten Years. Payments to a married Plan Participant will be made
under the annuity option providing a Variable Life Annuity with
One-Half Survivorship.
b. Forms of Variable Annuities
Because of certain restrictions contained in the Internal Revenue
Code and regulations thereunder, an annuity option is not
available under a contract used to fund a TDA Plan, PEDC Plan or
401(a) Plan unless (i) the joint or contingent annuitant is the
Plan Participant's spouse or (ii) on the Plan Participant's
Annuity Commencement Date, the present value of the amount to be
paid while the Plan Participant is living is greater than 50% of
the present value of the total benefit to the Plan Participant and
the Plan Participant's beneficiary (or contingent annuitant, if
applicable).
An Owner of Benefits may elect to have Investment Account Values
applied under one of the following annuity options. However, if
the monthly Variable Annuity Payment would be less than $20, the
Company may, at its sole option, pay the Investment Account Values
in full settlement of all benefits otherwise available.
Variable Life Annuity with Monthly Payments Certain for Zero,
Five, Ten, Fifteen or Twenty Years or Installment Refund Period --
a Variable Annuity which provides monthly payments during the Plan
Participant's lifetime, and further provides that if, at the death
of the Plan Participant, monthly payments have been made for less
than a minimum period, e.g. five years, any remaining payments for
the balance of such period shall be paid to the Owner of Benefits,
if the Owner of Benefits is not the Plan Participant, or to a
designated beneficiary unless the beneficiary requests in writing
that the Commuted Value of the remaining payments be paid in a
single sum. (Designated beneficiaries entitled to take the
remaining payments or the Commuted Value thereof rather than
continuing monthly payments should consult with their tax advisor
to be made aware of the differences in tax treatment.)
The minimum period may be either zero, five, ten, fifteen or
twenty years or the period (called "installment refund period")
consisting of the number of months determined by dividing the
amount applied under the option by the initial payment. If, for
example, $14,400 is applied under a life option with an
installment refund period, and if the first monthly payment
provided by that amount, as determined from the applicable annuity
conversion rates, would be $100, the minimum period would be 144
months ($14,400 divided by $100 per month) or 12 years. A variable
life annuity with an installment refund period guarantees a
minimum number of payments, but not the amount of any monthly
payment or the amount of aggregate monthly payments. The longer
the minimum period selected, the smaller will be the amount of the
first annuity payment.
Under the Variable Life Annuity with Zero Years Certain, which
provides monthly payments to the Owner of Benefits during the Plan
Participant's lifetime, it would be possible for the Owner of
Benefits to receive no annuity payments if the Plan Participant
died prior to the due date of the first payment since payment is
made only during the lifetime of the Plan Participant.
Joint and Survivor Variable Life Annuity with Monthly Payments
Certain for Ten Years -- a Variable Annuity which provides monthly
payments for a minimum period of ten years and thereafter during
the joint lifetimes of the Plan Participant on whose life the
annuity is based and the contingent annuitant named at the time
this option is elected, and continuing after the death of either
of them for the amount that would have been payable while both
were living during the remaining lifetime of the survivor. In the
event the Plan Participant and the contingent annuitant do not
survive beyond the minimum ten year period, any remaining payments
for the balance of such period will be paid to the Owner of
Benefits, if the owner of Benefits is not the Plan Participant, or
to a designated beneficiary unless the beneficiary requests in
writing that the Commuted Value of the remaining payments be paid
in a single sum. (Designated beneficiaries entitled to take the
remaining payments or the Commuted Value thereof rather than
continuing monthly payments should consult with their tax advisor
to be made aware of the differences in tax treatment.)
Joint and Two-Thirds Survivor Variable Life Annuity -- a variable
annuity which provides monthly payments during the joint lives of
a Plan Participant and the person designated as contingent
annuitant with two-thirds of the amount that would have been
payable while both were living continuing until the death of the
survivor.
Variable Life Annuity with One-Half Survivorship -- a variable
annuity which provides monthly payments during the life of the
Plan Participant with one-half of the amount otherwise payable
continuing so long as the contingent annuitant lives.
Under the Joint and Two-thirds Survivor Variable Life Annuity and
under the Variable Life Annuity with One-Half Survivorship, it
would be possible for the Owner of Benefits and/or contingent
annuitant to receive no annuity payments if the Plan Participant
and contingent annuitant both died prior to the due date of the
first payment since payment is made only during their lifetimes.
Other Options -- Other Variable Annuity options permitted under
the applicable Plan may be arranged by mutual agreement of the
Owner of Benefits and the Company.
c. Basis of Annuity Conversion Rates
Because women as a class live longer than men, it has been common
that retirement annuities of equal cost for women and men of the
same age will provide women less periodic income at retirement.
The Supreme Court of the United States ruled in Arizona Governing
Committee vs. Norris that sex distinct annuity tables under an
employer-sponsored benefit plan result in discrimination that is
prohibited by Title VII of the Federal Civil Rights Act of 1964.
The Court further ruled that sex distinct annuity tables will be
deemed discriminatory only when used with values accumulated from
employer contributions made after August 1, 1983, the date of the
ruling.
Title VII applies only to employers with 15 or more employees.
However, certain State Fair Employment Laws and Equal Payment Laws
may apply to employers with less than 15 employees.
The contract described in this Prospectus offers both sex distinct
and sex neutral annuity conversion rates. The annuity rates are
used to convert a Plan Participant's pre-retirement Investment
Account Values to a monthly lifetime income at retirement. Usage
of either sex distinct or sex neutral annuity rates will be
determined by the Contractholder.
For each form of variable annuity, the annuity conversion rates
determine how much the first monthly Variable Annuity Payment will
be for each $1,000 of the Investment Account Value applied to
effect the variable annuity. The conversion rates vary with the
form of annuity, date of birth, and, if sex distinct rates are
used, the sex of the Plan Participant and the contingent
annuitant, if any. The sex neutral guaranteed annuity conversion
rates are based upon (i) an interest rate of 2.5% per annum and
(ii) mortality according to the "1983 Table a for Individual
Annuity Valuation" projected with Scale G to the year 2001, set
back five years in age. The sex distinct female rates are
determined for all Plan Participants in the same way as neutral
rates, as described above. The sex distinct male rates are
determined for all Plan Participants in the same way as sex
neutral rates, as described above, except mortality is not set
back five years in age. The guaranteed annuity conversion rates
may be changed, but no change which would be less favorable to the
Owner of Benefits will take effect for a current Plan Participant.
The contract provides that an interest rate of not less than 2.5%
per annum will represent the assumed investment return. Currently
the assumed investment return used in determining the amount of
the first monthly payment is 4% per annum. This rate may be
increased or decreased by the Company in the future but in no
event will it be less than 2.5% per annum. If, under the contract,
the actual investment return (as measured by an Annuity Change
Factor, defined below) should always equal the assumed investment
return, Variable Annuity Payments would remain level. If the
actual investment return should always exceed the assumed
investment return, Variable Annuity Payments would increase;
conversely, if it should always be less than the assumed
investment return, Variable Annuity Payments would decrease.
The current 4% assumed investment return is higher than the 2.5%
interest rate reflected in the annuity conversion rates contained
in the contract. With a 4% assumption, Variable Annuity Payments
will commence at a higher level, will increase less rapidly when
actual investment return exceeds 4%, and will decrease more
rapidly when actual investment return is less than 4%, than would
occur with a lower assumption.
d. Determining the Amount of the First Variable Annuity Payment
The initial amount of monthly annuity income shall be based on the
option selected, the age of the Plan Participant and contingent
annuitant, if any, and the Investment Account Values applied as of
the Annuity Purchase Date. The initial monthly income payment will
be determined on the basis of the annuity conversion rates
applicable on such date to such conversions under all contracts of
this class issued by the Company. However, the basis for the
annuity conversion rates will not produce payments less beneficial
to the Owner of Benefits than the annuity conversion rate basis
described above.
e. Determining the Amount of the Second and Subsequent Monthly
Variable Annuity Payments
The second and subsequent monthly Variable Annuity Payments will
increase or decrease in response to the investment experience of
the Account underlying the Capital Value Division. The amount of
each payment will be determined by multiplying the amount of the
monthly Variable Annuity Payment due in the immediately preceding
calendar month by the Annuity Change Factor for the Capital Value
Division for the Contract for the calendar month in which the
Variable Annuity Payment is due.
Each Annuity Change Factor for the Capital Value Division for a
calendar month is the quotient of (1) divided by (2),
below:
(1) The number which results from dividing (a) the Contract's Unit
Value for the Capital Value Division for the first Valuation
Date in the calendar month beginning one month before the
given calendar month by (b) the Contract's Unit Value for such
Division for the first Valuation Date in the calendar month
beginning two months before the given calendar month.
(2) An amount equal to one plus the effective interest rate for
the number of days between the two Valuation Dates specified
in subparagraph (1) above at the interest rate assumed to
determine the initial payment of variable benefits to the
Owner of Benefits.
f. Hypothetical Example of Calculation of Variable Annuity Payments
Assume that on the date one month before the Annuity Commencement
Date the Investment Account Value that is invested in the Capital
Value Division which correlates to a Plan Participant is $37,592.
