SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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1-16725
(Commission file number)
PRINCIPAL FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 42-1520346
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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711 HIGH STREET, DES MOINES, IOWA 50392
(Address of principal executive offices)
(515) 247-5111
(Registrant's telephone number, including area code)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
The total number of shares of the registrant's Common Stock, $0.01 par value,
outstanding as of July 28, 2004 was 313,410,192.
PRINCIPAL FINANCIAL GROUP, INC.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Position at June
30, 2004 (Unaudited) and December 31, 2003........... 3
Unaudited Consolidated Statements of Operations for the
three months and six months ended June 30, 2004
and 2003............................................. 4
Unaudited Consolidated Statements of Stockholders'
Equity for the six months ended June 30, 2004
and 2003............................................. 6
Unaudited Consolidated Statements of Cash Flows for
the six months ended June 30, 2004 and 2003.......... 7
Notes to Unaudited Consolidated Financial Statements
- June 30, 2004...................................... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 40
Item 3. Quantitative and Qualitative Disclosures about Market
Risk................................................. 94
Item 4. Controls and Procedures................................... 100
PART II - OTHER INFORMATION
Item 1. Legal proceedings........................................ 100
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities........................... 101
Item 4. Submission of Matters to a Vote of Security Holders...... 102
Item 6. Exhibits and Reports on Form 8-K......................... 103
Signature......................................................... 104
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
JUNE 30, DECEMBER 31,
2004 2003
------------------ ------------------
(Unaudited) (Note 1)
(IN MILLIONS,
EXCEPT PER SHARE DATA)
ASSETS
Fixed maturities, available-for-sale........................................ $ 37,451.0 $ 37,418.4
Fixed maturities, trading................................................... 100.3 102.9
Equity securities, available-for-sale....................................... 687.9 699.2
Mortgage loans.............................................................. 11,327.6 11,251.6
Real estate................................................................. 1,046.7 1,526.1
Policy loans................................................................ 805.2 804.1
Other investments........................................................... 1,282.8 1,412.1
------------------ ------------------
Total investments........................................................ 52,701.5 53,214.4
Cash and cash equivalents................................................... 1,475.9 1,192.5
Accrued investment income................................................... 633.8 656.6
Premiums due and other receivables.......................................... 594.3 714.9
Deferred policy acquisition costs........................................... 1,740.3 1,568.9
Property and equipment...................................................... 436.4 445.2
Goodwill.................................................................... 231.8 175.8
Other intangibles........................................................... 156.8 121.0
Separate account assets..................................................... 46,412.4 43,407.8
Assets of discontinued operations........................................... 6,262.2 5,425.1
Other assets................................................................ 727.5 832.2
------------------ ------------------
Total assets............................................................. $ 111,372.9 $ 107,754.4
================== ==================
LIABILITIES
Contractholder funds........................................................ $ 30,130.2 $ 28,896.4
Future policy benefits and claims........................................... 15,578.5 15,450.8
Other policyholder funds.................................................... 634.7 709.1
Short-term debt............................................................. 626.2 702.8
Long-term debt.............................................................. 1,069.7 1,374.3
Income taxes payable........................................................ 123.9 113.9
Deferred income taxes....................................................... 950.6 1,198.9
Separate account liabilities................................................ 46,412.4 43,407.8
Liabilities of discontinued operations...................................... 4,917.4 4,575.3
Other liabilities........................................................... 3,790.2 3,925.5
------------------ ------------------
Total liabilities........................................................ 104,233.8 100,354.8
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share - 2,500.0 million shares
authorized, 378.0 million and 377.4 million shares issued, and 314.9
million and 320.7 million shares outstanding in 2004 and 2003,
respectively............................................................. 3.8 3.8
Additional paid-in capital.................................................. 7,211.9 7,153.2
Retained earnings........................................................... 943.7 630.4
Accumulated other comprehensive income...................................... 761.1 1,171.3
Treasury stock, at cost (63.1 million and 56.7 million shares in 2004 and
2003, respectively)...................................................... (1,781.4) (1,559.1)
------------------ ------------------
Total stockholders' equity.................................................. 7,139.1 7,399.6
------------------ ------------------
Total liabilities and stockholders' equity.................................. $ 111,372.9 $ 107,754.4
================== ==================
SEE ACCOMPANYING NOTES.
3
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- -------------------------------
2004 2003 2004 2003
---------------- ---------------- --------------- ---------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
REVENUES
Premiums and other considerations.............. $ 892.6 $ 875.7 $1,813.0 $ 1,780.4
Fees and other revenues........................ 364.2 276.7 696.8 543.3
Net investment income.......................... 789.2 808.8 1,575.4 1,601.8
Net realized/unrealized capital losses......... (66.3) (9.7) (108.8) (84.2)
---------------- ---------------- --------------- ---------------
Total revenues.............................. 1,979.7 1,951.5 3,976.4 3,841.3
EXPENSES
Benefits, claims and settlement expenses....... 1,221.1 1,185.2 2,407.2 2,379.9
Dividends to policyholders..................... 74.4 73.9 147.7 154.0
Operating expenses............................. 521.1 490.3 1,050.6 975.6
---------------- ---------------- --------------- ---------------
Total expenses.............................. 1,816.6 1,749.4 3,605.5 3,509.5
---------------- ---------------- --------------- ---------------
Income from continuing operations before
income taxes................................ 163.1 202.1 370.9 331.8
Income taxes................................... 34.2 50.0 78.6 81.1
---------------- ---------------- --------------- ---------------
Income from continuing operations, net of
related income taxes........................ 128.9 152.1 292.3 250.7
Income (loss) from discontinued operations, net
of related income taxes..................... (9.2) 50.1 26.7 107.2
---------------- ---------------- --------------- ---------------
Income before cumulative effect of
accounting change........................... 119.7 202.2 319.0 357.9
Cumulative effect of accounting change, net of
related income taxes........................ - - (5.7) -
---------------- ---------------- --------------- ---------------
Net income..................................... $ 119.7 $ 202.2 $ 313.3 $ 357.9
================ ================ =============== ===============
4
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
--------------- ---------------- --------------- ----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
EARNINGS PER COMMON SHARE
Basic earnings per common share:
Income from continuing operations, net of
related income taxes....................... $ 0.41 $ 0.46 $ 0.92 $ 0.76
Income (loss) from discontinued operations,
net of related income taxes................ (0.03) 0.16 0.08 0.33
--------------- ---------------- --------------- ----------------
Income before cumulative effect of
accounting change.......................... 0.38 0.62 1.00 1.09
Cumulative effect of accounting change,
net of related income taxes................ - - (0.02) -
--------------- ---------------- --------------- ----------------
Net income................................... $ 0.38 $ 0.62 $ 0.98 $ 1.09
=============== ================ =============== ================
Diluted earnings per common share:
Income from continuing operations, net of
related income taxes....................... $ 0.40 $ 0.46 $ 0.91 $ 0.76
Income (loss) from discontinued operations,
net of related income taxes................ (0.03) 0.16 0.09 0.33
--------------- ---------------- --------------- ----------------
Income before cumulative effect of
accounting change.......................... 0.37 0.62 1.00 1.09
Cumulative effect of accounting change, net
of related income taxes.................... - - (0.02) -
--------------- ---------------- --------------- ----------------
Net income................................... $ 0.37 $ 0.62 $ 0.98 $ 1.09
=============== ================ =============== ================
SEE ACCOMPANYING NOTES.
