<PAGE>
As filed with the Securities and Exchange
Commission on April 29, 1998
333-47027
---------
811-08377
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1
Post-Effective Amendment No. ___
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 5
PFL ENDEAVOR TARGET ACCOUNT
---------------------------
(Exact Name of Registrant)
PFL Life Insurance Company
--------------------------
(Name of Insurance Company)
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
800-525-6205
Name and Address of Agent for Service: Copy to:
Frank A. Camp, Esquire Frederick R. Bellamy, Esquire
PFL Life Insurance Company Sutherland, Asbill & Brennan LLP
4333 Edgewood Road, N.E. 1275 Pennsylvania Avenue, N.W.
Cedar Rapids, Iowa 52499 Washington, D.C. 20004-2404
Title of Securities Being Registered:
Flexible Premium Variable Annuity Policies
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Rule 495
Showing Location in Part A (Prospectus),
Part B (Statement of Additional Information) and Part C
of Registration Statement Information Required by Form N-3
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PART A
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<CAPTION>
Item of Form N-3 Prospectus Caption
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1. Cover Page....................................................... Cover Page
2. Table of Contents................................................ Table of Contents
3. Definitions...................................................... Definitions
4. Synopsis......................................................... Summary of the Policy; Fee Table; Historical
Performance Data of the Mutual Fund Account;
Performance Information
5. Condensed Financial Information.................................. Condensed Financial Information; Financial
Statements
6. General Description of Registrant and Depositor
(a) Depositor.................................................... PFL Life Insurance Company
(b) Registrant................................................... The Endeavor Account - The Target Account;
The Target Account - General
(c) Voting Rights................................................ Voting Rights
7. Management....................................................... The Endeavor Accounts; The Target Account -
General
8. Deductions and Expenses
(a) General...................................................... Charges and Deductions; The Target Account -
General
(b) Sales Load %................................................. Charges and Deductions
(c) Special Purchase Plan........................................ N/A
(d) Commissions.................................................. Distributor of the Policies
(e) Expenses - Registrant........................................ N/A
(f) Subaccount Expenses.......................................... Other Expenses Including Investment Advisory
Fees; The Target Account - General
(g) Organizational Expenses...................................... N/A
9. General Description of Variable Annuity Policies
(a) Persons with Rights.......................................... The Policy; Election of Payment Option; Annuity
Payment Options; Annuity Commencement Date;
Voting Rights
(b)(i) Allocation of Premium Payments............................. Allocation of Premium Payments
</TABLE>
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<TABLE>
<S> <C>
(ii) Transfers................................................. Transfers
(iii) Exchanges................................................. N/A
(c) Changes.................................................... The Mutual Fund Account; Election of Payment
Option; Annuity Commencement Date; Death of
Annuitant/Owner Prior to Annuity Commencement
Date; Beneficiary; Amendments; The Target
Account - General
(d) Inquiries.................................................. Summary of the Policy
10. Annuity Period.................................................. Annuity Payment Options
11. Death Benefit................................................... Death of Annuitant/Owner Prior to Annuity
Commencement Date
12. Purchase and Policy Value
(a) Purchases.................................................. Policy Application and Issuance of Policies -
Premium Payments
(b) Valuation.................................................. Policy Value; The Mutual Fund Account Value;
The Target Account Value
(c) Daily Calculation.......................................... The Mutual Fund Account Value; The Target
Account Value
(d) Underwriter................................................ Distributor of the Policies
13. Redemptions
(a) By Owners.................................................. Surrenders
By Annuitant............................................... N/A
(b) Texas ORP.................................................. Restrictions Under the Texas Optional
Retirement Program
(c) Check Delay................................................ Payment Not Honored by Bank
(d) Lapse...................................................... N/A
(e) Free Look.................................................. Summary of the Policy
14. Taxes........................................................... Certain Federal Income Tax Consequences
15. Legal Proceedings............................................... Legal Proceedings
16. Table of Contents for the Statement of Additional
Information............................................ Table of Contents for the Statement of
Additional Information
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART B
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Statement of Additional
Item of Form N-3 Information Caption
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<S> <C>
17. Cover Page...................................................... Cover Page
18. Table of Contents............................................... Table of Contents
19. General Information and History................................. (Prospectus) PFL Life Insurance Company
20. Investment Objectives and Policies.............................. What is the Investment Strategy; Investment
Restrictions
21. Management...................................................... Management
22. Investment Advisory and Other Services
(a) Investment Advisory Services............................... The Investment Advisory Services
(b) Fees and Expenses of the Registrant........................ N/A
(c) Management Policies........................................ The Manager
(d) Custodian.................................................. Transfer Agent and Custodian; Custody of Assets
Independent Auditors....................................... Independent Auditors
(e) Assets of Registrant....................................... Custody of Assets
(f) Affiliated Person.......................................... N/A
(g) Principal Underwriter...................................... Distribution of Policies
23. Brokerage Allocations........................................... Brokerage Allocation
24. Purchase and Pricing of Securities
Being Offered................................................... Distribution of the Policies
Offering Sales Load............................................. N/A
25. Underwriters.................................................... Distribution of the Policies; (Prospectus)
Distributor of the Policies
26. Calculation of Performance Data................................. Historical Performance Data
27. Annuity Payments................................................ (Prospectus) Election of Payment Option;
(Prospectus) Annuity Payment Options
28. Federal Tax Matters............................................. Federal Tax Matters
29. Financial Statements............................................ Financial Statements
</TABLE>
<PAGE>
PART C - OTHER INFORMATION
--------------------------
<TABLE>
<CAPTION>
Item of Form N-3 Part C Caption
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<S> <C>
30. Financial Statements and Other Exhibits......................... Financial Statements and Exhibits
(a) Financial Statements....................................... Financial Statements
(b) Exhibits................................................... Exhibits
31. Directors and Officers of the
Insurance Company.......................................... Directors and Officers of the Insurance
Company; Business and Other Connections of
Investment Advisor
32. Persons Controlled by or Under Common
Control with the Insurance Company
or Registrant.............................................. Persons Controlled by or Under Common Control
with the Insurance Company or Registrant
33. Number of Policyowners.......................................... Number of Contract Owners
34. Indemnification................................................. Indemnification
35. Business and Other Connection of
Investment Adviser......................................... Directors and Officers of the Insurance
Company; Business and Other Connections of the
Investment Adviser
36. Principal Underwriters.......................................... Principal Underwriters
37. Location of Accounts and Records................................ Location of Accounts and Records
38. Management Services............................................. Management Services
39. Undertakings.................................................... Undertakings
40. Signatures...................................................... Signatures
</TABLE>
<PAGE>
PROSPECTUS May 1, 1998
THE ENDEAVOR VARIABLE ANNUITY
Issued Through
PFL ENDEAVOR VARIABLE ANNUITY ACCOUNTS
by
PFL LIFE INSURANCE COMPANY
The Endeavor Variable Annuity Policy is a Flexible Premium Variable Annuity
that is offered by PFL Life Insurance Company ("PFL"). You can use the Policy
to accumulate funds for retirement or other long-term financial planning
purposes. You are generally not taxed on any earnings on amounts you invest
until you withdraw them or begin to receive Annuity Payments. The Policy is a
"variable" annuity because the value of your investments can go up or down
based on the performance of the investment options that you select. It is a
flexible premium policy because after you purchase it you can generally make
additional investments of any amount of $50 or more, until the Annuity
Commencement Date when PFL begins making Annuity Payments to you.
You have several investment options to choose from offered through three
accounts: the Mutual Fund Account, the Target Account, and the Fixed Account.
These include the following variable investment options:
Endeavor Asset Allocation Portfolio Dreyfus U.S. Government Securities
EndeavorMoney Market Portfolio Portfolio
T. Rowe Price International Stock Endeavor Value Equity Portfolio
Portfolio Endeavor Opportunity Value Portfolio
T. Rowe Price Equity Income Endeavor Enhanced Index Portfolio
Portfolio Endeavor Select 50 Portfolio
T. Rowe Price Growth Stock Portfolio WRL Growth Portfolio
The Dow Target 10 Subaccount
The Dow Target 5 Subaccount
Dreyfus Small Cap Value Portfolio
YOU AS THE OWNER OF THE POLICY, BEAR THE ENTIRE INVESTMENT RISK FOR ALL
AMOUNTS THAT YOU ALLOCATE TO ANY OF THE MUTUAL FUND OR TARGET SUBACCOUNTS.
THIS MEANS THAT YOU COULD LOSE THE AMOUNT THAT YOU INVEST. BUT IF THE MUTUAL
FUND OR TARGET SUBACCOUNTS INCREASE IN VALUE, THEN THE VALUE OF YOUR POLICY
WILL ALSO INCREASE.
The Fixed Account is an additional investment option. If you invest in one
of the alternatives available under the Fixed Account, then PFL guarantees to
return your investment with interest at rates that PFL will declare from time
to time.
Of course, you can choose any combination of these investment options. You
can also transfer amounts among these options (subject to some restrictions).
LIKE ALL SECURITIES, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
You should only purchase a Policy as a long-term investment. However, you do
have access to all or some of the current cash value of your investments at
any time before the Annuity Commencement Date. But, if you do withdraw cash
from your Policy, there may be a surrender charge. You may also have to pay
income taxes on some or all of the amount you withdraw, and if you are under
the age 59 1/2 there may also be a tax penalty. In addition, there may be an
interest penalty if you make a premature withdrawal from the Fixed Account
(this is called an "Excess Interest Adjustment," and it could also result in
you earning extra interest). PFL has the right to postpone withdrawals from
the Fixed Account.
<PAGE>
Prospectuses for the mutual fund portfolios are attached to the back of this
Prospectus. This Prospectus and the mutual fund prospectuses give you vital
information about the Policies, the mutual funds and the subaccounts. Please
read them carefully before you invest. Keep them for future reference.
PLEASE NOTE THAT THE POLICIES, THE MUTUAL FUNDS AND THE SUBACCOUNTS: ARE NOT
BANK DEPOSITS, ARE NOT FEDERALLY INSURED, ARE NOT ENDORSED BY ANY BANK OR
GOVERNMENT AGENCY AND ARE NOT GUARANTEED TO ACHIEVE THEIR GOAL.
This Prospectus sets forth the information that a prospective purchaser
should consider before purchasing a Policy. It should be kept for future
reference. A Statement of Additional Information about the Policy, the Mutual
Fund Account and the Target Account which has the same date as this Prospectus
has been filed with the Securities and Exchange Commission ("SEC") and is
incorporated herein by reference. The Statement of Additional Information is
available at no cost to any person requesting a copy by writing PFL at the
Administrative and Service Office or by calling 1-800-525-6205. The table of
contents of the Statement of Additional Information is included at the end of
this Prospectus.
This Prospectus and the Statement of Additional Information generally
describe only the Policies, the Mutual Fund Account and the Target Account,
except when the Fixed Account is specifically mentioned.
Administrative and Service Office:
Financial Markets Division--Variable Annuity Department
PFL Life Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
Please Read This Prospectus Carefully
Keep it For Future Reference.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESPERSON OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
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<PAGE>
INTRODUCTION
There are three parts to this prospectus. Part I contains a summary and
certain financial data. Part II contains a detailed description of the
Policies and a brief description of the investment options. Part III describes
the Target Account. Separate prospectuses follow that describe the mutual fund
portfolios.
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<PAGE>
TABLE OF CONTENTS
PART I
<TABLE>
<S> <C>
DEFINITIONS................................................................. 6
SUMMARY OF THE POLICY....................................................... 9
ANNUITY POLICY FEE TABLE.................................................... 14
CONDENSED FINANCIAL INFORMATION............................................. 20
FINANCIAL STATEMENTS........................................................ 22
PART II
PFL LIFE INSURANCE COMPANY.................................................. 23
THE ENDEAVOR ACCOUNTS....................................................... 23
The Mutual Fund Account................................................... 23
The Underlying Funds.................................................... 24
The Target Account........................................................ 26
The Target Subaccounts.................................................. 26
The Fixed Account......................................................... 27
Guaranteed Periods...................................................... 27
Dollar Cost Averaging Fixed Account Option.............................. 28
Current Interest Rates.................................................. 28
Transfers................................................................. 29
Reinstatements............................................................ 30
Telephone Transactions.................................................... 30
Dollar Cost Averaging (DCA)............................................... 31
Asset Rebalancing......................................................... 31
PUBLISHED RATINGS........................................................... 32
THE POLICY.................................................................. 32
Policy Application and Issuance of Policies--Premium Payments............. 32
Additional Premium Payments............................................. 33
Maximum Total Premium Payments.......................................... 33
Allocation of Premium Payments.......................................... 33
Payment Not Honored by Bank............................................. 33
Policy Value.............................................................. 33
The Mutual Fund Account Value........................................... 34
The Target Account Value................................................ 34
Amendments................................................................ 34
Non-participating Policy.................................................. 34
DISTRIBUTIONS UNDER THE POLICY.............................................. 35
Surrenders................................................................ 35
Nursing Care and Terminal Condition Waiver................................ 36
Excess Interest Adjustment (EIA).......................................... 36
Systematic Payout Option.................................................. 36
Annuity Payments.......................................................... 37
Annuity Commencement Date............................................... 37
Election of Payment Option.............................................. 37
Premium Tax............................................................. 38
Supplementary Contract.................................................. 38
Availability as an Immediate Annuity.................................... 38
Annuity Payment Options................................................... 38
Death Benefit............................................................. 41
Death of Owner............................................................ 43
Restrictions Under the Texas Optional Retirement Program.................. 43
Restrictions Under Section 403(b) Plans................................... 43
Restrictions Under Qualified Policies..................................... 43
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<TABLE>
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CHARGES AND DEDUCTIONS...................................................... 44
Surrender Charge.......................................................... 44
Mortality and Expense Risk Fee............................................ 44
Administrative Charges.................................................... 45
Distribution Financing Charge............................................. 46
Premium Taxes............................................................. 46
Federal, State and Local Taxes............................................ 46
Transfer Fee.............................................................. 46
Other Expenses Including Investment Advisory Fees......................... 46
Employee and Agent Purchases.............................................. 46
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................... 47
Tax Status of the Policy.................................................. 47
Taxation of Annuities..................................................... 48
DISTRIBUTOR OF THE POLICIES................................................. 53
VOTING RIGHTS............................................................... 54
The Mutual Fund Account................................................... 54
The Target Account........................................................ 55
YEAR 2000 MATTERS........................................................... 55
LEGAL PROCEEDINGS........................................................... 56
HISTORICAL PERFORMANCE DATA OF THE MUTUAL FUND ACCOUNT...................... 56
Standardized Performance Data............................................. 56
Non-Standardized Performance Data......................................... 58
Endeavor Enhanced Index and Endeavor Select 50 Portfolios................. 60
</TABLE>
PART III
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<S> <C>
THE TARGET ACCOUNT.......................................................... 61
Target Account Definitions................................................ 61
General................................................................... 61
Investment Strategy....................................................... 62
The Dow Jones Industrial Average.......................................... 64
Investment Risks.......................................................... 65
PERFORMANCE INFORMATION..................................................... 67
Target Strategies--Performance Data....................................... 67
COMPARISON OF TOTAL RETURN.................................................. 68
Past Performance of the DJIA.............................................. 69
Standardized Performance Data............................................. 69
Non-Standardized Performance Data......................................... 69
PORTFOLIO TURNOVER.......................................................... 70
STATEMENT OF ADDITIONAL INFORMATION......................................... 70
APPENDIX A.................................................................. A-1
APPENDIX B.................................................................. B-1
</TABLE>
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<PAGE>
DEFINITIONS
Accumulation Unit--An accounting unit of measure used in calculating the
Policy Value in the Mutual Fund Account and the Target Account before the
Annuity Commencement Date.
Adjusted Policy Value--An amount equal to the Policy Value increased or
decreased by any Excess Interest Adjustments.
Administrative and Service Office--Financial Markets Division--Variable
Annuity Dept., PFL Life Insurance Company, 4333 Edgewood Road, N.E., Cedar
Rapids, Iowa 52499-0001.
Annuitant--The person entitled to receive Annuity Payments after the Annuity
Commencement Date and during whose life any Annuity Payments involving life
contingencies will continue.
Annuity Commencement Date--The date upon which Annuity Payments are to
commence. This date may be any date at least thirty days after the Policy Date
and may not be later than the last day of the policy month starting after the
Annuitant attains age 85, except as expressly allowed by PFL. In no event will
this date be later than the last day of the month following the month in which
the Annuitant attains age 95.
Annuity Payment Option or Payment Option--A method of receiving a stream of
Annuity Payments selected by the Owner.
Annuity Unit--An accounting unit of measure used in the calculation of the
amount of the second and each subsequent Variable Annuity Payment after the
Annuity Commencement Date.
Beneficiary--The person who has the right to the death benefit set forth in
the Policy.
Business Day--A day when the New York Stock Exchange is open for business.
Cash Value--On or before the Annuity Commencement Date, is the amount equal
to the Adjusted Policy Value, less the Surrender Charge.
Code--The Internal Revenue Code of 1986, as amended.
Current Interest Rate--The interest rate or rates currently guaranteed to be
credited on amounts under a Policy allocated to the Fixed Account. This
interest rate will always equal or exceed a minimum effective annual rate of
3%. See Appendix B for variations in the minimum guaranteed effective annual
interest rate applicable to the Fixed Account.
Distribution Financing Charge--A daily charge for the first seven Policy
Years equal to an effective annual rate of 0.15% of the Mutual Fund Account's
and the Target Account's net assets. This charge is not deducted after the
Annuity Commencement Date.
Due Proof of Death--A certified copy of a death certificate, a certified
copy of a decree of a court of competent jurisdiction as to the finding of
death, a written statement by the attending physician, or any other proof
satisfactory to PFL will constitute Due Proof of Death.
Excess Interest Adjustment--A positive or negative adjustment to amounts
withdrawn upon partial withdrawals or surrenders, to amounts you transfer from
the Fixed Account Guaranteed Period Options, or to amounts applied to Annuity
Payment Options. The adjustment reflects changes in the interest rates
declared by PFL since the date any payment
- 6 -
<PAGE>
was received by, or an amount was transferred to, the Guaranteed Period
Option. The Excess Interest Adjustment (EIA) can either decrease or increase
the amount you receive upon surrender or commencement of Annuity Payments,
depending upon whether there has been an increase or decrease in interest
rates, respectively.
Fixed Account--A group of Investment Options under the Policy, other than
the Mutual Fund Account or the Target Account, that are part of the general
assets of PFL and which are not in separate accounts.
Fixed Annuity Payments--Payments made pursuant to an Annuity Payment Option
which do not fluctuate in amount.
Gross Partial Withdrawal--The amount of the requested partial withdrawal,
plus any applicable Surrender Charge, minus any applicable Excess Interest
Adjustment.
Guaranteed Period Options--The various guaranteed interest rate periods
which may be offered by PFL under the Fixed Account into which premiums may be
paid or amounts may be transferred.
Investment Options--Any of the Guaranteed Period Options of the Fixed
Account, the Dollar Cost Averaging Fixed Account Option, and any of the
Subaccounts of the Mutual Fund Account or the Target Account.
Mutual Fund Account--A separate account established and registered as a unit
investment trust under the Investment Company Act of 1940 (the "1940 Act"), as
amended, to which Premium Payments under the Policies may be allocated and
which invests in the WRL Growth Portfolio of the WRL Series Fund, Inc.,
designated portfolios of the Endeavor Series Trust and such other mutual funds
as PFL may determine from time to time.
Mutual Fund Subaccount--A subdivision within the Mutual Fund Account, the
assets of which are invested in a specified portfolio of the Underlying Funds.
Nonqualified Policy--A Policy other than a Qualified Policy.
PFL--PFL Life Insurance Company, the issuer of the Policies.
Policy--One of the variable annuity policies offered by this Prospectus.
Policy Anniversary--Each anniversary of the Policy Date.
Policy Date--The date shown on the Policy data page attached to the Policy
and the date on which the Policy becomes effective.
Policy Owner or Owner--The person who may exercise all rights and privileges
under the Policy. The Policy Owner during the lifetime of the Annuitant and
prior to the Annuity Commencement Date is the person designated as the Policy
Owner or a Successor Owner in the application.
Policy Value--On or before the Annuity Commencement Date, this is an amount
equal to (a) the Premium Payments; minus (b) Gross Partial Withdrawals taken;
plus (c) interest credited in the Fixed Account; plus (d) accumulated gains or
losses in the Mutual Fund Account and the Target Account; minus (e) applicable
service charges, premium taxes, and transfer fees, if any.
Policy Year--Each 12-month period beginning on the Policy Date shown on the
Policy data page and each Policy Anniversary thereafter.
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<PAGE>
Premium Payment--An amount you pay to PFL, or is paid to PFL on your behalf,
as consideration for the benefits provided by the Policy.
Qualified Policy--A Policy issued in connection with retirement plans that
qualify for special Federal income tax treatment under the Code.
Service Charge--An annual charge on each Policy Anniversary (and a charge at
the time of surrender) for Policy maintenance and related administrative
expenses. This annual charge is the lesser of 2% of the Policy Value or $35.
Successor Owner--A person appointed by the Policy Owner to succeed to
ownership of the Policy in the event of the death of the Policy Owner (if the
Policy Owner is not the Annuitant) before the Annuity Commencement Date.
Surrender Charge--A percentage of each Premium Payment in an amount from 7%
to 0% depending upon the length of time from the date of each Premium Payment.
The Surrender Charge is assessed on surrenders of, or partial withdrawals
from, the Policy. A Surrender Charge may also be referred to as a "Contingent
Deferred Sales Charge."
Target Account--A separate account established and registered as a
management investment company under the 1940 Act to which Premium Payments
under the Policies may be allocated.
Target Subaccount--A subdivision within the Target Account, the assets of
which are invested in common stocks selected according to a specified
investment strategy.
Underlying Funds--The WRL Growth Portfolio of the WRL Series Fund, Inc., and
designated portfolios of the Endeavor Series Trust.
Valuation Period--The period of time from one determination of Accumulation
Unit values and Annuity Unit values to the next subsequent determination of
values. Such determination shall be made on each Business Day.
Variable Annuity Payments--Payments made pursuant to an Annuity Payment
Option which fluctuate as to dollar amount or payment term in relation to the
investment performance of the specified Subaccounts within the Mutual Fund
Account or the Target Account.
Written Notice or Written Request--Written notice, signed by the Owner, that
gives PFL the information it requires and is received at the Administrative
and Service Office. For some transactions, PFL may accept an electronic notice
such as telephone instructions. Such electronic notice must meet the
requirements PFL establishes for such notices.
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<PAGE>
SUMMARY OF THE POLICY
The following summary is intended to provide a brief overview of the Policy.
More detailed information can be found in the sections of this Prospectus that
follow, all of which should be read in their entirety.
THE POLICY
The Endeavor Variable Annuity is a Flexible Premium Variable Annuity which
can be purchased as a Non-Qualified Policy or as a Qualified Policy. You
allocate the Premium Payments among the Mutual Fund Account, the Target
Account or the Fixed Account.
THE ENDEAVOR ACCOUNTS
The Mutual Fund Account. The Mutual Fund Account is a separate account of
PFL, which has dedicated a number of subaccounts to the Policy that invest
exclusively in shares of the designated portfolios of the Endeavor Series
Trust and the Growth Portfolio of the WRL Series Fund, Inc. (collectively, the
"Underlying Funds"). The Endeavor Series Trust is a mutual fund managed by
Endeavor Investment Advisers, a general partnership between Endeavor
Management Co. and AUSA Financial Markets, Inc. (an affiliate of PFL), which
contracts with several subadvisers (as described in separate prospectuses that
accompany this Prospectus) for investment advisory services. The WRL Growth
Portfolio is a portfolio within the WRL Series Fund, Inc. The WRL Series Fund,
Inc. is a mutual fund whose investment adviser is WRL Investment Management,
Inc., a subsidiary of Western Reserve Life Assurance Co. of Ohio ("Western
Reserve"), (an affiliate of PFL). WRL Investment Management, Inc. contracts
with Janus Capital Corporation as a subadviser to the WRL Growth Portfolio for
investment advisory services.
The portfolios of the Underlying Funds currently offered are as follows:
Endeavor Asset Allocation Portfolio Dreyfus U.S. Government Securities
Endeavor Money Market Portfolio Portfolio
T. Rowe Price International Stock Endeavor Value Equity Portfolio
Portfolio Endeavor Opportunity Value Portfolio
T. Rowe Price Equity Income Endeavor Enhanced Index Portfolio
Portfolio Endeavor Select 50 Portfolio
T. Rowe Price Growth Stock Portfolio WRL Growth Portfolio
Dreyfus Small Cap Value Portfolio
Each of the Subaccounts of the Mutual Fund Account invests solely in a
corresponding Portfolio of the Underlying Funds. BECAUSE THE POLICY VALUE
DEPENDS ON THE INVESTMENT EXPERIENCE OF THE SELECTED SUBACCOUNTS, THE OWNER
BEARS THE ENTIRE INVESTMENT RISK WITH RESPECT TO PREMIUM PAYMENTS ALLOCATED
TO, AND AMOUNTS TRANSFERRED TO, THE MUTUAL FUND ACCOUNT. (See "THE ENDEAVOR
ACCOUNTS--Mutual Fund Account," p. 23.)
The Target Account. The Target Account is a separate account of PFL, which
invests according to the specific investment strategies of its Subaccounts.
Interests in the Target Account are not expected to be available until mid-
1998. (See "THE TARGET ACCOUNT--General," p. 61.)
The Dow Target 10 Subaccount will invest in the common stock of the ten
companies in the Dow Jones Industrial Average ("DJIA") that have the highest
dividend yield as of a specified business day and hold those stocks for a 12-
month period.
The Dow Target 5 Subaccount will invest in the common stock of the five
companies with the lowest per share stock price of the ten companies in the
DJIA that have the highest dividend yield as of a specified business day and
hold those stocks for a 12-month period.
BECAUSE THE POLICY VALUE WILL DEPEND ON THE INVESTMENT EXPERIENCE OF THE
SELECTED SUBACCOUNTS, THE OWNER BEARS THE ENTIRE INVESTMENT RISK WITH RESPECT
TO
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<PAGE>
PREMIUM PAYMENTS ALLOCATED TO, AND AMOUNTS TRANSFERRED TO, THE TARGET ACCOUNT.
(See "THE ENDEAVOR ACCOUNTS--The Target Account," p. 26.)
The investment adviser for the Target Account is First Trust Advisers L.P.
The manager for the Target Account is Endeavor Investment Advisers. (See "THE
TARGET ACCOUNT--General," p. 61.)
The Fixed Account. The Fixed Account guarantees an annual credited rate of
at least 3% on Premium Payments and transfers to, less partial withdrawals and
transfers from, the Fixed Account (see Appendix "B" for variations in the
minimum guaranteed effective annual interest rate for prior versions of
Policies and for Policies offered in certain states). Upon surrender, PFL
guarantees return of at least the Premium Payments made to, less prior Partial
withdrawals and transfers from, the Fixed Account. PFL may, in its sole
discretion, declare a higher Current Interest Rate. A Current Interest Rate is
guaranteed for at least one year, although certain Dollar Cost Averaging
programs may run for shorter periods. (See "THE ENDEAVOR ACCOUNTS--The Fixed
Account," p. 27.)
PREMIUM PAYMENTS
A Nonqualified Policy may be purchased with an initial Premium Payment of at
least $5,000. A Qualified Policy generally may be purchased with an initial
Premium Payment of at least $1,000, but policies purchased and used in
connection with a Tax Deferred 403(b) Annuity may be purchased with an initial
premium payment in any amount chosen by the purchaser; however, PFL must
receive the initial Premium Payment within 90 days following the Policy Date,
otherwise the Policy will be canceled. You may make additional Premium
Payments of at least $50 each at any time before the Annuity Commencement
Date. The maximum total Premium Payments allowed without prior approval of PFL
is $1,000,000. No charges or fees are deducted from Premium Payments, so the
entire Premium Payment is invested immediately, subject to the restrictions
below regarding the "Right to Cancel" period. (See "CHARGES AND DEDUCTIONS--
Surrender Charge," p. 44 and "CHARGES AND DEDUCTIONS--Premium Taxes," p. 46.)
You must allocate the initial Premium Payment among the Investment Options
according to allocation percentages in the Policy application, or information
provided in lieu thereof, or transmittal form. Any allocation must be in whole
percents, and the total allocation must equal 100%. Allocations you specify
for the initial Premium Payment will be used for additional Premium Payments
unless you request a change in allocation. Allocations of additional Premium
Payments may be changed by sending Written Notice to PFL's Administrative and
Service Office. (See "THE POLICY--Policy Application and Issuance of
Policies--Premium Payments," p. 32.)
RIGHT TO CANCEL PERIOD
You may, until the end of the period of time specified in the Policy ("Right
to Cancel Period"), examine the Policy and return it for a refund. The
applicable period will depend on the state in which the Policy is issued. In
some states the period is ten days after the Policy is delivered to you. Some
states allow for a longer period to return the Policy. The amount of the
refund will also depend on the state in which the Policy is issued. Ordinarily
the amount of the refund will be the Policy Value. However, some states may
require a return of the Premium Payments, or the greater of the Premium
Payments or the Policy Value. PFL will pay the refund within seven days after
it receives written notice of cancellation and the returned Policy within the
applicable period. The Policy will then be deemed void.
TRANSFERS BEFORE THE ANNUITY COMMENCEMENT DATE
An Owner can transfer Policy Values from one Subaccount to another within
the Mutual Fund Account, the Target Account or the Fixed Account, or transfer
Policy Values or an
- 10 -
<PAGE>
amount equal to the interest credited from the Guaranteed Period Options of
the Fixed Account to the Mutual Fund Account or the Target Account. Transfers
of amounts equal to interest credited to a Guaranteed Period Option are
referred to as "Interest Transfers." Each Interest Transfer will be subject to
a minimum amount of $50. No Excess Interest Adjustment will apply to such
transfers of interest. For transfers other than Interest Transfers, the
minimum amount which may be transferred is $500, or the entire Subaccount (or
Guaranteed Period Option) Policy Value, whichever is less. However, following
a transfer out of a particular Subaccount or Guaranteed Period Option, at
least $500 must remain in that Subaccount or Guaranteed Period Option,
otherwise PFL reserves the right to include remaining amounts in the transfer.
Transfers currently may be made either by telephone (subject to the provisions
described below under "Telephone Transactions," p. 30) or by sending Written
Notice to the Administrative and Service Office.
An Owner may choose which Guaranteed Period Option to or from transfers may
be made. Transfers of Policy Value from a Guaranteed Period Option prior to
the end of that Guaranteed Period are subject to the Excess Interest
Adjustment which may increase or decrease the amount removed from the
Guaranteed Period Option in order to honor the transfer amount requested.
Interest Transfers are not subject to an Excess Interest Adjustment. Due to
the manner of crediting interest in the Fixed Account, however, Interest
Transfers may affect the rate of interest credited on funds remaining in the
Fixed Account. (See "THE ENDEAVOR ACCOUNTS--Transfers," p. 29 and
"DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment," p. 36.)
Transfers from the Dollar Cost Averaging Fixed Account Option, except
through automatic Dollar Cost Averaging transfers, are not allowed. (See "THE
ENDEAVOR ACCOUNTS--Dollar Cost Averaging Fixed Account Option," p. 28.)
Prior versions of the Policy and Policies issued in certain states may have
additional restrictions on transfers. See Appendix B and the Policy or
endorsement for details. If the Excess Interest Adjustment (at the time of a
transfer request only) from any Guaranteed Period Option (GPO) is a negative
adjustment, then the maximum amount of Policy Value that can be transferred
out of the Fixed Account is 25% of that GPO's Policy Value, less amounts
previously transferred out of that GPO during the current Policy Year. No
maximum will apply to amounts transferred from any Guaranteed Period Option if
the Excess Interest Adjustment is a positive adjustment at the time of
transfer.
A $10 charge may be imposed for each transfer in excess of twelve per Policy
Year. Currently PFL does not charge for any transfers. (See "THE ENDEAVOR
ACCOUNTS--Transfers," p. 29.)
SURRENDERS AND PARTIAL WITHDRAWALS
You may elect to surrender the Policy or make a partial withdrawal from the
Policy ($500 minimum) in exchange for a cash payment from PFL at any time
prior to the earlier of the Annuitant's death or the Annuity Commencement
Date. A surrender or partial withdrawal may be subject to deductions for
Surrender Charges, Excess Interest Adjustments and Service Charges. (See
"CHARGES AND DEDUCTIONS," p. 44.) A surrender or partial withdrawal request
must be made by Written Request, and a request for a partial withdrawal must
specify the Subaccount(s) or Guaranteed Period Options from which the
withdrawal is requested. There is currently no limit on the frequency or
timing of partial withdrawals, although for Qualified Policies the retirement
plan or applicable law may restrict and/or penalize partial withdrawals. (See
"DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 35). In addition to the
applicable charges and deductions under the Policy, surrenders and partial
withdrawals may be subject to premium taxes, income taxes and a 10% Federal
penalty tax.
- 11 -
<PAGE>
NURSING CARE AND TERMINAL CONDITION WITHDRAWAL OPTION
If you or your spouse (or Annuitant or Annuitant's spouse if the Owner is
not a natural person): (1) has been confined in a hospital or nursing facility
for 30 consecutive days or (2) has been diagnosed as having a terminal
condition, as defined in the Policy or endorsement (generally, a life
expectancy of not more than 12 months), then partial withdrawals or surrenders
may be taken with no Surrender Charge and no Excess Interest Adjustment. (This
benefit may not be available in all states or for all policy forms. See
Appendix B and the Policy or endorsement for details.) (See "DISTRIBUTIONS
UNDER THE POLICY--Nursing Care and Terminal Condition Withdrawal Option," p.
36.)
CHARGES AND DEDUCTIONS
Surrender Charge. In order to permit investment of the entire Premium
Payment, PFL does not deduct sales or other charges at the time the Policy is
purchased (although in some states, a premium tax charge may be deducted).
However, a Surrender Charge of up to 7% of the amount withdrawn is imposed on
certain surrenders or partial withdrawals of Premium Payments in order to
cover expenses relating to the sale of the Policies. A Surrender Charge will
only be applied to withdrawals that exceed the amount available under certain
listed exceptions. The applicable Surrender Charge is based on the period of
time elapsed since payment of the Premium Payment(s) being withdrawn. There is
no Surrender Charge imposed seven or more years after a Premium Payment was
paid. For purposes of determining the applicable Surrender Charge, Premium
Payments are considered to be withdrawn on a "first in--first out" basis. (See
"CHARGES AND DEDUCTIONS--Surrender Charge," p. 44.) Note that for income tax
purposes, however, gains are deemed to be withdrawn first. (See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES," p. 47.) After the first Policy Year, up to
10% of the Policy Value may be withdrawn once per Policy Year without an
Excess Interest Adjustment and without a Surrender Charge if it is the first
withdrawal in that Policy Year.
Excess Interest Adjustment. Surrenders, partial withdrawals, transfers
(other than "10% Withdrawals" and "Interest Transfers"), and amounts applied
to a Payment Option from Guaranteed Period Options which occur prior to the
end of the Guarantee Period are subject to an Excess Interest Adjustment,
which could eliminate all credited interest in excess of the minimum
guaranteed effective annual interest rate of 3%. The Excess Interest
Adjustment, if a positive adjustment, could also result in the crediting of
additional interest. (See "DISTRIBUTIONS UNDER THE POLICY--Excess Interest
Adjustment," p. 36.)
Account Charges. PFL deducts a daily charge equal to a percentage of the net
assets in the Mutual Fund Account and the Target Account (the "Accounts") for
the mortality and expense risks assumed by PFL. For Guaranteed Minimum Death
Benefit Options "A" (5% Annually Compounding Death Benefit) and "B" (Double
Enhanced Death Benefit), the effective annual rate of this charge prior to the
Annuity Commencement Date is 1.25% of the value of each Account's net assets.
For Guaranteed Minimum Death Benefit Option "C" (Return of Premium Death
Benefit), the effective annual rate of this charge prior to the Annuity
Commencement Date is 1.10% of the value of each Account's net assets. After
the Annuity Commencement Date, the Mortality and Expense Risk Fee may be lower
than the Mortality and Expense Risk Fee in effect prior to the Annuity
Commencement Date. (See "CHARGES AND DEDUCTIONS--Mortality and Expense Risk
Fee," p. 44, "DISTRIBUTIONS UNDER THE POLICY--Death Benefit," p. 41, and
Appendix B.)
PFL also deducts a daily Administrative Charge from the net assets of each
Account to partially cover expenses incurred by PFL in connection with the
administration of the Account and the Policies. The effective annual rate of
this charge is 0.15% of the value of each Account's net assets. (See "CHARGES
AND DEDUCTIONS--Administrative Charges," p. 45.)
- 12 -
<PAGE>
PFL guarantees that the account charges for mortality and expense risks and
administrative expenses prior to the Annuity Commencement Date will not exceed
a total of 1.40% for the 5% Annually Compounding Death Benefit and the Double
Enhanced Death Benefit, and 1.25% for the Return of Premium Death Benefit.