Using the appropriate annuity conversion factor (assuming $5.88
per $1,000 applied) the Investment Account Value provides a first
monthly Variable Annuity Payment of $221.04. To determine the
amount of the second monthly payment assume that the Capital Value
Division Unit Value as of the first Valuation Date in the
preceding calendar month was $1.3712044 and the Unit Value as of
the first Valuation Date in the second preceding calendar month
was $1.3273110. The Annuity Change Factor is determined by
dividing $1.3712044 by $1.3273110, which equals 1.0330694, and
dividing the result by an amount corresponding to the amount of
one increased by an assumed investment return of 4% (which for a
thirty day period is 1.0032288). 1.0330694 divided by 1.0032288
results in an Annuity Change Factor for the month of 1.0297446.
Applying this factor to the amount of Variable Annuity Payment for
the previous month results in a current monthly payment of $227.61
($221.04 multiplied by 1.0297446 equals $227.61).
2. Flexible Income Option
Instead of Variable Annuity Payments an Owner of Benefits may choose to
receive Income Benefits under the Flexible Income Option. Unlike
Variable Annuity Payments, payments under the Flexible Income Option
may be made from any Division of the Separate Account. Under the
Flexible Income Option, the Company will pay to the Owner of Benefits a
portion of the Investment Accounts on a monthly, quarterly, semi-annual
or annual basis on the date or dates requested each Year and continuing
for a period not to exceed the life or life expectancy of the Plan
Participant, or the joint lives or life expectancy of such Plan
Participant and the contingent annuitant, if the contingent annuitant
is the Plan Participant's spouse. If the Notification does not specify
from which Investment Accounts payments are to be made, amounts will be
withdrawn on a pro rata basis from all Investment Accounts which
correlate to the Plan Participant. Payments will end, however, on the
date no amounts remain in such Accounts or the date such Accounts are
paid or applied in full as described below. Payments will be subject to
the following:
a. The life expectancy of the Plan Participant and the Plan
Participant's spouse, if applicable, will be determined in
accordance with the life expectancy tables contained in Internal
Revenue Regulation Section 1.72-9. Life expectancy will be
determined as of the date on which the first payment is made. Life
expectancy will be redetermined annually thereafter.
b. Payments may begin any time after the Flexible Income Option is
requested. Payments must begin no later than the latest date
permitted or required by the Plan or regulation to be the Owner of
Benefit's Annuity Commencement Date.
c. Payments will be made annually, semiannually, quarterly, or
monthly as requested by the Owner of Benefits and agreed to by the
Company. The annual amount payable will be the lesser of the
Aggregate Investment Account Values which correlate to the Plan
Participant or the minimum annual amount determined in accordance
with the minimum distribution rules of the Internal Revenue Code.
d. If the Plan Participant should die before the Aggregate Investment
Account Value has been paid or applied in full, the remaining
Investment Account Values will be treated as benefits payable at
death as described in this Prospectus.
e. Year for purposes of determining payments under the Flexible
Income Option means the twelve month period starting on the
installment payment starting date and each corresponding twelve
month period thereafter.
An Owner of Benefits may request a payment in excess of the minimum
described above. Such payment may be equal to all or any portion of the
Investment Accounts which correlate to the Plan Participant; provided,
however, that if the requested payment would reduce the total value of
such accounts to a total balance of less than $1,750 then such request
will be a request for the total of such Investment Accounts.
The Owner of Benefits may request termination of the Flexible Income
Payments by giving the Company Notification (i) requesting an excess
payment equal to the remaining balance of the Aggregate Investment
Account Values which correlate to a Plan Participant, (ii) requesting
that the remaining balance of the Aggregate Investment Account Values
be applied to provide Variable Annuity Payments or (iii) a combination
of (i) and (ii), as long as the amount applied to provide an annuity is
at least $1,750. The Company will make such excess payment on the later
of (i) the date requested, or (ii) the date seven (7) calendar days
after the Company receives the Notification. The Annuity Commencement
Date for amounts so applied will be one month after the Annuity
Purchase Date. The Annuity Purchase Date for amounts so applied will be
the first Valuation Date in the month following the Company's receipt
of the Notification or the first Valuation Date of such subsequent
month as requested.
An additional annual charge of $25.00 will be made if an Owner of
Benefits elects to receive benefits under the Flexible Income Option.
This charge may be deducted from the Investment Accounts which
correlate to the Plan Participant only if such Plan Participant is
inactive. In such case, the Company will reduce the charge if necessary
so that when combined with any other expense being deducted from such
Investment Accounts, the aggregate of such charges will not exceed 1%
of the Plan Participant's aggregate Investment Account Values at the
time the charge is made. The portion of the charge attributable to a
Plan participant will be allocated to his or her Investment Account in
proportion to their relative values.
C. Payment on Death of Plan Participant
1. Prior to Annuity Purchase Date
If a Plan Participant dies prior to the Annuity Purchase Date, the
Company, upon receipt of due proof of death and any waiver or consent
required by applicable state law, will pay the death benefit in
accordance with the provisions of the Plan. The amount of the death
benefit is determined by the terms of the Plan. The Owner of Benefits
may elect to either (1) leave the assets in the contract to the extent
permitted by applicable law; (2) receive such value as a single sum
benefit; or (3) apply the Investment Account Values which correlate to
the Plan Participant to purchase Variable Annuity Payments for the
beneficiary if the aggregate value of such Investment Accounts is at
least $1,750. If the beneficiary does not provide Notification to the
Company within 120 days of the date the Company receives due proof of
death, (i.e. a certified copy of the death certificate, a certified
copy of a decree of a court of competent jurisdiction as to the finding
of death, a written statement by a medical doctor who attended the
deceased during his last illness.), the beneficiary will be deemed a
Plan Participant under the contract described in the Prospectus.
A beneficiary may elect to have all or a part of the amount available
under this contract transferred to any Companion Contract.
Alternatively, this contract may accept all or part of the amount
available under a Companion Contract to establish an Investment Account
or Accounts for a beneficiary under this contract. If the aggregate
value of such Investment Accounts is less than $1,750, the Company may
at its option pay the beneficiary the value of such accounts in lieu of
all other benefits.
An election to receive Variable Annuity Payments must be made prior to
the single sum payment to the beneficiary. Annuity income must be
payable as lifetime annuity income with no benefits beyond the
beneficiary's life or life expectancy. In addition, the amount of the
monthly Variable Annuity Payments must be at least $20, or the Company
may at its option pay the beneficiary the value of the Variable Annuity
Reserves in lieu of all other benefits. The beneficiary's Annuity
Purchase Date will be the first day of the calendar month specified in
the election, but in no event prior to the first day of the calendar
month following the date the Notification is received by the Company.
The amount to be applied will be determined as of the Annuity Purchase
Date. The beneficiary's Annuity Commencement Date will be the first day
of the calendar month following the Annuity Purchase Date. The
beneficiary must be a natural person in order to elect Variable Annuity
Payments. The election must be in writing. The annuity conversion rates
applicable to a beneficiary shall be the annuity conversion rates the
Company makes available to all beneficiaries under this contract. The
beneficiary will receive a written description of the options
available.
2. Subsequent to Annuity Purchase Date
Upon the death of a Plan Participant subsequent to the Annuity Purchase
Date, no benefits will be available except as may be provided under the
form of annuity selected. If provided for under the form of annuity,
the Owner of Benefits or beneficiary will continue receiving any
remaining payments unless the Owner of Benefits or the beneficiary
requests in writing that the Commuted Value of the remaining payments
be paid in a single sum.
D. Withdrawals and Transfers
1. Cash Withdrawals
The contract is designed for and intended to be used to fund retirement
Plans. However, subject to any Plan limitations, any restrictions
imposed by provisions of the Internal Revenue Code or any reduction for
vesting provided for in the Plan as to amounts available, the Owner of
Benefits may withdraw cash from the Investment Accounts which correlate
to a Plan Participant at any time prior to the Annuity Purchase Date.
The Internal Revenue Code generally provides that distributions from
the contracts (except those used to fund Creditor Exempt or General
Creditor Non-qualified Plans) may begin only after the Plan Participant
attains age 59 1/2, terminates employment, dies or becomes disabled, or
in the case of deemed hardship (or, for PEDC Plans, unforeseen
emergencies). Withdrawals before age 59 1/2 may involve an income tax
penalty. See "Federal Tax Status."
The procedure with respect to cash withdrawals is as follows:
(a) The Plan must allow for such withdrawal.
(b) The Company must receive a Notification requesting a cash
withdrawal from the Owner of Benefits on a form either furnished
or approved by the Company. The Notification must specify the
amount to be withdrawn for each Investment Account from which
withdrawals are to be made. If no specification is made,
withdrawals from Investment Accounts will be made on a pro rata
basis.
(c) If a certificate has been issued to the Owner of Benefits the
Company may require that any requests be accompanied by such
certificate.
(d) If the Aggregate Investment Account Values are insufficient to
satisfy the amount of the requested withdrawal and applicable
charges, if any, the amount paid will be reduced to satisfy such
charges.
Any cash withdrawal will result in the cancellation of a number of
units from each Investment Account from which values have been
withdrawn. The number of units cancelled from an Investment Account
will be equal to the amount withdrawn from that Account divided by the
Unit Value for the Division of Separate Account B in which the Account
is invested for the Valuation Period in which the cancellation is
effective.