5
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME STOCK EQUITY SHARES
------------- ------------ ------------- ---------------- ----------- --------------- -----------
(IN MILLIONS) (IN THOUSANDS)
BALANCES AT JANUARY 1, 2003....... $3.8 $7,106.3 $ 29.4 $ 635.8 $(1,118.1) $6,657.2 334,419.3
Shares issued, net of call
options......................... - 11.7 - - - 11.7 441.7
Stock-based compensation.......... - 12.2 - - - 12.2
Treasury stock acquired and
sold, net....................... - 3.2 - - (288.0) (284.8) (9,779.2)
Comprehensive income:
Net income...................... - - 357.9 - - 357.9
Net unrealized gains............ - - - 1,147.0 - 1,147.0
Provision for deferred income
taxes......................... - - - (398.4) - (398.4)
Net foreign currency
translation adjustment........ - - - 36.2 - 36.2
--------------
Comprehensive income.............. 1,142.7
------------- ------------- ------------- ---------------- ----------- --------------- -----------
BALANCES AT JUNE 30, 2003......... $3.8 $7,133.4 $ 387.3 $1,420.6 $(1,406.1) $7,539.0 325,081.8
============= ============= ============= ================ =========== =============== ===========
BALANCES AT JANUARY 1, 2004....... $3.8 $7,153.2 $ 630.4 $1,171.3 $(1,559.1) $7,399.6 320,667.5
Shares issued..................... 27.2 - - - 27.2 545.9
Stock-based compensation and
additional related tax benefits. - 22.7 - - - 22.7
Tax benefits related to initial
public offering................. - 8.8 - - - 8.8
Treasury stock acquired........... - - - - (222.3) (222.3) (6,317.1)
Comprehensive loss:
Net income...................... - - 313.3 - - 313.3
Net unrealized losses........... - - - (596.2) - (596.2)
Provision for deferred income
tax benefit................... - - - 228.9 - 228.9
Net foreign currency
translation adjustment........ - - - (42.9) - (42.9)
--------------
Comprehensive loss................ (96.9)
------------- ------------- ------------- ---------------- ----------- --------------- -----------
BALANCES AT JUNE 30, 2004......... $3.8 $7,211.9 $ 943.7 $ 761.1 $(1,781.4) $7,139.1 314,896.3
============= ============= ============= ================ =========== =============== ===========
SEE ACCOMPANYING NOTES.
6
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------------
2004 2003
----------------- ----------------
(IN MILLIONS)
OPERATING ACTIVITIES
Net income............................................ $ 313.3 $ 357.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from discontinued operations, net of
related income taxes.............................. (26.7) (107.2)
Cumulative effect of accounting change,
net of related income taxes....................... 5.7 -
Amortization of deferred policy acquisition costs... 92.4 98.4
Additions to deferred policy acquisition costs...... (215.0) (166.5)
Accrued investment income........................... 22.8 1.4
Premiums due and other receivables.................. 33.8 (7.7)
Contractholder and policyholder liabilities
and dividends.................................... 744.8 1,064.9
Current and deferred income taxes (benefits)........ (5.3) 254.7
Net realized/unrealized capital losses.............. 108.8 84.2
Depreciation and amortization expense............... 54.5 51.2
Mortgage loans held for sale, acquired or
originated........................................ (423.9) (443.1)
Mortgage loans held for sale, sold or repaid,
net of gain....................................... 449.5 429.8
Real estate acquired through operating activities... (16.1) (9.3)
Real estate sold through operating activities....... 56.4 4.3
Stock-based compensation............................ 20.9 10.5
Other............................................... (223.1) 235.3
----------------- ----------------
Net adjustments....................................... 679.5 1,500.9
----------------- ----------------
Net cash provided by operating activities............. 992.8 1,858.8
INVESTING ACTIVITIES
Available-for-sale securities:
Purchases......................................... (5,137.1) (5,341.6)
Sales............................................ 1,477.3 1,787.8
Maturities....................................... 2,802.0 1,916.2
Mortgage loans acquired or originated................. (949.6) (873.4)
Mortgage loans sold or repaid......................... 783.4 532.4
Real estate acquired.................................. (105.7) (152.4)
Real estate sold...................................... 131.7 31.5
Net change in property and equipment.................. (24.4) (8.5)
Net proceeds from sales of subsidiaries............... 14.9 33.6
Purchases of interest in subsidiaries, net of
cash acquired............................. (106.2) (88.1)
Net change in other investments....................... (65.5) (67.1)
----------------- ----------------
Net cash used in investing activities................. (1,179.2) (2,229.6)
7
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------------
2004 2003
----------------- ----------------
(IN MILLIONS)
FINANCING ACTIVITIES
Issuance of common stock, net of call options........ 14.1 11.7
Acquisition of treasury stock........................ (222.3) (300.0)
Proceeds from financing element derivatives.......... 94.0 -
Payments for financing element derivatives........... (41.1) -
Issuance of long-term debt........................... 7.8 1.9
Principal repayments of long-term debt............... (221.1) (8.4)
Net proceeds of short-term borrowings................ 49.6 7.8
Investment contract deposits......................... 3,740.9 5,052.1
Investment contract withdrawals...................... (2,938.2) (4,081.5)
Net increase (decrease) in banking operation
deposits........................................... (13.9) 150.9
----------------- ----------------
Net cash provided by financing activities............ 469.8 834.5
----------------- ----------------
Net increase in cash and cash equivalents............ 283.4 463.7
Cash and cash equivalents at beginning of period..... 1,192.5 727.8
----------------- ----------------
Cash and cash equivalents at end of period........... $ 1,475.9 $ 1,191.5
================= ================
SEE ACCOMPANYING NOTES.
8
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Principal
Financial Group, Inc. ("PFG"), its majority-owned subsidiaries and, subsequent
to June 30, 2003, its consolidated variable interest entities ("VIE"), have been
prepared in conformity with accounting principles generally accepted in the U.S.
("U.S. GAAP") for interim financial statements and with the instructions to Form
10-Q and Article 10 of Regulation S-X. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months and
six months ended June 30, 2004, are not necessarily indicative of the results
that may be expected for the year ended December 31, 2004. These interim
unaudited consolidated financial statements should be read in conjunction with
our annual audited financial statements as of December 31, 2003, included in our
Form 10-K for the year ended December 31, 2003, filed with the United States
Securities and Exchange Commission ("SEC"). The accompanying consolidated
statement of financial position at December 31, 2003, has been derived from the
audited consolidated statement of financial position but does not include all of
the information and footnotes required by U.S. GAAP for complete financial
statements.
Reclassifications have been made to the December 31, 2003 and June 30, 2003
financial statements to conform to the June 30, 2004 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin ("SAB") 105,
APPLICATION OF ACCOUNTING PRINCIPLES TO LOAN Commitments ("SAB 105"), in which
the SEC Staff expressed their view that the fair value of recorded loan
commitments, including interest rate lock commitments ("IRLCs"), that are
required to follow derivative accounting under Statement of Financial Accounting
Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, should not consider the expected future cash flows related to the
associated servicing of the loan. We record IRLCs at zero value at date of
issuance with subsequent gains or losses measured by changes in market interest
rates. Therefore, this SAB did not have a material impact on our consolidated
financial statements.
On December 24, 2003, the Financial Accounting Standards Board (the "FASB")
issued FASB Interpretation No. 46 (Revised 2003): CONSOLIDATION OF VARIABLE
INTEREST ENTITIES ("FIN 46R"), to clarify some of the provisions of FIN 46 and
to exempt certain entities from its requirements. We adopted FIN 46R effective
January 1, 2004, which did not have a material impact on our consolidated
financial statements.
On July 7, 2003, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 03-1, ACCOUNTING AND REPORTING BY INSURANCE
ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE
ACCOUNTS ("SOP 03-1"). This SOP addresses an insurance enterprise's accounting
for certain fixed and variable contract features not covered by other
authoritative accounting guidance. We adopted SOP 03-1 effective January 1,
2004, and recorded a cumulative effect of accounting change of $(5.7) million,
which is net of income tax benefits of $3.0 million. The accounting change
impacted our Life and Health Insurance, U.S. Asset Management and Accumulation
and International Asset Management and Accumulation segments.