After the Annuity Commencement Date, the total charge for mortality and
expense risks and administrative expenses will be less than or equal to that
charged before the Annuity Commencement Date (see Appendix B).
Distribution Financing Charges. During the first seven Policy Years, PFL
imposes a daily Distribution Financing Charge equal to an effective annual
rate of 0.15% of the Mutual Fund Account's and of the Target Account's net
assets. This charge is used by PFL to defray a portion of the cost of
distribution of the Policies. This charge will not be imposed after the
Annuity Commencement Date. (See "CHARGES AND DEDUCTIONS--Distribution
Financing Charge," p. 46.)
Service Charge. Prior to the Annuity Commencement Date, there is an annual
Service Charge on each Policy Anniversary (and a charge at the time of
surrender during any Policy Year) for Policy maintenance and related
administrative expenses. This annual charge is the lesser of 2% of the Policy
Value or $35. The Service Charge is deducted from each Investment Option in
proportion to each Investment Option's percentage of the Policy Value just
prior to such charge. This charge is waived if either the Policy Value or the
sum of all Premium Payments less the sum of all partial withdrawals equals or
exceeds $50,000 on a Policy Anniversary (or date of surrender). PFL guarantees
that this charge will not be increased in the future. (See "CHARGES AND
DEDUCTIONS--Administrative Charges," p 45.)
Transfer Fee. Any transfers among the Subaccounts of the Separate Account
and/or the Guaranteed Period Options of the Fixed Account in excess of 12 per
Policy year may be charged a $10 Transfer Fee per transfer. Currently, PFL
does not assess this fee.
Taxes. PFL may incur premium taxes relating to the Policies. When permitted
by state law, PFL will not deduct any premium taxes related to a particular
Policy from the Policy Value until withdrawal of the full Policy Value,
payment of the Death Benefit, or the Annuity Commencement Date. Premium taxes
currently range from 0% to 3.50% of Premium Payments. (See "CHARGES AND
DEDUCTIONS--Premium Taxes," p. 46.)
No charges are currently made against the Fixed Account, the Mutual Fund
Account, or the Target Account for federal, state, or local income taxes.
Should PFL determine that any such taxes may be imposed, PFL may deduct such
taxes from amounts held in the relevant Account. (See "CHARGES AND
DEDUCTIONS--Federal, State and Local Taxes," p. 46.)
Charges Against the Subaccounts. The value of the net assets of the Mutual
Fund Subaccounts will reflect the investment advisory fee and other expenses
incurred by the Underlying Funds. Those fees and expenses are detailed in the
prospectuses for the Underlying Funds that accompany this Prospectus. The
value of the net assets of the Target Subaccounts will reflect the investment
advisory fee and other expenses incurred by the manager in operating each
Target Subaccount.
Expense Data. The charges and deductions are summarized in the following Fee
Tables. This tabular information regarding expenses assumes that the entire
Policy Value is in either the Mutual Fund Account or the Target Account and
that the Policy Value has not been applied to purchase an Annuity Payment
Option. These tables reflect charges and expenses of the Mutual Fund Account
as well as the Underlying Funds for the fiscal year ended December 31, 1997,
except as otherwise noted. Expenses may be higher or lower in the future.
These tables do not reflect any premium taxes that may be applicable.
- 13 -
<PAGE>
ANNUITY POLICY FEE TABLE
<TABLE>
<CAPTION>
POLICY OWNER TRANSACTION EXPENSES
<S> <C>
Sales Load On
Purchase Payments.. 0
Maximum Surrender
Charge
(as a % of Premium
Payment
Surrendered)(/1/)(/2/).. 7%
Surrender Fees...... 0
Annual Service
Charge(/1/)........ $35 Per Policy
Transfer Fee(/1/)... Currently No Fee
</TABLE>
<TABLE>
<S> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF ACCOUNT VALUE)
Mortality and Expense Risk
Fee(/3/)..................... 1.25%
Administrative Charge......... 0.15%
Distribution Financing
Charge....................... 0.15%
TOTAL SEPARATE ACCOUNT
ANNUAL EXPENSES.............. 1.55%
</TABLE>
PORTFOLIO ANNUAL EXPENSES
(as a percentage of average net assets and after expense reimbursements)
<TABLE>
<CAPTION>
TOTAL PORTFOLIO TOTAL ACCOUNT
MANAGEMENT OTHER RULE 12B1 ANNUAL AND PORTFOLIO
FEES EXPENSES FEES EXPENSES(/4/) EXPENSE
---------- -------- --------- --------------- -------------
<S> <C> <C> <C> <C> <C>
ENDEAVOR SERIES TRUST
Endeavor Money Market.. 0.50% 0.10% -- 0.60% 2.15%
Endeavor Asset
Allocation............ 0.75% 0.09% -- 0.84% 2.39%
T. Rowe Price
International Stock... 0.90% 0.17% -- 1.07% 2.62%
Endeavor Value Equity.. 0.80% 0.09% -- 0.89% 2.44%
Dreyfus Small Cap
Value................. 0.80% 0.11% -- 0.91% 2.46%
Dreyfus U.S. Government
Securities............ 0.65% 0.15% -- 0.80% 2.35%
T. Rowe Price Equity
Income................ 0.80% 0.14% -- 0.94% 2.49%
T. Rowe Price Growth
Stock................. 0.80% 0.16% -- 0.96% 2.51%
Endeavor Opportunity
Value................. 0.80% 0.35% -- 1.15% 2.70%
Endeavor Enhanced
Index................. 0.75% 0.55% -- 1.30% 2.85%
Endeavor Select 50..... 1.10% 0.40% -- 1.50% 3.05%
WRL SERIES FUND,
INC.(/5/)
WRL Growth............. 0.80% 0.07% -- 0.87% 2.42%
TARGET ACCOUNT(/6/)
The Dow Target 10...... 0.75% 0.55% -- 1.30% 2.85%
The Dow Target 5....... 0.75% 0.55% -- 1.30% 2.85%
</TABLE>
- ----------------------------
(/1/)The Surrender Charge and Transfer Fee, if any is imposed, applies to each
Policy, regardless of how the Policy Value is allocated among the Mutual
Fund Account, the Target Account and the Fixed Account. The Service Charge
is $35 per year, but not greater than 2% of the Policy Value. The Service
Charge applies to the Fixed Account, the Mutual Fund Account, and the
Target Account and is assessed on a prorata basis relative to each
Account's Policy Value as a percentage of the Policy's total Policy Value.
The Service Charge is deducted on each Policy Anniversary and at the time
of surrender, if surrender occurs during a Policy year. (See "CHARGES AND
DEDUCTIONS--Administrative Charges" p. 45.) There is no fee for the first
12 transfers per year. For additional transfers PFL may charge a fee of $10
per transfer but currently does not charge for any transfers.
(/2/)The Surrender Charge is decreased based on the number of years since the
premium payment date in which the withdrawal is made. The charge is a
percentage of the Premium Payment: 7%, 7%, 6%, 6%, 5%, 4% and 2%; for years
one through seven, respectively, after the Premium Payment was made. If
applicable a Surrender Charge will only be applied to withdrawals that
exceed the amount available under certain listed exceptions. (See "CHARGES
AND DEDUCTIONS--Surrender Charge," p. 44, and "DISTRIBUTIONS UNDER THE
POLICY-- Surrenders," p. 35.)
(/3/)The Mortality and Expense Risk Fees shown (1.25%) are for the 5% Annually
Compounding Death Benefit and the Double Enhanced Death Benefit. The
corresponding fee for the Return of Premium Death Benefit is 1.10% for each
Subaccount. (See "DISTRIBUTIONS UNDER THE POLICY--Death Benefit," p. 41.)
(/4/)Endeavor Investment Advisers has agreed, until terminated by it, to assume
expenses of the Portfolios that exceed the following rates: Endeavor Money
Market--0.99%; Endeavor Managed Asset Allocation--1.25%; T. Rowe Price
International Stock--1.53%; Endeavor Value Equity--1.30%; Dreyfus Small Cap
Value--1.30%; Dreyfus U.S. Government Securities--1.00%; T. Rowe Price
Equity Income--1.30%; T. Rowe Price Growth Stock--1.30%; Endeavor
Opportunity Value--1.30%; Endeavor Enhanced Index--1.30%; Endeavor Select
50--1.50%; The Dow Target 10--1.30%; and The Dow Target 5--1.30%. During
1997, Endeavor Investment Advisers waived fees relative to, or reimbursed,
the Endeavor Enhanced Index Portfolio; the annualized operating expense
ratio before waiver/reimbursement by Endeavor Investment Advisers for the
period ended December 31, 1997, was 1.56%. Amounts shown for the Endeavor
Select 50 Portfolio, The Dow Target 10 and The Dow Target 5 are estimated
for 1998. The annualized operating expense ratio before
waiver/reimbursement by Endeavor Investment Advisors for the Endeavor
Select 50 Portfolio, The Dow Target 10 and The Dow Target 5 are estimated
to be 1.60%, 1.40%, and 1.40%, respectively. The fee table information
relating to the Underlying Funds was provided to PFL by the Underlying
Funds, and PFL has not independently verified such information.
- 14 -
<PAGE>
(/5/)Effective January 1, 1997, the WRL Series Fund, Inc. adopted a Plan of
Distribution pursuant to Rule 12b-1 under the 1940 Act ("Distribution
Plan") and pursuant to the Distribution Plan, entered into a Distribution
Agreement with InterSecurities, Inc. ("ISI"), principal underwriter for the
WRL Series Fund, Inc. Under the Distribution Plan, the WRL Series Fund,
Inc., on behalf of the WRL Growth Portfolio, is authorized to pay to
various service providers, as direct payment for expenses incurred in
connection with the distribution of the Portfolio's shares, amounts equal
to actual expenses associated with distributing the Portfolio's shares, up
to a maximum rate of 0.15% (fifteen one-hundredths of one percent) on an
annualized basis of the average daily net assets. This fee is measured and
accrued daily and paid monthly. ISI has determined that it would not seek
payment by the WRL Series Fund, Inc. of distribution expenses incurred with
respect to any portfolio (including the WRL Growth Portfolio) during the
fiscal year ending December 31, 1998. Owners will be notified in advance
prior to ISI's seeking such reimbursement in the future.
(/6/)For the Target Account, the Distribution Financing Charge included under
"Separate Account Annual Expenses" in this table is deducted pursuant to a
12b-1 plan.
EXAMPLES
I. 5% Annually Compounding Death Benefit or Double Enhanced Death
Benefit. An Owner would pay the following expenses on a $1,000 investment,
assuming 5% Annually Compounding Death Benefit or Double Enhanced Death
Benefit, a hypothetical 5% annual return on assets, and assuming the entire
Policy Value is in the applicable Subaccount:
1. If the Policy is surrendered at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Endeavor Money Market Portfolio................ $ 92 $122 $163 $248
Endeavor Asset Allocation Portfolio............ $ 95 $130 $175 $273
T. Rowe Price International Stock Portfolio.... $ 97 $137 $186 $296
Endeavor Value Equity Portfolio................ $ 95 $131 $177 $278
Dreyfus Small Cap Value Portfolio.............. $ 95 $132 $178 $280
Dreyfus U.S. Government Securities Portfolio... $ 94 $129 $173 $269
T. Rowe Price Equity Income Portfolio.......... $ 96 $133 $180 $283
T. Rowe Price Growth Stock Portfolio........... $ 96 $133 $181 $285
Endeavor Opportunity Value Portfolio........... $ 98 $139 $190 $303
Endeavor Enhanced Index Portfolio.............. $ 99 $144 $198 $318
Endeavor Select 50 Portfolio................... $101 $149 $207 $337
WRL Growth Portfolio........................... $ 95 $131 $176 $276
The Dow Target 10 Subaccount................... $ 99 $144 $198 $318
The Dow Target 5 Subaccount.................... $ 99 $144 $198 $318
2. If the Policy is annuitized at the end of the applicable time period:
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Endeavor Money Market Portfolio................ $ 22 $ 69 $118 $248
Endeavor Asset Allocation Portfolio............ $ 25 $ 76 $130 $273
T. Rowe Price International Stock Portfolio.... $ 27 $ 83 $142 $296
Endeavor Value Equity Portfolio................ $ 25 $ 78 $133 $278
Dreyfus Small Cap Value Portfolio.............. $ 25 $ 78 $134 $280
Dreyfus U.S. Government Securities Portfolio... $ 24 $ 75 $128 $269
T. Rowe Price Equity Income Portfolio.......... $ 26 $ 79 $135 $283
T. Rowe Price Growth Stock Portfolio........... $ 26 $ 80 $136 $285
Endeavor Opportunity Value Portfolio........... $ 28 $ 85 $146 $303
Endeavor Enhanced Index Portfolio.............. $ 29 $ 90 $153 $318
Endeavor Select 50 Portfolio................... $ 31 $ 96 $163 $337
WRL Growth Portfolio........................... $ 25 $ 77 $132 $276
The Dow Target 10 Subaccount................... $ 29 $ 90 $153 $318
The Dow Target 5 Subaccount.................... $ 29 $ 90 $153 $318
</TABLE>
- 15 -
<PAGE>
3. If the Policy is not surrendered or annuitized:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Endeavor Money Market Portfolio................ $ 22 $69 $118 $248
Endeavor Asset Allocation Portfolio............ $ 25 $76 $130 $273
T. Rowe Price International Stock Portfolio.... $ 27 $83 $142 $296
Endeavor Value Equity Portfolio................ $ 25 $78 $133 $278
Dreyfus Small Cap Value Portfolio.............. $ 25 $78 $134 $280
Dreyfus U.S. Government Securities Portfolio... $ 24 $75 $128 $269
T. Rowe Price Equity Income Portfolio.......... $ 26 $79 $135 $283
T. Rowe Price Growth Stock Portfolio........... $ 26 $80 $136 $285
Endeavor Opportunity Value Portfolio........... $ 28 $85 $146 $303
Endeavor Enhanced Index Portfolio.............. $ 29 $90 $153 $318
Endeavor Select 50 Portfolio................... $ 31 $96 $163 $337
WRL Growth Portfolio........................... $ 25 $77 $132 $276
The Dow Target 10 Subaccount................... $ 29 $90 $153 $318
The Dow Target 5 Subaccount.................... $ 29 $90 $153 $318
II. Return of Premium Death Benefit. An Owner would pay the following
expenses on a $1,000 investment, assuming Return of Premium Death Benefit, a
hypothetical 5% annual return on assets, and assuming the entire Policy Value
is in the applicable Subaccount:
1. If the Policy is surrendered at the end of the applicable time period:
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Endeavor Money Market Portfolio................ $ 91 $118 $155 $233
Endeavor Asset Allocation Portfolio............ $ 93 $125 $167 $258
T. Rowe Price International Stock Portfolio.... $ 96 $132 $179 $281
Endeavor Value Equity Portfolio................ $ 94 $127 $170 $263
Dreyfus Small Cap Value Portfolio.............. $ 94 $127 $171 $265
Dreyfus U.S. Government Securities Portfolio... $ 93 $124 $171 $265
T. Rowe Price Equity Income Portfolio.......... $ 94 $128 $172 $268
T. Rowe Price Growth Stock Portfolio........... $ 94 $129 $173 $270
Endeavor Opportunity Value Portfolio........... $ 96 $135 $183 $289
Endeavor Enhanced Index Portfolio.............. $ 98 $139 $190 $303
Endeavor Select 50 Portfolio................... $100 $145 $200 $322
WRL Growth Portfolio........................... $ 94 $126 $169 $261
The Dow Target 10 Subaccount................... $ 98 $139 $190 $303
The Dow Target 5 Subaccount.................... $ 98 $139 $190 $303
</TABLE>
- 16 -
<PAGE>
2. If the Policy is annuitized at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Endeavor Money Market Portfolio................ $21 $64 $111 $233
Endeavor Asset Allocation Portfolio............ $23 $72 $123 $258
T. Rowe Price International Stock Portfolio.... $26 $79 $134 $281
Endeavor Value Equity Portfolio................ $24 $73 $125 $263
Dreyfus Small Cap Value Portfolio.............. $24 $74 $126 $265
Dreyfus U.S. Government Securities Portfolio... $23 $70 $121 $254
T. Rowe Price Equity Income Portfolio.......... $24 $75 $128 $268
T. Rowe Price Growth Stock Portfolio........... $24 $75 $129 $270
Endeavor Opportunity Value Portfolio........... $26 $81 $138 $289
Endeavor Enhanced Index Portfolio.............. $28 $85 $146 $303
Endeavor Select 50 Portfolio................... $30 $91 $156 $322
WRL Growth Portfolio........................... $24 $73 $124 $261
The Dow Target 10 Subaccount................... $28 $85 $146 $303
The Dow Target 5 Subaccount.................... $28 $85 $146 $303
3. If the Policy is not surrendered or annuitized:
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Endeavor Money Market Portfolio................ $21 $64 $111 $233
Endeavor Asset Allocation Portfolio............ $23 $72 $123 $258
T. Rowe Price International Stock Portfolio.... $26 $79 $134 $281
Endeavor Value Equity Portfolio................ $24 $73 $125 $263
Dreyfus Small Cap Value Portfolio.............. $24 $74 $126 $265
Dreyfus U.S. Government Securities Portfolio... $23 $70 $121 $254
T. Rowe Price Equity Income Portfolio.......... $24 $75 $128 $268
T. Rowe Price Growth Stock Portfolio........... $24 $75 $129 $270
Endeavor Opportunity Value Portfolio........... $26 $81 $138 $289
Endeavor Enhanced Index Portfolio.............. $28 $85 $146 $303
Endeavor Select 50 Portfolio................... $30 $91 $156 $322
WRL Growth Portfolio........................... $24 $73 $124 $261
The Dow Target 10 Subaccount................... $28 $85 $146 $303
The Dow Target 5 Subaccount.................... $28 $85 $146 $303
</TABLE>
The above tables are intended to assist the Owner in understanding the costs
and expenses that will be borne, directly or indirectly. These include the
expenses of the Underlying Funds. (See "CHARGES AND DEDUCTIONS," p. 44, and
the Underlying Funds' prospectuses.) These examples include the 1.25%
Mortality and Expense Risk Fee for the 5% Annually Compounding and the Double
Enhanced Death Benefits; and the 1.10% Mortality and Expense Risk Fee for the
Return of Premium Death Benefit. In addition to the expenses listed above,
premium taxes may be applicable.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The
assumed 5% annual return used in these examples is purely hypothetical and
should not be considered a guarantee of past or future performance. The
figures and data for the Underlying Funds and the Target Account annual
expenses have been provided by WRL Investment Management, Inc. and Endeavor
Investment Advisers, and while PFL does not dispute these figures, PFL has not
independently verified their accuracy.
In the examples, the $35 Annual Service Charge is reflected as a charge of
.0547% based on average Policy Value of $64,005. Normally the $35 Annual
Service Charge would be waived if either the Premium Payment(s) less Partial
withdrawals, or the Policy Value is at least $50,000. However, it was included
in these examples for illustrative purposes.
- 17 -
<PAGE>
Any transfers among the Subaccounts of the Separate Account and/or the
Guaranteed Period Options of the Fixed Account in excess of 12 per Policy Year
may be charged a $10 fee per transfer. Currently, PFL does not assess this
fee. This fee is not reflected in these examples.
DEATH BENEFIT
Upon receipt of proof that the Annuitant who is the Owner has died before
the Annuity Commencement Date, the Death Benefit is calculated and is payable
to the Beneficiary when PFL receives Due Proof of Death, an election of the
method of settlement and return of the Policy. The Death Benefit is only paid
if the Owner and Annuitant are the same person, and that person dies prior to
the Annuity Commencement Date. In the event that the Annuitant who is not the
Owner dies prior to the Annuity Commencement Date, the Owner will generally
become the Annuitant unless the Owner specifically requests on the
application, order form or in writing prior to Annuitant's death that the
Death Benefit be paid upon the Annuitant's death and PFL agrees to such an
election.
The amount of the Death Benefit will depend on the state where the Policy is
purchased and will depend on the Death Benefit option you elect. However, the
Death Benefit will always be at least equal to the greater of the Policy Value
or the Cash Value on the date PFL receives the documentation it needs to
process the Death Benefit.
The Death Benefit is not paid on the death of an Owner if the Owner is not
the Annuitant. If an Owner who is not the Annuitant dies before the Annuity
Commencement Date, the amount payable under the Policy upon surrender will be
the Adjusted Policy Value. (See "DISTRIBUTIONS UNDER THE POLICY--Death
Benefit," p. 41, or the Policy or endorsement for details.) In certain
circumstances, if the Owner dies the Owner's spouse may elect to continue the
Policy. If the Policy is continued, all future Surrender Charges would be
waived.
You have the "one-time" option of choosing a Guaranteed Minimum Death
Benefit at the time of purchase of the Policy. You may choose among the "5%
Annually Compounding Death Benefit," the "Double Enhanced Death Benefit," or
the "Return of Premium Death Benefit. "The "5% Annually Compounding Death
Benefit" is only available for Annuitants and Owners under age 75 at issue.
The "Double Enhanced Death Benefit" is only available for Annuitants and
Owners under age 81 at issue. The "Return of Premium Death Benefit" is only
available for Annuitants and Owners under age 85 at issue, and must be used if
either the Owner or the Annuitant is 81 or older at issue. Prior versions of
the Policy or Policies offered in certain states may not offer all Guaranteed
Minimum Death Benefit Options. Appendix B contains information regarding the
Death Benefit in prior versions of the Policy and for Policies that may be
issued in certain states. See the Policy or endorsement for details. If you do
not make a Guaranteed Minimum Death Benefit Option election, the contract will
be issued with the Return of Premium Death Benefit. The Death Benefit may be
paid as either a lump sum cash benefit or as an annuity as permitted by
federal or state law.
VARIATIONS IN POLICY PROVISIONS
Certain provisions in prior versions of the Policies sold before May 1,
1998, and of Policies offered in certain states may vary from the descriptions
in this Prospectus in order to comply with different state laws. Any such
state variations will be included in the Policy itself or in riders or
endorsements attached to the Policy. A summary of certain differences is
contained in Appendix B to this Prospectus. See the Policy or endorsement for
details.
New Jersey residents: Annuity payments must begin on or before the Policy
Anniversary that is closest to the Annuitant's 70th birthday or the 10th
Policy Anniversary, whichever occurs last. You may not select a Guaranteed
Period Option that would extend beyond that
- 18 -
<PAGE>
date. Your options at the Annuity Commencement Date are to elect a lump sum
payment, or elect to receive annuity payments under one of the Fixed Payment
Options. New Jersey residents cannot elect Variable Payment Options. Consult
your agent and the policy form itself for details regarding these and other
terms applicable to policies sold in New Jersey.
FEDERAL INCOME TAX CONSEQUENCES OF INVESTMENT IN THE POLICY
With respect to Owners who are natural persons, there should be no federal
income tax on increases in the Policy Value until a distribution under the
Policy occurs (for example, a surrender, partial withdrawal, or Annuity
Payment) or is deemed to occur (for example, a pledge or assignment of a
Policy). Generally, a portion of any distribution or deemed distribution will
be taxable as ordinary income. The taxable portion of certain distributions
will be subject to withholding unless the recipient elects otherwise. In
addition, a 10% Federal penalty tax may apply to certain distributions or
deemed distributions under the Policy. (See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES," p. 47.)
INQUIRIES, WRITTEN NOTICES AND WRITTEN REQUESTS
Any questions about procedures or the Policy, or any Written Notice or
Written Request required to be sent to PFL, should be sent to the
Administrative and Service Office, Financial Markets Division--Variable
Annuity Department, 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001.
Telephone requests and inquiries may be made by calling 800-525-6205. All
inquiries, Notices and Requests should include the Policy number, the Owner's
name and the Annuitant's name.
* * *
Note: The foregoing summary is qualified in its entirety by the more
detailed information in the remainder of this Prospectus, in the Statement of
Additional Information, in the prospectuses for the Underlying Funds of the
Mutual Fund Account, and in the Policy itself. Prospective purchasers should
refer to those sources before purchasing a Policy. This Prospectus generally
describes only the Policy, the Mutual Fund Account and the Target Account.
Separate prospectuses describe the Underlying Funds. (There is no prospectus
for the Fixed Account since interests in the Fixed Account are not securities.
See "THE ENDEAVOR ACCOUNTS--The Fixed Account," p. 27.)
- 19 -
<PAGE>
CONDENSED FINANCIAL INFORMATION
The Accumulation Unit Values and the number of Accumulation Units outstanding
for each Mutual Fund Subaccount from the date of inception are shown in the
following tables.
5% Annually Compounding Death Benefit or Double Enhanced Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.55%)
<TABLE>
<CAPTION>
ACCUMULATION NUMBER OF
UNIT VALUE AT ACCUMULATION ACCUMULATION
BEGINNING OF UNIT VALUE AT UNITS AT END OF
YEAR END OF YEAR YEAR
------------- ------------- ---------------
<S> <C> <C> <C>
ENDEAVOR MONEY MARKET SUBACCOUNT
1997(/9/)......................... $ 1.170606 $ 1.185346 1,002,462.071
ENDEAVOR ASSET ALLOCATION
SUBACCOUNT
1997(/9/)......................... $ 1.998344 $ 2.169995 1,857,541.490
T. ROWE PRICE INTERNATIONAL STOCK
SUBACCOUNT
1997(/9/)......................... $ 1.432514 $ 1.345339 2,717,945.242
ENDEAVOR VALUE EQUITY SUBACCOUNT
1997(/9/)......................... $ 1.804168 $ 2.086425 2,607,465.410
DREYFUS SMALL CAP VALUE SUBACCOUNT
1997(/9/)......................... $ 1.635726 $ 1.849564 2,651,783.374
DREYFUS U.S. GOVERNMENT SECURITIES
SUBACCOUNT
1997(/9/)......................... $ 1.136634 $ 1.213942 858,785.418
T. ROWE PRICE EQUITY INCOME
SUBACCOUNT
1997(/9/)......................... $ 1.663897 $ 1.923303 3,943,109.487
T. ROWE PRICE GROWTH STOCK
SUBACCOUNT
1997(/9/)......................... $ 1.774078 $ 2.041653 1,909,047.791
ENDEAVOR OPPORTUNITY VALUE
SUBACCOUNT
1997(/9/)......................... $ 1.049539 $ 1.155963 2,879,146.147
ENDEAVOR ENHANCED INDEX SUBACCOUNT
1997(/9/)......................... $ 1.066111 $ 1.216554 1,987,857.002
WRL GROWTH SUBACCOUNT
1997(/9/)......................... $18.030324 $19.647490 331,277.459
</TABLE>
- 20 -
<PAGE>
Return of Premium Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.40%)
<TABLE>
<CAPTION>
ACCUMULATION NUMBER OF
UNIT VALUE AT ACCUMULATION ACCUMULATION
BEGINNING OF UNIT VALUE AT UNITS AT END OF
YEAR END OF YEAR YEAR
------------- ------------- ---------------
<S> <C> <C> <C>
ENDEAVOR MONEY MARKET SUBACCOUNT
1997.............................. $ 1.15422 $1.196418 28,678,037.042
1996.............................. $ 1.11571 $ 1.15422 26,461,099.190
1995.............................. $ 1.07242 $ 1.11571 21,103,926.232
1994.............................. $ 1.05150 $ 1.07242 17,836,839.874
1993.............................. $ 1.04313 $ 1.05150 12,190,857.625
1992.............................. $ 1.02803 $ 1.04313 4,334,947.760
1991(/1/)......................... $ 1.00000 $ 1.02803 1,855,372.177
ENDEAVOR ASSET ALLOCATION
SUBACCOUNT
1997.............................. $1.833135 $2.171948 127,262,704.167
1996.............................. $1.577873 $1.833135 124,998,927.667
1995.............................. $1.301669 $1.577873 122,974,873.030
1994.............................. $1.393488 $1.301669 130,909,987.116
1993.............................. $1.209859 $1.393488 69,252,242.665
1992.............................. $1.125386 $1.209859 11,637,563.615
1991(/1/)......................... $1.000000 $1.125386 3,775,618.731
T. ROWE PRICE INTERNATIONAL STOCK
SUBACCOUNT
1997.............................. $1.330640 $1.346560 101,220,764.948
1996.............................. $1.171039 $1.330640 91,462,303.686
1995.............................. $1.073958 $1.171039 75,065,177.549
1994.............................. $1.156482 $1.073958 76,518,044.179
1993.............................. $0.989782 $1.156482 45,569,234.403
1992.............................. $1.041235 $0.989782 6,368,485.858
1991(/1/)......................... $1.000000 $1.041235 3,068,279.081
ENDEAVOR VALUE EQUITY SUBACCOUNT
1997.............................. $1.694854 $2.086130 82,171,833.799
1996.............................. $1.387903 $1.694854 65,227,195.342
1995.............................. $1.045610 $1.387903 46,194,663.692
1994.............................. $1.018576 $1.045610 30,512,231.489
1993(/2/)......................... $1.000000 $1.018576 10,958,836.984
DREYFUS SMALL CAP VALUE SUBACCOUNT
1997.............................. $1.496065 $1.851229 63,123,931.161
1996.............................. $1.206843 $1.496065 51,124,831.634
1995.............................. $1.072941 $1.206843 40,635,696.978
1994.............................. $1.107747 $1.072941 32,607,348.474
1993(/3/)......................... $1.000000 $1.107747 11,449,956.948
DREYFUS U.S. GOVERNMENT SECURITIES
SUBACCOUNT
1997.............................. $1.128769 $1.215033 30,043,275.031
1996.............................. $1.124292 $ 1.12769 17,561,825.527
1995.............................. $0.985803 $1.124292 8,456,764.729
1994(/4/)......................... $0.998670 $0.985803 3,102,671.789
T. ROWE PRICE EQUITY INCOME
SUBACCOUNT
1997.............................. $1.521680 $1.925022 79,662,847.306
1996.............................. $1.287240 $1.521680 42,673,040.677
1995(/5/)......................... $1.000000 $1.287240 14,943,358.393
</TABLE>
- 21 -
<PAGE>
<TABLE>
<S> <C> <C> <C>
T. ROWE PRICE GROWTH STOCK SUBACCOUNT
1997...................................... $ 1.611613 $ 2.043487 44,624,829.320
1996...................................... $ 1.353339 $ 1.611613 30,237,847.748
1995(/5/)................................. $ 1.000000 $ 1.353339 14,196,707.745
ENDEAVOR OPPORTUNITY VALUE SUBACCOUNT
1997...................................... $ 1.004355 $ 1.156993 14,927,829.243
1996(/6/)................................. $ 1.000000 $ 1.004355 314,119.406
ENDEAVOR ENHANCED INDEX SUBACCOUNT
1997(/7/)................................. $ 1.000000 $ 1.217647 9,296,582.067
WRL GROWTH SUBACCOUNT
1997...................................... $16.964068 $19.665157 16,307,024.863
1996...................................... $14.583843 $16.964068 15,174,482.394
1995...................................... $10.051117 $14.583843 13,337,196.679
1994...................................... $11.114865 $10.051117 12,758,957.591
1993...................................... $10.839753 $11.114865 9,252,403.800
1992(/8/)................................. $10.000000 $10.839753 1,119,066.376
</TABLE>
- ----------------------------
(/1/Period)from April 8, 1991 through December 31, 1991.
(/2/Period)from May 27, 1993 through December 31, 1993.
(/3/Period)from May 4, 1993 through December 31, 1993.
(/4/Period)from May 9, 1994 through December 31, 1994.
(/5/Period)from January 3, 1995 through December 31, 1995.
(/6/Period)from November 18, 1996, through December 31, 1996.
(/7/Period)from May 1, 1997 through December 31, 1997.
(/8/Period)from July 1, 1992 through December 31, 1992.
(/9/Period)from May 23, 1997 through December 31, 1997.
The Endeavor Select 50 Subaccount and the Target Subaccounts had not
commenced operations as of December 31, 1997. Accordingly, no comparable data
is available for those Subaccounts.
FINANCIAL STATEMENTS
The financial statements of the Mutual Fund Account and PFL and the
independent auditors' reports thereon are in the Statement of Additional
Information which is available free upon request to the Administrative and
Service Office. There are no financial statements for the Target Account
because the Target Account had not commenced operations as of the date of this
Prospectus.
- 22 -
<PAGE>
PART II
INTRODUCTION. The following information in Part II describes the Policy in
detail and gives a very brief description of the investment options which are
described in detail in Part III (the Target Account) or in separate
prospectuses (the Mutual Fund Account). The Mutual Fund Account invests in
mutual fund portfolios. The Target Account invests directly in securities.
PFL LIFE INSURANCE COMPANY
PFL Life Insurance Company ("PFL"), 4333 Edgewood Road, N.E., Cedar Rapids,
Iowa 52499-0001, is a stock life insurance company. It was incorporated under
the name NN Investors Life Insurance Company, Inc. under the laws of the State
of Iowa on April 19, 1961. It is principally engaged in the sale of life
insurance and annuity policies, and is licensed in the District of Columbia,
Guam, and in all states except New York. As of December 31, 1997, PFL had
assets of approximately $8.7 billion. PFL is a wholly-owned indirect
subsidiary of AEGON USA, Inc., which conducts substantially all of its
operations through subsidiary companies engaged in the insurance business or
in providing non-insurance financial services. All of the stock of AEGON USA,
Inc. is indirectly owned by AEGON n.v. of the Netherlands. AEGON n.v., a
holding company, conducts its business through subsidiary companies engaged
primarily in the insurance business.
THE ENDEAVOR ACCOUNTS
Premium Payments made under a Policy may be allocated to the Mutual Fund
Account, to the Target Account, to the Fixed Account, or to a combination of
these Accounts.
The PFL Endeavor Variable Annuity Account comprises a portion of the PFL
Endeavor VA Separate Account of PFL Life Insurance Company. The PFL Endeavor
VA Separate Account was established as a separate investment account under the
laws of the State of Iowa on January 19, 1990.
THE MUTUAL FUND ACCOUNT
The Mutual Fund Account is registered with the SEC under the 1940 Act as a
unit investment trust and meets the definition of a separate account under
federal securities laws. However, the SEC does not supervise the management or
the investment practices or policies of the Mutual Fund Account or PFL.
The Mutual Fund Account receives and invests the Premium Payments under the
Policies that are allocated to it for investment in shares of certain
management investment companies. The shares available to be allocated under
the Policy are those of the WRL Growth Portfolio and designated portfolios of
the Endeavor Series Trust.
The Mutual Fund Account currently has dedicated twelve Subaccounts to the
Policy. Additional Subaccounts may be established in the future at the
discretion of PFL. The Mutual Fund Account may also include other subaccounts
which are not available under the policy. Each Subaccount invests exclusively
in shares of one of the Portfolios of the Underlying Funds. Under Iowa law,
the assets of the Mutual Fund Account are owned by PFL, but they are held
separately from the other assets of PFL. To the extent that these assets are
attributable to the Cash Value of the Policies, these assets are not
chargeable with liabilities incurred in any other business operation of PFL.
Income, gains, and losses incurred on the assets in the Subaccounts of the
Mutual Fund Account, whether or not realized, are credited to or charged
against that Subaccount without regard to other income, gains or losses of any
- 23 -
<PAGE>
other Account or Subaccount of PFL. Therefore, the investment performance of
any Subaccount is entirely independent of the investment performance of PFL's
general account assets or any other Account or Subaccount maintained by PFL.
The Underlying Funds. The Mutual Fund Account will invest in shares of
Endeavor Series Trust and the WRL Growth Portfolio of the WRL Series Fund,
Inc. (collectively the "Underlying Funds"). The WRL Series Fund, Inc., and the
Endeavor Series Trust are each a series-type mutual fund registered with the
SEC under the 1940 Act as an open-end, diversified management investment
company. The registration of the Underlying Funds does not involve supervision
of the management or investment practices or policies of the Underlying Funds
by the SEC.
The following Portfolios are currently available in the Mutual Fund Account
under the Policies:
Endeavor Asset Allocation Portfolio Endeavor Value Equity Portfolio
Endeavor Money Market Portfolio Endeavor Opportunity Value
T. Rowe Price International Stock Portfolio
Portfolio Endeavor Enhanced Index
T. Rowe Price Equity Income Portfolio
Portfolio Endeavor Select 50 Portfolio
T. Rowe Price Growth Stock Portfolio WRL Growth Portfolio
Dreyfus Small Cap Value Portfolio
Dreyfus U.S. Government Securities
Portfolio
The assets of each Portfolio are held separate from the assets of the other
Portfolios, and each Portfolio has its own distinct investment objectives and
policies. Each Portfolio operates as a separate investment fund, and the
income or losses of one Portfolio generally have no effect on the investment
performance of any other Portfolio.