(Special Note: Under the Texas Education Code, Plan Participants under
contracts issued in connection with Optional Retirement Programs for
certain employees of Texas institutions of higher education are
prohibited from making withdrawals except in the event of termination
of employment, retirement or death of the Plan Participant. Also, see
"Federal Tax Status" for a description of further withdrawal
restrictions.)
2. Transfers Between Divisions
Upon Notification, all or a portion of the value of a Investment
Account which correlates to a Plan Participant may be transferred to
another available Investment Account correlating to such Plan
Participant for the same type of Contribution.
Transfers may be made at any time before the Annuity Purchase Date.
A transfer will be effective as of the end of the Valuation Period in
which the request is received. Any amount transferred will result in
the cancellation of units in the Investment Account from which the
transfer is made. The number of units cancelled will be equal to the
amount transferred from that account divided by the Unit Value of the
Division for the Valuation Period in which the transfer is effective.
The transferred amount will result in the crediting of units in the
Investment Account to which the transfer is made. The number of units
credited will be equal to the amount transferred to that account
divided by the Unit Value of the Division for the Valuation Period in
which the transfer is effective.
3. Transfers to the Contract
If a Companion Contract has been issued by the Company to fund the
Plan, and except as otherwise provided by the applicable Plan, the
contract described in this Prospectus may accept all or a portion of
the proceeds available under the Companion Contract at any time at
least one month before Annuity Commencement Date, subject to the terms
of the Companion Contract.
4. Transfers to a Companion Contract
If a Companion Contract has been issued by the Company to fund the
Plan, except as otherwise provided by the applicable Plan and the
provisions of the Companion Contract, an Owner of Benefits may by
Notification transfer all or a portion of the Investment Account Values
which correlate to a Plan Participant to the Companion Contract. If the
Notification does not state otherwise, amounts will be transferred on a
pro rata basis from the Investment Accounts which correlate to the Plan
Participant. Transfers with respect to a Plan Participant from this
contract to the Companion Contract will not be permitted if this
contract has accepted, within the six-month period preceding the
proposed transfer from this contract to the Companion Contract, a
transfer from an unmatured Investment Account which correlates to the
Plan Participant established under the Companion Contract. An unmatured
Investment Account is an Investment Account which has not reached the
end of its interest guarantee period. In all other respects, such
transfers are subject to the same provisions regarding frequency of
transfer, effective date of transfer and cancellation of units as
described above in "Transfers Between Divisions."
5. Special Situation Involving Alternate Funding Agents
The contract allows the Investment Account Values of all Plan
Participants to be transferred to an alternate Funding Agent with or
without the consent of the Plan Participants. Transfers to an alternate
Funding Agent require Notification from the Contractholder. The amount
to be transferred will be equal to the Investment Account Values
determined as of the end of the Valuation Period in which the
Notification is received. Such transfers will be subject to the
contract administration expense and recordkeeping expense.
6. Postponement of Cash Withdrawal or Transfer
Any cash withdrawal or transfer to be made from the contract or between
Investment Accounts in accordance with the preceding paragraphs will be
made (i) within seven calendar days after Notification for such payment
or transfer is received by the Company at its Home Office or (ii) on
the requested date of payment or transfer, if later. However, such
withdrawal or transfer may be deferred during any period when the right
to redeem Account 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
Account of securities owned by it is not reasonably practicable or (ii)
it is not reasonably practicable for the Account fairly to determine
the value of its net assets; or (c) the Commission by order so permits
for the protection of security holders. If any deferment of transfer or
withdrawal is in effect and has not been cancelled by Notification to
the Company within the period of deferment, the amount to be
transferred or withdrawn shall be determined as of the first Valuation
Date following expiration of the permitted deferment, and transfer or
withdrawal will be made within seven calendar days thereafter. The
Company will notify the Contractholder of any deferment exceeding 30
days.
7. Loans.
The Company will not make available a loan option for the contract
described in this Prospectus.
E. Other Contractual Provisions
1. Contribution Limits
The contract prescribes no limits on the minimum Contribution which may
be made to an Investment Account which correlates to a Plan
Participant. Plan Participant maximum Contributions are discussed under
"Federal Tax Status." Contributions may also be limited by the Plan.
The Company may also limit Contributions on 60-days notice.
2. Assignment
No benefits in the course of payment under a contract used to fund a
TDA Plan, 401(a) Plan or Creditor-Exempt Non-Qualified Plan are
assignable, by any Owner of Benefits, Plan Participant, beneficiary or
contingent annuitant and all such benefits under such contracts, shall
be exempt from the claims of creditors to the maximum extent permitted
by law. Benefits in the course of payment for contracts used to fund
PEDC plans and General Creditor Non-Qualified Plans are assignable only
by the Contractholder and such benefits are subject to the claims of
the Contractholder's general creditors.
Investment Account Values which correlate to a Plan Participant are
non-forfeitable by the Owner of Benefits; provided, however, if the
Plan specifically so provides, Investment Account Values which
correlate to a Plan Participant shall be reduced to the extent required
by the vesting provisions of the Plan as of the date the Company
receives Notification of the event requiring the reduction.
3. Cessation of Contributions
A cessation of Contributions with respect to all Plan Participants
shall occur at the election of the Contractholder upon Notification to
the Company, on the date the Plan terminates or on the date no
Investment Account Values remain under the contract or at the election
of the Company upon 60-days notice to the Contractholder. Following a
cessation of Contributions all terms of the contract will continue to
apply except that no further Contributions may be made.
4. Substitution of Securities
If shares of an Account are not available at some time in the future,
or if in the judgment of the Company further investment in such shares
would no longer be appropriate, there may be substituted therefor, or
Contributions received after a date specified by the Company may be
applied to purchase (i) shares of another account or another registered
open-end investment company or (ii) securities or other property as the
Company should in its discretion select. In the event of any investment
pursuant to clause (ii) above, the Company can make such changes as in
its judgment are necessary or appropriate in the frequency and methods
of determination of Unit Values, Net Investment Factors, Annuity Change
Factors, and Investment Account Values, including any changes in the
foregoing which will provide for the payment of an investment advisory
fee; provided, however, that any such changes shall be made only after
approval by the Insurance Department of the State of Iowa. The Company
will give written notice to each Owner of Benefits of any substitution
or such change and any substitution will be subject to the rules and
regulations of the Securities and Exchange Commission.
5. Changes in the Contract
The terms of a contract may be changed at any time by written agreement
between the Company and the Contractholder without the consent of any
Plan Participant, Owner of Benefits, beneficiary, or contingent
annuitant. However, except as required by law or regulation, no such
change shall apply to variable annuities which were in the course of
payment prior to the effective date of the change. The Company will
notify any Contractholder affected by any change under this paragraph.
The Company may unilaterally change the Contract at any time, including
retroactive changes, in order to meet the requirements of any law or
regulation issued by any governmental agency to which the Company is
subject. The Company may add Divisions to Separate Account B at any
time. In addition, the Company may, on 60-days prior notice to the
Contractholder, unilaterally change the basis for determining
Investment Account Values, the Net Investment Factor, the Annuity
Purchase Rates and the Annuity Change Factor; the guaranteed annuity
conversion rates; the Recordkeeping Expense and Contract Administration
Charge; and the provisions with respect to transfers to or from a
Companion Contract or between Investment Accounts.
However, no amendment or change will apply to annuities in the course
of payment except to the extent necessary to meet the requirements of
any law or regulation issued by a governmental agency to which the
Company is subject. In addition, no change in the guaranteed annuity
conversion rates will take effect for a current Plan Participant if the
effect of such amendment or change would be less favorable to the Owner
of Benefits. Also, any change in the contract administration expense or
recordkeeping expense will not take affect as to any Investment
Accounts to be transferred to an Alternate Funding Agent if, prior to
the date of the amendment or change is to take affect, the Company
receives a written request from the Contractholder for payment of all
such Investment Account Values to the Alternate Funding Agent and such
request is not revoked.
Furthermore, the Company may, on 60-days notice to the Contractholder
affected by the change, unilaterally change the mortality and expense
risks charge provided that (a) the charge shall in no event exceed
1.25%, (b) the charge shall not be changed more frequently than once in
any one year period and (c) no change shall apply to annuities which
were in the course of payment prior to the effective date of the
change.
STATEMENT OF VALUES
The Company will furnish each Owner of Benefits at least once during each
year a statement showing the number of units credited to the Investment Account
or Accounts which correlate to the Plan Participant, Unit Values for such
Investment Accounts and the resulting Investment Account Values.
SERVICES AVAILABLE BY TELEPHONE
The following transactions may be exercised by telephone by any Owner of
Benefits: 1) transfers between Investment Accounts; and 2) changes in
Contribution allocation percentages. The telephone transactions may be exercised
by telephoning 1-800-633-1373. 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 of Benefits 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 of Benefits' address of record. Owners of Benefits may obtain
additional information and assistance by telephoning the toll free number.
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, a Member of 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 for the distribution of the Contract in accordance with two
separate schedules one of which provides for payment of 4.5% of Contributions
scaling down for Contributions in excess of $5,000 and one which provides for
payments of 3.0% of Contributions scaling down for Contributions in excess of
$50,000. The Contract may also be sold through other selected broker-dealers
registered under the Securities Exchange Act of 1934. Princor Financial Services
Corporation is also the principal underwriter for various registered investment
companies organized by the Company. Princor Financial Services Corporation is an
indirectly 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 July 15, 1992.