A provision of SOP 03-1 relates to the classification of contracts and
calculation of an additional liability for contracts that contain significant
insurance features. The adoption of the guidance requires the recognition of a
liability in addition to the contract account value in cases where the insurance
benefit feature results in gains in early years followed by losses in later
years. The accrual and release of the additional liability also impacts the
9
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortization of deferred policy acquisition costs ("DPAC"). As of January 1,
2004, we increased future policyholder benefits due to our no lapse guarantee
feature of our universal life and variable universal life products within our
Life and Health Insurance segment and for variable annuities with guaranteed
minimum death benefits in our U.S. Asset Management and Accumulation segment.
This resulted in an after-tax cumulative effect of $(0.9) million in the Life
and Health Insurance segment and $(1.5) million in the U.S. Asset Management and
Accumulation segment.
We also had an after-tax cumulative effect related to an equity method
investment within our International Asset Management and Accumulation segment of
$(3.3) million, net of income taxes, as of January 1, 2004, for select deferred
annuity products, which include guaranteed annuitization purchase rates. The
guidance requires contracts which provide for potential benefits in addition to
the account balance that are payable only upon annuitization to establish an
additional liability if the present value of the annuitized benefits exceed the
expected account balance at the expected annuitization date.
In addition, the guidance clarifies the accounting and classification for sales
inducements. Although the valuation impacts were immaterial, we reclassified
$37.6 million of sales inducements from DPAC to other assets effective January
1, 2004.
SEPARATE ACCOUNTS
At June 30, 2004 and December 31, 2003, the separate accounts included a
separate account valued at $755.7 million and $833.9 million, respectively,
which primarily includes shares of our stock that were allocated and issued to
eligible participants of qualified employee benefit plans administered by us as
part of the policy credits issued under the demutualization. These shares are
included in both basic and diluted earnings per share calculations. The separate
account shares are recorded at fair value and are reported as separate account
assets and separate account liabilities in the consolidated statement of
financial position. Changes in fair value of the separate account shares are
reflected in both the separate account assets and separate account liabilities.
STOCK-BASED COMPENSATION
At June 30, 2004, we have four stock-based compensation plans. We applied the
fair value method to all stock-based awards granted subsequent to January 1,
2002. For stock-based awards granted prior to this date, we used the intrinsic
value method.
10
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Awards under our plans vest over periods ranging from one year to three years.
Therefore, the cost related to stock-based compensation included in the
determination of net income for the three months ended and six months ended June
30, 2004, is less than that which would have been recognized if the fair value
based method had been applied to all awards since the inception of our
stock-based compensation plans. Had compensation expense for our stock option
awards and employees' purchase rights been determined based upon fair values at
the grant dates for awards under the plans in accordance with SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, our net income and earnings per share
would have been reduced to the pro forma amounts indicated below. For the
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
------------------------------- ------------------------------
2004 2003 2004 2003
---------------- -------------- --------------- --------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Net income, as reported...................... $ 119.7 $ 202.2 $ 313.3 $ 357.9
Add: Stock-based compensation expense
included in reported net income, net
of related tax effects..................... 9.2 6.1 12.6 9.1
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects........................ 10.1 6.9 14.3 10.8
---------------- -------------- --------------- --------------
Pro forma net income......................... $ 118.8 $ 201.4 $ 311.6 $ 356.2
================ ============== =============== ==============
Basic earnings per share:
As reported................................ $ 0.38 $ 0.62 $ 0.98 $ 1.09
Pro forma.................................. 0.37 0.62 0.98 1.08
Diluted earnings per share:
As reported................................ $ 0.37 $ 0.62 $ 0.98 $ 1.09
Pro forma.................................. 0.37 0.62 0.97 1.08
2. DISCONTINUED OPERATIONS
PRINCIPAL INTERNATIONAL ARGENTINA S.A.
On June 28, 2004, we entered into a definitive agreement for the sale of all the
stock of Principal International Argentina S.A. ("Argentina"), our subsidiary in
Argentina, and its wholly owned subsidiaries, Principal Life Compania de
Seguros, S.A. and Principal Retiro Compania de Seguros de Retiro, S.A. We closed
the transaction on July 2, 2004.
Our operations in Argentina qualify for discontinued operations treatment under
SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
("SFAS 144"), therefore, the results of operations have been removed from our
results of continuing operations and cash flows for all periods presented. The
results of operations for Argentina are reported as other after-tax adjustments
in our International Asset Management and Accumulation segment.
11
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
2. DISCONTINUED OPERATIONS (CONTINUED)
Selected financial information for the discontinued operations of Argentina is
as follows:
AS OF
-------------------------------------
JUNE 30, DECEMBER 31,
2004 2003
------------------ ------------------
(IN MILLIONS)
ASSETS
Total investments................. $33.4 $31.3
All other assets.................. 8.6 10.9
------------------ ------------------
Total assets.................... $42.0 $42.2
================== ==================
LIABILITIES
Policyholder liabilities.......... $31.4 $31.1
All other liabilities............. 1.4 2.1
------------------ ------------------
Total liabilities............... $32.8 $33.2
================== ==================
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- ----------- ------------ ------------
(IN MILLIONS)
Total revenues............................... $3.6 $ 5.6 $5.8 $ 5.7
============= =========== ============ ============
Income (loss) from discontinued operations:
Income (loss) before income taxes.......... $0.5 $(1.1) $0.3 $(2.6)
Income taxes............................... 0.2 0.5 0.1 -
------------- ----------- ------------ ------------
Income (loss) from discontinued
operations, net of related income taxes.. $0.3 $(1.6) $0.2 $(2.6)
============= =========== ============ ============
PRINCIPAL RESIDENTIAL MORTGAGE, INC.
On May 11, 2004, we entered into a definitive agreement for the sale of
Principal Residential Mortgage, Inc. ("Principal Residential Mortgage") to
CitiMortgage, Inc. We closed the sale on July 1, 2004.
Our Mortgage Banking segment, which includes Principal Residential Mortgage, is
accounted for as a discontinued operation, under SFAS 144 and therefore, the
results of operations (excluding corporate overhead) have been removed from our
results of continuing operations and cash flows for all periods presented.
Corporate overhead allocated to our Mortgage Banking segment does not qualify
for discontinued operations treatment under SFAS 144 and therefore is still
included in our results of continuing operations. The results of operations
(excluding corporate overhead) are reported as other after-tax adjustments.