Endeavor Investment Advisers (the "Manager"), an investment adviser
registered with the SEC under the Investment Advisers Act of 1940, is the
Endeavor Series Trust's manager. The Manager is a general partnership between
Endeavor Management Co. and AUSA Financial Markets, Inc. (an affiliate of
PFL). The Manager selects and contracts with advisers for investment services
for the Portfolios of the Endeavor Series Trust, reviews the advisers'
activities, and otherwise performs administerial and managerial functions for
the Endeavor Series Trust. The following seven advisers each perform
investment advisory services for particular Portfolios of Endeavor Series
Trust, (the "Advisers"):
MORGAN STANLEY ASSET MANAGEMENT INC.
(a subsidiary of Morgan Stanley, Dean Witter, Discover & Co.)
T. ROWE PRICE ASSOCIATES, INC.
ROWE PRICE-FLEMING INTERNATIONAL, INC.
(a joint venture between T. Rowe Price Associates, Inc. and Robert Fleming
Holdings Limited)
OPCAP ADVISORS
(an affiliate of PIMCO Advisers, L.P.)
J.P. MORGAN INVESTMENT MANAGEMENT INC.
(a wholly owned subsidiary of J.P. Morgan and Co. Incorporated)
THE DREYFUS CORPORATION
(a wholly-owned subsidiary of Mellon Bank, N.A.)
MONTGOMERY ASSET MANAGEMENT, LLC
(a wholly-owned subsidiary of Commerzbank AG)
Morgan Stanley Asset Management Inc. is the Adviser for the Endeavor Asset
Allocation Portfolio and the Endeavor Money Market Portfolio. Prior to May 1,
1998, TCW Funds Management, Inc. was the Adviser to the Endeavor Asset
Allocation Portfolio and the Endeavor Money Market Portfolio. T. Rowe Price
Associates, Inc. is the Adviser for the T. Rowe Price Equity Income Portfolio
and the T. Rowe Price Growth Stock Portfolio. Rowe
- 24 -
<PAGE>
Price-Fleming International, Inc. is the Adviser for the T. Rowe Price
International Stock Portfolio. OpCap Advisors is the Adviser for the Endeavor
Value Equity Portfolio and the Endeavor Opportunity Value Portfolio. J.P.
Morgan Investment Management Inc. is the Adviser for the Endeavor Enhanced
Index Portfolio. The Dreyfus Corporation is the Adviser for the Dreyfus U.S.
Government Securities Portfolio and the Dreyfus Small Cap Value Portfolio.
Montgomery Asset Management, LLC is the Adviser for the Endeavor Select 50
Portfolio.
WRL Investment Management, Inc., a subsidiary of Western Reserve Life
Assurance Co. of Ohio (an affiliate of PFL), is the Adviser for the WRL Series
Fund, Inc. and contracts with Janus Capital Corporation (also an "Adviser") as
the sub-adviser to the WRL Growth Portfolio.
The Adviser of a Portfolio is responsible for selecting the investments of
the Portfolio consistent with the investment objectives and policies of the
Portfolio, and will conduct securities trading for the Portfolio. All Advisers
are investment advisers registered with the SEC under the Investment Advisers
Act of 1940. The investment objectives of each Portfolio are summarized as
follows:
Endeavor Money Market Portfolio (formerly, TCW Money Market Portfolio) seeks
current income, preservation of capital and maintenance of liquidity through
investment in short-term money market securities. The Portfolio seeks to
maintain a constant net asset value of $1.00 per share although no assurances
can be given that such constant net asset value will be maintained.
Endeavor Asset Allocation Portfolio (formerly, TCW Managed Asset Allocation
Portfolio) seeks high total return through a managed asset allocation
portfolio of equity, fixed income and money market securities.
T. Rowe Price International Stock Portfolio seeks long-term growth of
capital through investments primarily in common stocks of established non-U.S.
companies.
Endeavor Value Equity Portfolio (formerly, Value Equity Portfolio) seeks
long-term capital appreciation through investment in securities (primarily
equity securities) of companies that are believed by the Portfolio's Adviser
to be undervalued in the marketplace in relation to factors such as the
companies' assets or earnings.
Dreyfus Small Cap Value Portfolio seeks capital appreciation through
investments in a diversified portfolio consisting primarily of equity
securities of companies with a median capitalization of approximately $750
million, provided that under normal market conditions at least 75% of the
Portfolio's investments will be in equity securities of companies with
capitalizations at the time of purchase between $150 million and $1.5 billion.
Dreyfus U.S. Government Securities Portfolio seeks as high a level of total
return as is consistent with prudent investment strategies by investing under
normal conditions at least 65% of its assets in debt obligations and
mortgaged-backed securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
T. Rowe Price Equity Income Portfolio seeks to provide substantial dividend
income and also capital appreciation by investing primarily in dividend paying
stocks of established companies.
T. Rowe Price Growth Stock Portfolio seeks long-term growth of capital and
to increase dividend income through investment primarily in common stocks of
well established growth companies.
Endeavor Opportunity Value Portfolio (formerly, Opportunity Value Portfolio)
seeks growth of capital over time through investment in a portfolio consisting
of common stocks,
- 25 -
<PAGE>
bonds and cash equivalents, the percentages of which will vary based upon the
Portfolio Adviser's assessment of relative values.
Endeavor Enhanced Index Portfolio (formerly, Enhanced Index Portfolio) seeks
to earn a total return modestly in excess of the total return performance of
the S&P 500 Composite Stock Index (the "S&P 500 Index") while maintaining a
volatility of return similar to the S&P 500 Index.
Endeavor Select 50 Portfolio (formerly, Select 50 Portfolio) seeks capital
appreciation by investing at least 65% of its total assets in at least 50
different equity securities of companies of all sizes throughout the world.
Each of five teams from different investment management disciplines of the
Portfolio's Adviser selects ten equity securities based on the potential for
capital appreciation.
WRL Growth Portfolio (Janus) seeks growth of capital. At most times this
Portfolio will be invested primarily in equity securities which are selected
solely for their capital growth potential; investment income is not a
consideration.
PFL may from time to time receive revenue or fees from the underlying funds
or their advisers or sub-advisers. The amount of the fees, if any, may be
based on the amount of assets that PFL or the Mutual Fund Account invests in
the underlying funds.
THE TARGET ACCOUNT
The Target Account is registered with the SEC under the 1940 Act as an open-
end management investment company and meets the definition of a separate
account under federal securities laws. However, the SEC does not supervise the
management or the investment practices of policies of the Target Account. The
Target Account is a managed separate account and currently is divided into two
Subaccounts, The Dow Target 10 Subaccount and The Dow Target 5 Subaccount,
both of which are non-diversified. Endeavor Investment Advisers (an affiliate
of PFL) is the Target Account's manager, and First Trust Advisers, L.P. is the
Target Account's adviser.
The Target Subaccounts. The following two subaccounts are currently
available under the Target Account:
The Dow Target 10 Subaccount will invest in the common stock of the ten
companies in the DJIA that have the highest dividend yield as of a
specified business day and hold those stocks for a 12-month period.
The Dow Target 5 Subaccount will invest in the five companies with the
lowest per share stock price of the ten companies in the DJIA that have the
highest dividend yield as of a specified business day and hold those stocks
for a 12-month period.
The objective of each Target Subaccount is to provide an above-average total
return through a combination of dividend income and capital appreciation. Each
Target Subaccount may have different investment portfolios running
simultaneously for different 12-month periods.
* * *
THERE IS NO ASSURANCE THAT ANY MUTUAL FUND ACCOUNT PORTFOLIO OR TARGET
SUBACCOUNT WILL ACHIEVE ITS STATED OBJECTIVE. MORE
- 26 -
<PAGE>
DETAILED INFORMATION, INCLUDING A DESCRIPTION OF EACH PORTFOLIO'S INVESTMENT
OBJECTIVE AND POLICIES AND A DESCRIPTION OF RISKS INVOLVED IN INVESTING IN
EACH OF THE PORTFOLIOS AND OF EACH PORTFOLIO'S FEES AND EXPENSES IS CONTAINED
IN THE PROSPECTUSES FOR THE UNDERLYING FUNDS, CURRENT COPIES OF WHICH ARE
ATTACHED TO THIS PROSPECTUS. MORE DETAILED INFORMATION REGARDING THE TARGET
SUBACCOUNTS IS CONTAINED IN PART III OF THIS PROSPECTUS AND THE STATEMENT OF
ADDITIONAL INFORMATION. INFORMATION CONTAINED IN THE UNDERLYING FUNDS'
PROSPECTUSES AND THE STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ
CAREFULLY BEFORE INVESTING IN A MUTUAL FUND OR TARGET SUBACCOUNT.
An investment in the Mutual Fund Account, the Target Account, or in any
Portfolio, including the Endeavor Money Market Portfolio and the Dreyfus U.S.
Government Securities Portfolio, is not insured or guaranteed by the U.S.
government or any government agency.
THE FIXED ACCOUNT
This Prospectus is generally intended to serve as a disclosure document only
for the Policy, the Mutual Fund Account and the Target Account. In addition,
some policy forms do not contain a Fixed Account. For complete details
regarding any applicable Fixed Account, see the Policy itself.
Premium Payments allocated and amounts transferred to the Fixed Account
become part of the general account of PFL, which supports insurance and
annuity obligations. Interests in the general account have not been registered
under the Securities Act of 1933 (the "1933 Act"), nor is the general account
registered as an investment company under the 1940 Act. Accordingly, neither
the general account nor any interests therein are generally subject to the
provisions of the 1933 or 1940 Acts and PFL has been advised that the staff of
the SEC has not reviewed the disclosures in this Prospectus which relate to
the Fixed Account.
The Fixed Account comprises a part of all the general assets of PFL, other
than those in the Mutual Fund Account, the Target Account or in any other
segregated asset account. The Owner may allocate Premium Payments to the Fixed
Account at the time of Premium Payment or by subsequent transfers from the
Mutual Fund Account and the Target Account. Instead of the Owner bearing the
investment risk, as is the case for Policy Value in the Mutual Fund Account
and the Target Account, PFL bears the full investment risk for all Policy
Value in the Fixed Account. PFL has sole discretion to invest the assets of
its general account, including the Fixed Account, subject to applicable law.
All guaranteed rates or benefits provided by PFL are subject to PFL's claims-
paying ability.
Premium Payments applied to and any amounts transferred to the Fixed Account
will reflect a fixed interest rate. The interest rates PFL sets will be
credited for increments of at least one year measured from each premium
payment or transfer date. These rates will never be less than an effective
annual interest rate of 3%. Upon Surrender of the Policy, the Owner will
receive at least the Premium Payments applied to, less prior partial
withdrawals and transfers from, the Fixed Account.
Guaranteed Periods. PFL may offer optional guaranteed interest rate periods
("Guaranteed Period Options" or "GPOs") into which Premium Payments may be
paid or amounts transferred. For example, PFL may, from time to time, offer
Guaranteed Period Options for periods of 1, 3, 5, or 7 years. The current
interest rate PFL sets for funds entering each Guaranteed Period Option will
apply to those funds until the end of that Guaranteed Period. At the end of
the Guaranteed Period, the Premium Payment or amount transferred into the
Guaranteed Period Option less any Gross Partial Withdrawals or transfers from
that Guaranteed Period Option, plus accrued interest, will be rolled into a
new Guaranteed Period Option.
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The Owner may choose the Guaranteed Period Option in which the funds are to
be placed by giving PFL notice within 30 days before the end of the expiring
Guaranteed Period. In the absence of such election, the new Guaranteed Period
will be the same as the expiring one. If that Guaranteed Period Option is no
longer offered by PFL, the next shorter Guaranteed Period Option then being
offered will be used. PFL reserves the right, for new Premium Payments,
transfers, or rollovers, to offer or not to offer any Guaranteed Period
Option. PFL will, however, always offer at least a one-year Guaranteed Period
Option.
Surrenders, partial withdrawals, transfers, and amounts applied to a Payment
Option from a Guaranteed Period Option prior to the end of the Guaranteed
Period may be subject to an Excess Interest Adjustment. An Excess Interest
Adjustment may result in a loss of interest credited, but the Owner's Fixed
Account Policy Values will always be credited with an effective annual
interest rate of at least 3%. Surrender charges, if any, are applied after the
Excess Interest Adjustment. However, upon full surrender the Owner is
guaranteed return of Premium Payments to the Fixed Account, less partial
withdrawals and transfers from the Fixed Account. (See "DISTRIBUTIONS UNDER
THE POLICY--Excess Interest Adjustment," p. 36.)
For purposes of crediting interest, the oldest Premium Payment or transfer
into a Guaranteed Period Option within the Fixed Account, plus interest
allocable to that Premium Payment or transfer, is considered to be withdrawn
or transferred out first; the next oldest Premium Payment plus interest is
considered to be transferred out next, and so on (this is a "first-in, first-
out" procedure).
Dollar Cost Averaging Fixed Account Option. PFL may offer a Dollar Cost
Averaging Fixed Account Option separate from the Guaranteed Period Option(s).
This option will generally have a one-year interest rate guarantee for amounts
in the DCA Fixed Account and will only be available under a Dollar Cost
Averaging (DCA) program. If the Owner, for any reason, discontinues the DCA
program before its completion, then the interest credited on amounts in the
DCA account may be adjusted downward, but not below the minimum guaranteed
effective annual interest rate of 3%. The current interest rate PFL credits
for the DCA Fixed Account may differ from the rates credited on other
Guaranteed Period Option(s) in the Fixed Account. In addition, the current
interest rate may vary on different portions of the DCA Fixed Account. PFL may
credit different interest rates for DCA programs of varying time periods.
Interest credited on the amounts in the DCA Fixed Account will always be at
least an annual effective rate of 3%.
Prior to the Annuity Commencement Date, you can instruct PFL to make
automatic transfers from the Dollar Cost Averaging Fixed Account to one or
more subaccounts of the Mutual Fund Account and the Target Account. Transfers
must be scheduled for at least six but not more than 24 months, or for at
least four, but not more than eight quarters. Transfers will continue until
the elected Subaccount or DCA Fixed Account value is depleted. The amount
transferred each time must be at least $500. All transfers from the DCA
account will be the same amount as the initial transfer unless subsequently
changed. Changes to the amount transferred will only be allowed after the
minimums are satisfied or when additional premium is allocated or a new amount
is transferred into the DCA account. If the amount transferred is changed, the
minimums must be met again (that is, transfers must be scheduled for at least
six more but not more than 24 months, or for at least four more, but not more
than eight quarters). Changes can be made to the Subaccounts to which these
transfers are allocated. Dollar Cost Averaging transfers from the Dollar Cost
Averaging Fixed Account will not be subject to an Excess Interest Adjustment.
(See "Dollar Cost Averaging," p. 31.)
Current Interest Rates. PFL periodically will establish an applicable
Current Interest Rate for each of the Guaranteed Period Options within the
Fixed Account, and the Dollar Cost Averaging Fixed Account Option. Current
Interest Rates may be changed by PFL
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frequently or infrequently depending on interest rates on investments
available to PFL and other factors as described below, but once established,
the rate will be guaranteed for the entire duration of the Guaranteed Period.
Each Guaranteed Period will have a duration of at least one year. However,
except for limited situations, any amount withdrawn or transferred will be
subject to an Excess Interest Adjustment, except at the end of the Guaranteed
Period. (See "Excess Interest Adjustment," p. 36.)
The Current Interest Rate will not be less than 3% per year, regardless of
any application of the Excess Interest Adjustment. PFL has no specific formula
for determining the rate of interest that it will declare as a Current
Interest Rate, as this rate will be reflective of interest rates available on
the types of debt instruments in which PFL intends to invest amounts allocated
to the Fixed Account. In addition, PFL's management may consider other factors
in determining Current Interest Rates for a particular Guaranteed Period
including but not limited to: regulatory and tax requirements; sales
commissions and administrative expenses borne by the Company; general economic
trends; and competitive factors. There is no obligation to declare a rate in
excess of 3%; you assume the risk that declared rates will not exceed 3%. PFL
has complete discretion to declare any rate of at least 3%, regardless of
market interest rates, the amounts earned by PFL on its investments, or any
other factors.
PFL'S MANAGEMENT HAS COMPLETE AND SOLE DISCRETION TO DETERMINE THE CURRENT
INTEREST RATES. PFL CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE CURRENT
INTEREST RATES, EXCEPT THAT PFL GUARANTEES THAT FUTURE CURRENT EFFECTIVE
INTEREST RATES WILL NOT BE BELOW 3% PER YEAR.
TRANSFERS
You can transfer Policy Values or an amount equal to the interest credited
from one Investment Option to another within certain limits. Transfers (from
the Guaranteed Period Option(s) of the Fixed Account) of an amount up to the
interest credited (that is, "Interest Transfers") are not subject to an Excess
Interest Adjustment, but may affect the interest crediting rates on the
remaining funds in the Guaranteed Period Option.
Subject to the limitations and restrictions described below, transfers from
an Investment Option may be made, up to thirty days prior to the Annuity
Commencement Date, by sending Written Notice, signed by you, to the
Administrative and Service Office. Each Interest Transfer will be subject to a
minimum amount of $50. For transfers other than Interest Transfers, the
minimum amount which may be transferred is the lesser of $500 or the entire
Subaccount or Guaranteed Period Option Value. If the Subaccount or Guaranteed
Period Option Value remaining after a transfer is less than $500, PFL reserves
the right, at its discretion, either to deny the transfer request or to
include that amount as part of the transfer.
If the Excess Interest Adjustment (at the time of a transfer request) from
any Guaranteed Period Option is a negative adjustment, then the maximum amount
of Policy Value that can be transferred is 25% of that Guaranteed Period
Option's Policy Value, less amounts previously transferred out of that
Guaranteed Period Option during the current Policy Year. No maximum will apply
to amounts transferred from any Guaranteed Period Option if the Excess
Interest Adjustment is a positive adjustment at the time of transfer. You must
notify PFL within 30 days prior to the end of any expiring Guaranteed Period
Option to instruct PFL regarding any transfers to be performed at that time.
Transfers prior to the Annuity Commencement Date currently may be made
without charge as often as you wish, subject to the minimum amount specified
above. PFL reserves the right to limit these transfers to no more than 12 per
Policy Year in the future, or to charge up to $10 for any transfer in excess
of 12 per Policy Year.
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You may transfer an amount up to the interest credited in any of the
Guaranteed Period Option(s) to any Investment Option prior to the end of the
Guaranteed Period. No Excess Interest Adjustment will apply to such Interest
Transfers. Interest Transfers may affect the interest crediting rates on the
remaining funds in the Guaranteed Period Option. This is because Interest
Transfers may have the effect of reducing or eliminating principal amounts in
the Guaranteed Period Options since, for purposes of crediting interest, PFL
considers the oldest Premium Payment or transfer into the Guaranteed Period
Option, plus interest allocable to that particular Premium Payment or
transfer, to be withdrawn first.
Transfers out of the Dollar Cost Averaging Fixed Account, except through an
automatic Dollar Cost Averaging program, are not allowed.
After the Annuity Commencement Date, transfers out of the Fixed Account are
not permitted, and transfers between Subaccounts or from Subaccounts to the
Fixed Account may be limited to once per Policy Year. (See "DISTRIBUTIONS
UNDER THE POLICY--Annuity Payment Options," p. 38.)
Transfers may be made by telephone, subject to the provisions described
below under "Telephone Transactions."
REINSTATEMENTS
Requests are occasionally received by PFL to reinstate funds which had been
transferred to another company via a Section 1035 exchange or trustee to
trustee transfer. In this situation PFL will require you to replace the same
total amount of money in the applicable Subaccounts and/or Fixed Accounts was
taken from them to effect the Exchange. The total dollar amount of funds
reapplied to the Mutual Fund Account or the Target Account will be used to
purchase a number of units available for each Subaccount based on the unit
prices at the date of Reinstatement (within two days of the date the funds are
received by PFL). It should be noted that the number of units available on the
Reinstatement date may be more or less than the number surrendered for the
Exchange. Amounts reapplied to the Fixed Account will receive the interest
rate they would otherwise have received, had they not been withdrawn. However,
an adjustment will be made to the amount reapplied to compensate PFL for the
additional interest credited during the period of time between the withdrawal
and the reapplication of the funds. You should consult a qualified tax adviser
concerning the tax consequences of any Section 1035 exchanges or
reinstatements.
TELEPHONE TRANSACTIONS
You (or your designated account executive) may make transfers and/or change
the allocation of subsequent Premium Payments by telephone. Telephone
transfers are only allowed if the "Telephone Transfer/Reallocation
Authorization" box in the Policy application, if any, has been checked or you
have subsequently authorized telephone transfers in writing on a form provided
to PFL. PFL and/or the Administrative and Service Office will not be liable
for following instructions communicated by telephone that it reasonably
believes to be genuine. PFL will employ reasonable procedures, however, to
confirm that instructions communicated by telephone are genuine. If PFL fails
to do so, certain Government regulators believe it may be liable for any
losses due to unauthorized or fraudulent instructions. All telephone requests
will be recorded on voice recorder equipment for your protection. When making
telephone requests, you may be required to provide your social security number
and/or other information for identification purposes.
Telephone requests must be received at the Administrative and Service Office
while the New York Stock Exchange is open in order to assure same day pricing
of the transaction.
At its discretion, PFL may discontinue the telephone transaction privilege
at any time as to some or all Owners, and PFL may require written confirmation
of any transaction request.
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DOLLAR COST AVERAGING (DCA)
Under the Dollar Cost Averaging program, prior to the Annuity Commencement
Date, you can instruct PFL to automatically transfer a specified dollar amount
from the Dollar Cost Averaging Fixed Account Option, the Endeavor Money Market
Subaccount or the Dreyfus U.S. Government Securities Subaccount to any other
Subaccount or Subaccounts of the Mutual Fund Account and the Target Account.
The automatic transfers can occur monthly or quarterly and will occur on the
28th day of the month. If the Dollar Cost Averaging request is received prior
to the 28th day of any month, the first transfer will occur on the 28th day of
that month. If the Dollar Cost Averaging request is received on or after the
28th day of any month, the first transfer will occur on the 28th day of the
following month. The amount transferred each time must be at least $500. A
minimum of six monthly or four quarterly transfers are required on all DCA
programs, and a maximum of 24 monthly or eight quarterly transfers are allowed
from the DCA Fixed Account. The Company may establish additional requirements
for particular DCA programs.
All transfers from the DCA account will be the same amount as the initial
transfer unless subsequently changed. Changes to the amount transferred will
only be allowed after the minimums discussed above are satisfied or when
additional premium is allocated or a new amount is transferred into the DCA
account. If the amount transferred is changed, the minimums discussed above
must be met again (that is, transfers must be scheduled for at least six more
but not more than 24 months, or for at least four more, but not more than
eight quarters).
Dollar Cost Averaging results in the purchase of more units when the Unit
Value is low, and fewer units when the Unit Value is high. However, there is
no guarantee that the Dollar Cost Averaging program will result in higher
Policy Values or will otherwise be successful. Dollar Cost Averaging requires
regular investment regardless of fluctuating prices and does not guarantee
profits nor prevent losses in a declining market. Before electing this option,
individuals should consider their financial ability to continue transfers
through periods of both high and low price levels.
You may request Dollar Cost Averaging when purchasing the Policy or at a
later date. The program will terminate when the amount in the Dollar Cost
Averaging Fixed Account, the Endeavor Money Market Subaccount or the Dreyfus
U.S. Government Securities Subaccount is insufficient for the next transfer,
at which time the entire remaining balance is transferred.
You may discontinue the program at any time after satisfying the minimum
number of required transfers by sending a Written Notice to the Administrative
and Service Office. The minimum number of transfers (6 monthly or 4 quarterly)
requirement must be satisfied each time the Dollar Cost Averaging program is
restarted following termination of the program for any reason. Discontinuance
of a DCA program may result in PFL reducing interest rates credited to amounts
remaining in the DCA Fixed Account if the conditions established for a
particular DCA program are not met. There is no charge for participation in
the Dollar Cost Averaging program.
ASSET REBALANCING
Prior to the Annuity Commencement Date you may instruct PFL to automatically
transfer amounts among the Subaccounts of the Mutual Fund Account and the
Target Account on a regular basis to maintain a desired allocation of the
Policy Value among the various Subaccounts offered. Rebalancing will occur on
a monthly, quarterly, semi-annual, or annual basis, beginning on a date you
select. If no date is selected, the account will be rebalanced on the day of
the month the Policy was effective. You must select the percentage of the
Policy Value desired in each of the various Subaccounts offered (totaling
100%). Any amounts in the Fixed Account are ignored for purposes of asset
rebalancing. Rebalancing
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may be started, stopped, or changed at any time, except that rebalancing will
not be available when:
(1) Automatic Dollar Cost Averaging transfers are being made; or
(2) any other transfer is requested.
There is no charge for participation in the asset rebalancing program.
PUBLISHED RATINGS
PFL may from time to time publish in advertisements, sales literature and
reports to Owners, the ratings and other information assigned to it by one or
more independent rating organizations such as A.M. Best Company, Standard &
Poor's Insurance Ratings Services, Moody's Investors Service and Duff & Phelps
Credit Rating Co. The purpose of the ratings is to reflect the financial
strength and/or claims-paying ability of PFL and the ratings should not be
considered as bearing on the investment performance of assets held in the
Mutual Fund Account or the Target Account or of the safety or riskiness of an
investment in the Mutual Fund Account or the Target Account. Each year the
A.M. Best Company reviews the financial status of thousands of insurers,
culminating in the assignment of Best's Ratings. These ratings reflect their
current opinion of the relative financial strength and operating performance
of an insurance company in comparison to the norms of the life/health
insurance industry. In addition, the claims-paying ability of PFL as measured
by Standard & Poor's Insurance Ratings Services, Moody's Investors Service or
Duff & Phelps Credit Rating Co. may be referred to in advertisements or sales
literature or in reports to Owners. These ratings are opinions of an operating
insurance company's financial capacity to meet the obligations of its
insurance policies in accordance with their terms. Claims-paying ability
ratings do not refer to an insurer's ability to meet non-policy obligations
(i.e., debt/commercial paper).
THE POLICY
The Endeavor Variable Annuity Policy is a Flexible Premium Variable Annuity
Policy. The rights and benefits under the Policy are summarized below;
however, the description of the Policy contained in this Prospectus is
qualified in its entirety by reference to the Policy itself, a copy of which
is available upon request from PFL. The Policy may be purchased on a non-tax
qualified basis ("Nonqualified Policy"). The Policy may also be purchased and
used in connection with retirement plans or individual retirement accounts
that qualify for favorable federal income tax treatment ("Qualified Policy").
POLICY APPLICATION AND ISSUANCE OF POLICIES--PREMIUM PAYMENTS
Before it will issue a Policy, PFL must receive a completed Policy
application, or any information provided in lieu thereof, or transmittal form
and a minimum initial Premium Payment of $5,000 for a Nonqualified Policy, or
$1,000 for a Qualified Policy. There is no minimum initial Premium Payment
required for tax deferred 403(b) annuity purchases; any amount you select in
such case, up to the maximum total Premium Payment allowed by PFL, may be used
to start a Policy. The initial Premium Payment for tax deferred 403(b)
purchases must be received within 90 days following the Policy Date, otherwise
the Policy will be canceled. The initial Premium Payment is the only Premium
Payment required to be paid under a Policy. A Policy ordinarily will be issued
only in respect of Annuitants and Owners Age 0 through 84. Acceptance or
declination of an application, transmittal form, or other information provided
in lieu thereof, shall be based on PFL's underwriting standards, and PFL
reserves the right to reject any application, or any information provided in
lieu thereof, or Premium Payment based on those underwriting standards.
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<PAGE>
If the application, transmittal form or other information can be accepted in
the form received, the initial Premium Payment will be credited to the Policy
Value within two Business Days after the later of receipt of the information
needed to issue the Policy or receipt of the initial Premium Payment. If the
initial Premium Payment cannot be credited because the application,
transmittal form, or other information, or other issuing requirements are
incomplete, the applicant will be contacted within five Business Days and
given an explanation for the delay and the initial Premium Payment will be
returned at that time unless the applicant consents to PFL's retaining the
initial Premium Payment and crediting it as soon as the necessary requirements
are fulfilled.
The date on which the initial Premium Payment is credited to the Policy
Value is the Policy Date. The Policy Date is the date used to determine Policy
Years and Policy Anniversaries.
All checks or drafts for Premium Payments should be made payable to PFL Life
Insurance Company and sent to the Administrative and Service Office. The Death
Benefit will not take effect until the Premium Payment is received and any
check or draft for the Premium Payment is honored.
Additional Premium Payments. While the Annuitant is living and prior to the
Annuity Commencement Date, you may make Additional Premium Payments at any
time, and in any frequency. The minimum Additional Premium Payment under both
a Nonqualified Policy and a Qualified Policy is $50. Additional Premium
Payments will be credited to the Policy and added to the Policy Value as of
the Business Day when the premium and required information are received.
Maximum Total Premium Payments. The maximum total Premium Payments allowed
without prior approval of PFL is $1,000,000.
Allocation of Premium Payments. You must allocate Premium Payments to one or
more of the Investment Options. You must specify the initial allocation in the
Policy application or transmittal form. This allocation will be used for
Additional Premium Payments unless you request a change of allocation. All
allocations must be made in whole percentages and must total 100%. If Premium
Payments are allocated to the Dollar Cost Averaging Fixed Account, directions
regarding the Subaccount(s) to which transfers are to be made must be
specified on the Application or other proper Written Request. If you fail to
specify how Premium Payments are to be allocated, the Premium Payment(s)
cannot be accepted.
You may change the allocation instructions for future additional Premium
Payments by sending Written Notice, signed by you, to PFL's Administrative and
Service Office, or by telephone (subject to the provisions described under
"Telephone Transactions," p. 37.) The allocation change will apply to Premium
Payments received after the date the Written Notice or telephone request is
received.
Payment Not Honored by Bank. Any payment due under the Policy which is
derived, all or in part, from any amount paid to PFL by check or draft may be
postponed until such time as PFL determines that such instrument has been
honored.
POLICY VALUE
On the Policy Date, the Policy Value equals the initial Premium Payment.
Thereafter, the Policy Value equals the sum of the values in the Mutual Fund
Account, the Target Account and the Fixed Account. The Policy Value will
increase by (1) any additional Premium Payments received by PFL; (2) any
increases in the Policy Value due to investment results of the selected
Subaccount(s); (3) any positive Excess Interest Adjustments on transfers; and
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(4) interest credited in the Fixed Account. The Policy Value will decrease by
(1) Gross Partial Withdrawals; (2) any decreases in the Policy Value due to
investment results of the selected Subaccounts; (3) the charges and deductions
imposed by PFL; (4) any negative Excess Interest Adjustments on transfers; and
(5) premium taxes, if any.
The Policy Value is expected to change from Valuation Period to Valuation
Period, reflecting the investment experience of the selected Subaccount(s), as
well as the deductions and charges. A Valuation Period is the period between
successive Business Days. It begins at the close of business on each Business
Day and ends at the close of business on the next succeeding Business Day. A
Business Day is each day that the New York Stock Exchange is open for trading.
Holidays are generally not Business Days.
When a Premium Payment is allocated or an amount is transferred to a
Subaccount of the Mutual Fund Account or the Target Account, it is credited to
the Policy Value in the form of Accumulation Units. Each Subaccount of the
Mutual Fund Account or the Target Account has a distinct Accumulation Unit
value (the "Unit Value"). The number of units credited is determined by
dividing the Premium Payment or amount transferred by the Unit Value of the
Subaccount as of the end of the Valuation Period during which the allocation
is made. When amounts are transferred out of, or surrendered or withdrawn from
a Subaccount, units are canceled or redeemed in a similar manner.
The Mutual Fund Account Value. For each Mutual Fund Subaccount, the Unit
Value for a given Business Day is based on the net asset value of a share of
the corresponding Portfolio of the Underlying Funds. Therefore, the Unit
Values will fluctuate from day to day based on the investment experience of
the corresponding Portfolio. The determination of Subaccount Unit Values is
described in detail in the Statement of Additional Information.
The Target Account Value. For each Target Subaccount, the Unit Value for a
given Business Day is computed by dividing the value of the net assets of the
Target Subaccount (that is, the value of the assets of the Target Subaccount
minus its liabilities) by the total number of the Target Subaccount's
Accumulation Units outstanding at such time and adjusting the quotient to the
nearest cent per unit. Securities in the Target Subaccount will be valued as
of the close of trading at the end of the Valuation Period. Therefore, the
Unit Values will fluctuate from day to day based on the investment experience
and expenses of the corresponding Target Subaccount. The determination of Unit
Values is described in detail in the Statement of Additional Information.
AMENDMENTS
No change in the Policy is valid unless made in writing by PFL and approved
by one of PFL's officers. No registered representative has authority to change
or waive any provision of the Policy.
PFL reserves the right to amend the Policies to meet the requirements of the
Code, regulations or published rulings. You can refuse such a change by giving
Written Notice, but a refusal may result in adverse tax consequences.
NON-PARTICIPATING POLICY
The Policy does not participate or share in the profits or surplus earnings
of PFL. No dividends are payable on the Policy.
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DISTRIBUTIONS UNDER THE POLICY
SURRENDERS
Prior to or on the Annuity Commencement Date you may surrender all or a
portion of the Cash Value in exchange for a cash withdrawal payment from PFL.
Prior to or on the Annuity Commencement Date, the Cash Value is the Policy
Value increased or decreased by any applicable Excess Interest Adjustments and
less any applicable Surrender Charge. (See "Annuity Payment Options," p. 38.)
The Policy cannot be surrendered after the Annuity Commencement Date. (See
"Annuity Payments," p. 37.)
When requesting a partial withdrawal ($500 minimum), you must tell PFL how
the withdrawal is to be allocated among the various Investment Options. If
your request for a partial withdrawal from an Investment Option is greater
than the Cash Value of that Option, PFL will pay you the amount of the Cash
Value of that Option. If no allocation instructions are given, the withdrawal
will be deducted from each Investment Option in the same proportion that your
interest in each Investment Option bears to the Policy's total Policy Value.
PFL reserves the right to defer payment of the Cash Value from the Fixed
Account for up to six months.
Beginning in the second Policy Year, you may surrender up to 10% of the
Policy Value ("10% Withdrawals") at the time of withdrawal without an Excess
Interest Adjustment and without a Surrender Charge if no withdrawal has been
made in the current Policy Year. Amounts withdrawn from the Policy in excess
of the 10% Withdrawal or withdrawn in the same Policy Year as any previous
withdrawal (and all surrenders in the first Policy Year) are subject to the
Excess Interest Adjustment. Neither a Surrender Charge nor an Excess Interest
Adjustment will be assessed if the withdrawal is necessary to meet the minimum
distribution requirements for that Policy specified by the IRS for tax
qualified plans.
The Gross Partial Withdrawal is the total amount which will be deducted from
your Policy Value as a result of each Partial withdrawal. The Gross Partial
Withdrawal may be more or less than your requested Partial withdrawal amount,
depending on whether Surrender Charges and/or Excess Interest Adjustments
apply at the time you request the partial withdrawal. The Excess Partial
Withdrawal amount is the portion of the requested partial withdrawal that is
subject to Surrender Charge.
The formula for determining the Gross Partial Withdrawal is as follows:
Gross Partial Withdrawal = R - E + SC
where:R is the requested partial withdrawal;
E is the Excess Interest Adjustment; and
SC is the Surrender Charge on (EPW - E); where
EPW is the Excess Partial Withdrawal amount.
For a discussion of the Surrender Charge, see "CHARGES AND DEDUCTIONS--
Surrender Charge," p. 44. For a discussion of the Excess Interest Adjustment,
see "DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment," p. 36, and
Appendix A.
Since you assume the investment risk with respect to Premium Payments
allocated to the Mutual Fund Account and the Target Account, and because
partial withdrawals are subject to an Excess Interest Adjustment and to a
Surrender Charge, and possibly income taxes or premium taxes, the total amount
paid upon total surrender of the Cash Value (taking any prior surrenders into
account) may be more or less than the total Premium Payments made. Following a
surrender of the total Cash Value, or at any time the Policy Value is zero,
all your rights and those of the Annuitant will terminate.
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In addition to the Excess Interest Adjustment and any applicable premium
taxes, surrenders may be subject to income taxes and, if prior to age 59 1/2,
a ten percent Federal penalty tax. (See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES," p. 47.)
NURSING CARE AND TERMINAL CONDITION WAIVER
If you or your spouse (Annuitant or Annuitant's spouse if the Owner is not a
natural person): (1) has been confined in a hospital or nursing facility for
30 consecutive days, or (2) has been diagnosed as having a terminal condition
as defined in the Policy or endorsement (generally a life expectancy of 12
months or less), then the Surrender Charge and Excess Interest Adjustment are
not imposed on surrenders or partial withdrawals. (This benefit may not be
available in all states or in all Policy forms--See the Policy or endorsement
for details.)