However, the Divisions invest in Accounts of the Principal Variable Contract
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 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
Some of the Accounts (under their former names) were offered prior to the date
that 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. 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." 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.
In addition, from time to time, the Separate Account may advertise its
"yield" for the Bond Division and Government Securities Division for these
contracts. The "yield" of the Divisions 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.
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.
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 persons having the voting interest in the Account
shares.
The number of Account shares as to which a person 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.
During the accumulation period, the Owner of Benefits is the person having
the voting interest in the Account shares attributable to the Investment
Accounts which correlate to the Plan Participant. The number of Account shares
held in Separate Account B which are attributable to each Investment Account is
determined by dividing the Investment Account Value attributable to a Division
of Separate Account B by the net asset value of one share of the underlying
Account.
During the annuity period, the person then entitled to Variable Annuity
Payments has the voting interest in the Account shares attributable to the
Variable Annuity. The number of Account shares held in Separate Account B which
are attributable to each Variable Annuity is determined by dividing the reserve
for the Variable Annuity by the net asset value of one Account share. The voting
interest in the Account shares attributable to the Variable Annuity will
ordinarily decrease during the annuity period since the reserve for the Variable
Annuity decreases due to the reduction in the expected payment period.
Account shares for which Owners of Benefits or payees of Variable Annuities
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 person having a voting interest
together with an appropriate form which may be 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 persons otherwise having the voting interest as provided above, then the
Company may vote Account shares held in Separate Account B in its own right.
FEDERAL TAX STATUS
It should be recognized that the descriptions below of the federal income
tax status of amounts received under the contracts are not exhaustive and do not
purport to cover all situations. A qualified tax advisor should be consulted for
complete information. (For the federal tax status of the Company and Separate
Account B, see "Principal Mutual Life Insurance Company Separate Account B".)
A. Taxes Payable by Owners of Benefits and Annuitants
The contract offered in connection with this Prospectus is used with
retirement programs which receive favorable tax deferred treatment under
Federal income tax law and deferred annuity contracts purchased with after
tax dollars. Annuity payments or other amounts received under the contract
are subject to income tax withholding. 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.
Contributions to contracts used to fund Creditor-Exempt and General
Creditor Non-Qualified Plans do not enjoy the advantages available to
qualified retirement plans, but Contributions invested in contracts used to
Fund Creditor-Exempt Non-qualified Retirement Plans may receive
tax-deferred treatment of the earnings, until distributed from the contract
as retirement benefits.
1. Tax-Deferred Annuity Plans-- (Section 403(b) Annuities for Employees of
Certain Tax-Exempt Organizations or Public Educational Institutions)
Contributions. Under section 403(b) of the Code, payments made by
certain employers (i.e., tax-exempt organizations, meeting the
requirements of section 501(c)(3) of the Code and public educational
institutions) to purchase annuity contracts for their employees are
excludable from the gross income of employees to the extent that the
aggregate Purchase Payments do not exceed the limitations prescribed by
section 402(g), section 403(b)(2), and section 415 of the Code. This
gross income exclusion applies to employer contributions and voluntary
salary reduction contributions.
An individual's voluntary salary reduction contributions under section
403(b) are generally limited to the lesser of $9,500 or 25 percent of
net salary (or 20 percent of gross salary); additional catch-up
contributions are permitted under certain circumstances. Combined
employer and salary reduction contributions are generally limited to
approximately 25 percent of net salary. In addition, for plan years
beginning after December 31, 1988, employer contributions must comply
with various nondiscrimination rules; these rules may have the effect
of further limiting the rate of employer contributions for highly
compensated employees.
Taxation of Distributions. Distributions are restricted. The
restrictions apply to amounts accumulated after December 31, 1988
(including voluntary contributions after that date and earnings on
prior and current voluntary contributions). These restrictions require
that no distributions will be permitted prior to one of the following
events: (1) attainment of age 59 1/2, (2) separation from service, (3)
death, (4) disability, or (5) hardship (hardship distributions will be
limited to the amount of salary reduction contributions exclusive of
earnings thereon).
All distributions from a section 403(b) Plan are taxed as ordinary
income of the recipient in accordance with section 72 of the Code and
are subject to 20% income tax withholding. Distributions received
before the recipient attains age 59 1/2 generally are subject to a 10%
penalty tax in addition to regular income tax. Certain distributions
are excepted from this penalty tax, including distributions following
(1) death, (2) disability, (3) separation from service during or after
the year the Participant reaches age 55, (4) separation from service at
any age if the distribution is in the form of payments over the life
(or life expectancy) of the Plan Participant (or the Plan Participant
and Beneficiary), and (5) distributions not in excess of tax deductible
medical expenses.
Required Distributions. Generally, distributions from section 403(b)
Plans must commence no later than April 1 of the calendar year
following the calendar year in which the Plan Participant attains age
70 1/2 and such distributions must be made over a period that does not
exceed the life expectancy of the Plan Participant (or the Plan
Participant and Beneficiary). Plan Participants employed by
governmental entities and certain church organizations may delay the
commencement of payments until April 1 of the calendar year following
retirement if they remain employed after attaining age 70 1/2. However,
upon the death of the Plan Participant prior to the commencement of
annuity payments, the amount accumulated under the contract must be
distributed within five years or, if distributions to a beneficiary
designated under the contract commence within one year of the Plan
Participant's death, distributions are permitted over the life of the
beneficiary or over a period not extending beyond the beneficiary's
life expectancy. If the Plan Participant has commenced receiving
annuity distributions prior to the Plan Participant's death,
distributions must continue at least as rapidly as under the method in
effect at the date of death. Amounts accumulated under a contract on
December 31, 1986, are not subject to these minimum distributions
requirements. A penalty tax of 50% will be imposed on the amount by
which the minimum required distribution in any year exceeds the amount
actually distributed in that year.
Tax-Free Transfers and Rollovers. The Code provides for the tax-free
exchange of one annuity contract for another annuity contract, and the
IRS has ruled that total or partial amounts transferred between section
403(b) annuity contracts and/or 403(b)(7) custodial accounts may
qualify as tax-free exchanges under certain circumstances. In addition,
section 403(b) of the Code permits tax-free rollovers of eligible
rollover distributions from section 403(b) programs to Individual
Retirement Accounts (IRAs) under certain circumstances. If an eligible
rollover distribution is taken as a direct rollover to an IRA (or
another 403(b) plan) the mandatory 20% income tax withholding does not
apply. However, the 20% mandatory withholding requirement does apply to
an eligible rollover distribution that is not made as a direct
rollover. In addition, such a rollover must be completed within 60 days
of receipt of the distribution.
2. Public Employee Deferred Compensation Plans-- (Section 457 Unfunded
Deferred Compensation Plans of Public Employers and Tax-Exempt
Organizations)
Contributions. Under section 457 of the Code, individuals who perform
services for a unit of a state or local government may participate in a
deferred compensation program. Tax-exempt employers may establish
deferred compensation plans under section 457 only for a select group
of management or highly compensated employees and/or independent
contractors.
This type of program allows individuals to defer the receipt of
compensation which would otherwise be presently payable and to
therefore defer the payment of Federal income taxes on the amounts.
Assuming that the program meets the requirements to be considered a
Public Employee Deferred Compensation Plan (an "PEDC Plan"), an
individual may contribute (and thereby defer from current income for
tax purposes) the lesser of $7,500 or 331/3% of the individuals
includible compensation. (Includible compensation means compensation
from the employer which is current includible in gross income for
Federal tax purposes.) During the last three years before an individual
attains normal retirement age, additional catch-up deferrals are
permitted.
The amounts which are deferred may be used by the employer to purchase
the contract offered by this Prospectus. The contract is owned by the
employer and, in fact, is subject to the claims of the employer's
creditors. The employee has no present rights or vested interest in the
contract and is only entitled to payment in accordance with the PEDC
Plan provisions.
Taxation of Distributions. Amounts received by an individual from an
PEDC Plan are includible in gross income for the taxable year in which
such amounts are paid or otherwise made available.
Distributions Before Separation from Service. Distributions generally
are not permitted under an PEDC Plan prior to separation from service
except for unforeseeable emergencies. Emergency distributions are
includible in the gross income of the individual in the year in which
paid.
Required Distributions. The minimum distribution requirements for PEDC
Plans are generally the same as those for qualified plans and section
403(b) Plans Contracts, except that no amounts are exempted from
minimum distribution requirements.
Tax Free Transfers and Rollovers. Federal income tax law permits the
tax free transfer of PEDC Plan amounts to another PEDC Plan, but not to
an IRA or other type of plan.
3. 401(a) Plans
Contributions. Under Section 401(a) of the Code, payments made by
employers to purchase annuity Contracts for their employees are
excludable from the gross income of employees to the extent that the
aggregate Purchase Payments do not exceed the limitations prescribed by
section 402(g), and section 415 of the Code. This gross income
exclusion applies to employer contributions and voluntary salary
reduction contributions.
An individual's voluntary salary reduction contributions for a 401(k)
plan are generally limited to $10,000 (1998 limit).