12
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
2. DISCONTINUED OPERATIONS (CONTINUED)
Selected financial information for the discontinued operations of our Mortgage
Banking segment is as follows:
AS OF
-------------------------------------
JUNE 30, DECEMBER 31,
2004 2003
------------------ ------------------
(IN MILLIONS)
ASSETS
Mortgage loans....................... $2,784.4 $2,256.5
Mortgage loan servicing rights....... 2,210.7 1,951.9
Cash and cash equivalents............ 631.4 674.6
All other assets..................... 839.7 675.8
------------------ ------------------
Total assets....................... $6,466.2 $5,558.8
================== ==================
LIABILITIES
Short-term debt (1).................. $2,501.1 $1,450.9
Long-term debt....................... 1,393.0 1,393.0
All other liabilities................ 2,027.7 2,242.8
------------------ ------------------
Total liabilities.................. $5,921.8 $5,086.7
================== ==================
- ----------------------
(1) We were not in compliance with one of the covenants under a short-term debt
agreement at June 30, 2004. We obtained a waiver from the unaffiliated
entity.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- ----------- ------------ ------------
(IN MILLIONS)
Total revenues.............................. $190.6 $452.5 $ 446.1 $ 857.0
============= =========== ============ ============
Loss from continuing operations, net of
related income taxes (corporate
overhead)................................. $ (5.4) $ (4.5) $ (10.3) $ (8.4)
Income (loss) from discontinued operations:
Income (loss) before income taxes......... (5.7) 80.1 48.3 170.5
Income taxes (benefits)................... (2.2) 30.5 18.3 64.7
------------- ----------- ------------ ------------
Income (loss) from discontinued
operations, net of related income
taxes................................... (3.5) 49.6 30.0 105.8
------------- ----------- ------------ ------------
Net income (loss) ......................... $ (8.9) $ 45.1 $ 19.7 $ 97.4
============= =========== ============ ============
Our U.S. Asset Management and Accumulation segment held $1,142.0 million and
$804.8 million of residential mortgage banking escrow deposits (reported as
other liabilities) as of June 30, 2004 and December 31, 2003, respectively,
which were transferred as a result of the sale. U.S. Asset Management and
Accumulation segment revenues from this arrangement reclassified to discontinued
operations for the three months ended June 30, 2004 and 2003, were $(9.5)
million and $7.0 million, respectively. Revenues reclassified to discontinued
13
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
operations, for the six months ended June 30, 2004 and 2003, were $(5.6) million
and $13.1 million, respectively. Income (loss) from discontinued operations net
of related income taxes, for the three months ended June 30, 2004 and 2003, was
$(6.0) million and $2.5 million, respectively. Income (loss) from discontinued
operations, net of related income taxes, for the six months ended June 30, 2004
and 2003, was $(3.5) million and $5.1 million, respectively.
3. FEDERAL INCOME TAXES
The effective income tax rate on income from continuing operations for the three
months and six months ended June 30, 2004 and 2003, is lower than the prevailing
corporate federal income tax rate primarily due to income tax deductions allowed
for corporate dividends received and interest exclusion from taxable income. The
effective income tax rate for the six months ended June 30, 2004 was also
reduced due to a tax benefit associated with the sale of a foreign investment.
4. EMPLOYEE AND AGENT BENEFITS
COMPONENTS OF NET PERIODIC BENEFIT COST (INCOME):
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------------------- ----------------------------
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- -------------- ------------- --------------
(IN MILLIONS)
Service cost.......................... $ 12.8 $ 12.3 $ 2.3 $ 3.1
Interest cost......................... 18.3 16.7 3.9 4.5
Expected return on plan assets........ (21.5) (18.7) (6.8) (6.4)
Amortization of prior service
cost (benefit)...................... 0.5 0.4 (0.7) (0.8)
Amortization of transition asset...... - (0.1) - -
Recognized net actuarial loss......... 4.0 4.4 0.1 0.6
------------- -------------- ------------- --------------
Net periodic benefit cost (income).... $ 14.1 $ 15.0 $(1.2) $ 1.0
============= ============== ============= ==============
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------------------- ----------------------------
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- -------------- ------------- --------------
(IN MILLIONS)
Service cost.......................... $ 25.6 $ 24.5 $ 4.5 $ 6.2
Interest cost......................... 36.6 33.5 7.7 8.9
Expected return on plan assets........ (43.1) (37.4) (13.6) (12.9)
Amortization of prior service
cost (benefit)...................... 0.9 0.8 (1.4) (1.6)
Amortization of transition asset...... - (0.2) - -
Recognized net actuarial loss......... 8.2 8.9 0.3 1.4
------------- -------------- ------------- --------------
Net periodic benefit cost (income).... $ 28.2 $ 30.1 $(2.5) $ 2.0
============= ============== ============= ==============
14
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
4. EMPLOYEE AND AGENT BENEFITS (CONTINUED)
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") was signed into law. This Act introduces a
prescription drug benefit under Medicare (Medicare Part D), as well as a federal
subsidy to sponsors of retiree health benefits. On May 19, 2004, the FASB issued
Staff Position No. 106-2, ACCOUNTING AND DISCLOSURE REQUIREMENTS RELATED TO THE
MEDICARE PRESCRIPTION DRUG MODERNIZATION ACT OF 2003 ("FSP 106-2"). FSP 106-2
provides guidance on the accounting for the effects of the Act. In accordance
with the deferral provision of FSP106-2, our benefit obligations and net
periodic postretirement benefit costs do not reflect any amount associated with
the subsidy as we have not determined that the benefits provided by the plan are
actuarially equivalent to Medicare. The Centers of Medicare and Medicaid
Services ("CMS") are expected to issue guidance on the definition of actuarially
equivalent retiree health coverage later this year. This specific authoritative
guidance, when issued, could require us to change previously reported
The new Act will be reflected once the plan is amended or actuarial equivalence
is determined.
CONTRIBUTIONS
We anticipate contributing $1.4 million in 2004 to fund our other postretirement
benefit plans. We contributed approximately $0.4 million during the three months
ended and six months ended June 30, 2004. Our funding policy for the qualified
pension plan is to fund the plan annually in an amount at least equal to the
minimum annual contribution required under ERISA and, generally, not greater
than the maximum amount that can be deducted for federal income tax purposes. We
don't anticipate that we will be required to fund a minimum annual contribution
under ERISA for the qualified pension plan. At this time, it is too early to
estimate the amount that may be contributed, but it is possible that we may fund
the plans in 2004 in the range of $30 million to $50 million for both the
qualified and nonqualified plans. During the three months ended and six months
ended June 30, 2004, $10.5 million was contributed to the plans.
15
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is as follows (in millions):
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
2004 2003 2004 2003
-------------- ------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS):
Net income............................... $ 119.7 $ 202.2 $ 313.3 $ 357.9
Net change in unrealized gains and
losses on fixed maturities,
available-for-sale..................... (1,411.7) 978.4 (773.4) 1,385.2
Net change in unrealized gains and
losses on equity securities,
available-for-sale..................... (19.7) 16.6 (10.5) 14.0
Net change in unrealized gains and
losses on equity method subsidiaries
and minority interest adjustments...... 5.6 (2.8) (8.1) (5.3)
Adjustments for assumed changes in
amortization patterns:
Deferred policy acquisition costs...... 122.9 (90.8) 80.3 (138.9)
Sales inducements...................... 6.2 - 3.1 -
Unearned revenue reserves.............. (6.1) 4.0 (4.8) 6.1
Net change in unrealized gains and
losses on derivative instruments....... 36.4 3.7 39.0 18.1
Adjustments to unrealized gains for
Closed Block policyholder dividend
obligation............................. 133.1 (94.0) 78.2 (132.2)
Provision for deferred income tax
benefit (expense)...................... 401.6 (281.4) 228.9 (398.4)
Change in net foreign currency
translation adjustment................. (46.8) 45.4 (42.9) 36.2
-------------- ------------- ------------- -------------
Comprehensive income (loss).............. $ (658.8) $ 781.3 $ (96.9) $1,142.7
============== ============= ============= =============
16
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
6. DEBT
LONG-TERM DEBT
The components of long-term debt as of June 30, 2004 and December 31, 2003, were as follows (in millions):
AS OF AS OF
JUNE 30, DECEMBER 31,
2004 2003
------------------- -------------------
7.95% notes payable, due 2004....................................... $ 200.0 $ 200.0
8.2% notes payable, due 2009........................................ 464.0 464.0
7.875% surplus notes payable, due 2024.............................. - 199.0
8% surplus notes payable, due 2044.................................. 99.2 99.2
Nonrecourse mortgages and notes payable............................. 246.4 340.7
Other mortgages and notes payable................................... 60.1 71.4
------------------- -------------------
Total long-term debt................................................ $ 1,069.7 $ 1,374.3
=================== ===================
The amounts included above are net of the discount and direct costs associated
with issuing these notes, which are being amortized to expense over their
respective terms using the interest method.