EXCESS INTEREST ADJUSTMENT (EIA)
Surrenders, partial withdrawals, transfers, and amounts applied to a Payment
Option (prior to the end of a Guaranteed Period) from the Fixed Account
Guaranteed Period Options will be subject to an Excess Interest Adjustment
except as provided for under "Surrenders" or "Nursing Care and Terminal
Condition Withdrawal Option" above or "Systematic Payout Option," below. Prior
versions of the Policy or Policies offered in certain states may not be
subject to an Excess Interest Adjustment. (See Appendix B to this Prospectus.)
The Excess Interest Adjustment partially compensates PFL for the foregoing
early removal of funds from the Guaranteed Period Options where interest rates
have risen since the date of the guarantee. Conversely, the Excess Interest
Adjustment allows PFL to share the benefit of falling interest rates with you
upon such withdrawals.
Generally, if interest rates declared by PFL have risen since the date of
the guarantee, the application of the Excess Interest Adjustment (a negative
Excess Interest Adjustment in this case) will result in a lower payment upon
surrender. Conversely, if interest rates have fallen since the date of the
guarantee, the application of the Excess Interest Adjustment (a positive
Excess Interest Adjustment in this case) will result in a higher payment upon
surrender.
Excess Interest Adjustments will not reduce the Adjusted Policy Value for a
Guaranteed Period Option below the Premium Payments and transfers to that
Guaranteed Period Option, less any prior partial withdrawals and transfers
from that Guaranteed Period Option, plus interest at the Policy's minimum
guaranteed effective annual interest rate of 3%.
The formula for calculating the EIA and examples of the application of the
EIA are set forth in Appendix A to this Prospectus.
SYSTEMATIC PAYOUT OPTION
Under the Systematic Payout Option, if no withdrawals have been made in the
current Policy Year, you can instruct PFL to make automatic payments to you
monthly, quarterly, semi-annually or annually from a specified Subaccount.
Monthly and quarterly payments can only be sent by electronic funds transfer
directly to a checking or savings account. The minimum payment is $50. The
maximum payment is 10% of the Policy Value at the time the Systematic Payout
is elected divided by the number of payments made per year (for example, 12
for monthly). If this requested amount is below the minimum distribution
requirements for that policy specified by the IRS for tax qualified plans, the
maximum payment will be increased to this minimum required distribution
amount. The "Request for Systematic Payout" form must specify a date for the
first payment, which must be at least 30 days but
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not more than one year after the form is submitted (that is, Systematic
Payouts will start at the end of the payment mode selected, but not earlier
than 30 days from the date of request).
The Surrender Charge and Excess Interest Adjustment will be waived for
Owners of Qualified Policies who are under age 59 1/2 if they take Systematic
Payouts using one of the payout methods described in I.R.S. Notice 89-25, Q&A-
12 (the Life Expectancy Recalculation Option, Amortization, or Annuity Factor)
which generally require payments for life or life expectancy. These payments
must be continued until the later of age 59 1/2 or five years from their
commencement. No additional withdrawals may be taken during this time. For
Qualified Policies, when the Owner is age 59 1/2 or older, the Excess Interest
Adjustment will be waived if payments are made using the Life Expectancy
Recalculation Option.
In addition, for either Qualified or Nonqualified Policies, the Surrender
Charge and Excess Interest Adjustment will not be imposed on Systematic
Payouts.
In certain circumstances amounts withdrawn pursuant to a systematic payout
may be included in your income and may be subject to penalty taxes. In
addition, Qualified Policies are subject to complex rules with respect to
restrictions on and taxation of distributions, including the applicability of
penalty taxes. Therefore, you should consult a qualified tax adviser before
requesting a Systematic Payout. (See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES," p. 47.)
ANNUITY PAYMENTS
Annuity Commencement Date. Unless the Annuity Commencement Date is changed,
Annuity Payments under a Policy will begin on the Annuity Commencement Date
you select at the time you apply for the Policy. You may change the Annuity
Commencement Date from time to time by Written Notice to PFL, provided that
notice of each change is received by PFL at its Administrative and Service
Office at least thirty (30) days prior to the then current Annuity
Commencement Date. Except as otherwise permitted by PFL, a new Annuity
Commencement Date must be a date which is: (1) at least thirty (30) days after
the date notice of the change is received by PFL; and (2) not later than the
last day of the Policy month starting after the Annuitant attains age 85. In
no event will an Annuity Commencement Date be permitted to be later than the
last day of the month following the month in which the Annuitant attains age
95. The laws of some states may require earlier Annuity Commencement Dates.
The Annuity Commencement Date may also be changed by the Beneficiary's
election of the Annuity Option after the Annuitant's death.
Election of Payment Option. During the lifetime of the Annuitant and prior
to the Annuity Commencement Date, you may choose an Annuity Payment Option or
change the election, but Written Notice of any election or change of election
must be received by PFL at its Administrative and Service Office at least
thirty (30) days prior to the Annuity Commencement Date. If no election is
made prior to the Annuity Commencement Date, Annuity Payments will be made
under (i) Payment Option 3, life income with level payments for 10 years
certain, using the existing Policy Value of the Fixed Account, or (ii) Payment
Option 3-V, life income with variable payments for 10 years certain, using the
existing Policy Value of the Mutual Fund Account and the Target Account, or
(iii) in a combination of (i) and (ii). If the Policy Value on the Annuity
Commencement Date is less than $2,000, PFL reserves the right to pay it in one
lump sum in lieu of applying it under an Annuity Payment Option.
Prior to the Annuity Commencement Date, the Beneficiary may elect to receive
the Death Benefit in a lump sum or under one of the Payment Options, to the
extent allowed by law and subject to the terms of any settlement agreement.
(See "Death Benefit," p. 51.) Subject to the restrictions of certain state
laws, Annuity Payments will be made on either a fixed basis or a variable
basis as selected by you (or the Beneficiary, after the Annuitant's death).
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<PAGE>
The person who elects a Payment Option can also name one or more successor
payees to receive any unpaid amount PFL has at the death of a payee. Naming
these payees cancels any prior choice of a successor payee.
A payee who did not elect the Payment Option does not have the right to
advance or assign payments, take the payments in one sum, or make any other
change. However, the payee may be given the right to do one or more of these
things if the person who elects the option tells PFL in writing and PFL
agrees.
Unless you specify otherwise, the payee shall be the Annuitant, or, after
the Annuitant's death, the Beneficiary. PFL may require written proof of the
age of any person who has an annuity purchased under Payment Option 3, 3-V, 5
or 5-V.
Premium Tax. PFL may be required by state law to pay premium tax on the
amount applied to a Payment Option, or upon Surrender, or upon payment of
death proceeds. If so, PFL will deduct the premium tax before applying or
paying the proceeds.
Supplementary Contract. Once proceeds become payable and a choice has been
made, PFL will issue a Supplementary Contract in settlement of the option
elected under the Policy setting forth the terms of the option elected. The
Supplementary Contract will name the payees and will describe the payment
schedule.
Availability as Immediate Annuity. The Policy may be purchased and
immediately annuitized, without the need for an accumulation period. The
Annuity Commencement Date must be a date at least thirty days after notice of
such election is received by PFL.
ANNUITY PAYMENT OPTIONS
The Policy provides five Payment Options which are described below. Two of
these are offered as either "Fixed Payment Options" or "Variable Payment
Options," and three are only available as Fixed Payment Options. You may elect
a Fixed Payment Option, a Variable Payment Option, or a combination of both.
If you elect a combination, you must specify what part of the Policy proceeds
are to be applied to the Fixed and Variable Options (and you must also specify
which Subaccounts for the Variable Options).
Payments under Payment Options 3 and 5 and the first payment under Payment
Options 3-V and 5-V are determined based on the adjusted age of the annuitant.
The adjusted age is the annuitant's actual age on the annuitant's nearest
birthday, at the Annuity Commencement Date, adjusted as follows:
<TABLE>
<CAPTION>
ANNUITY COMMENCEMENT DATE ADJUSTED AGE
------------------------- --------------------
<S> <C>
Before 2001 Actual Age
2001-2010 Actual Age minus 1
2011-2020 Actual Age minus 2
2021-2030 Actual Age minus 3
2031-2040 Actual Age minus 4
After 2040 As determined by PFL
</TABLE>
This adjustment assumes an increase in life expectancy, and therefore it
results in lower payments than without such an adjustment.
NOTE CAREFULLY: Under Payment Options 3(1) and 5 (including 3-V(1) and 5-V),
it would be possible for only one Annuity Payment to be made if the
Annuitant(s) were to die before the due date of the second Annuity Payment;
only two Annuity Payments if the Annuitant(s) were to die before the due date
of the third Annuity Payment; and so forth.
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<PAGE>
On the Annuity Commencement Date, the Policy's Adjusted Policy Value will be
applied to provide for Annuity Payments under the selected Annuity Option as
specified. The Adjusted Policy Value is the Policy Value (for the Valuation
Period which ends immediately preceding the Annuity Commencement Date),
increased or decreased by any applicable Excess Interest Adjustment.
The effect of choosing a Fixed Annuity Option is that the amount of each
payment will be set on the Annuity Commencement Date and will not change. If a
Fixed Annuity Option is selected, the Adjusted Policy Value will be
transferred to the general account of PFL, and the Annuity Payments will be
fixed in amount by the fixed annuity provisions selected and the sex (if
consideration of sex is allowed) and adjusted age of the Annuitant. For
further information, contact PFL at its Administrative and Service Office.
Guaranteed Values. There are five Fixed Payment Options. Payment Options 1,
2 and 4 are based on a guaranteed interest rate of 3%. Payment Options 3 and 5
are based on a guaranteed interest rate of 3% using the "1983 Table a" (male,
female, and unisex if required by law) mortality table improved to the year
2000 with projection scale G. ("The 1983 Table a" mortality rates are adjusted
based on improvements in mortality since 1983 to more appropriately reflect
increased longevity. This is accomplished using a set of improvement factors
referred to as projection scale G.)
Payment Option 1--Interest Payments. The policy proceeds may be left with
PFL for any term agreed to. PFL will pay the interest in equal payments or it
may be left to accumulate. Withdrawal rights will be agreed upon by you and
PFL when the option is elected.
Payment Option 2--Income for a Specified Period. Level payments of the
proceeds with interest are made for the fixed period elected, at which time
the funds are exhausted.
Payment Option 3--Life Income. An election may be made between:
1. "No Period Certain"--Level payments will be made during the lifetime of
the Annuitant.
2. "10 Years Certain"--Level Payments will be made for the longer of the
Annuitant's lifetime or ten years.
3. "Guaranteed Return of Policy Proceeds"--Level payments will be made for
the longer of the Annuitant's lifetime or the number of payments which, when
added together, equals the proceeds applied to the income option.
Payment Option 4--Income of a Specified Amount. Payments are made for any
specified amount until the proceeds with interest are exhausted.
Payment Option 5--Joint and Survivor Annuity. Payments are made during the
joint lifetime of the payee and a joint payee you select. Payments will be
made as long as either person is living.
Other Payment options may be arranged by agreement with PFL. Certain options
may not be available in some states.
Current immediate annuity rates for the same class of annuities will be used
if higher than the guaranteed amount (guaranteed amounts are based upon the
tables contained in the Policy). Current amounts may be obtained from PFL.
Variable Payment Options. The dollar amount of the first Variable Annuity
Payment will be determined in accordance with the annuity payment rates set
forth in the applicable
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<PAGE>
table contained in the Policy. The tables are based on a 5% effective annual
assumed investment return and the "1983 Table a" (male, female, and unisex if
required by law) mortality table improved to the year 2000 with projection
Scale G. ("The 1983 Table a" mortality rates are adjusted based on
improvements in mortality since 1983 to more appropriately reflect increased
longevity. This is accomplished using a set of improvement factors referred to
as projection scale G.) The dollar amount of every subsequent Variable Annuity
Payment will vary based on the investment performance of the Subaccount of the
Mutual Fund Account or the Target Account selected by the Annuitant or
Beneficiary. If the actual investment performance exactly matched the Assumed
Investment Return of 5% at all times, the amount of each Variable Annuity
Payment would remain equal. If actual investment performance exceeds the
Assumed Investment Return, the amount of the payments would increase.
Conversely, if actual investment performance is worse than the Assumed
Investment Return, the amount of the payments would decrease.
The following Variable Payment Options generally are available:
Payment Option 3-V--Life Income. An election may be made between:
1. "No Period Certain"--Payments will be made during the lifetime of the
Annuitant.
2. "10 Years Certain"--Payments will be made for the longer of the
Annuitant's lifetime or ten years.
Payment Option 5-V--Joint and Survivor Annuity. Payments are made as long as
either the payee or the joint payee is living.
Certain Payment options may not be available in some states.
Determination of Variable Payments Other Than the First. All Variable
Annuity Payments other than the first are calculated using "Annuity Units"
which are credited to the Policy. The number of Annuity Units to be credited
in respect of a particular Subaccount is determined by dividing that portion
of the first Variable Annuity Payment attributable to that Subaccount by the
Annuity Unit Value of that Subaccount for the Annuity Commencement Date. The
number of Annuity Units of each particular Subaccount credited to the Policy
then remains fixed. The dollar value of variable Annuity Units in the chosen
Subaccount will increase or decrease reflecting the investment experience of
the chosen Subaccount. The dollar amount of each Variable Annuity Payment
after the first may increase, decrease or remain constant, and is equal to the
sum of the amounts determined by multiplying the number of Annuity Units of
each particular Subaccount credited to the Policy by the Annuity Unit Value
for the particular Subaccount on the date the payment is made.
Transfers. You may transfer the value of the Annuity Units from one
Subaccount to another within the Mutual Fund Account, the Target Account or to
the Fixed Account. However, after the Annuity Commencement Date no transfers
may be made from the Fixed Account to the Mutual Fund Account or the Target
Account. The minimum amount which may be transferred is the lesser of $10 of
monthly income or the entire monthly income of the variable Annuity Units in
the Subaccount from which the transfer is being made. The remaining Annuity
Units in the Subaccount must provide at least $10 of monthly income. If, after
a transfer, the monthly income of the remaining Annuity Units in a Subaccount
would be less than $10, PFL reserves the right to include those Annuity Units
as part of the transfer. PFL reserves the right to limit transfers between
Subaccounts after the Annuity Commencement Date to once per Policy Year.
Tax Withholding. A portion or the entire amount of the Annuity Payments may
be taxable as ordinary income. If, at the time the Annuity Payments begin, you
have not provided PFL with a written election not to have federal income taxes
withheld, PFL must by law withhold such taxes from the taxable portion of such
Annuity Payments and remit
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<PAGE>
that amount to the federal government. Withholding is mandatory for certain
Qualified Policies. (See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," p. 58.)
Adjustment of Annuity Payments. Payments will be made at 1, 3, 6, or 12
month intervals. If the individual payments provided for would be or become
less than $50, PFL may change, at its discretion, the frequency of payments to
such intervals as will result in payments of at least $50. If the Adjusted
Policy Value on the Annuity Commencement Date is less than $2,000, PFL may pay
such value in one sum in lieu of the payments otherwise provided for.
DEATH BENEFIT
Death of Annuitant/Owner Prior to Annuity Commencement Date. A Death Benefit
will be paid to the Beneficiary if the Owner, who is the Annuitant, dies prior
to the Annuity Commencement Date. The amount of the Death Benefit is the
greatest of the Policy Value, the Cash Value, or the Guaranteed Minimum Death
Benefit selected. Prior versions of the Policy or Policies offered in certain
states may provide for a different definition or calculation of the Death
Benefit. See Appendix B and the Policy or endorsement for details. The Death
Benefit is not payable upon the death of the Annuitant if the Annuitant and
Owner are not the same person, unless the Owner makes a separate election to
do so. The Death Benefit is determined when PFL receives both due proof of
death and an election of settlement option.
In certain circumstances, if the owner dies the spouse may elect to continue
the Policy. If the Policy is continued, all future Surrender Charges will be
waived.
There are three Guaranteed Minimum Death Benefit Options available: (A) The
"5% Annually Compounding Death Benefit," (B) the "Double Enhanced Death
Benefit," and (C) the "Return of Premium Death Benefit."
The "5% Annually Compounding Death Benefit" is the total Premium Payments
less any Adjusted Partial Withdrawals (defined below) plus interest at an
effective annual rate of 5% from the payment or withdrawal date up to the date
of death (even after age 81).
The "Double Enhanced Death Benefit" is equal to the greater of (1) and (2)
where (1) is a 5% Annually Compounding Death Benefit, equal to the total
Premium Payments, minus Adjusted Partial Withdrawals (defined below), plus
interest accumulated at 5% per annum from the payment or withdrawal date to
the earlier of the date of death or the Owner's 81st birthday, and (2) is a
Step-Up Death Benefit, equal to the largest Policy Value on any Policy
Anniversary prior to the earlier of the date of death or the Owner's 81st
birthday, plus any Premium Payments subsequent to the date of any Policy
Anniversary with the largest Policy Value, minus any Adjusted Partial
Withdrawals (defined below), subsequent to the date of the Policy Anniversary
with the largest Policy Value. For this purpose, the Policy Date will be
treated as a Policy Anniversary.
The "Return of Premium Death Benefit" is the total Premium Payments less any
Adjusted Partial Withdrawals (defined below) as of the date of death.
For the purpose of calculating the Death Benefit, the Policy Date will be
treated as a Policy Anniversary. Any applicable Excess Interest Adjustments on
transfers or partial withdrawals from the Fixed Account will affect the value
of the Guaranteed Minimum Death Benefit.
Under all three Death Benefit Options, if the surviving spouse elects to
continue the Policy in lieu of receiving the Death Benefit, an amount equal to
the excess, if any, of the Guaranteed Minimum Death Benefit over the Policy
Value, will then be added to the Policy
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<PAGE>
Value. This amount will be added only once, at the time of such election.
Thereafter, the amount paid on the death of the surviving spouse is based on
the Guaranteed Minimum Death Benefit elected on the Policy Date and the
surviving spouse's age.
The 5% Annually Compounding Death Benefit is not available if either the
Annuitant or the Owner is age 75 or higher on the Policy Date. The Double
Enhanced Death Benefit is not available if either the Annuitant or the Owner
is age 81 or higher on the Policy Date. If no choice is made prior to the
Policy Date then the Return of Premium Death Benefit will apply. After the
Policy Date, the Guaranteed Minimum Death Benefit option cannot be changed.
Adjusted Partial Withdrawal. A partial withdrawal will reduce the Guaranteed
Minimum Death Benefit by an amount referred to as the "Adjusted Partial
Withdrawal". The Adjusted Partial Withdrawal may be a different amount than
the Gross Partial Withdrawal. Each Adjusted Partial Withdrawal is equal to the
Gross Partial Withdrawal multiplied by an Adjustment Factor. The Adjustment
Factor is equal to the Death Benefit prior to the Partial withdrawal divided
by the Policy Value prior to the Partial withdrawal.
If a Partial withdrawal is taken when the Guaranteed Minimum Death Benefit
exceeds the Policy Value, then the amount deducted from the Guaranteed Minimum
Death Benefit as a result of the partial withdrawal (that is, the Adjusted
Partial Withdrawal) will exceed the partial withdrawal request. In that case,
the total proceeds of a partial withdrawal followed by payment of a Death
Benefit could be less than total Premium Payments.
Payment of Death Benefit. Due Proof of Death of the Annuitant is proof that
the Annuitant who is the Owner died prior to the commencement of Annuity
Payments. Upon receipt of this proof and an election of a method of settlement
and return of the Policy, the Death Benefit generally will be paid within
seven days, or as soon thereafter as PFL has sufficient information about the
Beneficiary to make the payment. The Beneficiary may receive the amount
payable in a lump sum cash benefit, or, subject to any limitation under any
state or federal law, rule, or regulation, under one of the Annuity Payment
Options described above, unless a settlement agreement is effective at the
death of the Owner preventing such election.
Required Distribution. If the Annuitant was the Owner, and the Beneficiary
was not the Annuitant's spouse, the Death Benefit must (1) be distributed
within five years of the date of the deceased Owner's death, or (2) payments
under a Payment Option must begin within one year of the deceased Owner's
death and must be made for the Beneficiary's lifetime or for a period certain
(so long as any certain period does not exceed the Beneficiary's life
expectancy). Death proceeds which are not paid to or for the benefit of a
natural person must be distributed within five years of the date of the
deceased Owner's death. If the sole Beneficiary is the deceased Owner's
surviving spouse, such spouse may elect to continue the Policy as the new
Annuitant and Owner instead of receiving the Death Benefit. If the surviving
spouse elects to continue the Policy, all future Surrender Charges will be
waived. (See "Federal Tax Matters" in the Statement of Additional
Information.)
If the Annuitant is not the Owner, and the Owner dies prior to the Annuity
Commencement Date, a Successor Owner may surrender the Policy at any time for
the Adjusted Policy Value. If the Successor Owner is not the deceased Owner's
surviving spouse, however, this amount must be distributed within five years
after the date of death of the Owner, or payments under a Payment Option must
begin within one year of the deceased Owner's death and must be made for the
Beneficiary's lifetime or for a period certain (so long as any certain period
does not exceed the Beneficiary's life expectancy). If the Successor Owner is
the deceased Owner's surviving spouse, the surviving spouse may elect to
continue the Policy, in which case all future Surrender Charges will be
waived.
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<PAGE>
Death On or After Annuity Commencement Date. The death benefit payable on or
after the Annuity Commencement Date depends on the Payment Option selected. If
any Owner dies on or after the Annuity Commencement Date, but before the
entire interest in the Policy is distributed, the remaining portion of such
interest in the Policy will be distributed at least as rapidly as under the
method of distribution being used as of the date of that Owner's death.
Beneficiary. The Beneficiary designation in the application will remain in
effect until changed. You may change the designated Beneficiary by sending
Written Notice to PFL. The Beneficiary's consent to such change is not
required unless the Beneficiary was irrevocably designated or consent is
required by law. (If an irrevocable Beneficiary dies, you may then designate a
new Beneficiary.) The change will take effect as of the date you sign the
Written Notice, whether or not you are living when the Notice is received by
PFL. PFL will not be liable for any payment made before the Written Notice is
received. If more than one Beneficiary is designated, and you fail to specify
their interests, they will share equally.
DEATH OF OWNER
Federal tax law requires that if the Owner (including any joint Owner or any
Successor Owner who has become a current Owner) dies before the Annuity
Commencement Date, then the entire value of the Policy must generally be
distributed within five years of the date of death of the Owner. Certain rules
apply where 1) the spouse of the deceased Owner is the sole Beneficiary, 2)
the Owner is not a natural person and the primary Annuitant dies or is
changed, or 3) any Owner dies after the Annuity Commencement Date. See
"Federal Tax Matters" in the Statement of Additional Information for a
detailed description of these rules. Other rules may apply to Qualified
Policies. (See also "DISTRIBUTIONS UNDER THE POLICY--Death Benefit" p. 41.)
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Section 36.105 of the Texas Educational Code permits participants in the
Texas Optional Retirement Program (ORP) to withdraw their interest in a
variable annuity policy issued under the ORP only upon: (1) termination of
employment in the Texas public institutions of higher education; (2)
retirement; or (3) death. Accordingly, a participant in the ORP (or the
participant's estate if the participant has died) will be required to obtain a
certificate of termination from the employer or a certificate of death before
the account can be redeemed.
RESTRICTIONS UNDER SECTION 403(B) PLANS
Section 403(b) of the Internal Revenue Code provides for tax-deferred
retirement savings plans for employees of certain non-profit and educational
organizations. In accordance with the requirements of Section 403(b), any
Policy used for a 403(b) plan will prohibit distributions of elective
contributions and earnings on elective contributions except upon death of the
employee, attainment of age 59 1/2, separation from service, disability, or
financial hardship. In addition, income attributable to elective contributions
may not be distributed in the case of hardship.
RESTRICTIONS UNDER QUALIFIED POLICIES
Other restrictions with respect to the election, commencement, or
distribution of benefits may apply under Qualified Policies or under the terms
of the plans in respect of which Qualified Policies are issued.
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CHARGES AND DEDUCTIONS
No deductions are made from Premium Payments, so that the full amount of
each Premium Payment is invested in one or more of the Accounts. PFL will make
certain charges and deductions in connection with the Policy in order to
compensate it for incurring expenses in distributing the Policy, bearing
mortality and expense risks under the Policy and for management,
administrative and distribution expenses. Charges may also be made for premium
taxes, federal, state or local taxes, or for certain transfers or other
transactions. Charges and expenses are also deducted from the Underlying Funds
and the Target Subaccounts.
SURRENDER CHARGE
PFL will incur expenses relating to the sale of Policies, including
commissions to registered representatives and other promotional expenses. PFL
may deduct a Surrender Charge from any amount surrendered (i.e., withdrawn) in
connection with a partial withdrawal or a surrender in order to cover a
portion of such distribution expenses. A Surrender Charge will not be deducted
from a withdrawal, after the first Policy Year, of up to 10% of the Policy
Value, if there have been no partial withdrawals in the current Policy Year.
(See "DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 35.)
The Surrender Charge is not imposed upon exercise of the Nursing Care and
Terminal Condition Option. This feature may not be available in all states.
(See "DISTRIBUTIONS UNDER THE POLICY," p. 35.)
The amount of the Surrender Charge is determined by multiplying the amount
of the Premium Payments withdrawn by the applicable Surrender Charge
Percentage. The applicable Surrender Charge Percentage will depend upon the
number of years that have elapsed since the Premium Payment that is being
withdrawn was made. For this purpose, surrenders are allocated to Premium
Payments on a "first in-first out" basis, that is, first to the oldest Premium
Payment, then to the next oldest Premium Payment, and so on. Premium Payments
are deemed to be withdrawn before earnings, and after all Premium Payments
have been withdrawn, the remaining Adjusted Policy Value may be withdrawn
without any Surrender Charge. The following is the table of Surrender Charge
Percentages:
<TABLE>
<CAPTION>
NUMBER OF YEARS SINCE APPLICABLE SURRENDER CHARGE PERCENTAGE
PREMIUM PAYMENT DATE (AS PERCENTAGE OF PREMIUM PAYMENT WITHDRAWN)
- --------------------- --------------------------------------------
<S> <C>
Less than 1........................ 7%
At least 1 and less than 2......... 7%
At least 2 and less than 3......... 6%
At least 3 and less than 4......... 6%
At least 4 and less than 5......... 5%
At least 5 and less than 6......... 4%
At least 6 and less than 7......... 2%
</TABLE>
PFL anticipates that the Surrender Charge will not generate sufficient funds
to pay the cost of distributing the Policies. If this charge is insufficient
to cover the distribution expenses, the deficiency will be met from PFL's
general funds, which will include amounts derived from the fee for mortality
and expense risks and the Distribution Financing Charge.
MORTALITY AND EXPENSE RISK FEE
PFL imposes a daily charge as compensation for bearing certain mortality and
expense risks in connection with the Policies. Prior to the Annuity
Commencement Date, for the 5% Annually Compounding Death Benefit and the
Double Enhanced Death Benefit, this charge is equal to an effective annual
rate of 1.25% of the daily net asset value of the Mutual Fund
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<PAGE>
Account and the Target Account. For the Return of Premium Death Benefit, the
corresponding charge is equal to an effective annual rate of 1.10% of the
daily net asset value of the Mutual Fund Account and the Target Account. After
the Annuity Commencement Date, the Mortality and Expense Risk Fee may be lower
than the Mortality and Expense Risk Fee in effect prior to the Annuity
Commencement Date (See Appendix B). The Mortality and Expense Risk Fee is
reflected in the Accumulation or Annuity Unit Values for the Policy for each
Subaccount, and is deducted from the Subaccounts of the Mutual Fund Account
and the Target Account both before and after the Annuity Commencement Date.
Policy Values and Annuity Payments are not affected by changes in actual
mortality experience nor by actual expenses incurred by PFL. The mortality
risks assumed by PFL arise from its contractual obligations to make Annuity
Payments (determined in accordance with the Annuity tables and other
provisions contained in the Policy) and to pay Death Benefits prior to the
Annuity Commencement Date. Thus, you are assured that neither an Annuitant's
own longevity nor an unanticipated improvement in general life expectancy will
adversely affect the monthly Annuity payments that the Annuitant will receive
under the Policy.
PFL also bears substantial risk in connection with the Death Benefit
Guarantee since PFL will pay a Death Benefit equal to the Guaranteed Minimum
Death Benefit if that amount is higher than the Policy Value.
The expense risk assumed by PFL is the risk that PFL's actual expenses in
administering the Policy and the Accounts will exceed the amount recovered
through the Administrative Charges.
If the Mortality and Expense Risk Fee is insufficient to cover PFL's actual
costs, PFL will bear the loss; conversely, if the charge is more than
sufficient to cover costs, the excess will be profit to PFL. PFL expects a
profit from this charge. PFL's expenses for distributing the Policies will be
borne by the general assets of PFL which may include amounts derived from the
Distribution Financing Charge, the Surrender Charge and, if necessary, the
Mortality and Expense Risk Fee. A Mortality and Expense Risk Fee is also
assessed after the Annuity Commencement Date for all Variable Payment Options.
ADMINISTRATIVE CHARGES
Service Charge. In order to cover the costs of administering the Policies,
PFL deducts an annual Service Charge from the Policy Value of each Policy. The
annual Service Charge is deducted from the Policy Value of each Policy on each
Policy Anniversary prior to the Annuity Commencement Date. The charge is not
deducted after the Annuity Commencement Date. The Service Charge is the lesser
of 2% of the Policy Value or $35, and it will not be increased in the future.
This charge is waived if either the Policy Value or the sum of all Premium
Payments, less the sum of all partial withdrawals equals or exceeds $50,000 on
a Policy Anniversary (or date of surrender). PFL also reserves the right to
charge up to $35 at the time of surrender during any Policy Year. The Service
Charge will be deducted from the Investment Option(s) in the same proportion
that your interest in each Investment Option bears to your total Policy Value.
Administrative Charge. PFL also deducts a daily Administrative Charge from
the net assets of the Mutual Fund Account and the Target Account to partially
cover expenses incurred by PFL in connection with the administration of each
Account and the Policies. The effective annual rate of this charge is 0.15% of
the net assets in the Mutual Fund Account and the Target Account. This charge
is reflected in the Accumulation or Annuity Unit Values for the Policy for
each Subaccount.
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DISTRIBUTION FINANCING CHARGE
During the first seven Policy years, but only prior to the Annuity
Commencement Date, PFL deducts a daily Distribution Financing Charge equal to
an effective annual rate of 0.15% of the daily net asset value of the Mutual
Fund Account and the Target Account. The Distribution Financing Charge is paid
to PFL and is designed to partially compensate PFL for the cost of
distributing the Policies. The Distribution Financing Charge will be used to
support marketing efforts, training of representatives and reimbursement of
expenses incurred by broker/dealers who sell the Policies. The staff of the
SEC deems such charge to constitute a deferred sales charge.
PREMIUM TAXES
PFL currently makes no deduction from the Premium Payments when they are
paid to PFL for any state premium taxes PFL pays in connection with Premium
Payments it receives under the Policies. However, PFL will deduct the
aggregate premium taxes that it pays on behalf of a particular Policy on (i)
the Annuity Commencement Date, (ii) the total surrender of a Policy, or (iii)
payment of the death proceeds of a Policy. Premium taxes currently range from
0% to 3.50% of Premium Payments.
FEDERAL, STATE AND LOCAL TAXES
No charges are currently made for federal, state, or local taxes other than
premium taxes. However, PFL reserves the right to deduct charges in the future
for any taxes or other economic burden resulting from the application of any
tax laws that PFL determines to be attributable to the Account or the
Policies.
TRANSFER FEE
PFL will not impose a transfer fee for the first 12 transfers between
Investment Options in each Policy Year. PFL reserves the right to impose a $10
charge for the thirteenth and each subsequent transfer request you make during
a single Policy Year. For the purpose of determining whether a transfer fee is
payable, Premium Payment allocations are not considered transfers. All
transfer requests made simultaneously will be treated as a single request. No
transfer fee will be imposed for any transfer which is not at your request.
OTHER EXPENSES INCLUDING INVESTMENT ADVISORY FEES
Each of the Mutual Fund Account Portfolios and the Target Subaccounts is
responsible for all of its expenses. In addition, charges will be made against
each of the Portfolios of the Underlying Funds and the Target Subaccounts for
investment advisory services provided to them. The net assets of each
Portfolio of the Underlying Funds and the Target Subaccounts will reflect
deductions in connection with the investment advisory fee and other expenses.
For more information concerning the investment advisory fee and other
expenses of the Portfolios, see the prospectuses for the Underlying Funds,
current copies of which accompany this Prospectus. Investment advisory fees
and other expenses of the Target Subaccounts are described more fully in Part
III of this Prospectus.
EMPLOYEE AND AGENT PURCHASES
The Policy may be acquired by an employee or registered representative of
any broker/dealer authorized to sell the Policy or their spouse or minor
children, or by an officer, director, trustee or bonafide full-time employee
of PFL or its affiliated companies or their spouse or minor children. In such
a case, PFL may credit an amount equal to a percentage of each Premium Payment
to the Policy due to lower acquisition costs PFL experiences on those
purchases. The credit will be reported to the Internal Revenue Service as
taxable
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income to the employee or registered representative. PFL may offer certain
employer sponsored savings plans, in its discretion reduced fees and charges
including, but not limited to, the Surrender Charges, the Mortality and
Expense Risk Fee and the Administrative Charge for certain sales under
circumstances which may result in savings of certain costs and expenses. In
addition, there may be other circumstances of which PFL is not presently aware
which could result in reduced sales or distribution expenses. Credits to the
Policy or reductions in these fees and charges will not be unfairly
discriminatory against any Owner.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary does not constitute tax advice. It is a general
discussion of certain of the expected federal income tax consequences of
investment in and distributions with respect to a Policy, based on the
Internal Revenue Code of 1986, as amended (the "Code"), proposed and final
Treasury Regulations thereunder, judicial authority, and current
administrative rulings and practice. This summary discusses only certain
federal income tax consequences to "United States Persons," and does not
discuss state, local, or foreign tax consequences. United States Persons means
citizens or residents of the United States, domestic corporations, domestic
partnerships and trusts or estates that are subject to United States federal
income tax regardless of the source of their income.
At the time the initial Premium Payment is paid, a prospective purchaser
must specify whether he or she is purchasing a Nonqualified Policy or a
Qualified Policy. If the initial Premium Payment is derived from an exchange
or surrender of another annuity policy, PFL may require that the prospective
purchaser provide information with regard to the federal income tax status of
the previous annuity policy. PFL will require that persons purchase separate
Policies if they desire to invest monies qualifying for different annuity tax
treatment under the Code. Each such separate Policy would require the minimum
initial Premium Payment stated above. Additional Premium Payments under a
Policy must qualify for the same federal income tax treatment as the initial
Premium Payment under the Policy; PFL will not accept an Additional Premium
Payment under a Policy if the federal income tax treatment of such Premium
Payment would be different from that of the initial Premium Payment.
The Qualified Policies were designed for use by retirement plans and
individual retirement accounts that qualify for special federal income tax
treatment under Sections 401(a), 403(b), 408(a), 408A or 457 of the Code and
individuals purchasing individual retirement annuities that qualify for
special federal income tax treatment under Section 408(b) of the Code. Certain
requirements must be satisfied in purchasing a Qualified Policy in order for
the plan, account or annuity to retain its special tax treatment. This summary
is not intended to cover such requirements, and assumes that Qualified
Policies are purchased pursuant to retirement plans or individual retirement
accounts, or are individual retirement annuities, that qualify for such
special tax treatment. This summary was prepared by PFL after consultation
with tax counsel, but no opinion of tax counsel has been obtained.
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL PURPOSES ONLY. EACH
POTENTIAL PURCHASER IS URGED TO CONSULT HIS/HER OWN TAX ADVISER AS TO THE
CONSEQUENCES OF INVESTMENT IN A POLICY UNDER FEDERAL AND APPLICABLE STATE,
LOCAL AND FOREIGN TAX LAWS.
TAX STATUS OF THE POLICY
Diversification Requirements. Section 817(h) of the Code provides that in
order for a variable contract which is based on a segregated asset account to
qualify as an annuity contract under the Code, the investments made by such
account must be "adequately diversified" in accordance with Treasury
regulations. The Treasury regulations issued under
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Section 817(h) (Treas. Reg. (S)1.817-5) apply a diversification requirement to
each of the Mutual Fund Subaccounts and the Target Subaccounts. The Mutual
Fund Account, through its Underlying Funds and their Portfolios, and the
Target Account, through its Subaccounts, intends to comply with the
diversification requirements of the Treasury. PFL has entered into agreements
regarding participation in the Endeavor Series Trust and WRL Series Fund, Inc.
that requires the Portfolios to be operated in compliance with the Treasury
regulations. PFL has entered into an agreement with First Trust Advisers,
L.P., the adviser of the Target Account, that requires the Target Subaccounts
to be operated in compliance with the Treasury regulations.