For 401(a) qualified plans, the maximum annual contribution that a
member can receive is limited to the lesser of 25% of includible
compensation or $30,000.
Taxation of Distributions. Distributions are restricted. These
restrictions require that no distributions of employer contributions or
salary deferrals will be permitted prior to one of the following
events: (1) attainment of age 59 1/2, (2) separation from service, (3)
death, (4) disability, or (5) for certain 401(a) Plans, hardship
(hardship distributions will be limited to the amount of salary
reduction contributions exclusive of earnings thereon). In-service
distributions may be permitted under various circumstances in certain
plans.
All distributions from a section 401(a) Plan are taxed as ordinary
income of the recipient in accordance with section 72 of the Code.
Distributions received before the recipient attains age 59 1/2
generally are subject to a 10% penalty tax in addition to regular
income tax. Certain distributions are excepted from this penalty tax,
including distributions following (1) death, (2) disability, 3)
separation from service during or after the year the Plan Participant
reaches age 55, (4) separation from service at any age if the
distribution is in the form of payments over the life (or life
expectancy) of the Plan Participant (or the Plan Participant and
Beneficiary), and (5) distributions not in excess of tax deductible
medical expenses.
Required Distributions. Generally, distributions from section 401(a)
Plans must commence no later than April 1 of the calendar year
following the calendar year in which the Participant attains age 70 1/2
and such distributions must be made over a period that does not exceed
the life expectancy of the Plan Participant (or the Plan Participant
and Beneficiary). Following the death of the Plan Participant, the
distribution requirements are generally the same as those described
with respect to 403(b) Plans. A penalty tax of 50% will be imposed on
the amount by which the minimum required distribution in any year
exceeds the amount actually distributed in that year.
Tax-Free Transfers and Rollovers. The Code provides for the tax-free
exchange of one annuity contract for another annuity contract.
Distributions from a 401(a) Plan may also be transferred to a Rollover
IRA.
4. Creditor-Exempt Non-Qualified Plans
Certain employers may establish Creditor-Exempt Non-Qualified Plans.
Under such Plans the employer formally funds the Plan either by
purchasing an annuity contract or by transferring funds on behalf of
Plan Participants to a trust established for the benefit of such Plan
Participants with a direction to the trustee to use the funds to
purchase an annuity contract. The Trustee is the Contractholder and is
considered the nominal owner of the contract. Each Plan Participant as
a Trust beneficiary, is an Owner of Benefits under the contract and is
treated as the owner for income tax purposes.
Taxation of Contract Earnings. Since each Plan Participant for income
tax purposes is considered the owner of the Investment Account or
Accounts which correlate to such Participant, any increase in a
Participant's Investment Account Value resulting from the investment
performance of the Contract is not taxable to the Plan Participant
until received by such Plan Participant.
Contributions. Payments made by the employer to the Trust on behalf of
a Plan Participant are currently includible in the Plan Participant's
gross income as additional compensation and, if such payments coupled
with the Plan Participant's other compensation is reasonable in amount,
such payments are currently deductible as compensation by the Employer.
Taxation of Distributions. In general, partial redemptions from an
Investment Account that are not received by a Plan Participant as an
annuity under the contract allocated to post-August 13, 1982
Contributions under a preexisting contract are taxed as ordinary income
to the extent of the accumulated income or gain under the contract.
Partial redemptions from a contract that are allocated to pre-August
14, 1982 Contributions under a preexisting contract are taxed only
after the Plan Participant has received all of the "investment in the
contract" (Contributions less any amounts previously received and
excluded from gross income).
In the case of a complete redemption of an Investment Account under the
contract (regardless of the date of purchase), the amount received will
be taxed as ordinary income to the extent that it exceeds the Plan
Participant's investment in the contract.
If a Plan Participant purchases two or more contracts from the Company
(or an affiliated company) within any twelve month period after October
21, 1988, those contracts are treated as a single contract for purposes
of measuring the income on a partial redemption or complete surrender.
When payments are received as an annuity, the Plan Participant's
investment in the contract is treated as received ratably over the
expected payment period of the annuity and excluded from gross income
as a tax-free return of capital. Individuals who commence receiving
annuity payments on or after January 1, 1987, can exclude from income
only their unrecovered investment in the contract. Where such
individuals die before they have recovered their entire investment in
the contract on a tax-free basis, are entitled to a deduction of the
unrecovered amount on their final tax return.
In addition to regular income taxes, there is a 10% penalty tax on the
taxable portion of a distribution received before the Plan Participant
attains age 59 1/2 under the contract, unless the distribution is; (1)
made to a Beneficiary on or after death of the Plan Participant, (2)
made upon the disability of the Plan Participant; (3) part of a series
of substantially equal annuity payments for the life or life expectancy
of the Plan Participant or the Plan Participant and Beneficiary; (4)
made under an immediate annuity contract, or (5) allocable to
Contributions made prior to August 14, 1982.
Required Distributions. The Internal Revenue Code does not require a
Plan Participant under a Creditor-Exempt Non-Qualified Plan to commence
receiving distributions at any particular time and does not limit the
duration of annuity payments. However, the contract provides the
Annuity Commencement Date must be no later than the April 1 of the
calendar year following the calendar year in which the Participant
attains age 70 1/2. However, upon the death of the Plan Participant
prior to the commencement of annuity payments, the amount accumulated
under the contract must be distributed within five years or, if
distributions to a beneficiary designated under the contract commence
within one year of the Plan Participant's death, distributions are
permitted over the life of the beneficiary or over a period not
extending beyond the beneficiary's life expectancy. If the Plan
Participant has commenced receiving annuity distributions prior to the
Plan Participant's death, distributions must continue at least as
rapidly as under the method in effect at the date of death.
Tax-Free Exchanges. Under Section 1035 of the Code, the exchange of one
annuity contract for another is not a taxable transaction, but is
reportable to the IRS. Transferring Investment Account Values from this
contract to a Companion Contract would fall within the provisions of
Section 1035 of the Code.
5. General Creditor Non-Qualified Plans
Contributions. Private taxable employers may establish informally
funded, General Creditor Non-Qualified Plans for a select group of
management or highly compensated employees and/or independent
contractors. Certain arrangements of nonprofit employers entered into
prior to August 16, 1989, and not subsequently modified, are subject to
the rules discussed below.
Informally funded General Creditor Non-Qualified Plans represent a bare
contractual promise on the part of the employer to pay wages at some
future time. The contract used to informally fund the employer's
obligation is owned by the employer and is subject to the claims of the
employer's creditors. The Plan Participant has no present right or
vested interest in the contract and is only entitled to payment in
accordance with Plan provisions. If the Employer who is the
Contractholder, is not a natural person, the contract does not receive
tax-deferred treatment afforded other Contractholders under the
Internal Revenue Code.
Taxation of Distributions. Amounts received by an individual from a
General Creditor Non-Qualified Plan are includible in the employee's
gross income for the taxable year in which such amounts are paid or
otherwise made available. Such amounts are deductible by the employer
when paid to the individual.
B. Fund Diversification
Separate Account investments must be adequately diversified in order for
the increase in the value of Creditor-Exempt 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
Creditor-Exempt Non-Qualified Contractholders.
The investment opportunities of the Accounts could conceivably be limited
by adhering to the above diversification requirements. This would affect
all Contractholders, 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 Narber, Vice President and General Counsel of the Company.
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.
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.
CONTRACTHOLDERS' INQUIRIES
Contractholders' inquiries should be directed to Princor Financial Services
Corporation, A Member of The Principal Financial Group, Des Moines, Iowa
50392-0200, (515) 247-5711.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
The table of contents for the Statement of Additional Information is
provided below.
TABLE OF CONTENTS
Page
Independent Auditors................................................... 3
Underwriting Commissions............................................... 3
Calculation of Yield and Total Return.................................. 3
Principal Mutual Life Insurance Company Separate Account B
Report of Independent Auditors................................ 5
Financial Statements.......................................... 6
The Principal Financial Group(R)
Report of Independent Auditors................................ 23
Financial Statements.......................................... 24
To obtain a copy of the Statement of Additional Information, free of
charge, write or telephone:
Princor Financial Services Corporation
a Member of
The Principal Financial Group
Des Moines, IA 50392-0200
Telephone: 1-800-633-1373
<PAGE>
PART B
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B
PREMIER VARIABLE (A GROUP VARIABLE ANNUITY CONTRACT FOR
EMPLOYER- SPONSORED QUALIFIED AND NON-QUALIFIED RETIREMENT PLANS)
Statement of Additional Information
dated May 1, 1998
This Statement of Additional Information provides information about
Principal Mutual Life Insurance Company Separate Account B Premier Variable -
Group Variable Annuity Contracts (the "Contract" or the "Contracts") 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:
Princor Financial Services Corporation
a Member of
The Principal Financial Group
Des Moines, Iowa 50392-0200
Telephone: 1-800-633-1373
TABLE OF CONTENTS
Page
Independent Auditors ....................................................... 3
Underwriting Commissions.................................................... 3
Calculation of Yield and Total Return....................................... 3
Principal Mutual Life Insurance Company Separate Account B
Report of Independent Auditors..................................... 5
Financial Statements............................................... 6
The Principal Financial Group(R)
Report of Independent Auditors..................................... 23
Financial Statements............................................... 24
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.