On March 10, 1994, our subsidiary, Principal Life Insurance Company ("Principal
Life") issued $300.0 million of surplus notes, including $200.0 million due
March 1, 2024, at a 7.875% annual interest rate and the remaining $100.0 million
due March 1, 2044, at an 8% annual interest rate. Subject to the Commissioner of
Insurance of the State of Iowa (the "Commissioner") approval, the surplus notes
due March 1, 2024, were optionally redeemable at Principal Life's election on or
after March 1, 2004, in whole or in part at a redemption price of approximately
103.6% of par. We elected, with the Commissioner's approval, to redeem on March
1, 2004, the entire outstanding $200.0 million principal amount of surplus notes
due March 1, 2024, at a redemption price of 103.6%. Total cash paid for the
surplus note redemption on March 1, 2004, was $207.2 million.
7. CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS
LITIGATION
We are regularly involved in litigation, both as a defendant and as a plaintiff
but primarily as a defendant. Litigation naming us as a defendant ordinarily
arises out of our business operations as a provider of asset management and
accumulation products and services, life, health and disability insurance and
mortgage banking. Some of the lawsuits are class actions, or purport to be, and
some include claims for punitive damages. In addition, regulatory bodies, such
as state insurance departments, the SEC, the National Association of Securities
Dealers, Inc., the Department of Labor and other regulatory bodies regularly
make inquiries and conduct examinations or investigations concerning our
compliance with, among other things, insurance laws, securities laws, ERISA and
laws governing the activities of broker-dealers.
While the outcome of any pending or future litigation cannot be predicted,
management does not believe that any pending litigation will have a material
adverse effect on our business, financial position or net income. The outcome of
litigation is always uncertain, and unforeseen results can occur. It is possible
that such outcomes could materially affect net income in a particular quarter or
annual period.
17
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
7. CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS (CONTINUED)
GUARANTEES AND INDEMNIFICATIONS
In the normal course of business, we have provided guarantees to third parties
primarily related to a former subsidiary, joint ventures and industrial revenue
bonds. These agreements generally expire from 2004 through 2019. The maximum
exposure under these agreements as of June 30, 2004, was approximately $170.0
million; however, we believe the likelihood is remote that material payments
will be required and therefore have not accrued for a liability on our
consolidated statements of financial position. Should we be required to perform
under these guarantees, we generally could recover a portion of the loss from
third parties through recourse provisions included in agreements with such
parties, the sale of assets held as collateral that can be liquidated in the
event that performance is required under the guarantees or other recourse
generally available to us, minimizing the impact to net income. The fair value
of such guarantees issued after January 1, 2003, was insignificant.
In connection with the 2002 sale of BT Financial Group, we agreed to indemnify
the purchaser, Westpac Banking Corporation ("Westpac"), for among other things,
the costs associated with potential late filings made by BT Financial Group in
New Zealand prior to Westpac's ownership, up to a maximum of A$250.0 million
Australian dollars (approximately U.S. $175.0 million as of June 30, 2004). New
Zealand securities regulations allow Australian issuers to issue their
securities in New Zealand provided that certain documents are appropriately
filed with the New Zealand Registrar of Companies. Specifically, the regulations
required that any amendments to constitutions and compliance plans be filed in
New Zealand. In April 2003, the New Zealand Securities Commission opined that
such late filings would result in certain New Zealand investors having a right
to return of their investment plus interest at 10% per annum from the date of
investment. We view these potential late filings as a technical matter as we
believe investors received the information that is required to be provided
directly to them. This technical issue affected many in the industry. On April
15, 2004, the New Zealand government enacted legislation that will provide
issuers, including BT Financial Group, the opportunity for retroactive relief
from such late filing violations. The law allows issuers to apply for judicial
validation of non-compliant issuances resulting from late filings. The law
further provides that judicial relief is mandatory and unconditional unless an
investor was materially prejudiced by the late filing. A related judicial action
is pending. Although we cannot predict the outcome of this matter or reasonably
estimate losses, we do not believe that it would result in a material adverse
effect on our business or financial position. It is possible, however, that it
could have a material adverse effect on net income in a particular quarter or
annual period.
We are also subject to various other indemnification obligations issued in
conjunction with certain transactions, primarily the sale of BT Financial Group
and other divestitures, the sale of residential mortgage loans and servicing
rights in our mortgage banking business, acquisitions and financing transactions
whose terms range in duration and often are not explicitly defined. Certain
portions of these indemnifications may be capped, while other portions are not
subject to such limitations. Generally, a maximum obligation is not explicitly
stated; therefore, the overall maximum amount of the obligation under the
indemnifications cannot be reasonably estimated. While we are unable to estimate
with certainty the ultimate legal and financial liability with respect to these
indemnifications, we believe the likelihood is remote that material payments
would be required under such indemnifications and therefore such
indemnifications would not result in a material adverse effect on our business,
financial position or net income. The fair value of such indemnifications issued
after January 1, 2003, was insignificant.
18
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
8. SEGMENT INFORMATION
We provide financial products and services through the following segments: U.S.
Asset Management and Accumulation, International Asset Management and
Accumulation, Life and Health Insurance and Mortgage Banking. In addition, there
is a Corporate and Other segment. The segments are managed and reported
separately because they provide different products and services, have different
strategies or have different markets and distribution channels.
The U.S. Asset Management and Accumulation segment provides retirement and
related financial products and services primarily to businesses, their employees
and other individuals and provides asset management services to our asset
accumulation business, the life and health insurance operations, the Corporate
and Other segment and third-party clients.
The International Asset Management and Accumulation segment offers retirement
products and services, annuities, long-term mutual funds and life insurance
through subsidiaries in Argentina, Chile, Mexico, and Hong Kong and joint
ventures in Brazil, India, Japan and Malaysia. On June 28, 2004, we entered into
a definitive agreement for the sale of all the stock of our Argentine companies,
described further in Note 2. Consequently, the results of operations for
Argentina are reported as other after-tax adjustments for all periods presented.
The Life and Health insurance segment provides individual life insurance, group
health insurance and specialty benefits, which consists of group dental and
vision insurance, individual and group disability insurance, and group life
insurance, throughout the U.S.
The Mortgage Banking segment originates and services residential mortgage loan
products for customers in the U.S. On May 11, 2004, we entered into a definitive
agreement for the sale of Principal Residential Mortgage to CitiMortgage, Inc.,
described further in Note 2. Consequently, the results of operations (excluding
corporate overhead) for Mortgage Banking are reported as other after-tax
adjustments for all periods presented.
The Corporate and Other segment manages the assets representing capital that has
not been allocated to any other segment. Financial results of the Corporate and
Other segment primarily reflect our financing activities (including interest
expense), income on capital not allocated to other segments, intersegment
eliminations, income tax risks and certain income, expenses and other after-tax
adjustments not allocated to the segments based on the nature of such items.
Management uses segment operating earnings for goal setting, determining
employee compensation, and evaluating performance on a basis comparable to that
used by securities analysts. We determine segment operating earnings by
adjusting U.S. GAAP net income for net realized/unrealized capital gains and
losses, as adjusted, and other after-tax adjustments which management believes
are not indicative of overall operating trends. Net realized/unrealized capital
gains and losses, as adjusted, are net of income taxes, related changes in the
amortization pattern of deferred policy acquisition and sales inducement costs,
recognition of front-end fee revenues for sales charges on pension products and
services, net realized capital gains and losses distributed, minority interest
capital gains and losses and certain market value adjustments to fee revenues.