Owner Control. In certain circumstances, owners of variable annuity
contracts may be considered the owners, for Federal income tax purposes, of
the assets of the separate account used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includable in the variable annuity contract owner's gross income. Several
years ago, the IRS stated in published rulings that a variable annuity
contract owner will be considered the owner of separate account assets if the
contract owner possesses incidents of ownership in those assets, such as the
ability to exercise investment control over the assets. More recently, the
Treasury Department announced, in connection with the issuance of regulations
concerning investment diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., you),
rather than the insurance company, to be treated as the owner of the assets in
the account." This announcement also stated that guidance would be issued by
way of regulations or rulings on the "extent to which policyholders may direct
their investments to particular subaccounts without being treated as owners of
the underlying assets."
The ownership rights under the contract are similar to, but different in
certain respects from those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets.
For example, you have the choice of one or more Subaccounts in which to
allocate premiums and Policy Values, and may be able to transfer among these
accounts more frequently than in such rulings. Moreover, the investment
strategies for the Target Subaccounts are innovative and have not been
addressed by the IRS. These differences could result in you being treated as
the owner of the assets of the Mutual Fund Account or the Target Account. In
addition, PFL does not know what standards will be set forth, if any, in the
regulations or rulings that the Treasury Department has stated it expects to
issue. PFL therefore reserves the right to modify the Policies as necessary to
attempt to prevent you from being considered the owner of a
pro rata share of the assets of the Mutual Fund Account or the Target Account.
The Statement of Additional Information discusses other tax requirements for
qualifying as an annuity contract.
The following discussion is based on the assumption that the Policy
qualifies as an annuity contract for federal income tax purposes.
TAXATION OF ANNUITIES
The discussion below applies only to those Policies owned by natural
persons, and that qualify as annuity contracts for federal income tax
purposes. With respect to Owners who are natural persons, the Policy should be
treated as an annuity contract for federal income tax purposes.
In General. Except as described below with respect to Owners who are not
natural persons, an Owner who holds a Policy satisfying the diversification
and distribution requirements described in the Statement of Additional
Information should not be taxed on increases in the Policy Value until an
amount is received or deemed received, e.g., upon a
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partial or full surrender or as Annuity Payments under the Annuity Option
selected. Generally, any amount received or deemed received under a
Nonqualified Annuity Contract prior to the Annuity Commencement Date is deemed
to come first from any "Income on the Contract" and then from the "Investment
in the Contract." The "Investment in the Contract" generally equals total
premium payments less amounts received which were not includable in gross
income. To the extent that the Policy Value (Cash Value in the event of a
surrender) exceeds the "Investment in the Contract," such excess constitutes
the "Income on the Contract." For these purposes such "Income on the Contract"
shall be computed by reference to the aggregation rules described below, and
the amount includable in gross income will be taxable as ordinary income. If
at the time that any amount is received or deemed received there is no "Income
on the Contract" (e.g., because the gross Policy Value does not exceed the
"Investment in the Contract" and no aggregation rule applies), then such
amount received or deemed received will not be includable in gross income, and
will simply reduce the "Investment in the Contract."
For this purpose, the assignment, pledge or agreement to assign or pledge
any portion of the Policy Value (including assignment of Owner's right to
receive Annuity Payments prior to the Annuity Commencement Date) generally
will be treated as a distribution in the amount of such portion of the Policy
Value. Additionally, if an Owner designates a new Owner prior to the Annuity
Commencement Date without receiving full and adequate consideration, the old
Owner generally will be treated as receiving a distribution under the Policy
in an amount equal to the Policy Value. A transfer of ownership or an
assignment of a Policy, or designation of a Beneficiary or Annuitant who is
not also the Owner as well as the selection of certain Annuity Commencement
Dates, may result in certain tax consequences to the Owner that are not
discussed herein. An Owner contemplating any such transfer, designation,
selection or assignment of a Policy should contact a competent tax adviser
with respect to the potential tax effects of such a transaction.
Aggregation Rules. Generally all nonqualified deferred annuity contracts
issued by the same company (or an affiliated company) to the same owner during
any calendar year shall be treated as one annuity contract, and "aggregated"
for purposes of determining the amount includable in gross income. In
addition, for such purposes all Traditional individual retirement annuities
and accounts under Section 408 of the Code for an individual are aggregated,
and generally all distributions therefrom during a calendar year are treated
as one distribution made as of the end of such year. The same aggregation
rules apply to Roth individual retirement annuities and accounts. The Roth
IRAs and Traditional IRAs shall be treated separately for distribution
purposes.
Surrenders or Partial Withdrawals. In the case of a partial withdrawal
(including systematic Partial withdrawals) under a Nonqualified Policy, the
amount received generally will be includable in gross income to the extent
that it does not exceed the "Income on the Contract," which is generally equal
to the excess of the Policy Value immediately before the partial surrender
over the "Investment in the Contract" at that time. However, for these
purposes the Policy Value immediately before a Partial withdrawal may have to
be increased by any positive Excess Interest Adjustment which results from
such a partial withdrawal or which could result from a simultaneous surrender,
and may need further adjustments if the aggregation rules apply. There is,
however, no definitive guidance on the proper tax treatment of Excess Interest
Adjustments, and you should contact a competent tax adviser with respect to
the potential tax consequences of an Excess Interest Adjustment that may apply
in the case of a Non-Qualified Policy or a Qualified Policy. In the case of a
partial withdrawal (including systematic withdrawals) under a Qualified Policy
(other than one qualified under Section 457 of the Code), a ratable portion of
the amount received is generally excludable from gross income, based on the
ratio of the "Investment in the Contract" to the individual's total account
balance or accrued benefit under the retirement plan at the time of each such
payment. For a Qualified Policy, the "Investment in the
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Contract" can be zero. Special tax rules may be available for certain
distributions from a Qualified Policy. In the case of a surrender under a
Nonqualified Policy or a Qualified Policy, the amount received generally will
be taxable only to the extent it exceeds the "Investment in the Contract,"
unless the aggregation rules apply.
Annuity Payments. Although the tax consequences may vary depending on the
Annuity Payment Option elected under the Policy, in general only a portion of
the Annuity Payments received after the Annuity Commencement Date will be
includable in the gross income of the recipient.
For Fixed Annuity Payments, in general the excludable portion of each
payment is determined by dividing the "Investment in the Contract" on the
Annuity Commencement Date by the total expected value of the Annuity Payments
for the term of the payments. The remainder of each Annuity Payment is
includable in gross income. Once the "Investment in the Contract" has been
fully recovered, the full amount of any additional Annuity Payments is
includable in gross income.
For Variable Annuity Payments, the includable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is excludable from gross income. This dollar amount is determined
by dividing the "Investment in the Contract" on the Annuity Commencement Date
by the total number of expected periodic payments. The remainder of each
Annuity Payment is includable in gross income. Once the "Investment in the
Contract" has been fully recovered, the full amount of any additional Annuity
Payments is includable in gross income.
Where you allocate a portion of the Adjusted Policy Value on the Annuity
Commencement Date to more than one Annuity Payment Option (fixed or variable),
special rules govern the allocation of the Policy's entire "Investment in the
Contract" on such date to each such option, for purposes of determining the
excludable amount of each payment received under that option. PFL makes no
attempt to describe these allocation rules, because they would prescribe a
complex variety of results, depending on how the allocations were made among
the various types of Annuity Payment Options. Instead, you are advised to
consult a competent tax adviser as to the potential tax effects of allocating
any amount of Adjusted Policy Value to any particular Annuity Payment Option.
If, after the Annuity Commencement Date, Annuity Payments cease by reason of
the death of the Annuitant, the excess (if any) of the "Investment in the
Contract" as of the Annuity Commencement Date over the aggregate amount of
Annuity Payments received on or after the Annuity Commencement Date that was
excluded from gross income is allowable as a deduction for the last taxable
year of the Annuitant.
Taxation of Death Benefit Proceeds. Amounts may be distributed from the
Policy because of the death of an Owner or the Annuitant. Generally, such
amounts are includable in the income of the recipient as follows: (1) if
distributed in a lump sum, they are taxed in the same manner as a full
surrender, as described above, or (2) if distributed under an Annuity Option,
they are taxed in the same manner as Annuity Payments, as described above. For
these purposes, the "Investment in the Contract" is not affected by the
Owner's or Annuitant's death. That is, the "Investment in the Contract"
remains generally the total premium payments less amounts received which were
not includable in gross income.
Penalty Taxes. In the case of any amount received or deemed received from
the Policy, e.g., upon a surrender of a Policy (including systematic
withdrawals) or a deemed distribution under a Policy resulting from a pledge,
assignment or agreement to pledge or assign or an Annuity Payment with respect
to a Policy, there may be imposed on the recipient a federal penalty tax equal
to 10% of the amount includable in gross income. The penalty tax generally
will not apply to any distribution: (i) made on or after the date on which
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the taxpayer attains age 59 1/2; (ii) made as a result of the death of the
holder (generally the Owner); (iii) attributable to the disability of the
taxpayer; or (iv) which is part of a series of substantially equal periodic
payments made (not less frequently than annually) for the life (or life
expectancy) of the taxpayer or the joint lives (or joint life expectancies) of
such taxpayer and his/her beneficiary. Other rules may apply to Qualified
Policies.
Withholding. The portion of any distribution under a Policy that is
includable in gross income will be subject to federal income tax withholding
unless the recipient of such distribution elects not to have federal income
tax withheld. Election forms will be provided at the time distributions are
requested or made. For certain Qualified Policies, certain distributions are
subject to mandatory withholding. The withholding rate varies according to the
type of distribution and the Owner's tax status. For qualified policies,
"eligible rollover distributions" from section 401(a) plans and section 403(b)
tax-sheltered annuities are subject to a mandatory federal income tax
withholding of 20%. An eligible rollover distribution is the taxable portion
of any distribution from such a plan, except certain distributions such as
distributions required by the Code or distributions in a specified annuity
form. The 20% withholding does not apply, however, if the Owner chooses a
"direct rollover" from the plan to another tax-qualified plan or IRA.
Qualified Policies. The Qualified Policy is designed for use with several
types of tax-qualified retirement plans. The tax rules applicable to
participants and beneficiaries in tax-qualified retirement plans vary
according to the type of plan and the terms and conditions of the plan.
Special favorable tax treatment may be available for certain types of
contributions and distributions. Adverse tax consequences may result from
contributions in excess of specified limits; distributions prior to age 59 1/2
(subject to certain exceptions); distributions that do not conform to
specified commencement and minimum distribution rules; aggregate distributions
in excess of a specified annual amount; and in other specified circumstances.
Some retirement plans are subject to distribution and other requirements that
are not incorporated into our Policy administration procedures. Owners,
participants and beneficiaries are responsible for determining that
contributions, distributions and other transactions with respect to the
Policies comply with applicable law.
For qualified plans under section 401(a), 403(a), 403(b), and 457, the Code
requires that distributions generally must commence no later than the later of
April 1 of the calendar year following the calendar year in which the Owner
(or plan participant) (i) reaches age 70 1/2 or (ii) retires, and must be made
in a specified form or manner. If the plan participant is a "5 percent owner"
(as defined in the Code), distributions generally must begin no later than
April 1 of the calendar year in which the Owner (or plan participant) reaches
age 70 1/2. Each Owner is responsible for requesting distributions under the
Policy that satisfy applicable tax rules.
PFL makes no attempt to provide more than general information about use of
the Policy with the various types of retirement plans. Purchasers of Policies
for use with any retirement plan should consult their legal counsel and tax
adviser regarding the suitability of the Policy.
Individual Retirement Annuities. In order to qualify as a Traditional
individual retirement annuity under Section 408(b) of the Code, a Policy must
contain certain provisions: (i) the Owner must be the Annuitant; (ii) the
Policy generally is not transferable by the Owner, e.g., the Owner may not
designate a new Owner, designate a Contingent Owner or assign the Policy as
collateral security; (iii) the total Premium Payments for any calendar year
may not exceed $2,000, except in the case of a rollover amount or contribution
under Section 402(c), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code; (iv)
Annuity Payments or withdrawals must begin no later than April 1 of the
calendar year following the calendar year in which the Annuitant attains age
70 1/2; (v) an Annuity Payment Option with a Period Certain that will
guarantee Annuity Payments beyond the life expectancy of the Annuitant and the
Beneficiary may not be selected; and (vi) certain payments of Death Benefits
must be made in the event the Annuitant dies prior to the distribution of the
Policy Value. Policies
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intended to qualify as a Traditional individual retirement annuities under
Section 408(b) of the Code contain such provisions. Amounts in the IRA (other
than nondeductible contributions) are taxed when distributed from the IRA.
Distributions prior to age 59 1/2 (unless certain exceptions apply) are
subject to a 10% penalty tax.
Section 408 of the Code also indicates that no part of the funds for a
Traditional individual retirement account or annuity ("IRA") should be
invested in a life insurance contract, but the regulations thereunder allow
such funds to be invested in an annuity contract that provides a death benefit
that equals the greater of the premiums paid or the cash value for the
contract. The Policy provides an enhanced death benefit that could exceed the
amount of such a permissible death benefit, but it is unclear to what extent
such an enhanced death benefit could disqualify the Policy under Section 408
of the Code. The Internal Revenue Service has not reviewed the Policy for
qualification as an IRA, and has not addressed in a ruling of general
applicability whether an enhanced death benefit provision, such as the
provision in the Policy, comports with IRA qualification requirements.
Roth Individual Retirement Annuities (Roth IRA). The Roth IRA, under Section
408A of the Code, contains many of the same provisions as a Traditional IRA.
However, there are some differences. First, the contributions are not
deductible and must be made in cash or as a rollover or transfer from another
Roth IRA or other IRA. A rollover from or conversion of an IRA to a Roth IRA
may be subject to tax and other special rules may apply. You should con"sult a
tax adviser before combining any converted amounts with any other Roth IRA
contributions, including any other conversion amounts from other tax years.
The Roth IRA is available to individuals with earned income and whose adjusted
gross income is under $110,000 for single filers, $160,000 for married filing
jointly, and $10,000 for married filing separately. The amount per individual
that may be contributed to all IRAs (Roth and Traditional) is $2,000.
Secondly, the distributions are taxed differently. The Roth IRA offers tax-
free distributions when made from assets which have been held in the account
for 5 tax years and are made after attaining age 59 1/2, to pay for qualified
first time homebuyer expenses (lifetime maximum of $10,000) or due to death or
disability. All other distributions are subject to income tax when made from
earnings and may be subject to a premature withdrawal penalty tax unless an
exception applies. Unlike the Traditional IRA, there are no minimum required
distributions during the Owner's lifetime; however, required distributions at
death are the same.
Section 403(b) Plans. Under Section 403(b) of the Code, payments made by
public school systems and certain tax exempt organizations to purchase
Policies for their employees are excludable from the gross income of the
employee, subject to certain limitations. However, such payments may be
subject to FICA (Social Security) taxes. The Policy includes a Death Benefit
that in some cases may exceed the greater of the Premium Payments or the
Policy Value. The Death Benefit could be characterized as an incidental
benefit, the amount of which is limited in any tax-sheltered annuity under
section 403(b). Because the Death Benefit may exceed this limitation,
employers using the Policy in connection with such plans should consult their
tax adviser. Additionally, in accordance with the requirements of the Code,
Section 403(b) annuities generally may not permit distribution of (i) elective
contributions made in years beginning after December 31, 1988, and (ii)
earnings on those contributions and (iii) earnings on amounts attributed to
elective contributions held as of the end of the last year beginning before
January 1, 1989. Distributions of such amounts will be allowed only upon the
death of the employee, on or after attainment of age 59 1/2, separation from
service, disability, or financial hardship, except that income attributable to
elective contributions may not be distributed in the case of hardship.
Corporate Pension and Profit-Sharing Plans and H.R. 10 Plans. Sections
401(a) and 403(a) of the Code permit corporate employers to establish various
types of retirement plans
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for employees and self-employed individuals to establish qualified plans for
themselves and their employees. Such retirement plans may permit the purchase
of the Policies to accumulate retirement savings. Adverse tax consequences to
the plan, the participant or both may result if the Policy is assigned or
transferred to any individual as a means to provide benefit payments. The
Policy includes a Death Benefit that in some cases may exceed the greater of
the Premium Payments or the Policy Value. The Death Benefit could be
characterized as an incidental benefit, the amount of which is limited in an
pension or profit-sharing plan. Because the Death Benefit may exceed this
limitation, employers using the Policy in connection with such plans should
consult their tax adviser.
Deferred Compensation Plans. Section 457 of the Code, while not actually
providing for a qualified plan as that term is normally used, provides for
certain deferred compensation plans with respect to service for state
governments, local governments, political sub-divisions, agencies,
instrumentalities and certain affiliates of such entities, and tax exempt
organizations. The Policies can be used with such plans. Under such plans a
participant may specify the form of investment in which his or her
participation will be made. All such investments, however, are owned by, and
are subject to, the claims of the general creditors of the sponsoring
employer. Depending on the terms of the particular plan, the employer may be
entitled to draw on deferred amounts for purposes unrelated to its Section 457
plan obligations. In general, all amounts received under a Section 457 plan
are taxable and are subject to federal income tax withholding as wages.
Non-natural Persons. Pursuant to Section 72(u) of the Code, an annuity
contract held by a taxpayer other than a natural person generally will not be
treated as an annuity contract under the Code; accordingly, an Owner who is
not a natural person will recognize as ordinary income for a taxable year the
excess of (i) the sum of the Policy Value as of the close of the taxable year
and all previous distributions under the Policy over (ii) the sum of the
Premium Payments paid for the taxable year and any prior taxable year and the
amounts includable in gross income for any prior taxable year with respect to
the Policy. For these purposes, the Policy Value at year end may have to be
increased by any positive Excess Interest Adjustment which could result from a
full surrender at such time. There is, however, no definitive guidance on the
proper tax treatment of Excess Interest Adjustments, and the owner should
contact a competent tax adviser with respect to the potential tax consequences
of an Excess Interest Adjustment. Notwithstanding the preceding sentences in
this paragraph, Section 72(u) of the Code does not apply to (i) a Policy the
nominal Owner of which is not a natural person but the beneficial Owner of
which is a natural person, (ii) a Policy acquired by the estate of a decedent
by reason of such decedent's death, (iii) a Qualified Policy (other than one
qualified under Section 457) or (iv) a single-payment annuity the Annuity
Commencement Date for which is no later than one year from the date of the
single Premium Payment; instead, such Policies are taxed as described above
under the heading "Taxation of Annuities."
Possible Changes in Taxation. Although the likelihood of legislative change
in uncertain, there is always the possibility that the tax treatment of the
Policies could change by legislation or other means. For instance, the
President's 1999 Budget Proposal recommended legislation that, if enacted,
would adversely modify the federal taxation of the Policies. It is also
possible that any change could be retroactive (that is, effective prior to the
date of the change). A tax adviser should be consulted with respect to
legislative developments and their effect on the Policy.
DISTRIBUTOR OF THE POLICIES
AFSG Securities Corporation, 4333 Edgewood Road NE, Cedar Rapids, IA 52499-
0001, an affiliate of PFL, is the principal underwriter of the Policies. AFSG
Securities Corporation has entered or will enter into one or more contracts
with various broker-dealers for the
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distribution of the Policies. Commissions on Policy sales are paid to dealers.
Commissions payable to broker-dealers will be up to 6% of Premium Payments, or
5% plus an annual continuing fee based on Policy Values. In addition, certain
broker-dealers may receive additional commissions, expense allowances and
additional annual continuing fees based upon sales volume, agent or service
training responsibilities, and other factors. The Distribution Financing
Charge will be used by PFL to support these activities and reimbursements.
These commissions are not deducted from Premium Payments, they are paid by
PFL.
The Target Account has adopted a distribution plan in accordance with Rule
12b-1 under the 1940 Act for the Distribution Financing Charge (the
"Distribution Plan"). The Distribution Plan has been approved by a majority of
the disinterested members of the Board of Managers of the Target Account. The
Distribution Plan is designed to partially compensate PFL for the cost of
distributing the Policies. Charges under the Distribution Plan will be used to
support marketing efforts, training of representatives and reimbursement of
expenses incurred by broker-dealers who sell the Policies, and will be based
on a percentage of the daily net assets of the Target Account. The
Distribution Plan may be terminated at any time by a vote of a majority of the
disinterested members of the Target Account's Board of Managers, or by a vote
of the majority of its outstanding shares. (See "CHARGES AND DEDUCTIONS--
Distribution Financing Charge," p. 46.)
VOTING RIGHTS
THE MUTUAL FUND ACCOUNT
To the extent required by law, PFL will vote the Underlying Funds' shares
held by the Mutual Fund Account at regular and special shareholder meetings of
the Underlying Funds in accordance with instructions received from persons
having voting interests in the portfolios, although the Underlying Funds do
not hold regular annual shareholder meetings. If, however, the 1940 Act or any
regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result PFL determines that it is permitted to
vote the Underlying Funds' shares in its own right, it may elect to do so.
Before the Annuity Commencement Date, you hold the voting interest in the
selected Portfolios. The number of votes that you have the right to instruct
will be calculated separately for each Subaccount. The number of votes that
you have the right to instruct for a particular Subaccount will be determined
by dividing your Policy Value in the Subaccount by the net asset value per
share of the corresponding Portfolio in which the Subaccount invests.
Fractional shares will be counted.
After the Annuity Commencement Date, the person receiving Annuity Payments
has the voting interest, and the number of votes decreases as Annuity Payments
are made and as the reserves for the Policy decrease. The person's number of
votes will be determined by dividing the reserve for the Policy allocated to
the applicable Subaccount by the net asset value per share of the
corresponding Portfolio. Fractional shares will be counted.
The number of votes that you or the person receiving income payments has the
right to instruct will be determined as of the date established by the
Underlying Fund for determining shareholders eligible to vote at the meeting
of the Underlying Fund. PFL will solicit voting instructions by sending you,
or other persons entitled to vote, written requests for instructions prior to
that meeting in accordance with procedures established by the Underlying Fund.
Portfolio shares as to which no timely instructions are received and shares
held by PFL in which you, or other persons entitled to vote, have no
beneficial interest will be voted in proportion to the voting instructions
that are received with respect to all Policies participating in the same
Subaccount.
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<PAGE>
Each person having a voting interest in a Subaccount will receive proxy
material, reports, and other materials relating to the appropriate Portfolio.
THE TARGET ACCOUNT
The Target Account is the legal owner of the common stock held in the
Subaccounts and as such has the right to vote upon any matter that may be
voted by shareholders. However, you or persons receiving income payments may
vote on certain aspects of the governance of the Subaccounts. Matters on which
persons holding voting interests may vote include the following: (1) approval
of any change in the investment advisory agreement corresponding to a
Subaccount; (2) any change in the fundamental investment policies of a
Subaccount; or (3) any other matter requiring a vote of persons holding voting
interests in the Subaccount. With respect to approval of the investment
advisory agreements or any change in a fundamental investment policy, Policy
Owners participating in that Subaccount will vote separately on the matter
pursuant to the requirements of Rule 18f-2 under the 1940 Act.
Before the Annuity Commencement Date, you hold the voting interest in the
selected Subaccounts. The number of votes that you have will be calculated
separately for each Subaccount. The number of votes that you have for a
Subaccount will be determined by dividing your Policy Value in the Subaccount
into the total assets of the Subaccount and multiplying this by the total
number of votes.
After the Annuity Commencement Date, the person receiving Annuity Payments
has the voting interest, and the number of votes decreases as Annuity Payments
are made and as the reserves for the Policy decrease. The person's number of
votes will be determined by dividing the reserve for the Policy allocated to
the applicable Subaccount into the total assets of the Subaccount and
multiplying this by the total number of votes.
PFL does not intend to hold annual or other periodic meetings of Policy
Owners. PFL will solicit proxies by sending you or other persons entitled to
vote written requests for proxies prior to the vote. Where timely proxies are
not received, the voting interests will be voted in proportion to the proxies
that are received with respect to all Policies participating in the same
Subaccount.
PFL may, if required by state insurance officials, disregard proxies which
would require voting to cause a change in the subclassification or investment
objectives or policies of one or more of the Subaccounts, or to approve or
disapprove an investment adviser or principal underwriter for one or more of
the Subaccounts. In addition, PFL may disregard proxies that would require
changes in the investment objectives or policies of any Subaccount or in an
investment adviser or principal underwriter, if PFL reasonably disapproves
those changes in accordance with applicable federal regulations. If PFL
disregards proxies, it will advise those persons who may give proxies of that
action and its reasons for the action in the next semiannual report.
YEAR 2000 MATTERS
In October, 1996, PFL adopted and presently has in place a Year 2000
Assessment and Planning Project (the "Plan") to review and analyze existing
hardware and software systems, as well as voice and data communications
systems, to determine if they are Year 2000 compatible. The Plan provides for
a management process which ensures that when a particular system, or software
application, is determined to be "non-compliant" the proper steps are in place
to either remedy the "non-compliance" or cease using the particular system or
software. The Plan also provides that the Chief Information Officer report to
the Board of Directors as to the status of the efforts under the Plan on a
regular and routine basis. PFL
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<PAGE>
has engaged the services of a third-party provider that is specialized in Year
2000 issues to work on the project.
The Plan has four specific objectives (1) develop an inventory of all
applications; (2) evaluate all applications in the inventory to determine the
most prudent manner to move them to Year 2000 compliance, if required; (3)
estimate budgets, resources and schedules for the migration of the "affected"
applications to Year 2000 compliance; and (4) define testing and deployment
requirements to successfully manage validation and re-deployment of any
changed code. It is anticipated that all compliance issues will be resolved by
December 1998.
As of the date of this Prospectus, PFL has identified and made available
what it believes are the appropriate resources of hardware, people, and
dollars, including the engagement of outside third parties, to ensure that the
Plan will be completed.
The Year 2000 computer problem, and its resolution, is complex and
multifaceted, and the success of a response plan cannot be conclusively known
until the Year 2000 is reached (or an earlier date to the extent that the
systems or equipment addresses Year 2000 data prior to the Year 2000). Even
with appropriate and diligent pursuit of a well-conceived response plan,
including testing procedures, there is no certainty that any company will
achieve complete success. Further, notwithstanding its efforts or results,
PFL's ability to function unaffected to and through the Year 2000 may be
adversely affected by actions (or failure to act) of third parties beyond its
knowledge or control.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Mutual Fund Account or the
Target Account is a party or to which the assets of the Accounts are subject.
PFL, like other life insurance companies, is a defendant in lawsuits. In some
class action and other lawsuits involving other insurers, substantial damages
have been sought and/or material settlement payments have been made. Although
the outcome of any litigation cannot be predicted with certainty, PFL believes
that at the present time there are no pending or threatened lawsuits that are
reasonably likely to have a material adverse impact on the Mutual Fund
Account, the Target Account or PFL.
HISTORICAL PERFORMANCE DATA OF THE
MUTUAL FUND ACCOUNT
The following is a discussion of the historical performance data for the
Mutual Fund Account. A discussion of the historical performance data for the
Target Account is found in Part III of this Prospectus.
STANDARDIZED PERFORMANCE DATA
From time to time, PFL may advertise historical yields and total returns for
the Subaccounts of the Mutual Fund Account. In addition, PFL may advertise the
effective yield of the Subaccount investing in the Endeavor Money Market
Portfolio (the "Endeavor Money Market Subaccount"). These figures will be
calculated according to standardized methods prescribed by the SEC. They will
be based on historical earnings and are not intended to indicate future
performance.
Endeavor Money Market Subaccount. The yield of the Endeavor Money Market
Subaccount for a Policy refers to the annualized income generated by an
investment under a Policy in the Subaccount over a specified seven-day period.
The yield is calculated by assuming that the income generated for that seven-
day period is generated each seven-day period over a 52-week period and is
shown as a percentage of the investment. The effective
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<PAGE>
yield is calculated similarly but, when annualized, the income earned by an
investment under a Policy in the Subaccount is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment. For the seven days ended
December 31, 1997, the yield of the Endeavor Money Market Subaccount was
3.054%, and the effective yield was 3.100% for the 5% Annually Compounding
Death Benefit and the Double Enhance Death Benefit. For the seven days ended
December 31, 1997, the yield of the Endeavor Money Market Subaccount was
3.199%, and the effective yield was 3.250% for the Return of Premium Death
Benefit.
Other Subaccounts. The yield of a Mutual Fund Subaccount (other than the
Endeavor Money Market Subaccount) for a Policy refers to the annualized income
generated by an investment under a Policy in the Subaccount over a specified
thirty-day period. The yield is calculated by assuming that the income
generated by the investment during that thirty-day period is generated each
thirty-day period over a 12-month period and is shown as a percentage of the
investment.
The total return of a Subaccount refers to return quotations assuming an
investment under a Policy has been held in the Subaccount for various periods
of time including a period measured from the date the Subaccount commenced
operations. When a Subaccount has been in operation for one, five, and ten
years, respectively, the total return for these periods will be provided. The
total return quotations for a Subaccount will represent the average annual
compounded rates of return that equate an initial investment of $1,000 in the
Subaccount to the redemption value of that investment as of the first day of
each of the periods for which total return quotations are provided. In
addition to the Standard data discussed above, similar performance data for
other periods may also be shown.
The yield and total return calculations for a Subaccount do not reflect the
effect of any premium taxes that may be applicable to a particular Policy. To
the extent that any or all of a premium tax is applicable to a particular
Policy, the yield and/or total return of that Policy will be reduced. For
additional information regarding yields and total returns calculated using the
standard formats briefly summarized above, please refer to the Statement of
Additional Information, a copy of which may be obtained from the
Administrative and Service Office upon request.
Based on the method of calculation described in the Statement of Additional
Information, the average annual total returns for periods from inception of
the Subaccounts to December 31, 1997, and for the one and five year periods
ended December 31, 1997 are shown below. Total returns shown reflect
deductions for the Mortality and Expense Risk Fee, the Distribution Financing
Charge and the Administrative Charges. The total return for each Target
Subaccount will also reflect the Managers Fee and other operating expenses.
Total return calculations will reflect the effect of Surrender Charges that
may be applicable to a particular period.
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<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
5% Annually Compounding Death Benefit or Double Enhanced Death Benefit (Total
Mutual Fund Account Annual Expenses: 1.55%)
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS INCEPTION OF THE SUBACCOUNT
ENDED ENDED SUBACCOUNT TO INCEPTION
SUBACCOUNT 12/31/97 12/31/97 12/31/97 DATE
- ---------- -------- ---------- ---------------- -----------------
<S> <C> <C> <C> <C>
Endeavor Asset
Allocation............. 12.95% 11.97% 11.85% April 8, 1991
T. Rowe Price
International
Stock(/1/)............. (4.41%) 5.86% 4.10% April 8, 1991
Endeavor Value Equity... 17.57% N/A 16.70% May 27, 1993
Dreyfus Small Cap
Value.................. 18.23% N/A 13.45% May 4, 1993
Dreyfus U.S. Government
Securities............. 2.07% N/A 4.23% May 9, 1994
T. Rowe Price Equity
Income................. 21.01% N/A 23.13% January 3, 1995
T. Rowe Price Growth
Stock.................. 21.30% N/A 25.68% January 3, 1995
Endeavor Opportunity
Value.................. 9.79% N/A 9.16% November 18, 1996
Endeavor Enhanced
Index.................. N/A N/A 14.66% May 1, 1997
Endeavor Select
50(/2/)................ N/A N/A N/A February 2, 1998
WRL Growth.............. 10.28% 12.20% 12.66% July 1, 1992
</TABLE>
Return of Premium Death Benefit (Total Mutual Fund Account Annual Expenses:
1.40%)
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS INCEPTION OF THE SUBACCOUNT
ENDED ENDED SUBACCOUNT TO INCEPTION
SUBACCOUNT 12/31/97 12/31/97 12/31/97 DATE
- ---------- -------- ---------- ---------------- -----------------
<S> <C> <C> <C> <C>
Endeavor Asset
Allocation............. 13.12% 12.14% 12.02% April 8, 1991
T. Rowe Price
International Stock
(/1/).................. (4.26%) 6.01% 4.26% April 8, 1991
Endeavor Value Equity... 17.74% N/A 16.87% May 27, 1993
Dreyfus Small Cap
Value.................. 18.40% N/A 13.62% May 4, 1993
Dreyfus U.S. Government
Securities............. 2.22% N/A 4.39% May 9, 1994
T. Rowe Price Equity
Income................. 21.18% N/A 23.31% January 3, 1995
T. Rowe Price Growth
Stock.................. 21.48% N/A 25.87% January 3, 1995
Endeavor Opportunity
Value.................. 9.89% N/A 9.25% November 18, 1996
Endeavor Enhanced
Index.................. N/A N/A 14.76% May 1, 1997
Endeavor Select
50(/2/)................ N/A N/A N/A February 2, 1998
WRL Growth.............. 10.54% 12.38% 12.83% July 1, 1992
</TABLE>
- ----------------------------
(/1/Effective)January 1, 1995, Rowe-Price Fleming International, Inc. became
the Adviser to the T. Rowe Price International Stock Portfolio. The
Portfolio's name was changed from the Global Growth Portfolio and the
Portfolio's shareholders approved a change in investment objective from
investments in small capitalization companies on a global basis to
investments in a broad range of companies on an international basis (i.e.,
non-U.S. companies).
(/2/The)Endeavor Select 50 Portfolio began operations on February 2, 1998,
therefore comparable information is not available.
The figures for the "five year" and "from inception" periods in the above
tables reflect waiver of advisory fees and reimbursement of other expenses for
all portfolios except the T. Rowe Price Equity Income Portfolio and T. Rowe
Price Growth Stock Portfolio. In the absence of such waivers, the average
annual total return figures above for the from the five year and from
inception periods would have been lower.
NON-STANDARDIZED PERFORMANCE DATA
PFL may from time to time also advertise or disclose average annual total
return or other performance data in non-standard formats for a Subaccount of
the Mutual Fund Account. The non-standard performance data may assume that no
Surrender Charge is applicable, and may also make other assumptions such as
the amount invested in a Subaccount, differences in time periods to be shown,
or the effect of partial withdrawals or annuity payments.
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<PAGE>
All non-standard performance data will be advertised only if the standard
performance data is also disclosed. For additional information regarding the
calculation of other performance data, please refer to the Statement of
Additional Information, a copy of which may be obtained from the
Administrative and Service Office upon request.
The following non-standardized average annual total return figures are based
on the assumption that the Policy is not surrendered, and therefore the
Surrender Charge is not imposed.
AVERAGE ANNUAL TOTAL RETURNS
ASSUMING NO SURRENDER CHARGE
5% Annually Compounding Death Benefit or Double Enhanced Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.55%)
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS INCEPTION OF THE SUBACCOUNT
ENDED ENDED SUBACCOUNT TO INCEPTION
SUBACCOUNT 12/31/97 12/31/97 12/31/97 DATE
- ---------- -------- ---------- ---------------- -----------------
<S> <C> <C> <C> <C>
Endeavor Asset
Allocation............. 18.24% 12.18% 11.98% April 8, 1991
T. Rowe Price
International
Stock(/1/)............. 0.99% 6.13% 4.30% April 8, 1991
Endeavor Value Equity... 22.83% N/A 17.09% May 27, 1993
Dreyfus Small Cap
Value.................. 23.49% N/A 13.88% May 4, 1993
Dreyfus U.S. Government
Securities............. 7.42% N/A 5.30% May 9, 1994
T. Rowe Price Equity
Income................. 26.25% N/A 24.19% January 3, 1995
T. Rowe Price Growth
Stock.................. 26.54% N/A 26.69% January 3, 1995
Endeavor Opportunity
Value.................. 15.09% N/A 13.84% November 18, 1996
Endeavor Enhanced
Index.................. N/A N/A 21.66% May 1, 1997
Endeavor Select
50(/2/)................ N/A N/A N/A February 2, 1998
WRL Growth.............. 15.59% 12.40% 12.83% July 1, 1992
Return of Premium Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.40%)
<CAPTION>
ONE YEAR FIVE YEARS INCEPTION OF THE SUBACCOUNT
ENDED ENDED SUBACCOUNT TO INCEPTION
SUBACCOUNT 12/31/97 12/31/97 12/31/97 DATE
- ---------- -------- ---------- ---------------- -----------------
<S> <C> <C> <C> <C>
Endeavor Asset
Allocation............. 18.41% 12.34% 12.14% April 8, 1991
T. Rowe Price
International
Stock(/1/)............. 1.13% 6.29% 4.46% April 8, 1991
Endeavor Value Equity... 23.01% N/A 17.26% May 27, 1993
Dreyfus Small Cap
Value.................. 23.66% N/A 14.05% May 4, 1993
Dreyfus U.S. Government
Securities............. 7.57% N/A 5.45% May 9, 1994
T. Rowe Price Equity
Income................. 26.42% N/A 24.37% January 3, 1995
T. Rowe Price Growth
Stock.................. 26.72% N/A 26.87% January 3, 1995
Endeavor Opportunity
Value.................. 15.20% N/A 13.93% November 18, 1996
Endeavor Enhanced
Index.................. N/A N/A 21.76% May 1, 1997
Endeavor Select
50(/2/)................ N/A N/A N/A February 2, 1998
WRL Growth.............. 15.85% 12.58% 13.00% July 1, 1992
</TABLE>
- ----------------------------
(/1/)Effective January 1, 1995, Rowe-Price Fleming International, Inc. became
the Adviser to the T. Rowe Price International Stock Portfolio. The
Portfolio's name was changed from the Global Growth Portfolio and the
Portfolio's shareholders approved a change in investment objective from
investments in small capitalization companies on a global basis to
investments in a broad range of companies on an international basis (i.e.,
non-U.S. companies).