UNDERWRITING COMMISSIONS
Aggregate dollar amount of underwriting commissions paid to and retained by
Princor Financial Services Corporation for all Separate Account B contracts:
Year Paid To Retained by
---- -------------- -----------
1997 $11,491,356.06 $340.24
1996 $11,090,837.12 $14,528.47
1995 $5,326,848.77 $26,014.78
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 July 15, 1992.
However, the Divisions invest in Accounts of the Principal Variable Contract
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 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
Some of the Accounts (under their former names) were offered prior to the date
that 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 sales load deducted from purchase payments which, if included, would
reduce the "yield" and "effective yield." For the period ending December 31,
1997, the 7-day annualized and effective yields were 4.91% and 5.03%,
respectively.
From time to time, the Separate Account will advertise the average annual total
return of its various divisions for these contracts. 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.
Assuming the contract had been offered as of the dates indicated in the table
below, the hypothetical average annual total returns for the periods ending
December 31, 1997 are:
One Year Five Year Ten Year
-------- --------- --------
Balanced Division 17.43% 12.17% 12.57%
Bond Division 10.13% 8.06% 9.25%
Capital Value Division 27.99% 17.38% 14.84%
Government Securities Division 9.92% 7.00% 8.99%
Growth Division 26.43% 18.56%(1) 18.56%(1)
International Division 11.77% 12.26%(1) 12.26%(1)
MidCap Division 22.24% 17.76% 17.89%
Money Market Division 4.76% 4.08% 5.25%
(1) Period from May 2, 1994 - December 31, 1997
<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
===============
See accompanying notes.
</TABLE>
<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>
<CAPTION>
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> <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.
PART C
PREMIER VARIABLE CONTRACT
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration Statement
(1) Part A:
Condensed Financial Information for the five years ended
December 31, 1997 and for the period beginning July 15,
1992 and ended December 31, 1992.
(2) Part B:
Principal Mutual Life Insurance Company Separate
Account B:
Report of Independent Auditors.
Statement of Net Assets, December 31, 1997.
Statement of Operations for the year ended
December 31, 1997.
Statements of Changes in Net Assets for the years
ended December 31, 1997 and 1996.
Notes to Financial Statements.
The Principal Financial Group(R):
Report of Independent Auditors.
Consolidated Statements of Operations for the years
ended December 31, 1997 and 1996.
Consolidated Statements of Financial Position,
December 31, 1997 and 1996.
Consolidated Statements of Equity for the years
ended December 31, 1997 and 1996.
Consolidated Statements of Cash Flows for the
years ended December 31, 1997 and 1996.
Notes to Consolidated Financial Statements.
(b) Exhibits
(1) Board resolution of Registrant (Filed 3/1/96)
(3a) Distribution Agreement (Filed 3/1/96)
(3b) Selling Agreement (Filed 3/1/96)
(4a) Form of Variable Annuity Contract (Filed 12/16/97)
(4b) Variable Annuity Contract Endorsement (Filed 12/16/97)
(4c) Variable Annuity Contract Rider (Filed 12/16/97)
(5) Form of Variable Annuity Application (Filed 10/23/97)
(6a) Articles of Incorporation of Depositor (Filed 3/1/96)
(6b) Bylaws of Depositor (Filed 3/1/96)
(9) Opinion of Counsel (Filed 3/1/96)
(10a) Consent of Ernst & Young LLP
(10b) Powers of Attorney
(13a) Total Return Calculation (Filed 3/1/96)
(13b) Annualized Yield for Separate Account B (Filed 3/1/96)
(27) Financial Data Schedule for Separate Account B
<PAGE>
Item 25. Officers and Directors of the Depositor
Principal Mutual Life Insurance Company is managed by a Board of
Directors which is elected by its policyowners. The directors and
executive officers of the Company, their positions with the Company,
including Board Committee memberships, and their principal business
address, are as follows:
DIRECTORS: Principal
Name, Positions and Offices Business Address
MARY VERMEER ANDRINGA Vermeer Manufacturing Company
Director Box 200
Member, Nominating Committee Pella, IA 50219-0200
RUTH M. DAVIS The Pymatuning Group, Inc.
Director Suite 570, 4900 Seminary Road
Member, Nominating Committee Alexandria, VA 22311
DAVID J. DRURY The Principal Financial Group
Director Des Moines, IA 50392
Chairman of the Board
Chief Executive Officer
Chair, Executive Committee
C. DANIEL GELATT, JR. NMT Corporation
Director 2004 Kramer Street
Member, Executive Committee La Crosse, WI 54603
Chair, Human Resources
Committee
J. BARRY GRISWELL The Principal Financial Group
Director and Des Moines, IA 50392
President
G. DAVID HURD The Principal Financial Group
Director Des Moines, IA 50392
Member, Executive and
Nominating Committees
THEODORE M. HUTCHISON 4019 Oak Forest Drive
Director Des Moines, IA 50312
Member, Nominating Committees
CHARLES S. JOHNSON Pioneer Hi-Bred International, Inc.
Director 400 Locust, Ste. 700 Capital Square
Member, Audit Committee Des Moines, IA 50309
WILLIAM T. KERR Meredith Corporation
Director 1716 Locust St.
Member, Executive Committee Des Moines, IA 50309-3023
and Chair, Nominating
Committee
LEE LIU IES Industries Inc.
Director Post Office Box 351
Member, Executive and Cedar Rapids, IA 52406
Human Resources Committees
VICTOR. H. LOEWENSTEIN Egon Zehnder International
Director 350 Park Avenue - 8th Floor
Member, Audit New York, NY 10022
Committee
RONALD D. PEARSON Hy-Vee, Inc.
Director 5820 Westown Parkway
Member, Human Resources West Des Moines, IA 50266
Committee
JOHN R. PRICE The Chase Manhattan Corporation
Director 270 Park Avenue - 44th Floor
Member, Nominating Committee New York, NY 10017
DONALD M. STEWART The College Board
Director 45 Columbus Avenue
Member, Human Resources New York, NY 10023-6992
Committee
ELIZABETH E. TALLETT Dioscor, Inc.
Director 48 Federal Twist Road
Chair, Audit Committee Stockton, NJ 08559
DEAN D. THORNTON 1602- 34 Court West
Director Seattle, WA 98199
Member, Audit Committee
FRED W. WEITZ Essex Meadows, Inc.
Director 800 Second Avenue, Suite 150
Member, Human Resources Des Moines, IA 50309
Committee
Executive Officers (Other than Directors):
JOHN E. ASCHENBRENNER Senior Vice President
DENNIS P. FRANCIS Senior Vice President
THOMAS J. GAARD Senior Vice President
MICHAEL H.GERSIE Senior Vice President
THOMAS J. GRAF Senior Vice President
RONALD E. KELLER Executive Vice President
GREGG R. NARBER Senior Vice President and
General Counsel
MARY A. O'KEEFE Senior Vice President
RICHARD L. PREY Senior Vice President
CARL C. WILLIAMS Senior Vice President and Chief
Information Officer
Item 26. Persons Controlled by or Under Common Control with Depositor
Principal Mutual Life Insurance Company (incorporated as a
mutual life insurance company under the laws of Iowa);
Sponsored the organization of the following mutual funds,
some of which it controls by virtue of owning voting
securities:
Principal Balanced Fund, Inc.(a Maryland Corporation) 0.74% of
shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998.
Principal Blue Chip Fund, Inc.(a Maryland Corporation) 0.95% of
shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998.
Principal Bond Fund, Inc.(a Maryland Corporation) 1.35% of shares
outstanding owned by Principal Mutual Life Insurance Company
(including subsidiaries and affiliates) on January 30, 1998.
Principal Capital Value Fund, Inc. (a Maryland Corporation)
27.36% of outstanding shares owned by Principal Mutual Life
Insurance Company (including subsidiaries and affiliates) on
January 30, 1998.
Principal Cash Management Fund, Inc. (a Maryland Corporation)
2.34% of outstanding shares owned by Principal Mutual Life
Insurance Company (including subsidiaries and affiliates) on
January 30, 1998.
Principal Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.40% of shares outstanding owned by Principal
Mutual Life Insurance Company (including subsidiaries and
affiliates) on January 30, 1998.
Principal Growth Fund, Inc. (a Maryland Corporation) 0.48% of
outstanding shares owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998.
Principal High Yield Fund, Inc. (a Maryland Corporation) 16.72%
of shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998.
Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 66.10% of shares outstanding owned by Principal
Mutual Life Insurance Company (including subsidiaries and
affiliates) on January 30, 1998.
Principal International Fund, Inc. (a Maryland Corporation)
23.63% of shares outstanding owned by Principal Mutual Life
Insurance Company (including subsidiaries and affiliates) on
January 30, 1998.
Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 61.51% of shares outstanding owned by Principal
Mutual Life Insurance Company (including subsidiaries and
affiliates) on January 30, 1998.
Principal Limited Term Bond Fund, Inc. (a Maryland Corporation)
45.48% of shares outstanding owned by Principal Mutual Life
Insurance Company(including subsidiaries and affiliates) on
January 30, 1998.