Segment operating revenues exclude net realized/unrealized capital gains and
their impact on recognition of front-end fee revenues and certain market value
adjustments to fee revenues. While these items may be significant components in
understanding and assessing the consolidated financial performance, management
believes the presentation of segment operating earnings enhances the
understanding of our results of operations by highlighting earnings attributable
to the normal, ongoing operations of the business.
19
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
8. SEGMENT INFORMATION (CONTINUED)
The accounting policies of the segments are consistent with the accounting
policies for the consolidated financial statements, with the exception of income
tax allocation. The Corporate and Other segment functions to absorb the risk
inherent in interpreting and applying tax law. The segments are allocated tax
adjustments consistent with the positions we took on our tax returns. The
Corporate and Other segment results reflect any differences between the tax
returns and the estimated resolution of any disputes.
The following tables summarize selected financial information on a continuing
basis by segment and reconcile segment totals to those reported in the
consolidated financial statements:
AS OF JUNE 30, AS OF DECEMBER 31,
2004 2003
---------------------- ---------------------
(IN MILLIONS)
ASSETS:
U.S. Asset Management and Accumulation ............... $ 87,733.0 $ 83,904.8
International Asset Management and Accumulation....... 3,123.9 3,011.4
Life and Health Insurance............................. 12,472.5 12,171.8
Mortgage Banking...................................... 6,466.2 5,558.8
Corporate and Other .................................. 1,577.3 3,107.6
---------------------- ---------------------
Total consolidated assets........................... $ 111,372.9 $ 107,754.4
====================== =====================
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
(IN MILLIONS)
OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and
Accumulation............................ $ 906.8 $ 862.0 $ 1,800.1 $1,741.9
International Asset Management and
Accumulation............................ 122.3 106.2 235.3 180.7
Life and Health Insurance................. 1,030.7 1,001.8 2,066.0 2,014.1
Corporate and Other....................... (11.9) (2.0) (10.3) 1.0
-------------- -------------- -------------- --------------
Total segment operating revenues........ 2,047.9 1,968.0 4,091.1 3,937.7
Net realized/unrealized capital losses,
including recognition of front-end fee
revenues and certain market value
adjustments to fee revenues............. (68.2) (16.5) (114.7) (96.4)
-------------- -------------- -------------- --------------
Total revenue per consolidated
statements of operations.............. $ 1,979.7 $1,951.5 $ 3,976.4 $3,841.3
============== ============== ============== ==============
20
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
8. SEGMENT INFORMATION (CONTINUED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
(IN MILLIONS)
OPERATING EARNINGS (LOSS) BY SEGMENT:
U.S. Asset Management and Accumulation ... $ 121.7 $ 105.7 $ 241.2 $ 200.6
International Asset Management and
Accumulation............................ 9.3 11.9 17.9 18.5
Life and Health Insurance................. 56.9 62.9 131.7 122.0
Mortgage Banking.......................... (5.4) (4.5) (10.3) (8.4)
Corporate and Other ...................... (9.1) (10.4) (20.6) (15.4)
-------------- -------------- -------------- --------------
Total segment operating earnings........ 173.4 165.6 359.9 317.3
Net realized/unrealized capital losses,
as adjusted............................. (44.5) (13.5) (67.6) (66.6)
Other after-tax adjustments (1)........... (9.2) 50.1 21.0 107.2
-------------- -------------- -------------- --------------
Net income per consolidated
statements of operations................ $ 119.7 $ 202.2 $ 313.3 $ 357.9
============== ============== ============== ==============
- --------------------------
(1) For the three months ended June 30, 2004, other after-tax adjustments of
$(9.2) million included the negative effect of a loss from discontinued
operations of Principal Residential Mortgage ($9.5 million) and the
positive effect of income from discontinued operations of Argentina ($0.3
million).
For the three months ended June 30, 2003, other after-tax adjustments of
$50.1 million included the positive effect of income from discontinued
operations of Principal Residential Mortgage ($52.1 million); and the
negative effects of: (1) a loss from discontinued operations of Argentina
($1.6 million) and (2) a change in the estimated loss on disposal of BT
Financial Group ($0.4 million).
For the six months ended June 30, 2004, other after tax adjustments of
$21.0 million included the positive effects of: (1) income from
discontinued operations of Principal Residential Mortgage ($26.5 million)
and (2) income from discontinued operations of Argentina ($0.2 million);
and the negative effect from a cumulative change in accounting principle
related to the implementation of SOP 03-1 ($5.7 million).
For the six months ended June 30, 2003, other after-tax adjustments of
$107.2 million included the positive effect of income from discontinued
operations of Principal Residential Mortgage ($110.9 million); and the
negative effects of: (1) a loss from discontinued operations of Argentina
($2.6 million) and a change in the estimated loss on disposal of BT
Financial Group ($1.1 million).
9. STOCKHOLDERS' EQUITY
In May 2004, our board of directors authorized the repurchase of up to $700.0
million of our outstanding common stock. The repurchases will be made in the
open market or through privately negotiated transactions, from time to time,
depending on market conditions.
21
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
10. EARNINGS PER SHARE
The computations of the basic and diluted per share amounts for our continuing
operations were as follows:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ----------------------------------
2004 2003 2004 2003
----------------- ---------------- ----------------- ----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Income from continuing
operations, net of related
income taxes................ $128.9 $152.1 $ 292.3 $ 250.7
================= ================ ================= ================
Weighted-average shares
outstanding:
Basic....................... 317.9 326.9 319.4 329.1
Dilutive effect:
Stock options............. 1.1 0.5 1.1 0.5
Restricted stock units.... 0.2 - 0.1 -
----------------- ---------------- ----------------- ----------------
Diluted..................... 319.2 327.4 320.6 329.6
================= ================ ================= ================
Income from continuing
operations per share:
Basic..................... $ 0.41 $ 0.46 $ 0.92 $ 0.76
================= ================ ================= ================
Diluted................... $ 0.40 $ 0.46 $ 0.91 $ 0.76
================= ================ ================= ================
The calculation of diluted earnings per share for the three months and six
months ended June 30, 2004 and 2003, excludes the incremental effect related to
certain stock-based compensation grants due to their anti-dilutive effect.
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Principal Life has established special purpose entities to issue secured
medium-term notes. Under the program, the payment obligations of principal and
interest on the notes are secured by funding agreements issued by Principal
Life. Principal Life's payment obligations on the funding agreements are fully
and unconditionally guaranteed by PFG. All of the outstanding stock of Principal
Life is indirectly owned by PFG and PFG is the only guarantor of the payment
obligations of the funding agreements.
The following tables set forth condensed consolidating financial information of
Principal Life and PFG as of June 30, 2004 and December 31, 2003, and for the
six months ended June 30, 2004 and 2003.