(/2/)The Endeavor Select 50 Portfolio began operations on February 2, 1998,
therefore comparable information is not available.
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<PAGE>
ENDEAVOR ENHANCED INDEX AND ENDEAVOR SELECT 50 PORTFOLIOS
The Enhanced Index Portfolio and the Endeavor Select 50 Portfolio commenced
operations on May 1, 1997 and February 2, 1998, respectively, and therefore
these Portfolios do not have significant historical performance data. However,
their investment managers, (J.P. Morgan Investment Management Inc. and
Montgomery Asset Management, LLC, respectively) have experience managing
similar portfolios with substantially the same investment objectives and
policies. Historical performance data showing the results the investment
managers achieved for those other portfolios is in the prospectus for the
Endeavor Series Trust, which accompanies this Prospectus. See "Performance
Information" in the Endeavor Series Trust's prospectus. That performance
information in the Endeavor Series Trust's prospectus does not take into
account the fees and charges under the Policy; if those fees and charges were
reflected, the investment returns would be lower.
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<PAGE>
PART III
THE TARGET ACCOUNT
INTRODUCTION. Part III gives further background information on the Target
Account, The Dow Target 10 Subaccount and The Dow Target 5 Subaccount,
including their management and investment strategies and policies.
THE TARGET ACCOUNT
TARGET ACCOUNT DEFINITIONS
Adviser--First Trust Advisers L.P., the investment adviser to the Target
Account.
Annual Stock Selection Date--The last Business Day of a specified 12-month
period.
Common Shares--The common stock held in a Target Subaccount, selected
according to specified investment criteria.
DJIA--The Dow Jones Industrial Average SM. Thirty stocks chosen by the
editors of The Wall Street Journal as representative of the broad market and
of American industry.
Initial Stock Selection Date--June 30, 1998.
GENERAL
Interests in the Target Account are not expected to be available for
allocation of Premium Payments prior to the Initial Stock Selection Date.
The Target Account is a managed separate account and currently is divided
into two Subaccounts. Additional Subaccounts may be established in the future
at the discretion of PFL. Each Subaccount invests according to specific
investment strategies. Under Iowa law, the assets of the Target Account are
owned by PFL, but they are held separately from the other assets of PFL. To
the extent that these assets are attributable to the Policy Value of the
Policies, these assets are not chargeable with liabilities incurred in any
other business operation of PFL. Income, gains, and losses incurred on the
assets in a Subaccount of the Target Account, whether or not realized, are
credited to or charged against that Subaccount without regard to other income,
gains or losses of any other Account or Subaccount of PFL. Each Subaccount
operates as a separate investment fund. Therefore, the investment performance
of any Subaccount should be entirely independent of the investment performance
of PFL's general account assets or any other Account or Subaccount maintained
by PFL.
The Target Account is registered with the SEC under the 1940 Act as an open-
end management investment company and meets the definition of a separate
account under federal securities laws. However, the SEC does not supervise the
management or the investment practices or policies of the Target Account or
PFL. The Dow Target 10 Subaccount and The Dow Target 5 Subaccount are non-
diversified Subaccounts of the Target Account. The investments and
administration of each managed Subaccount are under the direction of a Board
of Managers. The Board of Managers for each Subaccount annually selects an
independent public accountant, reviews the terms of the management and
investment advisory agreements, recommends any changes in the fundamental
investment policies, and takes any other actions necessary in connection with
the operation and management of the Subaccounts.
Management of the Target Account. Endeavor Investment Advisers (the
"Manager"), an investment adviser registered with the SEC under the Investment
Advisers Act of 1940 (the "Advisers Act"), is the Target Account's manager.
The Manager performs administerial
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<PAGE>
and managerial functions for the Target Account. (see "The Mutual Fund
Account," supra.) First Trust Advisers L.P. (the "Adviser" or "First Trust"),
an Illinois limited partnership formed in 1991 and an investment adviser
registered with the SEC under the Advisers Act, is the Target Account's
investment adviser. The Adviser's address is 1001 Warrenville Road, Lisle,
Illinois 60532. First Trust Advisers L.P. is a limited partnership with one
limited partner, Grace Partners of Dupage L.P., and one general partner, Nike
Securities Corporation. Grace Partners of Dupage L.P. is a limited partnership
with one general partner, Nike Securities Corporation, and a number of limited
partners (none of whom have more than a 25% interest). Nike Securities
Corporation is an Illinois corporation controlled by Robert Donald Van Kampen.
The Adviser is responsible for selecting the investments of each Subaccount
consistent with the investment objectives and policies of that Subaccount, and
will conduct securities trading for the Subaccount.
At December 31, 1997, and as of the date of this Prospectus, the Target
Subaccounts had not commenced operations. However, the Adviser is also the
portfolio supervisor of certain unit investment trusts sponsored by Nike
Securities L.P. ("Nike Securities") which are substantially similar to the
Target Subaccounts in that they have the same investment objectives as the
Subaccounts but have a life of approximately one year. Nike Securities
specializes in the underwriting, trading and distribution of unit investment
trusts and other securities. Nike Securities, an Illinois limited partnership
formed in 1991, acts as sponsor for successive series of The First Trust
Combined Series, The First Trust Special Situations Trust, the First Trust
Insured Corporate Trust, The First Trust of Insured Municipal Bonds and the
First Trust GNMA. First Trust introduced the first insured unit investment
trust in 1974 and to date more than $11 billion in First Trust unit investment
trusts have been deposited.
Management Fee. For its services to the Target Account, the Manager is paid
a fee of 0.75% of the average daily net assets of each Target Subaccount. For
its services to the Target Account, the Adviser is paid a fee equal to 0.35%
of the average daily net assets of each Target Subaccount. This fee is paid by
the Manager.
Operating Expenses. In addition to the management fees, the Target Account
pays all expenses not assumed by the Manager, including, without limitation,
expenses for legal, accounting and auditing services, interest, taxes, costs
of printing and distributing reports to shareholders, proxy materials and
prospectuses, charges of its custodian, transfer agent and dividend disbursing
agent, registration fees, fees and expenses of the Board of Managers who are
not affiliated persons of the Manager or an Adviser, insurance, brokerage
costs, litigation, and other extraordinary or nonrecurring expenses. All
general Target Account expenses are allocated among and charged to the assets
of the Target Subaccounts on a basis that the Board of Managers deems fair and
equitable, which may be on the basis of relative net assets of each Target
Subaccount or the nature of the services performed and relative applicability
to each Target Subaccount. The Manager has agreed to limit each Target
Subaccount's management fee and operating expenses during its first year of
operations to an annual rate of 1.30% of the Subaccount's average net assets.
(This limit does not include other fees and deductions such as the Mortality
and Expense Risk Fee, Administrative Charge, and Distribution Financing
Charge.)
Portfolio Manager. There is no one individual primarily responsible for
portfolio management decisions for the Target Account. Investments are made
according to the prescribed strategy under the direction of a committee.
INVESTMENT STRATEGY
The Dow Target 10 Subaccount will invest in the common stock of the ten
companies in the DJIA that have the highest dividend yield as of a specified
business day and hold those stocks for the following 12-month period.
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<PAGE>
The Dow Target 5 Subaccount will invest in the common stock of the five
companies with the lowest per share stock price of the ten companies in the
DJIA that have the highest dividend yield as of a specified business day and
hold those stocks for the following 12-month period.
The objective of each Subaccount is to provide an above-average total return
through a combination of dividend income and capital appreciation. Each
Subaccount will function in a similar manner. Each Subaccount will initially
invest in substantially equal amounts in the common stock of the companies
described above for each Subaccount (as held in a Subaccount, such common
stock is referred to as the "Common Shares") determined as of a specified
business day (the "Initial Stock Selection Date"). Each Target Subaccount may
have different investment portfolios running simultaneously for different 12-
month periods. For example, within the Target 10 Subaccount there may be more
than one Portfolio, each with a different Initial Stock Selection Date. At the
Initial Stock Selection Date, a percentage relationship among the number of
Common Shares in a Portfolio will be established.
When additional funds are deposited into the Portfolio, additional Common
Shares will be purchased in such numbers reflecting as nearly as practicable
the percentage relationship of the number of Common Shares established at the
initial purchase. Sales of Common Shares by the Portfolio will likewise
attempt to replicate the percentage relationship of Common Shares. The
percentage relationship among the number of Common Shares in the Portfolio
should therefore remain stable. However, given the fact that the market price
of such Common Shares will vary throughout the year, the value of the Common
Shares of each of the companies as compared to the total assets of the
Portfolio will fluctuate during the year, above and below the proportion
established on a Stock Selection Date. As of the last Business Day of the
specified 12-month period following each preceding stock selection date
("Annual Stock Selection Date"), a new percentage relationship will be
established among the number of Common Shares described below for each
Portfolio on such date. Common Shares may be sold or new equity securities
bought so that the Portfolio is equally invested in the common stock of each
company meeting the Portfolio's investment criteria. Thus the Portfolio may or
may not hold equity securities of the same companies as the previous year. Any
purchase or sale of additional Common Shares during the year will duplicate,
as nearly as practicable, the percentage relationship among the number of
Common Shares as of the Annual Stock Selection Date since the relationship
among the value of the Common Shares on the date of any subsequent
transactions may be different than the original relationship among their
value.
The Target Account may determine to offer additional subaccounts in the
future, which may have different selection criteria or stock selection dates.
Units of both The Dow Target 10 Subaccount and The Dow Target 5 Subaccount
have not been designed so that their prices will parallel or correlate with
movements in the DJIA, and it is expected that their prices will not do so.
An investment in a Target Subaccount involves the purchase of a portfolio of
attractive equities with high dividend yields in one convenient purchase.
Investing in the stocks of the DJIA with the highest dividend yields amounts
to a contrarian strategy because these shares are often out of favor. Such
strategy may be effective in achieving a Target Subaccount's investment
objectives because regular dividends are common for established companies and
dividends have accounted for a substantial portion of the total return on
stocks of the DJIA as a group. However, there is no guarantee that either a
Target Subaccount's objective will be achieved or that a Target Subaccount
will provide for capital appreciation in excess of such Target Subaccount's
expenses.
Each Target Subaccount may also invest in futures and options, hold
warrants, and lend its Common Shares.
- 63 -
<PAGE>
Tax Limitations. Section 817(h) of the Code provides that in order for a
variable contract which is based on a segregated asset account to qualify as
an annuity contract under the Code, the investments made by such account must
be "adequately diversified" in accordance with Treasury regulations. The
Treasury regulations issued under Section 817(h) (Treas. Reg.(S)1.817-5) apply
a diversification requirement to each of the Subaccounts of the Target
Account. To qualify as "adequately diversified," each Subaccount may have:
(i) No more than 55% of the value of its total assets represented by any
one investment;
(ii) No more than 70% of the value of its total assets represented by any
two investments;
(iii) No more than 80% of the value of its total assets represented by
any three investments; and
(iv) No more than 90% of the value of its total assets represented by any
four investments.
The Target Account, through the Subaccounts, intends to comply with the
diversification requirements of the Treasury. PFL has entered into an
agreement with the Manager, who in turn, has entered into a contract with the
Advisor that requires the Subaccounts to be operated in compliance with the
Treasury regulations. The Adviser reserves the right to depart from either
Target Subaccount's investment strategy in order to meet these diversification
requirements.
THE DOW JONES INDUSTRIAL AVERAGE SM
The DJIA was first published in The Wall Street Journal in 1896. Initially
consisting of just 12 stocks, the DJIA expanded to 20 stocks in 1916 and to
its present size of 30 stocks on October 1, 1928. The stocks are chosen by the
editors of The Wall Street Journal as representative of the broad market and
of American industry. The companies are major factors in their industries and
their stocks are widely held by individuals and institutional investors.
Changes in the components of the DJIA are made entirely by the editors of The
Wall Street Journal without consultation with the companies, the stock
exchange or any official agency. For the sake of continuity, changes are made
rarely. Most substitutions have been the result of mergers, but from time to
time, changes may be made to achieve a better representation. The components
of the DJIA may be changed at any time, for any reason. Any changes in the
components of the DJIA made after the Initial Stock Selection Date will not
cause a change in the identity of the Common Shares included in a Target
Subaccount, including any equity securities deposited in the Target
Subaccount, except on an Annual Stock Selection Date. The following is a list
of the companies which currently comprise the DJIA.
AT&T Corporation E.I. du Pont de Nemours &
Allied Signal Company
Aluminum Company of America Eastman Kodak Company
American Express Company Exxon Corporation
Boeing Company General Electric Company
Caterpillar Inc. General Motors Corporation
Chevron Corporation Goodyear Tire & Rubber Company
Coca Cola Company Hewlett Packard Company
Walt Disney Company J.P. Morgan & Company, Inc.
International Business Machines Philip Morris Companies, Inc.
Corporation Procter & Gamble Company
International Paper Company Sears, Roebuck & Company
Johnson & Johnson Travelers Group
McDonald's Corporation Union Carbide Corporation
Merck & Company, Inc. United Technologies Corporation
Minnesota Mining & Manufacturing Wal Mart Stores Inc.
Company
- 64 -
<PAGE>
The Target Account is not sponsored, endorsed, sold or promoted by Dow
Jones. Dow Jones makes no representation or warranty, express or implied, to
the owners of the Target Account or any member of the public regarding the
advisability of purchasing the Target Account. Dow Jones' only relationship to
First Trust Advisers, Endeavor and PFL is the licensing of certain copyrights,
trademarks, servicemarks and service names of Dow Jones. Dow Jones has no
obligation to take the needs of First Trust Advisers, Endeavor, PFL or the
owners of the Target Account into consideration in determining, composing or
calculating the Dow Jones Industrial AverageSM. Dow Jones is not responsible
for and has not participated in the determination of the terms and conditions
of the Target Account to be issued, including the pricing or the amount
payable under the contract. Dow Jones has no obligation or liability in
connection with the administration or marketing of the Target Account.
DOW JONES DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE DOW
JONES INDUSTRIAL AVERAGE SM OR ANY DATA INCLUDED THEREIN AND DOW JONES SHALL
HAVE NO LIABILITY FOR ANY ERRORS, OMISSION, OR INTERRUPTIONS THEREIN. DOW
JONES MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY
FIRST TRUST ADVISERS, ENDEAVOR, PFL, OWNERS OF THE TARGET ACCOUNT OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE DOW JONES INDUSTRIAL AVERAGESM OR ANY
DATA INCLUDED THEREIN. DOW JONES MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE DOW JONES INDUSTRIAL AVERAGESM
OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO
EVENT SHALL DOW JONES HAVE ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT,
PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INVESTMENT RISKS
THERE IS NOT ASSURANCE THAT ANY SUBACCOUNT WILL ACHIEVE ITS STATED
OBJECTIVE. More detailed information, including a description of each
Subaccount's investment objective and policies and a description of risks
involved in investing in each of the Subaccounts and of each Subaccount's fees
and expenses is contained in the Statement of Additional Information.
INFORMATION CONTAINED IN THE STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ CAREFULLY BEFORE INVESTING IN A SUBACCOUNT OF THE TARGET ACCOUNT.
The Subaccounts consist of different issues of equity securities, all of
which are listed on a securities exchange. In addition, each of the companies
whose equity securities are included in a portfolio are actively-traded, well-
established corporations.
Common Shares from time to time may be sold under certain circumstances
described herein. Common Shares, however, will not be sold by a Subaccount to
take advantage of market fluctuations or changes in anticipated rates of
appreciation or depreciation or if the Common Shares no longer meet the
criteria by which they were selected for a Subaccount. However, Common Shares
will be sold on or about each Annual Stock Selection Date in accordance with
the Adviser's stock selection strategy.
Whether or not the Common Shares are listed on a securities exchange, the
principal trading market for the Common Shares may be in the over-the-counter
market. As a result, the existence of a liquid trading market for the Common
Shares may depend on whether dealers will make a market in the Common Shares.
There can be no assurance that a market will be made for any of the Common
Shares, that any market for the Common Shares will be maintained or that there
will be sufficient liquidity of the Common Shares in any markets made. The
price at which the Common Shares may be sold to meet transfers, partial
- 65 -
<PAGE>
withdrawals or surrenders and the value of a Subaccount will be adversely
affected if trading markets for the Common Shares are limited or absent.
Investors should be aware of certain other considerations before making a
decision to invest in a Subaccount. The value of common stocks is subject to
market fluctuations for as long as the common stocks remain outstanding, and
thus, the value of the Common Shares will fluctuate over the life of a
Subaccount and may be more or less than the price at which they were purchased
by such Subaccount. The Common Shares may appreciate or depreciate in value
(or pay dividends) depending on the full range of economic and market
influences affecting these securities, including the impact of the
Subaccounts' purchase and sale of the Common Shares and other factors.
An investment in a Subaccount should be made with an understanding of the
risks which an investment in common stocks entails. In general, the value of
your investment will decline if the financial condition of the issuers of the
common stocks becomes impaired or if the general condition of the relevant
stock market worsens. Common stocks are especially susceptible to general
stock market movements and to volatile increases and decreases of value, as
market confidence in and perceptions of the issuers change. These perceptions
are based on unpredictable factors including expectations regarding
government, economic, monetary and fiscal policies, inflation and interest
rates, economic expansion or contraction, and global or regional political,
economic or banking crises. In addition, due to the objective nature of the
investment selection criteria, Subaccounts may be for certain periods
considered concentrated in various industries. PFL cannot predict the
direction or scope of any of these factors. Common stocks have generally
inferior rights to receive payments from the issuer in comparison with the
rights of creditors of, or holders of debt obligations or preferred stocks
issued by, the issuer. Moreover, common stocks do not represent an obligation
of the issuer and therefore do not offer any assurance of income or provide
the degree of protection of capital provided by debt securities.
An investment in The Dow Target 5 Subaccount may subject you to additional
risk due to the relative lack of diversity in its portfolio since the
portfolio contains only five stocks. Therefore, The Dow Target 5 Subaccount
may be subject to greater market risk than other subaccounts which contain a
more diversified portfolio of securities. Each Subaccount is not actively
managed and common shares will not be sold to take advantage of market
fluctuations or changes in anticipated rates of appreciation. Finally, each
strategy has under performed the DJIA in certain years.
PFL, the Manager and the Adviser shall not be liable in any way for any
default, failure or defect in any Common Share.
To the best of the Adviser's knowledge, there is no litigation pending as of
the date of the Prospectus with respect to any equity security which might
reasonably be expected to have a material adverse effect on the Subaccounts.
At any time after the date of the Prospectus, litigation may be instituted on
a variety of grounds with respect to the Common Shares. PFL is unable to
predict whether any such litigation will be instituted, or if instituted,
whether such litigation might have a material adverse effect on the
Subaccounts.
Legislation. Further, at any time after the date of the Prospectus,
legislation may be enacted that could negatively affect the Common Shares in
the Subaccounts or the issuers of the Common Shares. Changing approaches to
regulation, particularly with respect to the environment or with respect to
the petroleum industry, may have a negative impact on certain companies
represented in the Subaccounts. There can be no assurance that future
legislation, regulation or deregulation will not have a material adverse
effect on the Subaccounts or will not impair the ability of the issuers of the
Common Shares to achieve their business goals.
- 66 -
<PAGE>
PERFORMANCE INFORMATION
TARGET STRATEGIES--PERFORMANCE DATA
At December 31, 1997 and as of the date of this Prospectus, the Target
Subaccounts had not commenced operations. However, certain aspects of the
investment strategies can be demonstrated using historical data.
The following table contains three columns that show the performance of:
Column One:the Ten Highest Dividend Yielding Stocks Strategy for the DJIA;
Column Two:Five Lowest Priced Stocks of the Ten Highest Dividend Yielding
Stocks Strategies in the DJIA; and
Column Three:the performance of the DJIA.
The returns shown in the following table and graphs are not guarantees of
future performance and should not be used as predictors of returns to be
expected in connection with a Subaccount. Both stock prices (which may
appreciate or depreciate) and dividends (which may be increased, reduced or
eliminated) will affect the returns. Each strategy under performed its
respective index in certain years. Accordingly, there can be no assurance that
a Subaccount will outperform its respective index over the life of a
Subaccount or over consecutive rollover periods, if available.
An investor in a Subaccount would not necessarily realize as high a total
return on an investment in the stocks upon which the hypothetical returns are
based for the following reasons: the total return figures shown do not reflect
brokerage commissions, Subaccount expenses or taxes; the Subaccounts are
established at different times of the year; and the Subaccounts may not be
fully invested at all times or equally weighted in all stocks comprising a
strategy. If the above-mentioned charges were reflected in the hypothetical
returns, the returns would be lower than those presented here. (See "CHARGES
AND DEDUCTIONS," p. 44.)
- 67 -
<PAGE>
COMPARISON OF TOTAL RETURN(/2/)
<TABLE>
<CAPTION>
INDEX
STRATEGY TOTAL RETURNS TOTAL RETURNS
-------------------------------------------------- -------------
5 LOWEST PRICED OF
10 HIGHEST DIVIDEND THE 10 HIGHEST
YEAR YIELDING STOCKS(/1/) DIVIDEND YIELDING STOCKS(/1/) DJIA
- ---- -------------------- ----------------------------- -------------
<S> <C> <C> <C>
1973.......... 4.01% 20.01% (13.20)%
1974.......... (1.02)% (5.40)% (23.64)%
1975.......... 56.10% 64.77% 44.46%
1976.......... 35.18% 40.96% 22.80%
1977.......... (1.95)% 5.49% (12.91)%
1978.......... 0.03% 1.23% 2.66%
1979.......... 13.01% 9.84% 10.60%
1980.......... 27.90% 41.69% 21.90%
1981.......... 7.46% 3.19% (3.61)%
1982.......... 27.12% 43.37% 26.85%
1983.......... 39.07% 36.38% 25.82%
1984.......... 6.22% 11.12% 1.29%
1985.......... 29.54% 38.34% 33.28%
1986.......... 35.63% 30.89% 27.00%
1987.......... 5.59% 10.69% 5.66%
1988.......... 24.57% 21.47% 16.03%
1989.......... 26.97% 10.55% 32.09%
1990.......... (7.82)% (15.74)% (0.73)%
1991.......... 34.20% 62.03% 24.19%
1992.......... 7.69% 22.90% 7.39%
1993.......... 27.08% 34.01% 16.87%
1994.......... 4.21% 8.27% 5.03%
1995.......... 36.85% 30.50% 36.67%
1996.......... 28.35% 26.20% 28.71%
1997.......... 21.68% 19.97% 24.82%
</TABLE>
- ----------------------------
(1) The Ten Highest Dividend Yielding Stocks and the Five Lowest Priced Stocks
of the Ten Highest Dividend Yielding Stocks in the DJIA for any given
period were selected by ranking the dividend yields for each of the stocks
in the index, as of the beginning of the period, and dividing by the
stock's market value on the first trading day on the exchange where that
stock principally trades in the given period.
(2) Total Return represents the sum of the percentage change in market value
of each group of stocks between the first trading day of a period and the
total dividends paid on each group of stocks during the period divided by
the opening market value of each group of stocks as of the first trading
day of a period. Total Return does not take into consideration any sales
charges, commissions, expenses or taxes. Total Return does not take into
consideration any reinvestment of dividend income and all returns are
stated in terms of the United States dollar. Based on the year-by-year
returns contained in the table, over the twenty-five years listed above,
the Ten Highest Dividend Yielding Stocks in the DJIA achieved an average
annual total return of 18.44%, while the Five Lowest Priced Stocks of the
Ten Highest Dividend Yielding Stocks in the DJIA achieved an average
annual total return of 21.39%. In addition, over this period, the
individual strategies achieved a greater average annual total return than
that of the DJIA, which was 13.08%. Although each Target Subaccount seeks
to achieve a better performance than the index as a whole, there can be no
assurance that a Target Subaccount will achieve a better performance.
- 68 -
<PAGE>
PAST PERFORMANCE OF THE DJIA
LOGO
The chart above represents past performance of the DJIA, the Ten Highest
Dividend Yielding DJIA Stocks and the Five Lowest Priced Stocks of the Ten
Highest Yielding DJIA Stocks (but not The Dow Target 10 Subaccount or The Dow
Target 5 Subaccount) from January 1, 1973 through December 31, 1997 and should
not be considered indicative of future results. Further, these results are
hypothetical. The chart assumes that all dividends during a year are
reinvested at the end of that year and does not reflect sales charges,
commissions, expenses or taxes. There can be no assurance that either The Dow
Target 10 Subaccount or The Dow Target 5 Subaccount will outperform the DJIA.
Investors should not rely on the preceding financial information as an
indication of the past or future performance of the Target Subaccounts.
STANDARDIZED PERFORMANCE DATA
From time to time, PFL may advertise historical total returns for the Target
Subaccounts. These figures will be calculated according to standardized
methods prescribed by the SEC. They will be based on historical earnings and
are not intended to indicate future performance.
The total return calculations for a Subaccount do not reflect the effect of
any premium taxes that may be applicable to a particular Policy. To the extent
that any or all of a premium tax is applicable to a particular Policy, the
total return of that Policy will be reduced. For additional information
regarding total returns calculated using the standard formats briefly
summarized above, please refer to the Statement of Additional Information, a
copy of which may be obtained from the Administrative and Service Office upon
request.
NON-STANDARDIZED PERFORMANCE DATA
PFL may from time to time also advertise or disclose average annual total
return or other performance data in non-standard formats for a Target
Subaccount. The non-standard data may assume that the Policy remains in force
and therefore not reflect the Surrender Charge. The non-standard performance
data may make other assumptions such as the amount invested in a Subaccount,
differences in time periods to be shown, or the effect of partial withdrawals
or annuity payments and may also make other assumptions.
All non-standard performance data will be advertised only if the standard
performance data is also disclosed. For additional information regarding the
calculation of other performance data, please refer to the Statement of
Additional Information, a copy of which may be obtained from the
Administrative and Service office upon request.
- 69 -
<PAGE>
PORTFOLIO TURNOVER
It is anticipated that each Target Subaccount's annual rate of portfolio
turnover normally will not exceed 100%. Portfolio turnover for each Target
Subaccount will vary from year to year, and depending on market conditions,
the portfolio turnover rate could be greater in periods of unusual market
movement. A higher turnover rate would result in heavier brokerage commissions
or other transactional expenses which must be borne, directly or indirectly by
each subaccount, and ultimately by you.
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information is available (at no cost) which
contains more details concerning the subjects discussed in this Prospectus.
The following is the Table of Contents for that Statement:
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE POLICY--GENERAL PROVISIONS
Owner.................................................................... 4
Entire Policy............................................................ 4
Delay of Payment and Transfers........................................... 4
Misstatement of Age or Sex............................................... 5
Reallocation of Policy Values After the Annuity Commencement Date........ 5
Assignment............................................................... 5
Evidence of Survival..................................................... 6
Non-Participating........................................................ 6
Amendments............................................................... 6
Addition, Deletion, or Substitution of Investments....................... 6
FEDERAL TAX MATTERS........................................................ 7
Tax Status of the Policy................................................. 7
Taxation of PFL.......................................................... 7
INVESTMENT EXPERIENCE...................................................... 8
Accumulation Units....................................................... 8
Annuity Unit Value and Annuity Payment Rates............................. 9
HISTORICAL PERFORMANCE DATA................................................ 11
Money Market Yields...................................................... 11
Other Subaccount Yields.................................................. 12
Total Returns............................................................ 13
Other Performance Data................................................... 14
Adjusted Performance Data--The Mutual Fund Account....................... 14
</TABLE>
- 70 -
<PAGE>
TABLE OF CONTENTS (CONTINUED)
PART II
PAGE
----
<TABLE>
<S> <C>
THE TARGET ACCOUNT.......................................................... 14
What is the Investment Strategy?.......................................... 14
Determination of Unit Value; Valuation of Securities...................... 15
MANAGEMENT.................................................................. 16
The Board of Managers..................................................... 16
The Investment Advisory Services.......................................... 19
The Manager............................................................... 19
Transfer Agent and Custodian.............................................. 20
BROKERAGE ALLOCATION........................................................ 20
INVESTMENT RESTRICTIONS..................................................... 20
Fundamental Policies...................................................... 20
Operating Policies........................................................ 21
Options and Futures Strategies............................................ 21
Securities Lending........................................................ 23
PART III
STATE REGULATION OF PFL..................................................... 24
ADMINISTRATION.............................................................. 24
RECORDS AND REPORTS......................................................... 24
DISTRIBUTION OF THE POLICIES................................................ 24
OTHER PRODUCTS.............................................................. 25
CUSTODY OF ASSETS........................................................... 25
LEGAL MATTERS............................................................... 25
OTHER INFORMATION........................................................... 25
FINANCIAL STATEMENTS........................................................ 25
INDEPENDENT AUDITORS........................................................ 26
</TABLE>
- 71 -
<PAGE>
APPENDIX A
EXCESS INTEREST ADJUSTMENT(1)
The formula which will be used to determine the Excess Interest Adjustment
(EIA) is:
S* (G - C)* (M/12)
S= Gross amount being withdrawn that is subject to the EIA
G= Guaranteed Interest Rate in effect for the policy
C= Current Guaranteed Interest Rate then being offered on new premiums for
the next longer option period than "M". If this policy form or such an
option period is no longer offered, "C" will be the U.S. Treasury rate for
the next longer maturity (in whole years) than "M" on the 25th day of the
previous calendar month, plus up to 2%.
M= Number of months remaining in the current option period, rounded up to the
next higher whole number of months.
EXAMPLE 1 (SURRENDER, RATES INCREASE BY 3%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Surrender: Middle of Contract Year 3
Policy Value at middle of Contract = 50,000* (1.055) R 2.5 = 57,161.18
Year 3
Penalty Free Amount at middle of
Contract Year 3
= 57,161.18* .10 = 5,716.12
Amount Subject to EIA = 57,161.18 - 5,716.12 = 51,445.06
EIA Floor = 50,000* (1.03) R 2.5 = 53,834.80
Excess Interest Adjustment
G=.055
C=.085
M=30
Excess Interest Adjustment = S* (G - C)* (M/12)
= 51,445.06* (.055 - .085)* (30/12)
= -3,858.38, but Excess Interest
Adjustment cannot cause the
Adjusted Policy Value to fall
below the floor, so the adjustment
is limited to 53,834.80 -
57,161.18
= -3,326.38
Adjusted Policy Value ("APV") = PV + EIA = 57,161.18 + (-3,326.38)
= 53,834.80
Surrender Charges =(50,000 - 5,716.12)* .06 = 2,657.03
Net Surrender Value at middle of
Contract Year 3
=53,834.80 - 2,657.03 = 51,177.77
- ----------------------------
(1)* represents multiplication;
R represents exponentiation.
A-1
<PAGE>
EXAMPLE 2 (SURRENDER, RATES DECREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Surrender: Middle of Contract Year 3
Policy Value at middle of Contract
Year 3 = 50,000* (1.055) R 2.5 = 57,161.18
Penalty Free Amount at middle of
Contract Year 3 = 57,161.18* .10 = 5,716.12
Amount Subject to EIA = 57,161.18 - 5,716.12 = 51,445.06
EIA Floor = 50,000* (1.03) R 2.5 = 53,834.80
Excess Interest Adjustment
G=.055
C=.045
M=30
Excess Interest Adjustment = S* (G - C)* (M/12)
= 51,445.06* (.055 - .045)* (30/12)
= 1,286.13
Adjusted Policy Value = 57,161.18 + 1,286.13 = 58,447.31
Surrender Charges = (50,000 - 5,716.12)* .06 =
2,657.03
Net Surrender Value at middle of
Contract Year 3 = 58,447.31 - 2,657.03 = 55,790.28
On a Partial Withdrawal, PFL will pay the policy holder the full amount of
withdrawal requested (as long as the Policy Value is sufficient). Amounts
withdrawn will reduce the Policy Value by an amount equal to:
R -E + SC
R= the requested Partial withdrawal;
E= the Excess Interest Adjustment; and
SC= the Surrender Charges on (EPW - E); where
EPW= the Excess Partial Withdrawal amount.
A-2
<PAGE>
EXAMPLE 3 (PARTIAL WITHDRAWAL, RATES INCREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Withdrawal: $20,000; Middle of Contract Year 3
Policy Value at middle of Contract = 50,000* (1.055) R 2.5 = 57,161.18
Year 3
Penalty Free Amount at middle of
Contract Year 3
= 57,161.18* .10 = 5,716.12
Excess Interest/Surrender Charge (SC)
Adjustment
S=20,000 - 5,716.12 = 14,283.88
G=.055
C=.065
M=30
E=14,283.88* (.055 - .065)* (30/12) = - 357.10
EPW=20,000 - 5,716.12 = 14,283.88
SC=.06* (14,283.88 - (- 357.10) = 878.46
Remaining Policy Value at middle of
Contract Year 3
= 57,161.18 - (R - E + SC)
= 57,161.18 - (20,000 - (- 357.10) +
878.46)
= 35,925.62
EXAMPLE 4 (PARTIAL WITHDRAWAL, RATES DECREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Withdrawal: $20,000; Middle of Contract Year 3
Policy Value at middle of Contract = 50,000* (1.055) R 2.5 = 57,161.18
Year 3
Penalty Free Amount at middle of
Contract Year 3
= 57,161.18* .10 = 5,716.12
Excess Interest/Surrender Charge
Adjustment
S=20,000 - 5,716.12 = 14,283.88
G=.055
C=.045
M=30
E=14,283.88* (.055 - .045)* (30/12) = 357.10
EPW=20,000 - 5,716.12 = 14,283.88
SC=.06* (14,283.88 - 357.10) = 835.61
Remaining Policy Value at middle of
Contract Year 3
= 57,161.18 - (R - E + SC)
= 57,161.18 - (20,000 - 357.10
+ 835.61)
= 36,682.67
A-3
<PAGE>
APPENDIX B
The dates shown below are the approximate first issue dates of the various
versions of the Policy. These dates will vary by state in many cases. This
Appendix describes certain of the more significant differences in features of
the various versions of the Policy. There may be additional variations. Please
see your actual policy and any attachments for determining your specific
coverage.
<TABLE>
- -------------------------------------------------------------
<S> <C>
Policy Form/Endorsement Approximate First Issue Date
- -------------------------------------------------------------
AV201 101 65 189 (Policy Form) January 1991
- -------------------------------------------------------------
AE830 292 (endorsement) May 1992
- -------------------------------------------------------------
AE847 394 (endorsement) June 1994
- -------------------------------------------------------------
AE871 295 (endorsement) May 1995
- -------------------------------------------------------------
AV254 101 87 196 (Policy Form) June 1996
- -------------------------------------------------------------
AE909 496 (endorsement) June 1996
- -------------------------------------------------------------
AE890 196 (endorsement) June 1996
- -------------------------------------------------------------
AV320 101 99 197 (Policy Form) May 1997
- -------------------------------------------------------------
AE945 197 (endorsement) May 1997
- -------------------------------------------------------------
AV376 101 106 198 (Policy Form) Anticipated: May 1998
- -------------------------------------------------------------
</TABLE>
B-1
<PAGE>
<TABLE>
<CAPTION>
Product AV201 101 65 189 AV201 101 65 189, AV201 101 65 189, AV254 101 87 196, AV320 101 99 197,
Feature AE830 292, and AE847 394, and AE909 496, and and AE945 197
AE847 394 AE871 295 AE890 196
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Excess Interest N/A N/A N/A yes yes
Adjustment
- -------------------------------------------------------------------------------------------------------------------
Guaranteed Total Premiums 5% Annually 5% Annually 5% Annually 5% Annually
Minimum Death Paid, less any Compounding Compounding Compounding Compounding (Option
Benefit partial (Option A). (Option A) or (Option A) or A), Annual Step-Up
Option(s) withdrawals and Annual Step-Up Annual Step-Up (Option B), or
any surrender (Option B). Option (Option B). Option Return of Premium
charges made A is only A is only (Option C). Option
before death, available if Owner available if Owner A is only available
accumulated at 4% and Annuitant are and Annuitant are if Owner and
to the date we both under age 75. both under age 75. Annuitant are both
receive due proof under age 75.
of death or the Option B is only
Policy Value on available if Owner
the date we and Annuitant are
receive due proof under age 81.
of death, which
ever is greater.