Principal MidCap Fund, Inc. (a Maryland Corporation) 0.60% of
shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998
Principal Real Estate Fund, Inc. (a Maryland Corporation) 95.34%
of shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998
Principal SmallCap Fund, Inc.(a Maryland Corporation) 88.70% of
shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998
Principal Special Markets Fund, Inc. (a Maryland Corporation)
96.92% of shares outstanding of the International Emerging
Markets Portfolio, 50.28% of the shares outstanding of the
International Securities Portfolio, 96.87% of shares outstanding
of the International SmallCap Portfolio and 100% of the shares
outstanding of the Mortgage-Backed Securities Portfolio were
owned by Principal Mutual Life Insurance Company (including
subsidiaries and affiliates) on January 30, 1998
Principal Tax-Exempt Bond Fund, Inc. (a Maryland Corporation)
0.56% of shares outstanding owned by Principal Mutual Life
Insurance Company (including subsidiaries and affiliates) on
January 30, 1998.
Principal Tax-Exempt Cash Management Fund, Inc. (a Maryland
Corporation) 0.99% of shares outstanding owned by Principal
Mutual Life Insurance Company (including subsidiaries and
affiliates) on January 30, 1998.
Principal Utilities Fund, Inc. (a Maryland Corporation) 1.45% of
shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998.
Principal Variable Contracts Fund, Inc. (a Maryland Corporation)
100% of shares outstanding of the following Accounts owned by
Principal Mutual Life Insurance Company and its Separate Accounts
on January 30, 1998: Aggressive Growth, Asset Allocation,
Balanced, Bond, Capital Value, Government Securities, Growth,
High Yield, International, MidCap and Money Market.
Subsidiaries organized and wholly-owned by Principal Mutual Life
Insurance Company:
a. Principal Holding Company (an Iowa Corporation) A holding
company wholly-owned by Principal Mutual Life Insurance
Company.
b. PT Asuransi Jiwa Principal Egalita Indonesia (an Indonesia
Corporation)
Subsidiaries wholly-owned by Principal Holding Company:
a. Petula Associates, Ltd. (an Iowa Corporation) a real estate
development company.
b. Patrician Associates, Inc. (a California Corporation) a real
estate development company.
c. Principal Development Associates, Inc. (a California
Corporation) a real estate development company.
d. Princor Financial Services Corporation (an Iowa Corporation)
a registered broker-dealer.
e. Invista Capital Management, Inc. (an Iowa Corporation) a
registered investment adviser.
f. Principal Marketing Services, Inc. (a Delaware Corporation)
a corporation formed to serve as an interface between
marketers and manufacturers of financial services products.
g. The Principal Financial Group, Inc. (a Delaware corporation)
a general business corporation established in connection
with the new corporate identity. It is not currently active.
h. Delaware Charter Guarantee & Trust Company (a Delaware
Corporation) a nondepository trust company.
i. The Admar Group, Inc. (a Florida Corporation) a national
managed care service organization that developes and manages
preferred provider organizations.
j. Principal Health Care, Inc. (an Iowa Corporation) a
developer and administrator of managed care systems.
k. Principal Financial Advisors, Inc. (an Iowa Corporation) a
registered investment advisor.
l. Principal Asset Markets, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
m. Principal Portfolio Services, Inc. (an Iowa Corporation) a
mortgage due diligence company.
n. Principal International, Inc. (an Iowa Corporation) a
company formed for the purpose of international business
development.
o. Principal Spectrum Associates, Inc. (a California
Corporation) a real estate development company.
p. Principal Commercial Advisors, Inc. (an Iowa Corporation) a
company that purchases, manages and sells commercial real
estate assets.
q. Principal FC, Ltd. (an Iowa Corporation) a limited purpose
investment corporation.
r. Principal Residential Mortgage, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
s. Equity FC, Ltd. (an Iowa Corporation) engaged in investment
transactions including limited partnership and limited
liability companies.
t. Principal Bank (a Federal Corporation) a Federally chartered
direct delivery savings bank.
u. HealthRisk Resource Group, Inc. (an Iowa Corporation) a
management services organization.
Subsidiaries organized and wholly-owned by Princor Financial Services
Corporation:
a. Principal Management Corporation (an Iowa Corporation) a
registered investment advisor.
b. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange
Commission. It is not currently active.
Subsidiary wholly owned by Delaware Charter Guarantee & Trust Company:
a. Trust Consultants, Inc. (a California Corporation) a
Consulting and Administration of Employee Benefit Plans.
Subsidiary organized and wholly-owned by Principal Health Care, Inc.:
a. Principal Health Care of Texas, Inc. ( a Texas Corporation)
a health maintenance organization.
Subsidiaries owned by The Admar Group, Inc.:
a. Admar Corporation (a California Corporation) a managed care
services organization.
b. Admar Insurance Marketing, Inc. (a California Corporation) a
managed care services organization.
c. Benefit Plan Administrators, Inc. (a Colorado Corporation) a
managed care services organization.
d. SelectCare Management Co., Inc. (a California Corporation) a
managed care services organization.
e. Image Financial & Insurance Services, Inc. (a California
Corporation) a managed care services organization.
f. WM. G. Hofgard & Co., Inc. (a California Corporation) a
managed care services organization.
Subsidiary owned by Petula Associates, Ltd.
a. Magnus Properties, Inc. (an Iowa Corporation) which owns
real estate.
Subsidiaries owned by Principal International, Inc.:
a. Principal Insurance Company (Hong Kong) Limited (a Hong Kong
Corporation) group life and group pension products.
b. Principal International Argentina, S.A. (an Argentina
services corporation).
c. Principal International Asia Limited (a Hong Kong
Corporation) a corporation operating as a regional
headquarters for Asia.
d. Principal International de Chile, S.A. (a Chile
Corporation) a holding company.
e. Principal International Espana, S.A. de Seguros de Vida (a
Spain Corporation) a life insurance company (individual
group), annuities and pension.
f. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation) a life insurance company (individual and
group), personal accidents.
g. Qualitas Medica, S.A. (an Argentina HMO) a health
maintenance organization.
h. Afore Confia-Principal, S.a. de C.V. (a Mexico Corporation),
pension.
i. Zao Principal International (a Russia Corporation) inactive.
j. Principal Trust Company (Asia) Limited (an Asia trust
company).
k. Principal Asset Management Company (Asia) Ltd. (Hong Kong)
a corporation which manages pension funds.
Subsidiaries owned by Principal International Argentina, S.A.:
a. Ethika Administradora de Fondos de Jubilaciones y Pensions
S.A. (an Argentina company) a pension company.
b. Principal Compania de Seguros de Retiro, S.A. (an Argentina
Corporation) an individual annuity/employee benefit company.
c. Principal Life Compania de Seguros, S.A. (an Argentina
Corporation) a life insurance company.
Subsidiary owned by Principal International de Chile, S.A.:
a. BanRenta Compania de Seguros de Vida, S.A. (a Chile
Corporation) group life and supplemental health, individual
annuities.
Subsidiary owned by Principal International Espana, S.A. de Seguros de
Vida:
a. Princor International Espana Sociedad Anonima de Agencia de
Seguros (a Spain Corporation) an insurance agency.
Subsidiary owned by Afore Confia-Principal, S.A. de C.V.:
a. Siefore Confia-Principal, S.A. de C.V. (a Mexico
Corporation) an investment fund company.
Item 27. Number of Contractowners - As of: March 31, 1998
(1) (2) (3)
Number of Plan Number of
Title of Class Participants Contractowners
-------------- -------------- --------------
BFA Variable Annuity Contracts 95 10
Pension Builder Contracts 1,192 1,340
Personal Variable Contracts 4,388 137
Premier Variable Contracts 17,789 270
Flexible Variable Annuity Contract 29,718 29,718
Item 28. Indemnification
None
Item 29. Principal Underwriters
(a) Princor Financial Services Corporation, principal underwriter for
Registrant, acts as principal underwriter for, Principal Balanced Fund, Inc.,
Principal Blue Chip Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Value Fund, Inc., Principal Cash Management Fund, Inc., Principal Government
Securities Income Fund, Inc., Principal Growth Fund, Inc., Principal High Yield
Fund, Inc., Principal International Emerging Markets Fund, Inc., Principal
International Fund, Inc., Principal International SmallCap Fund, Inc., Principal
Limited Term Bond Fund, Inc., Principal MidCap Fund, Inc., Principal Real Estate
Fund, Inc., Principal SmallCap Fund, Inc., Principal Special Markets Fund, Inc.,
Principal Tax-Exempt Bond Fund, Inc., Principal Tax-Exempt Cash Management Fund,
Inc., Principal Utilities Fund, Inc., Principal Variable Contracts Fund, Inc.
and for variable annuity contracts participating in Principal Mutual Life
Insurance Company Separate Account B, a registered unit investment trust for
retirement plans adopted by public school systems or certain tax-exempt
organizations pursuant to Section 403(b) of the Internal Revenue Code, Section
457 retirement plans, Section 401(a) retirement plans, certain non- qualified
deferred compensation plans and Individual Retirement Annuity Plans adopted
pursuant to Section 408 of the Internal Revenue Code, and for variable life
insurance contracts issued by Principal Mutual Life Insurance Company Variable
Life Separate Account, a registered unit investment trust.