22
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
JUNE 30, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- ---------------
(IN MILLIONS)
ASSETS
Investments, excluding
investment in
unconsolidated entities...... $ - $ 48,705.9 $ 5,192.7 $ (1,367.5) $ 52,531.1
Investment in unconsolidated
entities..................... 6,474.2 852.4 4,365.8 (11,522.0) 170.4
Cash and cash equivalents....... 263.7 53.5 1,366.8 (208.1) 1,475.9
Other intangibles............... - 4.2 152.6 - 156.8
Separate account assets......... - 45,725.1 687.3 - 46,412.4
Assets of discontinued
operations................... - - 6,508.2 (246.0) 6,262.2
All other assets................ 402.5 3,921.0 1,284.8 (1,244.2) 4,364.1
-------------- ---------------- -------------------- ----------------- ---------------
Total assets................. $ 7,140.4 $ 99,262.1 $ 19,558.2 $(14,587.8) $ 111,372.9
============== ================ ==================== ================= ===============
LIABILITIES
Contractholder funds............ $ - $ 30,283.9 $ 6.2 $ (159.9) $ 30,130.2
Future policy benefits and
claims....................... - 14,141.1 1,437.4 - 15,578.5
Other policyholder funds........ - 631.9 2.8 - 634.7
Short-term debt................. - (0.5) 818.5 (191.8) 626.2
Long-term debt.................. - 210.7 1,098.1 (239.1) 1,069.7
Income taxes currently
payable................... 1.4 111.2 31.4 (20.1) 123.9
Deferred income taxes........... (0.4) 746.0 217.8 (12.8) 950.6
Separate account liabilities.... - 45,725.1 687.3 - 46,412.4
Liabilities of discontinued
operations................... - - 5,218.5 (301.1) 4,917.4
Other liabilities............... 0.3 1,741.4 3,565.9 (1,517.4) 3,790.2
-------------- ---------------- -------------------- ----------------- ---------------
Total liabilities............ 1.3 93,590.8 13,083.9 (2,442.2) 104,233.8
STOCKHOLDERS' EQUITY
Common stock.................... 3.8 2.5 - (2.5) 3.8
Additional paid-in capital...... 7,211.9 5,085.3 6,831.8 (11,917.1) 7,211.9
Retained earnings (deficit)..... 943.7 (203.7) (1,118.8) 1,322.5 943.7
Accumulated other comprehensive
income....................... 761.1 787.2 761.3 (1,548.5) 761.1
Treasury stock, at cost......... (1,781.4) - - - (1,781.4)
-------------- ---------------- -------------------- ----------------- ---------------
Total stockholders' equity... 7,139.1 5,671.3 6,474.3 (12,145.6) 7,139.1
-------------- ---------------- -------------------- ----------------- ---------------
Total liabilities and
stockholders' equity......... $ 7,140.4 $ 99,262.1 $ 19,558.2 $(14,587.8) $ 111,372.9
============== ================ ==================== ================= ===============
- ---------------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
23
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2003
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- ---------------
(IN MILLIONS)
ASSETS
Investments, excluding
investment in
unconsolidated entities...... $ - $48,156.9 $ 6,247.5 $ (1,357.2) $ 53,047.2
Investment in unconsolidated
entities..................... 7,234.0 793.8 5,693.3 (13,553.9) 167.2
Cash and cash equivalents....... 173.8 640.5 684.2 (306.0) 1,192.5
Other intangibles............... - 4.5 116.5 - 121.0
Separate account assets......... - 42,753.4 632.2 22.2 43,407.8
Assets of discontinued
operations................... - - 5,601.1 (176.0) 5,425.1
All other assets................ 1.7 3,825.7 766.5 (200.3) 4,393.6
-------------- ---------------- -------------------- ----------------- ---------------
Total assets................. $7,409.5 $96,174.8 $ 19,741.3 $(15,571.2) $ 107,754.4
============== ================ ==================== ================= ===============
LIABILITIES
Contractholder funds............ $ - $29,040.4 $ 5.8 $ (149.8) $ 28,896.4
Future policy benefits and
claims....................... - 14,025.3 1,425.5 - 15,450.8
Other policyholder funds........ - 706.2 2.9 - 709.1
Short-term debt................. - - 888.8 (186.0) 702.8
Long-term debt.................. - 423.3 1,237.7 (286.7) 1,374.3
Income taxes currently
payable...................... - 160.0 28.2 (74.3) 113.9
Deferred income taxes........... 8.2 974.0 221.8 (5.1) 1,198.9
Separate account liabilities.... - 42,753.4 632.2 22.2 43,407.8
Liabilities of discontinued
operations................... - - 4,834.1 (258.8) 4,575.3
Other liabilities............... 1.7 1,226.1 3,230.4 (532.7) 3,925.5
-------------- ---------------- -------------------- ----------------- ---------------
Total liabilities............ 9.9 89,308.7 12,507.4 (1,471.2) 100,354.8
STOCKHOLDERS' EQUITY
Common stock.................... 3.8 2.5 - (2.5) 3.8
Additional paid-in capital...... 7,153.2 5,052.1 6,796.9 (11,849.0) 7,153.2
Retained earnings (deficit)..... 630.4 594.6 (734.4) 139.8 630.4
Accumulated other comprehensive
income....................... 1,171.3 1,216.9 1,171.4 (2,388.3) 1,171.3
Treasury stock, at cost......... (1,559.1) - - - (1,559.1)
-------------- ---------------- -------------------- ----------------- ---------------
Total stockholders' equity... 7,399.6 6,866.1 7,233.9 (14,100.0) 7,399.6
-------------- ------------------------------------- ----------------- ---------------
Total liabilities and
stockholders' equity......... $7,409.5 $96,174.8 $ 19,741.3 $(15,571.2) $ 107,754.4
============== ================ ==================== ================= ===============
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
24
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- ---------------
(IN MILLIONS)
Premiums and other
considerations............... $ - $ 1,694.1 $ 118.9 $ - $ 1,813.0
Fees and other revenues......... - 493.2 321.2 (117.6) 696.8
Net investment income........... 1.2 1,416.8 144.5 12.9 1,575.4
Net realized/unrealized
capital losses............... - (100.2) (14.1) 5.5 (108.8)
-------------- ---------------- -------------------- ----------------- ---------------
Total revenues............... 1.2 3,503.9 570.5 (99.2) 3,976.4
EXPENSES
Benefits, claims, and settlement
expenses..................... - 2,249.2 163.1 (5.1) 2,407.2
Dividends to policyholders...... - 147.7 - - 147.7
Operating expenses.............. 4.8 786.2 360.9 (101.3) 1,050.6
-------------- ---------------- -------------------- ----------------- ---------------
Total expenses............... 4.8 3,183.1 524.0 (106.4) 3,605.5
-------------- ---------------- -------------------- ----------------- ---------------
Income (loss) from continuing
operations before income
taxes........................ (3.6) 320.8 46.5 7.2 370.9
Income taxes (benefits)......... (1.3) 72.8 4.8 2.3 78.6
Equity in the net income of
subsidiaries, excluding
discontinued operations and
cumulative effect of
accounting change............ 294.6 53.3 252.9 (600.8) -
-------------- ---------------- -------------------- ----------------- ---------------
Income from continuing
operations, net of related
income taxes................. 292.3 301.3 294.6 (595.9) 292.3
Income (loss) from discontinued
operations, net of related
income taxes................. 26.7 (3.3) 26.7 (23.4) 26.7
-------------- ---------------- -------------------- ----------------- ---------------
Income before cumulative effect
of accounting change......... 319.0 298.0 321.3 (619.3) 319.0
Cumulative effect of accounting
change, net of related income
taxes........................ (5.7) (2.5) (5.7) 8.2 (5.7)
-------------- ---------------- -------------------- ----------------- ---------------
Net income...................... $ 313.3 $ 295.5 $ 315.6 $ (611.1) $ 313.3
============== ================ ==================== ================= ===============
- ------------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
25
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- ---------------
(IN MILLIONS)
REVENUES
Premiums and other
considerations................ $ - $ 1,692.2 $ 88.2 $ - $ 1,780.4
Fees and other revenues.......... - 397.8 231.8 (86.3) 543.3
Net investment income............ 1.7 1,470.6 127.1 2.4 1,601.8
Net realized/unrealized capital
gains (losses)................ - (83.6) 13.4 (14.0) (84.2)
-------------- ---------------- -------------------- ----------------- ---------------
Total revenues................ 1.7 3,477.0 460.5 (97.9) 3,841.3