- -------------------------------------------------------------------------------------------------------------------
Guaranteed 1 and 3 year 1 and 3 year 1 and 3 year 1, 3, 5, and 7 1, 3, 5 and 7 year
Period Options guaranteed periods guaranteed periods guaranteed periods year guaranteed guaranteed periods
(available in available. available. available. periods available. available.
the Fixed
Account)
- -------------------------------------------------------------------------------------------------------------------
Minimum 4% 4% 4% 3% 3%
effective annual
interest rate
applicable to
the fixed
account
- -------------------------------------------------------------------------------------------------------------------
Asset N/A N/A N/A Yes Yes
Rebalancing
- -------------------------------------------------------------------------------------------------------------------
Death Proceeds Greater of 1) the Greater of (a) Greatest of (a) Greatest of (a) Greatest of (a)
Policy Value on Policy Value and Annuity Purchase Annuity Purchase Policy Value, (b)
the date we (b) 5% Annually Value, (b) Cash Value, (b) Cash Cash Value, and (c)
receive due proof Compounding Death Value, and (c) Value, and (c) Guaranteed Minimum
of death, or 2) Benefit Guaranteed Minimum Guaranteed Minimum Death Benefit.
the total premiums Death Benefit Death Benefit.
paid for this
policy, less any
partial
withdrawals and
any surrender
charges made
before death,
accumulated at 4%
interest per annum
to the date we
receive due proof
of death
- -------------------------------------------------------------------------------------------------------------------
Distribution N/A N/A N/A N/A Applicable
Financing Charge
- -------------------------------------------------------------------------------------------------------------------
Is Mortality & No No No No No
Expense Risk Fee
different after
the Annuity
Commencement
Date?
- -------------------------------------------------------------------------------------------------------------------
Dollar Cost N/A N/A N/A yes yes
Averaging Fixed
Account Option
- -------------------------------------------------------------------------------------------------------------------
Service Charge $35 assessed on $35 assessed on Assessed only on a Assessed only on a Assessed either on
each Policy each Policy Policy Policy a Policy
Anniversary. Not Anniversary. Not Anniversary; Anniversary; Anniversary or on
deducted from the deducted from the Waived if Sum of Waived if Sum of Surrender; Waived
Fixed Account. Fixed Account. Premium Payments Premium Payments if Sum of Premium
less partial less partial Payments less
withdrawals is at withdrawals is at partial withdrawals
least $50,000 on least $50,000 on or the Policy Value
the Policy the Policy is at least $50,000
Anniversary. Not Anniversary. Not on the Policy
deducted from the deducted from the Anniversary or at
Fixed Account. Fixed Account. the time of
Surrender. The
Service Charge is
deducted pro-rata
from the Investment
Options.
- -------------------------------------------------------------------------------------------------------------------
Nursing Care and N/A yes yes yes yes
Terminal Condition
Withdrawal
Option
<CAPTION>
Product AV376 101 106 1197,
Feature and AE 945 197
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Excess Interest yes
Adjustment
- -------------------------------------------------------------------------------------------------------------------
Guaranteed 5% Annually
Minimum Death Compounding (Option
Benefit A), Double Enhanced
Option(s) (Option B), or
Return of Premium
(Option C). Option
A is only available
if Owner and
Annuitant are both
under age 75.
Option B is only
available if Owner
and Annuitant are
both under age 81.
- -------------------------------------------------------------------------------------------------------------------
Guaranteed 1, 3, 5, and 7 year
Period Options guaranteed periods
(available in available.
the Fixed
Account)
- -------------------------------------------------------------------------------------------------------------------
Minimum 3%
effective annual
interest rate
applicable to
the fixed
account
- -------------------------------------------------------------------------------------------------------------------
Asset Yes
Rebalancing
- -------------------------------------------------------------------------------------------------------------------
Death Proceeds Greatest of (a)
Policy Value, (b)
Cash Value, and (c)
Guaranteed Minimum
Death Benefit.
- -------------------------------------------------------------------------------------------------------------------
Distribution Applicable
Financing Charge
- -------------------------------------------------------------------------------------------------------------------
Is Mortality & Yes (1.10%, plus
Expense Risk Fee Administrative
different after Charge, regardless
the Annuity of death benefit
Commencement chosen prior to the
Date? Annuity
Commencement Date)
- -------------------------------------------------------------------------------------------------------------------
Dollar Cost yes
Averaging Fixed
Account Option
- -------------------------------------------------------------------------------------------------------------------
Service Charge Assessed either on
a Policy
Anniversary or on
Surrender; Waived
if Sum of Premium
Payments less
partial withdrawals
or the Policy Value
is at least $50,000
on the Policy
Anniversary or at
the time of
Surrender. The
Service Charge is
deducted pro-rata
from the Investment
Options.
- -------------------------------------------------------------------------------------------------------------------
Nursing Care and yes
Terminal Condition
Withdrawal
Option
</TABLE>
B-2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE ENDEAVOR VARIABLE ANNUITY
Issued through
PFL ENDEAVOR VARIABLE
ANNUITY ACCOUNTS
Offered by
PFL LIFE INSURANCE COMPANY
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
----------------
This statement of additional information expands upon subjects discussed in
the current prospectus for the Endeavor Variable Annuity (the "Policy")
offered by PFL Life Insurance company. You may obtain a copy of the Prospectus
dated May 1, 1998 by calling 1-800-525-6205, or by writing to the
Administrative and Service Office, Financial Markets Division--Variable
Annuity Dept., 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001. Terms
used in the current prospectus for the policy are incorporated in this
Statement of Additional Information.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE POLICY AND TARGET
ACCOUNT, ENDEAVOR SERIES TRUST, AND THE GROWTH PORTFOLIO OF THE WRL SERIES
FUND, INC.
Dated: May 1, 1998
- 1 -
<PAGE>
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE POLICY--GENERAL PROVISIONS............................................. 4
Owner.................................................................... 4
Entire Policy............................................................ 4
Delay of Payment and Transfers........................................... 5
Misstatement of Age or Sex............................................... 5
Reallocation of Policy Values After the Annuity Commencement Date........ 5
Assignment............................................................... 5
Evidence of Survival..................................................... 6
Non-Participating........................................................ 6
Amendments............................................................... 6
Addition, Deletion, or Substitution of Investments....................... 6
FEDERAL TAX MATTERS........................................................ 7
Tax Status of the Policy................................................. 7
Taxation of PFL.......................................................... 7
INVESTMENT EXPERIENCE...................................................... 8
Accumulation Units....................................................... 8
Annuity Unit Value and Annuity Payment Rates............................. 9
HISTORICAL PERFORMANCE DATA................................................ 11
Money Market Yields...................................................... 11
Other Subaccount Yields.................................................. 12
Total Returns............................................................ 13
Other Performance Data................................................... 14
Adjusted Performance Data--The Mutual Fund Account....................... 14
PART II
THE TARGET ACCOUNT......................................................... 14
What is the Investment Strategy?......................................... 14
Determination of Unit Value; Valuation of Securities..................... 15
MANAGEMENT................................................................. 16
The Board of Managers.................................................... 16
The Investment Advisory Services......................................... 19
The Manager.............................................................. 19
Transfer Agent and Custodian............................................. 20
BROKERAGE ALLOCATION....................................................... 20
INVESTMENT RESTRICTIONS.................................................... 20
Fundamental Policies..................................................... 20
Operating Policies....................................................... 21
Options and Futures Strategies........................................... 21
Securities Lending....................................................... 23
PART III
STATE REGULATION OF PFL.................................................... 24
ADMINISTRATION............................................................. 24
RECORDS AND REPORTS........................................................ 24
DISTRIBUTION OF THE POLICIES............................................... 24
CUSTODY OF ASSETS.......................................................... 25
</TABLE>
- 2 -
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OTHER PRODUCTS............................................................ 25
LEGAL MATTERS............................................................. 25
OTHER INFORMATION......................................................... 25
FINANCIAL STATEMENTS...................................................... 25
INDEPENDENT AUDITORS...................................................... 26
</TABLE>
- 3 -
<PAGE>
In order to supplement the description in the Prospectus, the following
provides additional information about the Policy which may be of interest to
you. Part I of this Statement of Additional Information provides additional
information regarding the Policy. Part II of this Statement of Additional
Information (beginning on p. 14) provides information regarding the operations
and investment activities of the Target Account, including its investment
policies. Part III provides miscellaneous additional information about PFL and
the Accounts.
PART I
THE POLICY--GENERAL PROVISIONS
OWNER
The Policy shall belong to you, as the Owner, upon issuance of the Policy
after completion of an application and delivery of the initial Premium
Payment. While the Annuitant is living, you may: (1) assign the Policy; (2)
surrender the Policy; (3) amend or modify the Policy with PFL's consent; (4)
receive annuity payments or name a Payee to receive the payments; and (5)
exercise, receive and enjoy every other right and benefit contained in the
Policy. The exercise of these rights may be subject to the consent of any
assignee or irrevocable Beneficiary; and of your spouse in a community or
marital property state.
Unless PFL has been notified of a community or marital property interest in
the Policy, it will rely on its good faith belief that no such interest exists
and will assume no responsibility for inquiry.
A Successor Owner can be named in the Policy application or information
provided in lieu thereof or in a Written Notice. The Successor Owner will
become the new Owner upon your death, if you predecease the Annuitant. If no
Successor Owner survives you and you predecease the Annuitant, your estate
will become the Owner.
You may change the ownership of the Policy in a Written Notice. When this
change takes effect, all rights of ownership in the Policy will pass to the
new Owner. A change of ownership may have adverse tax consequences.
When there is a change of Owner or Successor Owner, the change will take
effect as of the date the Owner signs the Written Notice, subject to any
payment PFL has made or action PFL has taken before recording the change.
Changing the Owner or naming a new Successor Owner cancels any prior choice of
Successor Owner, but does not change the designation of the Beneficiary or the
Annuitant.
If ownership is transferred (except to your spouse) because you die before
the Annuitant, the Cash Value generally must be distributed to the Successor
Owner within five years of your death, or payments must be made for a period
certain or for the Successor Owner's lifetime so long as any period certain
does not exceed that Successor Owner's life expectancy, if the first payment
begins within one year of your death.
ENTIRE POLICY
The Policy and any endorsements thereon and the Policy application (or
information provided in lieu thereof) constitute the entire contract between
PFL and you. All statements in the application are representations and not
warranties. No statement will cause the Policy to be void or to be used in
defense of a claim unless contained in the application or information provided
in lieu thereof.
- 4 -
<PAGE>
DELAY OF PAYMENT AND TRANSFERS
Payment of any amount due from the Mutual Fund Account or the Target Account
in respect of a surrender, partial withdrawal, the Death Benefit or the death
of the Owner of a Nonqualified Policy generally will occur within seven
business days from the date the Written Notice (and any other required
documentation or information) is received, except that PFL may be permitted to
defer such payment from the Mutual Fund Account or the Target Account if: (1)
the New York Stock Exchange is closed for other than usual weekends or
holidays or trading on the Exchange is otherwise restricted; or (2) an
emergency exists as defined by the Securities and Exchange Commission (the
"SEC") or the SEC requires that trading be restricted; or (3) the SEC permits
a delay for your protection. In addition, transfers of amounts from the
Subaccounts may be deferred under these circumstances.
Certain delays and restrictions apply to transfers of amounts out of the
Fixed Account. See "THE ENDEAVOR ACCOUNTS--The Fixed Account," p. 27 of the
Prospectus.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Annuitant or Owner has been misstated, PFL will
change the annuity benefit payable to that which the Premium Payments would
have purchased for the correct age or sex. The dollar amount of any
underpayment made by PFL shall be paid in full with the next payment due such
person or the Beneficiary. The dollar amount of any overpayment made by PFL
due to any misstatement shall be deducted from payments subsequently accruing
to such person or Beneficiary. Any underpayment or overpayment will include
interest at 5% per year, from the date of the wrong payment to the date of the
adjustment. The age of the Annuitant or Owner may be established at any time
by the submission of proof satisfactory to PFL.
REALLOCATION OF POLICY VALUES AFTER THE ANNUITY COMMENCEMENT DATE
After the Annuity Commencement Date, you may reallocate the value of a
designated number of Annuity Units of a Subaccount of the Mutual Fund Account
("Mutual Fund Subaccount") or of a Subaccount of the Target Account ("Target
Subaccount")then credited to a Policy into an equal value of Annuity Units of
one or more other Mutual Fund Subaccounts, Target Subaccounts, or the Fixed
Account. The reallocation shall be based on the relative value of the Annuity
Units of the Account(s) or Subaccount(s) at the end of the Business Day on the
next payment date. The minimum amount which may be reallocated is the lesser
of (1) $10 of monthly income or (2) the entire monthly income of the Annuity
Units in the Account or Subaccount from which the transfer is being made. If
the monthly income of the Annuity Units remaining in an Account or Subaccount
after a reallocation is less than $10, PFL reserves the right to include the
value of those Annuity Units as part of the transfer. The request must be in
writing to PFL's Administrative and Service Office. There is no charge
assessed in connection with such reallocation. PFL reserves the right to limit
the number of times a reallocation of Annuity Units may be made in any given
Policy Year.
ASSIGNMENT
During the lifetime of the Annuitant you may assign any rights or benefits
provided by the Policy. An assignment will not be binding on PFL until a copy
has been filed at its Administrative and Service Office. Your rights and
benefits and those of the Beneficiary are subject to the rights of the
assignee. PFL assumes no responsibility for the validity or effect of any
assignment. Any claim made under an assignment shall be subject to proof of
interest and the extent of the assignment. An assignment may have tax
consequences.
- 5 -
<PAGE>
Unless you so direct by filing Written Notice with PFL, no Beneficiary may
assign any payments under the Policy before they are due. To the extent
permitted by law, no payments will be subject to the claims of any
Beneficiary's creditors.
EVIDENCE OF SURVIVAL
PFL reserves the right to require satisfactory evidence that a person is
alive if a payment is based on that person being alive. No payment will be
made until PFL receives such evidence.
NON-PARTICIPATING
The Policy will not share in PFL's surplus earnings; no dividends will be
paid.
AMENDMENTS
No change in the Policy is valid unless made in writing by PFL and approved
by one of PFL's officers. No Registered Representative has authority to change
or waive any provision of the Policy.
PFL reserves the right to amend the Policies to meet the requirements of the
Internal Revenue Code (the "Code"), regulations or published rulings. You can
refuse such a change by giving Written Notice, but a refusal may result in
adverse tax consequences.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
PFL cannot and does not guarantee that any of the Portfolios or Subaccounts
will always be available for Premium Payments, allocations, or transfers. PFL
retains the right, subject to any applicable law, to make certain changes in
the Mutual Fund Account and its investments. PFL reserves the right to
eliminate the shares of any Portfolio held by a Mutual Fund Subaccount and to
substitute shares of another Portfolio of the Underlying Funds, or of another
registered open-end management investment company for the shares of any
Portfolio, if the shares of the Portfolio are no longer available for
investment or if, in PFL's judgment, investment in any Portfolio would be
inappropriate in view of the purposes of the Mutual Fund Account. To the
extent required by the 1940 Act, substitutions of shares attributable to your
interest in a Mutual Fund Subaccount will not be made without prior notice to
you and the prior approval of the SEC. PFL retains the right, subject to any
applicable law, to make certain changes in the Target Account and its
investments. PFL reserves the right to eliminate a Target Subaccount if, in
PFL's judgment, investment in any Target Subaccount would be inappropriate in
view of the purposes of the Policy. Nothing contained herein shall prevent the
Mutual Fund Account from purchasing other securities for other series or
classes of variable annuity policies, or from effecting an exchange between
series or classes of variable annuity policies on the basis of your requests.
New Subaccounts may be established when, in the sole discretion of PFL,
marketing, tax, investment or other conditions warrant. Any new Subaccounts
may be made available to existing Owners on a basis to be determined by PFL.
Each additional Subaccount will purchase shares in a mutual fund portfolio,
other investment vehicle, or, in the case of the Target Account, in shares of
common stock. PFL may also eliminate one or more Subaccounts if, in its sole
discretion, marketing, tax, investment or other conditions warrant such
change. In the event any Subaccount is eliminated, PFL will notify you and
request a reallocation of the amounts invested in the eliminated Subaccount.
If no such reallocation is provided by you, PFL will reinvest the amounts in
the Subaccount that invests in the Endeavor Money Market Portfolio (or in a
similar portfolio of money market instruments), in another Subaccount, or in
the Fixed Account, if appropriate.
- 6 -
<PAGE>
In the event of any such substitution or change, PFL may, by appropriate
endorsement, make such changes in the Policies as may be necessary or
appropriate to reflect such substitution or change. Furthermore, if deemed to
be in the best interests of persons having voting rights under the Policies,
the Mutual Fund Account may be (i) operated as a management company under the
1940 Act or any other form permitted by law, (ii) deregistered under the 1940
Act in the event such registration is no longer required or (iii) combined
with one or more other separate accounts, and the Target Account may be (i)
operated in any form permitted by law, (ii) deregistered under the 1940 Act in
the event such registration is no longer required or (iii) combined with one
or more other separate accounts. To the extent permitted by applicable law,
PFL also may transfer the assets of the Mutual Fund Account or the Target
Account associated with the Policies to another account or accounts.
FEDERAL TAX MATTERS
TAX STATUS OF THE POLICY
Distribution Requirements. The Code requires that Nonqualified Policies
contain specific provisions for distribution of Policy proceeds upon the death
of any Owner. In order to be treated as an annuity contract for federal income
tax purposes, the Code requires that such Policies provide that if any Owner
dies on or after the Annuity Commencement Date and before the entire interest
in the Policy has been distributed, the remaining portion must be distributed
at least as rapidly as under the method in effect on such Owner's death. If
any Owner dies before the Annuity Commencement Date, the entire interest in
the Policy must generally be distributed within 5 years after such Owner's
date of death or be used to purchase an immediate annuity under which payments
will begin within one year of such Owner's death and will be made for the life
of the Beneficiary or for a period not extending beyond the life expectancy of
the "Designated Beneficiary" as defined in section 72(s) of the Code. However,
if upon such Owner's death prior to the Annuity Commencement Date, such
Owner's surviving spouse becomes the sole new Owner under the Policy, then the
Policy may be continued with the surviving spouse as the new Owner. Under the
Policy, the Beneficiary is the Designated Beneficiary of an Owner/Annuitant
and the Successor Owner is the Designated Beneficiary of an Owner who is not
the Annuitant. If any Owner is not a natural person, then for purposes of
these distribution requirements, the primary Annuitant shall be treated as the
Owner and any death or change of such primary Annuitant shall be treated as
the death of the Owner. The Nonqualified Policies contain provisions intended
to comply with these requirements of the Code. No regulations interpreting
these requirements of the Code have yet been issued and thus no assurance can
be given that the provisions contained in the Policies satisfy all such Code
requirements. The provisions contained in the Policies will be reviewed and
modified if necessary to assure that they comply with the Code requirements
when clarified by regulation or otherwise.
TAXATION OF PFL
PFL at present is taxed as a life insurance company under part I of
Subchapter L of the Code. The Mutual Fund Account and the Target Account are
treated as part of PFL and, accordingly, will not be taxed separately as
"regulated investment companies" under Subchapter M of the Code. PFL does not
expect to incur any federal income tax liability with respect to investment
income and net capital gains arising from the activities of the Mutual Fund
Account or the Target Account retained as part of the reserves under the
Policy. Based on this expectation, it is anticipated that no charges will be
made against the Mutual Fund Account or the Target Account for federal income
taxes. If, in future years, any federal income taxes are incurred by PFL with
respect to the Mutual Fund Account or the Target Account, PFL may make a
charge to that Account.
- 7 -
<PAGE>
INVESTMENT EXPERIENCE
A "Net Investment Factor" is used to determine the value of Accumulation
Units and Annuity Units, and to determine annuity payment rates.
ACCUMULATION UNITS
Upon allocation to the selected Mutual Fund Subaccount or Target Subaccount,
Premium Payments are converted into Accumulation Units of the Subaccount. The
number of Accumulation Units to be credited is determined by dividing the
dollar amount allocated to each Subaccount by the value of an Accumulation
Unit for that Subaccount as next determined after the Premium Payment is
received at the Administrative and Service Office or, in the case of the
initial Premium Payment, when the Policy application is completed, whichever
is later. The value of an Accumulation Unit was arbitrarily established at $1
(except the WRL Growth Subaccount and the Target Subaccounts which were
established at $10) at the inception of each Subaccount. Thereafter, the value
of an Accumulation Unit is determined as of the close of trading on each day
the New York Stock Exchange and PFL's Administrative and Service Office are
open for business.
For the Mutual Fund Account, an index (the "Net Investment Factor") which
measures the investment performance of a Subaccount during a Valuation Period
is used to determine the value of an Accumulation Unit for the next subsequent
Valuation Period. The Net Investment Factor may be greater or less than or
equal to one; therefore, the value of an Accumulation Unit may increase,
decrease or remain the same from one Valuation Period to the next. You bear
this investment risk. The Net Investment Performance of a Subaccount and
deduction of certain charges affect the Accumulation Unit Value.
The Net Investment Factor for any Mutual Fund Subaccount for any Valuation
Period is determined by dividing (a) by (b) and subtracting (c) from the
result, where:
(a) is the net result of:
(1) the net asset value per share of the shares held in the
Subaccount determined at the end of the current Valuation Period, plus
(2) the per share amount of any dividend or capital gain distribution
made with respect to the shares held in the Subaccount if the ex-
dividend date occurs during the current Valuation Period, plus or minus
(3) a per share credit or charge for any taxes determined by PFL to
have resulted during the Valuation Period from the investment
operations of the Subaccount;
(b) is the net asset value per share of the shares held in the Subaccount
determined as of the end of the immediately preceding Valuation Period.
(c) is the charge for Mortality and Expense Risk during the Valuation
Period, equal on an annual basis to 1.25% (for both the 5% Annually
Compounding Death Benefit and the Double Enhanced Death Benefit) and 1.10%
(for the Return of Premium Death Benefit) of the daily net asset value of
the Subaccount, plus the .15% Administrative Charge plus the Distribution
Financing Charge of .15%. The Distribution Financing Charge is assessed
only during the first seven Policy Years and prior to the Annuity
Commencement Date.
- 8 -
<PAGE>
ILLUSTRATION OF MUTUAL FUND ACCOUNT ACCUMULATION UNIT VALUE CALCULATIONS
FORMULA AND ILLUSTRATION FOR DETERMINING THE NET INVESTMENT FACTOR
Net Investment Factor = (A + B - C) - E
---------
D
Where: A = The Net Asset Value of an Underlying Fund share as of the end of
the current Valuation Period.
Assume..........................................A = $11.57
B = The per share amount of any dividend or capital gains
distribution since the end of the immediately preceding
Valuation Period.
Assume...............................................B = 0
C = The per share charge or credit for any taxes reserved for at the
end of the current Valuation Period.
Assume...............................................C = 0
D = The Net Asset Value of an Underlying Fund share at the end of
the immediately preceding Valuation Period.
Assume..........................................D = $11.40
E = The daily deduction for the Mortality and Expense Risk Fee, the
Administrative Charge, and the Distribution Financing Charge,
which totals 1.55% on an annual basis for the first seven years
and 1.40% thereafter. On a daily basis, E equals .0000421409 for
the first seven years and .0000380909 thereafter.
<TABLE>
<S> <C>
Then, the Net Investment Factor = (11.57 + 0 - 0) - .0000421409 = Z = 1.0148701398
--------------
(11.40)
</TABLE>
for the first seven years, and (11.57 + 0 - 0) - 0000380909 = 1.0148741898
-------------
11.40
thereafter.
FORMULA AND ILLUSTRATION FOR DETERMINING ACCUMULATION UNIT VALUE
Accumulation Unit Value = A X B
Where: A = The Accumulation Unit Value for the immediately preceding
Valuation Period.
Assume.............................................. = $ X
B = The Net Investment Factor for the current Valuation Period.
Assume................................................ = Y
Then, the Accumulation Unit Value = $ X X Y = $ Z
ANNUITY UNIT VALUE AND ANNUITY PAYMENT RATES
For both the Mutual Fund Account and the Target Account, the amount of
Variable Annuity Payments will vary with Annuity Unit Values. Annuity Unit
Values rise if the net investment performance of the Subaccount exceeds the
assumed interest rate of 5% annually. Conversely, Annuity Unit Values fall if
the net investment performance of the Subaccount is less than the assumed
rate. The value of a variable Annuity Unit in each Subaccount was established
at $1.00 on the date operations began for that Subaccount. For the Mutual Fund
Account, the value of a
- 9 -
<PAGE>
variable Annuity Unit on any subsequent Business Day is equal to (a)
multiplied by (b) multiplied by (c), where:
(a) is the variable Annuity Unit Value on the immediately preceding
Business Day;
(b) is the Net Investment Factor for the valuation period; and
(c) is the investment result adjustment factor for the valuation period.
The investment result adjustment factor for the valuation period is the
product of discount factors of .99986634 per day to recognize the 5% effective
annual Assumed Investment Return. The valuation period is the period from the
close of the immediately preceding Business Day to the close of the current
Business Day.
For the Target Account, at the end of each Valuation Period, the Annuity
Unit Value is established by multiplying the value of an Annuity Unit
determined at the end of the immediately preceding Valuation Period by a Net
Investment Factor for the current Valuation Period, and then multiplying that
product by an investment result adjustment factor for the purpose of
offsetting the effect of an Assumed Investment Return of 5.0% per annum which
is assumed in the Annuity Conversion Rates for the Contracts. The Net
Investment Factor for the Target Subaccounts is very similar to the Net
Investment Factor for the Mutual Fund Account, except that it is based upon
the value of the assets in the subaccount instead of the net asset value for a
mutual fund share. The Net Investment Factor includes a charge for mortality
and expense risks, that is, the Mortality and Expense Risk Fee, and
Administrative Charge (see "Charges and Deductions" at page of the
Prospectus).
The dollar amount of subsequent Variable Annuity Payments will depend upon
changes in applicable Annuity Unit Values.
The annuity payment rates vary according to the Annuity Option elected and
the sex and adjusted age of the Annuitant at the Annuity Commencement Date.
The Policy also contains a table for determining the adjusted age of the
Annuitant.
ILLUSTRATION OF CALCULATIONS FOR ANNUITY UNIT VALUE
AND VARIABLE ANNUITY PAYMENTS
FORMULA AND ILLUSTRATION FOR DETERMINING ANNUITY UNIT VALUE
Annuity Unit Value = A X B X C
Where: A = Annuity Unit Value for the immediately preceding Valuation Period.
Assume................................................ = $ X
B = Net Investment Factor for the Valuation Period for which the
Annuity Unit Value is being calculated.
Assume................................................ = Y
C = A factor to neutralize the assumed interest rate of 5% built into
the Annuity Tables used.
Assume................................................ = Z
Then, the Annuity Unit Value is:
$ X X Y X Z = $ Q
- 10 -
<PAGE>
FORMULA AND ILLUSTRATION FOR DETERMINING AMOUNT OF FIRST MONTHLY VARIABLE
ANNUITY PAYMENT
First Monthly Variable Annuity Payment = A X B
------
$1,000
Where: A = The Adjusted Policy Value as of the Annuity Commencement Date.
Assume.............................................. = $ X
B = The Annuity purchase rate per $1,000 of Adjusted Policy Value
based upon the option selected, the sex and adjusted age of the
Annuitant according to the tables contained in the Policy.
Assume.............................................. = $ Y
Then, the first Monthly Variable Annuity
Payment = $ X X $ Y = $ Z
----------
1,000
FORMULA AND ILLUSTRATION FOR DETERMINING THE NUMBER OF ANNUITY UNITS
REPRESENTED BY EACH MONTHLY VARIABLE ANNUITY PAYMENT
Number of Annuity Units = A
---
B
Where: A = The dollar amount of the first monthly Variable Annuity Payment.
Assume.............................................. = $ X
B = The Annuity Unit Value for the Valuation Date on which the first
monthly payment is due.
Assume.............................................. = $ Y
Then, the number of Annuity Units $ X = Z
----
$ Y
HISTORICAL PERFORMANCE DATA
MONEY MARKET YIELDS
PFL may from time to time disclose the current annualized yield of the
Endeavor Money Market Subaccount, which invests in the Endeavor Money Market
Portfolio, for a 7-day period in a manner which does not take into
consideration any realized or unrealized gains or losses on shares of the
Endeavor Money Market Portfolio or on its portfolio securities. This current
annualized yield is computed by determining the net change (exclusive of
realized gains and losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment income) at the
end of the 7-day period in the value of a hypothetical account having a
balance of 1 unit of the Endeavor Money Market Subaccount at the beginning of
the 7-day period, dividing such net change in account value by the value of
the account at the beginning of the period to determine the base period
return, and annualizing this quotient on a 365-day basis. The net change in
account value reflects (i) net income from the Portfolio attributable to the
hypothetical account; and (ii) charges and deductions imposed under a Policy
that are attributable to the hypothetical account. The charges and deductions
include the per unit charges for the
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<PAGE>
hypothetical account for (i) the Administrative Charges; (ii) the Mortality
and Expense Risk Fee, and (iii) the Distribution Financing Charge. Current
Yield will be calculated according to the following formula:
Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
NCS= The net change in the value of the Portfolio (exclusive of realized
gains and losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment
income) for the 7-day period attributable to a hypothetical account
having a balance of 1 Subaccount unit.
ES= Per unit expenses of the Subaccount for the 7-day period.
UV= The unit value on the first day of the 7-day period.
Because of the charges and deductions imposed under a Policy, the yield for
the Endeavor Money Market Subaccount will be lower than the yield for the
Endeavor Money Market Portfolio. The yield calculations do not reflect the
effect of any premium taxes that may be applicable to a particular Policy.
PFL may also disclose the effective yield of the Endeavor Money Market
Subaccount for the same 7-day period, determined on a compounded basis. The
effective yield is calculated by compounding the base period return according
to the following formula:
Effective Yield = (1 + ((NCS - ES)/UV)) /(365/7/ - 1
Where:
NCS= The net change in the value of the Portfolio (exclusive of realized
gains and losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment
income) for the 7-day period attributable to a hypothetical account
having a balance of 1 Subaccount unit.
ES= Per unit expenses of the Subaccount for the 7-day period.
UV= The unit value on the first day of the 7-day period.
The yield on amounts held in the Endeavor Money Market Subaccount normally
will fluctuate on a daily basis. Therefore, the disclosed yield for any given
past period is not an indication or representation of future yields or rates
of return. The Endeavor Money Market Subaccount's actual yield is affected by
changes in interest rates on money market securities, average portfolio
maturity of the Endeavor Money Market Portfolio, the types and quality of
portfolio securities held by the Endeavor Money Market Portfolio and its
operating expenses. For the seven days ended December 31, 1997, the yield of
the Endeavor Money Market Subaccount was 3.054%, and the effective yield was
3.100% for the 5% Annually Compounding Death Benefit and the Double Enhanced
Death Benefit. For the seven days ended December 31, 1997, the yield of the
Endeavor Money Market Subaccount was 3.199%, and the effective yield was
3.250% for the Return of Premium Death Benefit.
OTHER SUBACCOUNT YIELDS
PFL may from time to time advertise or disclose the current annualized yield
of one or more of the Mutual Fund Subaccounts and the Target Subaccounts
(except the Endeavor Money Market Subaccount) for 30-day periods. The
annualized yield of a Subaccount refers to income generated by the Subaccount
over a specific 30-day period. Because the yield is annualized, the yield
generated by a Subaccount during the 30-day period is assumed to be generated
each 30-day period over a 12-month period. The yield is computed by: (i)
dividing the net investment income of the Subaccount less Subaccount expenses
for the period, by (ii) the maximum offering price per unit on the last day of
the period times the daily average number of units outstanding for the
- 12 -
<PAGE>
period, (iii) compounding that yield for a 6-month period, and (iv)
multiplying that result by 2. Expenses attributable to the Subaccount include
(i) the Administrative Charges; (ii) the Mortality and Expense Risk Fee; and
(iii) the Distribution Financing Charge. The 30-day yield is calculated
according to the following formula:
Yield = 2 X ((((NI - ES)/(U - UV)) + 1)/6/ - 1)
Where:
NI = Net investment income of the Subaccount for the 30-day period
attributable to the Subaccount's unit.
ES = Expenses of the Subaccount for the 30-day period.
U = The average number of units outstanding.
UV = The unit value at the close (highest) of the last day in the 30-day
period.
Because of the charges and deductions imposed by the Mutual Fund Account,
the yield for a Mutual Fund Subaccount will be lower than the yield for its
corresponding Portfolio. The yield calculations do not reflect the effect of
any premium taxes that may be applicable to a particular Policy.
The yield on amounts held in the Mutual Fund Subaccounts and the Target
Subaccounts normally will fluctuate over time. Therefore, the disclosed yield
for any given past period is not an indication or representation of future
yields or rates of return. A Subaccount's actual yield is affected by the
types and quality of its investments and its operating expenses.
TOTAL RETURNS
PFL may from time to time also advertise or disclose total returns for one
or more of the Mutual Fund Subaccounts or the Target Subaccounts for various
periods of time. One of the periods of time will include the period measured
from the date the Subaccount commenced operations. When a Subaccount has been
in operation for 1, 5 and 10 years, respectively, the total return for these
periods will be provided. Total returns for other periods of time may from
time to time also be disclosed. Total returns represent the average annual
compounded rates of return that would equate an initial investment of $1,000
to the redemption value of that investment as of the last day of each of the
periods. The ending date for each period for which total return quotations are
provided will be for the most recent month end practicable, considering the
type and media of the communication and will be stated in the communication.
Total returns will be calculated using Subaccount Unit Values which PFL
calculates on each Business Day based on the performance of the Mutual Fund
Account's underlying Portfolio, and the Target Subaccount's common shares, and
the deductions for the Mortality and Expense Risk Fee, the Distribution
Financing Charges, and the Administrative Charges. The total return for each
Target Subaccount will also reflect the Manager's Fee and other operating
expenses. Total return calculations will reflect the effect of Surrender
Charges that may be applicable to a particular period. The total return will
then be calculated according to the following formula:
P (1 + T)/N/ = ERV
Where:
T = The average annual total return net of Subaccount recurring charges.
ERV = The ending redeemable value of the hypothetical account at the end of
the period.
P = A hypothetical initial payment of $1,000.
N = The number of years in the period.
- 13 -
<PAGE>
OTHER PERFORMANCE DATA
PFL may from time to time also disclose average annual total returns in a
non-standard format in conjunction with the standard format described above.
The non-standard format will be identical to the standard format except that
the surrender charge percentage will be assumed to be 0%.
PFL may from time to time also disclose cumulative total returns in
conjunction with the standard format described above. The cumulative returns
will be calculated using the following formula.
CTR = (ERV / P) - 1
Where:
CTR = The cumulative total return net of Subaccount recurring charges for
the period.
ERV = The ending redeemable value of the hypothetical investment at the end
of the period.
P = A hypothetical initial payment of $1,000.
All non-standard performance data will only be advertised if the standard
performance data for the same period, as well as for the required period, is
also disclosed.
ADJUSTED PERFORMANCE DATA--THE MUTUAL FUND ACCOUNT
From time to time, sales literature or advertisements may quote average
annual total returns for periods prior to the date a particular Mutual Fund
Subaccount commenced operations. Such performance information for the Mutual
Fund Subaccounts will be calculated based on the performance of the various
Portfolios and the assumption that the Mutual Fund Subaccounts were in
existence for the same periods as those indicated for the Portfolios, with the
level of Policy charges that are currently in effect.
PART II
THE TARGET ACCOUNT
WHAT IS THE INVESTMENT STRATEGY?
The objective of each of the Target Subaccounts is to provide an above-
average total return through a combination of dividend income and capital
appreciation. While the objectives of the Target Subaccounts are the same,
each Target Subaccount follows a different investment strategy (set forth
below) in order to achieve its stated objective.
Each Target Subaccount will initially invest in equal amounts in the common
stock described below for each Target Subaccount (the "Common Shares")
determined as of a specified business day (the "Initial Stock Selection
Date"). The Dow Target 10 Subaccount will invest in the common stock of the
ten companies in the Dow Jones Industrial Average (the "DJIA") that have the
highest dividend yield. The Dow Target 5 Subaccount will invest in the common
stock of the five companies with the lowest per share stock price of the ten
companies in The Dow Target 10 Subaccount. These stocks will be held for one
year.
At the Initial Stock Selection Date, a percentage relationship among the
number of Common Shares in a Target Subaccount will be established. When
additional funds are deposited into the Target Subaccount, additional Common
Shares will be purchased in such numbers reflecting as nearly as practicable
the percentage relationship of the number of Common Shares established at the
initial purchase. Sales of Common Shares by the Target Subaccount will
likewise attempt to
- 14 -
<PAGE>
replicate the percentage relationship of Common Shares. The percentage
relationship among the number of Common Shares in the Target Subaccount should
therefore remain stable. However, given the fact that the market price of such
Common Shares will vary throughout the year, the value of the Common Shares of
each of the companies as compared to the total assets of the Target Subaccount
will fluctuate during the year, above and below the proportion established on
a Stock Selection Date. On the last Business Day of the 12-month period
following the preceding Stock Selection Date ("Annual Stock Selection Date"),
a new percentage relationship will be established among the number of Common
Shares described above for each Target Subaccount on such date. Common Shares
may be sold or new equity securities bought so that the Target Subaccount is
equally invested in the common stock of each company meeting the Target
Subaccount's investment criteria. Thus the Target Subaccount may or may not
hold equity securities of the same companies as the previous year. Any
purchase or sale of additional Common Shares during the year will duplicate,
as nearly as practicable, the percentage relationship among the number of
Common Shares as of the Annual Stock Selection Date since the relationship
among the value of the Common Shares on the date of any subsequent
transactions may be different than the original relationship among their
value.