(b) (1) (2)
Positions
and offices
Name and principal with principal
business address underwriter
John E. Aschenbrenner Director
The Principal
Financial Group
Des Moines, IA 50392
Robert W. Baehr Marketing Services
The Principal Officer
Financial Group
Des Moines, IA 50392
Craig L. Bassett Treasurer
The Principal
Financial Group
Des Moines, IA 50392
Michael J. Beer Senior Vice President and
The Principal Chief Operating Officer
Financial Group
Des Moines, IA 50392
Mary L. Bricker Assistant Corporate
The Principal Secretary
Financial Group
Des Moines, IA 50392
Lynn A. Brones Vice President -
The Principal Investment Network
Financial Group
Des Moines, IA 50392
David J. Drury Director
The Principal
Financial Group
Des Moines, IA 50392
Arthur S. Filean Vice President
The Principal
Financial Group
Des Moines, IA 50392
Paul N. Germain Vice President -
The Principal Mutual Fund Operations
Financial Group
Des Moines, IA 50392
Ernest H. Gillum Assistant Vice President -
The Principal Registered Products
Financial Group
Des Moines, IA 50392
William C. Gordon Insurance License Officer
The Principal
Financial Group
Des Moines, IA 50392
Thomas J. Graf Director
The Principal
Financial Group
Des Moines, IA 50392
J. Barry Griswell Director and
The Principal Chairman of the
Financial Group Board
Des Moines, IA 50392
Joyce N. Hoffman Vice President and
The Principal Corporate Secretary
Financial Group
Des Moines, IA 50392
Stephan L. Jones Director and
The Principal President
Financial Group
Des Moines, IA 50392
Ronald E. Keller Director
The Principal
Financial Group
Des Moines, IA 50392
Ellen Z. Lamale Director
The Principal
Financial Group
Des Moines, IA 50392
John R. Lepley Senior Vice
The Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392
Gregg R. Narber Director
The Principal
Financial Group
Des Moines, IA 50392
Mark M. Oswald Compliance Officer
The Principal
Financial Group
Des Moines, IA 50392
Kelly A. Paul Systems/Technology -
The Principal Officer
Financial Group
Des Moines, IA 50392
Richard L. Prey Director
The Principal
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller -
The Principal Mutual Funds
Financial Group
Des Moines, IA 50392
Martin R. Richardson Operations Officer -
The Principal Broker/Dealer Services
Financial Group
Des Moines, IA 50392
Elizabeth R. Ring Controller
The Principal
Financial Group
Des Moines, IA 50392
Michael D. Roughton Counsel
The Principal
Financial Group
Des Moines, IA 50392
Jean B. Schustek Product Compliance Officer -
The Principal Registered Products
Financial Group
Des Moines, IA 50392
Kyle R. Selberg Vice President-Marketing
The Principal
Financial Group
Des Moines, IA 50392
Susan R. Sorensen Marketing Officer
The Principal
Financial Group
Des Moines, IA 50392
Roger C. Stroud Assistant Director -
The Principal Marketing
Financial Group
Des Moines, IA 50392
(c) (1) (2)
Net Underwriting
Name of Principal Discounts and
Underwriter Commissions
Princor Financial $11,491,356.06
Services Corporation
(3) (4) (5)
Compensation on Brokerage
Redemption Commissions Compensation
0 0 0
Item 30. Location of Accounts and Records
All accounts, books or other documents of the Registrant are located
at the offices of the Depositor, The Principal Financial Group, Des
Moines, Iowa 50392.
Item 31. Management Services
Inapplicable
Item 32. Undertakings
The Registrant undertakes that in restricting cash withdrawals from
Tax Sheltered Annuities to prohibit cash withdrawals before the
Participant attains age 59 1/2, separates from service, dies, or
becomes disabled or in the case of hardship, Registrant acts in
reliance of SEC No Action Letter addressed to American Counsel of Life
Insurance (available November 28, 1988). Registrant further undertakes
that:
1. Registrant has included appropriate disclosure regarding the
redemption restrictions imposed by Section 403(b)(11) in its
registration statement, including the prospectus, used in
connection with the offer of the contract;
2. Registrant will include appropriate disclosure regarding the
redemption restrictions imposed by Section 403(b)(11) in any
sales literature used in connection with the offer of the
contract;
3. Registrant will instruct sales representatives who solicit Plan
Participants to purchase the contract specifically to bring the
redemption restrictions imposed by Section 403(b)(11) to the
attention of the potential Plan Participants; and
4. Registrant will obtain from each Plan Participant who purchases a
Section 403(b) annuity contract, prior to or at the time of such
purchase, a signed statement acknowledging the Plan Participant's
understanding of (a) the restrictions on redemption imposed by
Section 403(b)(11), and (b) the investment alternatives available
under the employer's Section 403(b) arrangement, to which the
Plan Participant may elect to transfer his contract value.
REPRESENTATION PURSUANT TO SECTION 26 OF THE INVESTMENT COMPANY ACT OF 1940
Principal Mutual Life Insurance Company represents the fees and charges deducted
under the Policy, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed by the
Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Principal Mutual Life Insurance
Company Separate Account B, certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of the Registration Statement and
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned thereto duly authorized in the City of Des Moines and
State of Iowa, on the 13th day of April, 1998
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT B
(Registrant)
By: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
(Depositor)
/s/ David J. Drury
By ______________________________________________
David J. Drury
Chairman and Chief Executive Officer
Attest:
/s/ Joyce N. Hoffman
- -----------------------------------
Joyce N. Hoffman
Vice President and
Corporate Secretary
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
Signature Title Date
/s/ D. J. Drury Chairman and April 13, 1998
- -------------------- Chief Executive Officer
D. J. Drury
/s/ D. C. Cunningham Vice President and April 13, 1998
- -------------------- Controller (Principal
D. C. Cunningham Accounting Officer)
/s/ M. H. Gersie Senior Vice President April 13, 1998
- -------------------- (Principal Financial
M. H. Gersie Officer)
(M. V. Andringa)* Director April 13, 1998
- --------------------
M. V. Andringa
(R. M. Davis)* Director April 13, 1998
- --------------------
R. M. Davis
(C. D. Gelatt, Jr.)* Director April 13, 1998
- --------------------
C. D. Gelatt, Jr.
(J. B. Griswell)* Director April 13, 1998
- --------------------
J. B. Griswell
(G. D. Hurd)* Director April 13, 1998
- --------------------
G. D. Hurd
(T. M. Hutchison)* Director April 13, 1998
- --------------------
T. M. Hutchison
(C. S. Johnson)* Director April 13, 1998
- --------------------
C. S. Johnson
(W. T. Kerr)* Director April 13, 1998
- --------------------
W. T. Kerr
(L. Liu)* Director April 13, 1998
- --------------------
L. Liu
(V. H. Loewenstein)* Director April 13, 1998
- --------------------
V. H. Loewenstein
(R. D. Pearson)* Director April 13 1998
- --------------------
R. D. Pearson
(J. R. Price)* Director April 13, 1998
- --------------------
J. R. Price, Jr.
(D. M. Stewart)* Director April 13, 1998
- --------------------
D. M. Stewart
(E. E. Tallett)* Director April 13, 1998
- --------------------
E. E. Tallett
(D. D. Thornton)* Director April 13, 1998
- --------------------
D. D. Thornton
(F. W. Weitz)* Director April 13, 1998
- --------------------
F. W. Weitz
*By /s/ David J. Drury
------------------------------------
David J. Drury
Chairman and Chief Executive Officer
Pursuant to Powers of Attorney
Previously Filed or Included Herein
ERNST & YOUNG LLP Suite 3400 Phone: 515 243 2727
801 Grand Avenue
Des Moines, Iowa 50309-2764
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Independent
Auditors" and to the use of our reports dated February 6, 1998 (with respect to
Principal Mutual Life Insurance Company Separate Account B) and January 30, 1998
(with respect to The Principal Financial Group(R), comprised of Principal Mutual
Life Insurance Company and its subsidiaries), in Post-Effective Amendment No. 12
to the Registration Statement (Form N-4 No. 33-44670) and related Prospectus of
Principal Mutual Life Insurance Company Separate Account B Premier Variable (a
Group Variable Annuity Contract for Employer-Sponsored Qualified and
Non-Qualified Retirement Plans).
/s/ Ernst & Young LLP
Des Moines, Iowa
April 15, 1998
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Principal
Mutual Life Insurance Company, an Iowa corporation (the "Company"), hereby
constitutes and appoints D. J. Drury, G. D. Hurd, T. M. Hutchison and F. W.
Weitz, and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name, place and stead of the
undersigned, to execute and file any of the documents referred to below relating
to registration under the Securities Act of 1933 with respect to variable
annuity contracts, with premiums received in connection with such contracts held
in the Principal Mutual Life Insurance Company Separate Account B on Form N-4 or
other forms under the Securities Act of 1933, and any and all amendments thereto
and reports thereunder with all exhibits and all instruments necessary or
appropriate in connection therewith, each of said attorneys-in-fact and agents
and his or their substitutes being empowered to act with or without the others
or other, and to have full power and authority to do or cause to be done in the
name and on behalf of the undersigned each and every act and thing requisite and
necessary or appropriate with respect thereto to be done in and about the
premises in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director has hereunto set
his hand this 13th day of April, 1998.
/S/ J. B. GRISWELL
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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