EXPENSES
Benefits, claims, and settlement
expenses...................... - 2,259.3 124.2 (3.6) 2,379.9
Dividends to policyholders....... - 154.0 - - 154.0
Operating expenses............... 4.5 764.8 280.0 (73.7) 975.6
-------------- ---------------- -------------------- ----------------- ---------------
Total expenses................. 4.5 3,178.1 404.2 (77.3) 3,509.5
-------------- ---------------- -------------------- ----------------- ---------------
Income (loss) from continuing
operations before income
taxes......................... (2.8) 298.9 56.3 (20.6) 331.8
Income taxes (benefits).......... (1.0) 66.0 21.2 (5.1) 81.1
Equity in the net income of
subsidiaries, excluding
discontinued operations....... 252.5 89.7 217.4 (559.6) -
-------------- ---------------- -------------------- ----------------- ---------------
Income from continuing
operations, net of related
income taxes.................. 250.7 322.6 252.5 (575.1) 250.7
Income (loss) from discontinued
operations, net of related
income taxes.................. 107.2 (3.1) 107.2 (104.1) 107.2
-------------- ---------------- -------------------- ----------------- ---------------
Net income....................... $ 357.9 $ 319.5 $ 359.7 $(679.2) $ 357.9
============== ================ ==================== ================= ===============
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
26
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities........ $ (2.2) $ 958.8 $ (83.5) $ 119.7 $ 992.8
INVESTING ACTIVITIES
Available-for-sale securities:
Purchases................... - (4,335.7) (810.9) 9.5 (5,137.1)
Sales....................... - 750.8 726.5 - 1,477.3
Maturities.................. - 2,222.5 579.5 - 2,802.0
Mortgage loans acquired or
originated.................. - (967.5) (18.3) 36.2 (949.6)
Mortgage loans sold or repaid.. - 806.0 57.2 (79.8) 783.4
Real estate acquired........... - (87.2) (18.5) - (105.7)
Real estate sold............... - 83.0 48.7 - 131.7
Net change in property and
equipment................... - (20.2) (4.2) - (24.4)
Net proceeds from sale of
subsidiaries................ - - 14.9 - 14.9
Purchases of interest in
subsidiaries, net of cash
acquired.................... - - (106.2) - (106.2)
Dividends received from
unconsolidated entities..... 300.0 26.0 557.2 (883.2) -
Net change in other
investments................. 0.3 (171.7) 45.7 60.2 (65.5)
-------------- ---------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
investing activities........ 300.3 (1,694.0) 1,071.6 (857.1) (1,179.2)
27
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
FINANCING ACTIVITIES
Issuance of common stock........ 14.1 - - - 14.1
Acquisition of treasury stock... (222.3) - - - (222.3)
Proceeds from financing element
derivatives.................. - 94.0 - - 94.0
Payments for financing element
derivatives.................. - (41.1) - - (41.1)
Issuance of long-term debt...... - 4.7 3.1 - 7.8
Principal repayments of long-
debt......................... - (218.1) (50.7) 47.7 (221.1)
Net proceeds of short-term
borrowings................... - - 56.0 (6.4) 49.6
Dividends paid to parent........ - (494.0) (300.0) 794.0 -
Investment contract deposits.... - 3,740.9 - - 3,740.9
Investment contract
withdrawals.................. - (2,938.2) - - (2,938.2)
Net decrease in banking
operation deposits........... - - (13.9) - (13.9)
-------------- --------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
financing activities......... (208.2) 148.2 (305.5) 835.3 469.8
-------------- --------------- -------------------- ----------------- -----------------
Net increase (decrease) in cash
and cash equivalents......... 89.9 (587.0) 682.6 97.9 283.4
Cash and cash equivalents at
beginning of year............ 173.8 640.5 684.2 (306.0) 1,192.5
-------------- --------------- -------------------- ----------------- -----------------
Cash and cash equivalents at
end of year.................. $ 263.7 $ 53.5 $1,366.8 $(208.1) $ 1,475.9
============== =============== ==================== ================= =================
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
28
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities......... $ (1.5) $1,101.5 $ 815.7 $ (56.9) $ 1,858.8
INVESTING ACTIVITIES
Available-for-sale securities:
Purchases................... - (4,555.6) (812.7) 26.7 (5,341.6)
Sales....................... - 1,559.8 228.0 - 1,787.8
Maturities.................. - 1,693.0 223.2 - 1,916.2
Net cash flows from trading
securities................... - - 2.0 (2.0) -
Mortgage loans acquired or
originated................... - (801.2) (87.3) 15.1 (873.4)
Mortgage loans sold or repaid... - 421.2 131.0 (19.8) 532.4
Real estate acquired............ - (143.2) (9.2) - (152.4)
Real estate sold................ - 20.9 10.6 - 31.5
Net change in property and
equipment.................... - (6.2) (2.3) - (8.5)
Net proceeds from sales of
subsidiaries................. - - 33.6 - 33.6
Purchases of interest in
subsidiaries, net of cash
acquired..................... - (26.0) (62.1) - (88.1)
Dividends received from
(contributions to)
unconsolidated entities...... 300.0 73.3 (68.8) (304.5) -
Net change in other investments. - (74.4) (91.8) 99.1 (67.1)
-------------- ---------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
investing activities......... 300.0 (1,838.4) (505.8) (185.4) (2,229.6)
29
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- -----------------
(IN MILLIONS)
FINANCING ACTIVITIES
Issuance of common stock........ 11.7 - - - 11.7
Acquisition of treasury stock... (300.0) - - - (300.0)
Issuance of long-term debt...... - - 1.9 - 1.9
Principal repayments of long-
debt......................... - (11.4) (1.7) 4.7 (8.4)
Net proceeds of short-term
borrowings................... - - 5.7 2.1 7.8
Dividends paid to parent........ - - (300.0) 300.0 -
Investment contract deposits.... - 5,052.1 - - 5,052.1
Investment contract
withdrawals.................. - (4,081.5) - - (4,081.5)
Net increase in banking
operation deposits........... - - 150.9 - 150.9
-------------- --------------- -------------------- ----------------- -----------------
Net cash provided by (used in)
financing activities......... (288.3) 959.2 (143.2) 306.8 834.5
-------------- --------------- -------------------- ----------------- -----------------
Net increase in cash and cash
equivalents.................. 10.2 222.3 166.7 64.5 463.7
Cash and cash equivalents at
beginning of year........... 332.1 585.7 391.9 (581.9) 727.8
-------------- --------------- -------------------- ----------------- -----------------
Cash and cash equivalents at
end of year.................. $ 342.3 $ 808.0 $ 558.6 $(517.4) $ 1,191.5
============== =============== ==================== ================= =================
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
30
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
On June 30, 2004, our shelf registration statement with the Securities and
Exchange Commission was effective. We now have the ability to issue up to $3.0
billion of debt securities, preferred stock, common stock, warrants, stock
purchase contracts and stock purchase units of PFG and trust preferred
securities of three subsidiary trusts. If we issue securities, we intend to use
the proceeds from the sale of the securities offered by the prospectus,
including the corresponding junior subordinated debentures issued to the trusts
in connection with their investment of all the proceeds from the sale of
preferred securities, for general corporate purposes, including working capital,
capital expenditures, investments in subsidiaries, acquisitions and refinancing
of debt, including commercial paper and other short-term indebtedness. Principal
Financial Services, Inc. unconditionally guarantees our obligations with respect
to one or more series of debt securities described in the shelf registration
statement.
The following tables set forth condensed consolidating financial information of
Principal Financial Services, Inc. and Principal Financial Group, Inc. as of
June 30, 2004 and December 31, 2003, and for the six months ended June 30, 2004
and 2003.
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
JUNE 30, 2004