The yield for each equity security listed on the DJIA is calculated by
annualizing the last quarterly or semi-annual ordinary dividend declared and
dividing the result by the market value of such equity security as of the
close of business on the Stock Selection Date.
The publishers of the DJIA are not affiliated with PFL, Endeavor, or First
Trust Advisers L.P. and have not participated in the creation of the Target
Subaccounts or the selection of the equity securities included therein. Any
changes in the components of any of the respective indices made after a Stock
Selection Date will not cause a change in the identity of the Common Shares
included in a Target Subaccount, including any additional Common Shares
purchased thereafter, until the next Annual Stock Selection Date.
Investors should note that the above criteria were applied and will in the
future be applied to the Common Shares selected for inclusion in the Target
Subaccounts as of the respective Stock Selection Date. Additional Common
Shares which were originally selected through this process may be purchased
throughout the year, as investors may continue to invest in the Target
Subaccounts, even though the yields on these Common Shares may have changed
subsequent to the previous Stock Selection Date. These Common Shares may no
longer be included in the index, or may not meet a Target Subaccount's
selection criteria at that time, and therefore, such Common Shares would no
longer be chosen for inclusion in the Target Subaccounts if the selection
process were to be performed again at that time. The equity securities
selected as Common Shares and the percentage relationship among the number of
shares will not change for purchase or sales by a Target Subaccount until the
next Annual Stock Selection Date.
DETERMINATION OF UNIT VALUE; VALUATION OF SECURITIES
PFL determines the Unit Value of each Target Subaccount each Business Day.
This daily determination of Unit Value is made as of the close of regular
trading on the New York Stock Exchange, currently 4:00 p.m. New York time
unless the Exchange closes earlier, by dividing the total assets of a Target
Subaccount less all of its liabilities, by the total number of units
outstanding at the time the determination is made. Purchases and redemptions
will be effected at the time of determination of Unit Value next following the
receipt of any purchase or redemption order deemed to be in good order.
Equity securities are valued at the last sale price on the exchange on which
they are primarily traded or at the ask price on the NASDAQ system for
unlisted national market issues, or at the last quoted bid price for
securities in which there were no sales during the day or for unlisted
- 15 -
<PAGE>
securities not reported on the NASDAQ system. Short-term obligations which
mature in 60 days or less are valued at amortized cost, which approximates
fair value as determined by the Board of Managers. Futures and option
contracts that are traded on commodities or securities exchanges are normally
valued at the settlement price on the exchange on which they are traded.
Securities (other than short-term obligations) for which there are no such
quotations or valuations are valued at fair value as determined in good faith
by or at the direction of the Board of Managers of the Target Subaccounts.
MANAGEMENT
THE BOARD OF MANAGERS
The members of the Board of Managers of the Target Account, and their
principal occupations during the past five years are set forth below. Their
titles may have varied during that period. Unless otherwise indicated, the
address of each member is 2101 East Coast Highway, Suite 300, Corona del Mar,
California 92625.
<TABLE>
<CAPTION>
NAME, AGE AND ADDRESS HELD WITH REGISTRANT DURING PAST 5 YEARS
--------------------- ------------------------ ------------------------------------
<S> <C> <C>
*+Vincent J. McGuinness, President and Manager From January, 1997 to December 1997,
Jr. (32) Executive Vice-President of
Operations and since December, 1997,
Chief Financial Officer of Endeavor
Group; from September, 1996 to June,
1997, Chief Financial Officer and
since May, 1996, Director, and since
June, 1997, Executive Vice
President--Administration of
Endeavor Management Co.; since
August, 1996, Chief Financial
Officer of VJM Corporation; from
May, 1996 to January 1997, Executive
Vice President and Director of
Sales, Western Division of Endeavor
Group; since May, 1996, Chief
Financial Officer of McGuinness &
Associates; from July, 1993 to
August, 1995 Rocky Mountain Regional
Marketing Director for Endeavor
Group; President and Trustee of
Endeavor Series Trust.
*Vincent J. McGuinness Manager Chairman, Chief Executive Officer
(63) and Director of McGuinness &
Associates, Endeavor Group, VJM
Corporation (oil and gas), until
July, 1996 McGuinness Group
(insurance marketing) and until
January, 1994 Swift Energy Marketing
Company and since September, 1988
Endeavor Management Co.; President
of VJM Corporation, Endeavor
Management Co. and, since February,
1996, McGuinness & Associates;
Trustee, Endeavor Series Trust.
</TABLE>
- 16 -
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND ADDRESS HELD WITH REGISTRANT DURING PAST 5 YEARS
--------------------- ------------------------ ------------------------------------
<S> <C> <C>
Timothy A. Devine (63) Manager Prior to September, 1993, President
1424 Dolphin Terrace and Chief Executive Officer, Devine
Corona del Mar, Califor- Properties, Inc. Since September,
nia 92625 1993, Vice President, Plant Control,
Inc. (landscape contracting and
maintenance); Trustee, Endeavor
Series Trust.
Thomas J. Hawekotte (63) Manager President, Thomas Hawekotte, P.C.
1200 Lake Shore Drive (law practice); Trustee, Endeavor
Chicago, Illinois 60610 Series Trust.
Steven L. Klosterman Manager Since July, 1995, President of
(46) 5973 Avenida Klosterman Capital Corporation
Encinas, #300 (investment adviser); Investment
Carlsbad, California Counselor, Robert J. Metcalf &
92008 Associates, Inc. (investment
adviser) from August, 1990 to June,
1995; Trustee, Endeavor Series
Trust.
*Halbert D. Lindquist Manager President, Lindquist Associates,
(52) Inc. (investment advisor) and since
1650 E. Fort Lowell Road December, 1987 Tucson Asset
Tucson, Arizona 85719- Management Inc. (commodity trading
2324 advisor), and since November, 1987,
Presidio Government Securities,
Incorporated (broker-dealer); since
January 1998, Chief Investment
Officer, Gladstone Alternative Asset
Management, Trustee, Endeavor Series
Trust.
R. Daniel Olmstead, Jr. Manager Rancher until January, 1997. Since
(66) January, 1997, real estate
2661 Point Del Mar consultant; Trustee, Endeavor Series
Corona Del Mar, Califor- Trust.
nia 92625
Keith H. Wood (62) Manager Since 1972, Chairman and Chief
Executive Officer of Jameson, Eaton
& Wood (investment adviser) and
since 1979, President of Ivory &
Sime International, Inc. (investment
adviser); Trustee, Endeavor Series
Trust.
*William. L. Busler (55) Manager President, PFL Life Insurance
4333 Edgewood Road N.E. Company; Trustee, Endeavor Series
Cedar Rapids, Iowa Trust.
52499-0001
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND ADDRESS HELD WITH REGISTRANT DURING PAST 5 YEARS
--------------------- ------------------------ ------------------------------------
<S> <C> <C>
Michael J. Roland (39) Chief Financial Officer Since June, 1996, Chief Financial
(Treasurer) Officer of Endeavor Group, Endeavor
Management Co. and Endeavor Series
Trust; from January, 1995 to April,
1997, Senior Vice President,
Treasurer and Chief Financial
Officer of Pilgrim America Group,
Pilgrim America Investments, Inc.,
Pilgrim America Securities and of
each of the funds in the Pilgrim
America Group of Funds; from July,
1994 to December, 1994, partner at
the consulting firm of Corporate
Savings Group; From March, 1992 to
June, 1994, Vice President of PIMCO
Advisors, LP and of the PIMCO
Institutional Funds.
Pamela A. Shelton (48) Secretary Since October, 1993, Executive
Secretary to Chairman of the Board
and Chief Executive Officer of, and
since April, 1996, Secretary of
McGuinness & Associates, Endeavor
Group, VJM Corporation, McGuinness
Group (until July, 1996) and
Endeavor Management Co.; from July,
1992 to October, 1993,
Administrative Secretary, Mayor and
City Council, City of Laguna Niguel,
California; Secretary, Endeavor
Series Trust.
</TABLE>
- --------
* An "interested person" of the Target Account as defined in the 1940 Act.
+ Vincent J. McGuinness, Jr. is the son of Vincent J. McGuinness.
The Rules and Regulations of the Target Account provide that the Target
Account will indemnify its Board of Managers and officers against liabilities
and expenses incurred in connection with litigation in which they may be
involved because of their offices with the Target Account, except if it is
determined in the manner specified in the Rules and Regulations that they have
not acted in good faith in the reasonable belief that their actions were in
the best interests of the Target Account or that such indemnification would
relieve any officer or member of the Board of Managers of any liability to the
Target Account or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of his duties. The Target
Account, at its expense, provides liability insurance for the benefit of its
Board of Managers and officers.
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<PAGE>
Compensation. For the first full year of the Target Account, the following
compensation is estimated to be paid to members of the Board of Managers:
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM ACCOUNT AND FUND
NAME OF PERSON FROM ACCOUNT COMPLEX PAID TO TRUSTEES
- -------------- ------------ -------------------------
<S> <C> <C>
Vicent J. McGuinness..................... $ 0 $ 0
Timothy A. Devine........................ $1,500 $14,000
Thomas J. Hawekotte...................... $1,500 $14,000
Steven L. Klosterman..................... $1,500 $14,000
Halbert D. Lindquist..................... $1,500 $14,000
R. Daniel Olmstead....................... $1,500 $14,000
Keith H. Wood............................ $1,500 $14,000
Vincent J. McGuinness, Jr. .............. $ 0 $ 0
William L. Busler........................ $ 0 $ 0
</TABLE>
THE INVESTMENT ADVISORY SERVICES
First Trust Advisers L.P. (the "Adviser") is the Target Account's investment
adviser. The Adviser manages the assets of each Target Subaccount, consistent
with the investment objective and policies described herein and in the
Prospectus, pursuant to an investment advisory agreement (the "Advisory
Agreement") with Endeavor Investment Advisers, the Target Account's Manager.
Under the Advisory Agreement, the Adviser provides each Target Subaccount
with discretionary investment services. Specifically, the Adviser is
responsible for supervising and directing the investments of each Target
Subaccount in accordance with each Target Subaccount's investment objective,
program, and restrictions as provided in the Prospectus and this Statement of
Additional Information. The Adviser is also responsible for effecting all
security transactions on behalf of each Target Subaccount.
As compensation for its services, the Adviser receives a fee of 0.35% of the
average daily net assets of each Target Subaccount, which is paid by the
Manager. Each Target Subaccount's Advisory Agreement also provides that the
Adviser, its directors, officers, employees, and certain other persons
performing specific functions for the Target Subaccounts will only be liable
to the Target Subaccount for losses resulting from willful misfeasance, bad
faith, gross negligence, or reckless disregard of duty.
THE MANAGER
The Target Account is managed by Endeavor Investment Advisers ("the
Manager") which, subject to the supervision and direction of the Target
Account's Board of Managers, has overall responsibility for the general
management and administration of the Target Account. The Manager is a general
partnership of which Endeavor Management Co. is the managing partner. Endeavor
Management Co., by whose employees all management services performed under the
management agreement are rendered to the Target Account, holds a 50.01%
interest in the Manager and AUSA Financial Markets, Inc., an affiliate of PFL,
holds the remaining 49.99% interest therein. Vincent J. McGuinness, a member
of the Board of Managers of the Target Account, together with his family
members and trusts for the benefit of his family members, own all of Endeavor
Management Co.'s outstanding common stock. Mr. McGuinness is Chairman, Chief
Executive Officer and President of Endeavor Management Co.
The Manager is responsible for providing investment management to the Target
Account and in the exercise of such responsibility selects an investment
adviser for each of the Target
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<PAGE>
Subaccounts (the "Adviser") and monitors the Adviser's investment program and
results, reviews brokerage matters, oversees compliance by the Target Account
with various federal and state statutes, and carries out the directives of the
Board of Managers. The Manager is responsible for providing the Target Account
with office space, office equipment, and personnel necessary to operate and
administer the Target Account's business, and also supervises the provision of
services by third parties such as the Target Account's custodian, transfer
agent and administrator. Pursuant to an administration agreement, First Data
Investor Services Group, Inc. ("FDISG") assists the Manager in the performance
of its administrative responsibilities to the Target Account. For its
administrative responsibilities, the Target Account pays FDISG, a state fee of
$10,000 per annum per subaccount and are out-of-pocket fees of the expenses.
As compensation for its services, the Manager receives a fee equal to 0.75%
of the average daily net assets of each Target Subaccount.
TRANSFER AGENT AND CUSTODIAN
All cash and securities of each Target Subaccount are held by Boston Safe
Deposit and Trust Company as custodian. FDISG, located at 4400 Computer Drive,
Westborough, Massachusetts 01581, serves as transfer agent for the Target
Account.
BROKERAGE ALLOCATION
The Adviser invests all assets of the Target Subaccounts in common stock and
incurs brokerage costs in connection therewith.
Allocations of transactions by the Target Subaccounts, including their
frequency, to various dealers is determined by the Adviser in its best
judgment and in a manner deemed to be in the best interest of the investors in
the Target Subaccount rather than by any formula. The primary consideration is
prompt execution of orders in an effective manner at the most favorable price.
Purchases and sales of securities may be principal transactions; that is,
securities may be purchased directly from the issuer or from an underwriter or
market maker for the securities. Any transactions for which the Target
Subaccounts pays a brokerage commission will be effected at the best price and
execution available. Purchases from underwriters of securities include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers include the spread between the bid and
the asked price. Brokerage may be allocated based on the sale of Policies by
dealers or activities in support of sales of the Policies. The Target Account
has adopted a Brokerage Enhancement Plan, whereby all or a portion of certain
brokerage commission paid by the Target Subaccounts may be allocated or
credited to the Distributor or other entities marketing the Policies, to help
to finance sales activities.
INVESTMENT RESTRICTIONS
Fundamental policies of the Target Subaccounts may not be changed without
the approval of the lesser of (1) 67% of the persons holding voting interests
(generally Policy Owners) present at a meeting if the holders of more than 50%
are present in person or by proxy or (2) more than 50% of the persons holding
voting interests. Other restrictions, in the form of operating policies, are
subject to change by the Board of Managers without the approval of persons
holding a voting interest. Any investment restriction which involves a maximum
percentage of securities or assets shall not be considered to be violated
unless an excess over the percentage occurs immediately after, and is caused
by, an acquisition of securities or assets of, or borrowings by, a Target
Subaccount.
FUNDAMENTAL POLICIES
As a matter of fundamental policy, each Target Subaccount may not:
(1) Borrowing. Borrow money, except each Target Subaccount may borrow as
a temporary measure for extraordinary or emergency purposes, and then only
in amounts not
- 20 -
<PAGE>
exceeding 30% of its total assets valued at market. Each Target Subaccount
will not borrow in order to increase income (leveraging), but only to
facilitate redemption requests which might otherwise require untimely
investment liquidations;
(2) Loans. Make loans, although the Target Subaccounts may purchase money
market securities and enter into repurchase agreements; and they may lend
their Common Shares.
(3) Margin. Purchase securities on margin;
(4) Mortgaging. Mortgage, pledge, hypothecate or, in any manner, transfer
any security owned by the Target Subaccounts as security for indebtedness
except as may be necessary in connection with permissible borrowings, in
which event such mortgaging, pledging, or hypothecating may not exceed 30%
of each Target Subaccount's total assets, valued at market;
(5) Real Estate. Purchase or sell real estate;
(6) Senior Securities. Issue senior securities (except permitted
borrowings);
(7) Short Sales. Effect short sales of securities; or
(8) Underwriting. Underwrite securities issued by other persons, except
to the extent the Target Subaccounts may be deemed to be underwriters
within the meaning of the Securities Act of 1933 in connection with the
purchase and sale of their portfolio securities in the ordinary course of
pursuing their investment programs.
In addition, as a matter of fundamental policy, each Target Subaccount may
engage in futures and options transactions and hold warrants.
OPERATING POLICIES
As a matter of operating policy, each Target Subaccount may not:
(1) Control of Companies. Invest in companies for the purpose of
exercising management or control;
(2) Illiquid Securities. Purchase a security if, as a result of such
purchase, more than 15% of the value of each Target Subaccount's net assets
would be invested in illiquid securities or other securities that are not
readily marketable.
(3) Oil and Gas Programs. Purchase participations or other direct
interests or enter into leases with respect to, oil, gas, other mineral
exploration or development program.
OPTIONS AND FUTURES STRATEGIES.
A Subaccount may at times seek to hedge against either a decline in the
value of its portfolio securities or an increase in the price of securities
which the Adviser plans to purchase through the writing and purchase of
options and the purchase or sale of future contracts and related options.
Expenses and losses incurred as a result of such hedging strategies will
reduce a Subaccount's current return.
The ability of a Subaccount to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. It is impossible to predict the amount of trading interest that
may exist in various types of options or futures. Therefore no assurance can
be given that a Subaccount will be able to utilize these instruments
effectively for the purposes stated below.
Writing Covered Options on Securities. A Subaccount may write covered call
options and covered put options on optionable securities of the types in which
it is permitted to invest from time to time as the Adviser determines is
appropriate in seeking to attain the Subaccount's
- 21 -
<PAGE>
investment objective. Call options written by a Subaccount give the holder the
right to buy the underlying security from the Subaccount at a started exercise
price; put options give the holder the right to sell the underlying security
to the Subaccount at a stated price.
A Subaccount may only write call options on a covered basis or for cross-
hedging purposes and will only write covered put options. A put option would
be considered "covered" if the Subaccount owns an option to sell the
underlying security subject to the option having an exercise price equal to or
greater than the exercise price of the "covered" option at all times while the
put option is outstanding. A call option is covered if the Subaccount owns or
has the right to acquire the underlying securities subject to the call option
(or comparable securities satisfying the cover requirements of securities
exchanges) at all times during the option period. A call option is for cross-
hedging purposes if it is not covered, but is designed to provide a hedge
against another security which the Subaccount owns or has the right to
acquire. In the case of a call written for cross-hedging purposes or a put
option, the Subaccount will maintain in a segregated account at the
Subaccount's custodian bank cash or short-term U.S. government securities with
a value equal to or greater than the Subaccount's obligation under the option.
A Subaccount may also write combinations of covered puts and covered calls on
the same underlying security.
A Subaccount will receive a premium from writing an option, which increases
the Subaccount's return in the event the option expires unexercised or is
terminated at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option, and the volatility of
the market price of the underlying security. By writing a call option, a
Subaccount will limit its opportunity to profit from any increase in the
market value of the underlying security above the exercise price of the
option. By writing a put option, a Subaccount will assume the risk that it may
be required to purchase the underlying security for an exercise price higher
than its then current market price, resulting in a potential capital loss if
the purchase price exceeds the market price plus the amount of the premium
received.
A Subaccount may terminate an option which it has written prior to its
expiration by entering into a closing purchase transaction in which it
purchases an option having the same terms as the option written. The
Subaccount will realize a profit (or loss) from such transaction if the cost
of such transaction is less (or more) than the premium received from the
writing of the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option may be
offset in whole or in part by unrealized appreciation of the underlying
security owned by the Subaccount.
Purchasing Put and Call Options on Securities. A Subaccount may purchase put
options to protect its portfolio holdings in an underlying security against a
decline in market value. This protection is provided during the life of the
put option since the Subaccount, as holder of the put, is able to sell the
underlying security at the exercise price regardless of any decline in the
underlying security's market price. For the purchase of a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs. By using put options in this manner, any profit which the Subaccount
might otherwise have realized on the underlying security will be reduced by
the premium paid for the put option and by transaction costs.
A Subaccount may also purchase a call option to hedge against an increase in
price of a security that it intends to purchase. This protection is provided
during the life of the call option since the Subaccount, as holder of the
call, is able to buy the underlying security at the exercise price regardless
of any increase in the underlying security's market price. For the purchase of
a call option to be profitable, the market price of the underlying security
must rise sufficiently above
- 22 -
<PAGE>
the exercise price to cover the premium and transaction costs. By using call
options in this matter, any profit which the Subaccount might have realized
had it brought the underlying security at the time it purchased the call
option will be reduced by the premium paid for the call option and by
transaction costs.
No Subaccount intends to purchase put or call options if, as a result of any
such transaction, the aggregate cost of options held by the Subaccount at the
time of such transaction would exceed 5% of its total assets.
Limitations. A Subaccount will not purchase or sell futures contracts or
options on futures contracts for non-hedging purposes if, as a result, the sum
of the initial margin deposits on its existing futures contracts and related
options positions and premiums paid for options on futures contracts would
exceed 5% of the net assets of the Subaccount unless the transaction meets
certain "bona fide hedging" criteria.
Risks of Options and Futures Strategies. The effective use of options and
futures strategies depends, among other things, on a Subaccount's ability to
terminate options and futures positions at times when the Adviser deems it
desirable to do so. Although a Subaccount will not enter into an option or
futures position unless the Adviser believes that a liquid market exists for
such option or future, there can be no assurance that a Subaccount will be
able to effect closing transactions at any particular time or at an acceptable
price. The Adviser generally expects that options and futures transactions for
the Subaccounts will be conducted on recognized exchanges. In certain
instances, however, a Subaccount may purchase and sell options in the over-
the-counter market. The staff of the Securities and Exchange Commission
considers over-the-counter options to be illiquid. A Subaccount's ability to
terminate option positions established in the over-the-counter market may be
more limited than in the case of exchange traded options and may also involve
the risk that securities dealers participating in such transactions would fail
to meet their obligations to the Subaccount.
The use of options and futures involves the risk of imperfect correlation
between movements in options and futures prices and movements in the price of
the securities that are the subject of the hedge. The successful use of these
strategies also depends on the ability of the Subaccounts' Adviser to forecast
correctly interest rate movements and general stock market price movements.
The risk increases as the composition of the securities held by the Subaccount
diverges from the composition of the relevant option or futures contract.
SECURITIES LENDING
Each Target Subaccount may also lend Common Shares to broker-dealers and
financial institutions to realize additional income. As an operating policy,
the Target Subaccounts will not lend Common Shares or other assets, if as a
result, more than 33% of each Subaccount's total assets would be lent to other
parties. Under applicable regulatory requirements (which are subject to
change), the following conditions apply to securities loans: (a) the loan must
be continuously secured by liquid assets maintained on a current basis in an
amount at least equal to the market value of the securities loaned; (b) each
Target Subaccount must receive any dividends or interest paid by the issuer on
such securities; (c) each Target Subaccount must have the right to call the
loan and obtain the securities loaned at any time upon notice of not more than
five business days, including the right to call the loan to permit voting of
the securities; and (d) each Target Subaccount must receive either interest
from the investment of collateral or a fixed fee from the borrower.
Securities loaned by a Target Subaccount remain subject to fluctuations in
market value. A Target Subaccount may pay reasonable finders, custodian and
administrative fees in connection with a loan. Securities lending, as with
other extensions of credit, involves the risk that the
- 23 -
<PAGE>
borrower may default. Although securities loans will be fully collateralized
at all times, a Target Subaccount may experience delays in, or be prevented
from, recovering the collateral. During the period that the Target Subaccount
seeks to enforce its rights against the borrower, the collateral and the
securities loaned remain subject to fluctuations in market value. The Target
Subaccount do not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if it were considered
important with respect to the investment. A Target Subaccounts may also incur
expenses in enforcing its rights. If a Target Subaccount has sold a loaned
security, it may not be able to settle the sale of the security and may incur
potential liability to the buyer of the security on loan for its costs to
cover the purchase.
PART III
STATE REGULATION OF PFL
PFL is subject to the laws of Iowa governing insurance companies and to
regulation by the Iowa Division of Insurance. An annual statement in a
prescribed form is filed with the Division of Insurance each year covering the
operation of PFL for the preceding year and its financial condition as of the
end of such year. Regulation by the Division of Insurance includes periodic
examination to determine PFL's contract liabilities and reserves so that the
Division may determine the items are correct. PFL's books and accounts are
subject to review by the Division of Insurance at all times and a full
examination of its operations is conducted periodically by the National
Association of Insurance Commissioners. In addition, PFL is subject to
regulation under the insurance laws of other jurisdictions in which it may
operate.
ADMINISTRATION
PFL performs administrative services for the Policies. These services
include issuance of the Policies, maintenance of records concerning the
Policies, and certain valuation services.
RECORDS AND REPORTS
All records and accounts relating to the Mutual Fund Account and the Target
Account will be maintained by PFL. As presently required by the Investment
Company Act of 1940, as amended, and regulations promulgated thereunder, PFL
will mail to all Policy Owners at their last known address of record, at least
annually, reports containing such information as may be required under that
Act or by any other applicable law or regulation. Policy Owners will also
receive confirmation of each financial transaction and any other reports
required by law or regulation.
DISTRIBUTION OF THE POLICIES
The Policies are offered to the public through brokers licensed under the
federal securities laws and state insurance laws. The offering of the Policies
is continuous and PFL does not anticipate discontinuing the offering of the
Policies. However, PFL reserves the right to discontinue the offering of the
Policies.
AFSG Securities Corporation, an affiliate of PFL, is the principal
underwriter of the Policies and may enter into agreements with broker-dealers
for the distribution of the Policies. Prior to April 30, 1998, AEGON USA
Securities, Inc. (also an affiliate of PFL) was the principal underwriter.
During 1997, 1996, and 1995, the amount paid to AEGON USA Securities, Inc.
and/or the broker-dealers for their services was $29,678,498, $19,668,001, and
$13,569,474, respectively.
- 24 -
<PAGE>
The Target Account has adopted a distribution plan in accordance with Rule
12b-1 under the 1940 Act for the Distribution Financing Charge (the
"Distribution Plan"). The Distribution Plan has been approved by a majority of
the disinterested members of the Board of Managers of the Target Account. The
Distribution Plan is designed to partially compensate PFL for the cost of
distributing the Policies. Charges under the Distribution Plan will be used to
support marketing efforts, training of representatives and reimbursement of
expenses incurred by broker/dealers who sell the Policies, and will be based
on a percentage of the daily net assets of the Target Account. The
Distribution Plan may be terminated at any time by a vote of a majority of the
disinterested members of the Target Account's Board of Managers, or by a vote
of the majority of its outstanding shares. (See "CHARGES AND DEDUCTIONS--
Distribution Financing Charge," p. 57.)
CUSTODY OF ASSETS
The assets of each of the Mutual Fund Subaccounts and the Target Subaccounts
are held by PFL. The assets of each of the Subaccounts are segregated and held
separate and apart from the assets of the other Subaccounts and from PFL's
general account assets. PFL maintains records of all purchases and redemptions
of shares of the Underlying Funds held by each of the Mutual Fund Subaccounts,
and of all purchases and sales of common stock held by each of the Target
Subaccounts. Additional protection for the assets of the Mutual Fund Account
and the Target Account is afforded by PFL's fidelity bond, presently in the
amount of $5,000,000, covering the acts of officers and employees of PFL.
OTHER PRODUCTS
PFL makes other variable annuity policies available that may also be funded
through the Mutual Fund Account and/or the Target Account. These variable
annuity policies may have different features, such as different investment
options or charges.
LEGAL MATTERS
Legal advice relating to certain matters under the federal securities laws
applicable to the issue and sale of the Policies has been provided to PFL by
Sutherland, Asbill & Brennan LLP, of Washington D.C.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
Policies discussed in this Statement of Additional Information. Not all of the
information set forth in the Registration Statement, amendments and exhibits
thereto has been included in the Prospectus or this Statement of Additional
Information. Statements contained in the Prospectus and this Statement of
Additional Information concerning the content of the Policies and other legal
instruments are intended to be summaries. For a complete statement of the
terms of these documents, reference should be made to the instruments filed
with the Securities and Exchange Commission.
FINANCIAL STATEMENTS
The values of your interest in the Mutual Fund Account or the Target Account
will be affected solely by the investment results of the selected
Subaccount(s). Financial Statements of The PFL Endeavor Variable Annuity
Account (which comprises a portion of the PFL Endeavor VA Separate
- 25 -
<PAGE>
Account) are contained herein. The financial statements of PFL, which are
included in this Statement of Additional Information, should be considered
only as bearing on the ability of PFL to meet its obligations under the
Policies. They should not be considered as bearing on the investment
performance of the assets held in the Mutual Fund Account or the Target
Account.
There are no financial statements for the Target Account because as of the
date hereof it had not commenced operations and had no assets or liabilities.
INDEPENDENT AUDITORS
The Financial Statements of PFL as of December 31, 1997 and 1996, and for
each of the three years in the period ended December 31, 1997, and the
Financial Statements of certain subaccounts of PFL Endeavor VA Separate
Account (which comprises the Endeavor Variable Annuity) at December 31, 1997
and for each of the two years in the period then ended, included in this
Statement of Additional Information have been audited by Ernst & Young LLP,
Independent Auditors, 801 Grand Avenue, Suite 3400, Des Moines, Iowa 50309.
Ernst & Young LLP will also be the independent auditors for the Target
Account.
- 26 -
<PAGE>
FINANCIAL STATEMENTS - STATUTORY BASIS
PFL LIFE INSURANCE COMPANY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
PFL Life Insurance Company
Financial Statements - Statutory Basis
Years ended December 31, 1997, 1996 and 1995
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors................................. 1
Audited Financial Statements
Balance Sheets - Statutory Basis................................ 3
Statements of Operations - Statutory Basis...................... 5
Statements of Changes in Capital and Surplus - Statutory Basis.. 6
Statements of Cash Flows - Statutory Basis...................... 7
Notes to Financial Statements - Statutory Basis................. 9
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
PFL Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of PFL Life
Insurance Company as of December 31, 1997 and 1996, and the related statutory-
basis statements of operations, changes in capital and surplus, and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the accompanying statutory-basis financial statement schedules
required by Article 7 of Regulation S-X. These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules 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.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Division, Department of Commerce, of the State of
Iowa, which practices differ from generally accepted accounting principles. The
variances between such practices and generally accepted accounting principles
also are described in Note 1. The effects on the financial statements of these
variances are not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matters described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of PFL Life Insurance Company at December 31, 1997 and 1996, or the results of
its operations or its cash flows for each of the three years in the period ended
December 31, 1997.
1
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PFL Life Insurance Company
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with accounting practices prescribed or permitted by the Insurance
Division, Department of Commerce, of the State of Iowa. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic statutory-basis financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ Ernst & Young LLP
February 27, 1998
2
<PAGE>
PFL Life Insurance Company
Balance Sheets - Statutory Basis
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments $ 23,939 $ 50,737
Bonds 4,913,144 4,773,433
Stocks:
Preferred 2,750 3,097
Common (cost: 1997 - $33,058; 1996 - $23,212) 42,345 32,038
Affiliated entities (cost: 1997 - $10,798; 1996 -
$14,893) 8,031 6,934
Mortgage loans on real estate 935,207 911,705
Real estate, at cost less accumulated depreciation
($8,655 in 1997; $11,338 in 1996):
Home office properties 8,283 10,372
Properties acquired in satisfaction of debt 11,814 12,260
Investment properties 36,416 35,922
Policy loans 57,136 54,214
Other invested assets 29,864 16,343
--------------------------------
Total cash and invested assets 6,068,929 5,907,055
Premiums deferred and uncollected 16,101 16,345
Accrued investment income 69,662 70,401
Short-term notes receivable from affiliate -- 53,900
Federal income taxes recoverable -- 4,018
Transfers from separate accounts 60,193 38,528
Other assets 37,624 31,215
Separate account assets 2,517,365 1,844,515
--------------------------------
Total admitted assets $8,769,874 $7,965,977
================================
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life $ 884,018 $ 736,100
Annuity 4,204,125 4,408,419
Accident and health 169,328 139,269
Policy and contract claim reserves:
Life 8,635 7,369
Accident and health 57,713 66,988
Other policyholders' funds 143,831 126,672
Remittances and items not allocated 153,745 64,064
Asset valuation reserve 69,825 54,851
Interest maintenance reserve 30,287 23,745
Federal income taxes payable 1,889 --
Short-term notes payable to affiliates 16,400 --
Other liabilities 75,070 70,663
Payable to affiliates 13,240 4,975
Separate account liabilities 2,512,406 1,844,515
--------------------------------
Total liabilities 8,340,512 7,547,630
Commitments and contingencies
Capital and surplus:
Common stock, $10 par value, 500 shares authorized,
266 issued and outstanding 2,660 2,660
Paid-in surplus 154,282 154,129
Unassigned surplus 272,420 261,558
--------------------------------
Total capital and surplus 429,362 418,347
--------------------------------
Total liabilities and capital and surplus $8,769,874 $7,965,977
================================
</TABLE>
See accompanying notes.
4
<PAGE>
PFL Life Insurance Company
Statements of Operations - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of
reinsurance:
Life $ 202,435 $ 204,872 $ 114,704
Annuity 657,695 725,966 921,452
Accident and health 207,982 227,862 232,738
Net investment income 446,424 428,337 392,685
Amortization of interest maintenance reserve 3,645 2,434 4,341
Commissions and expense allowances on reinsurance
ceded 49,859 73,931 77,071
--------------------------------------------------------
1,568,040 1,663,402 1,742,991
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits 146,583 147,024 146,346
Surrender benefits 658,071 512,810 498,626
Other benefits 126,495 101,288 88,607
Increase (decrease) in aggregate reserves for
policies and contracts:
Life 149,575 140,126 50,071
Annuity (203,139) 188,002 528,330
Accident and health 30,059 26,790 17,694
Other 16,998 19,969 16,017
--------------------------------------------------------
924,642 1,136,009 1,345,691
Insurance expenses:
Commissions 157,300 177,466 200,706
General insurance expenses 57,571 57,282 57,623
Taxes, licenses and fees 8,715 13,889 15,700
Net transfers to separate accounts 297,480 171,785 42,981
Other expenses 119 526 760
--------------------------------------------------------
521,185 420,948 317,770
--------------------------------------------------------
1,445,827 1,556,957 1,663,461
--------------------------------------------------------
Gain from operations before federal income taxes and
net realized capital gains (losses) on investments 122,213 106,445 79,530
Federal income tax expense 43,381 41,177 33,335
--------------------------------------------------------
Gain from operations before net realized capital
gains (losses) on investments 78,832 65,268 46,195
Net realized capital gains (losses) on investments
(net of related federal income taxes and amounts
transferred to interest maintenance reserve) 7,159 (3,503) (18,096)
--------------------------------------------------------
Net income $ 85,991 $ 61,765 $ 28,099
========================================================
</TABLE>
See accompanying notes.
5
<PAGE>
PFL Life Insurance Company
Statements of Changes in Capital and Surplus - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
TOTAL CAPITAL
COMMON STOCK PAID-IN UNASSIGNED AND SURPLUS
SURPLUS SURPLUS
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $2,660 $114,129 $211,552 $328,341
Capital contribution - 40,000 - 40,000
Net income for 1995 - - 28,099 28,099
Net unrealized capital losses - - (7,574) (7,574)
Decrease in non-admitted assets - - 50 50
Increase in asset valuation reserve - - (5,946) (5,946)
Surplus effect of ceding commissions
associated with the sale of a division - - 35 35
Cancellation of reinsurance agreement - - 585 585
Amendment of reinsurance agreement - - 419 419
Transfer of subsidiary investment to
stockholder - - (3,250) (3,250)
Change in reserve valuation methodology - - (501) (501)
Increase in liability for reinsurance in
unauthorized companies - - (2,730) (2,730)
---------------------------------------------------------------------
Balance at December 31, 1995 2,660 154,129 220,739 377,528
Net income for 1996 - - 61,765 61,765
Net unrealized capital gains - - 2,351 2,351
Increase in non-admitted assets - - (148) (148)
Increase in asset valuation reserve - - (10,930) (10,930)
Dividend to stockholder - - (20,000) (20,000)
Prior period adjustment - - 5,025 5,025
Surplus effect of sale of a division - - (384) (384)
Surplus effect of ceding commission
associated with the sale of a division - - 29 29
Amendment of reinsurance agreement - - 421 421
Decrease in liability for reinsurance in
unauthorized companies - - 2,690 2,690
---------------------------------------------------------------------
Balance at December 31, 1996 2,660 154,129 261,558 418,347
Capital contribution - 153 - 153
Net income for 1997 - - 85,991 85,991
Net unrealized capital gains - - 3,592 3,592
Increase in non-admitted assets - - (481) (481)
Increase in asset valuation reserve - - (14,974) (14,974)
Dividend to stockholder - - (62,000) (62,000)
Surplus effect of sale of a division - - (161) (161)
Surplus effect of ceding commissions
associated with the sale of a division - - 5 5
Surplus effect of amendment of reinsurance - - 389 389
agreement
Surplus effect of reinsurance agreement - - 402 402
Increase in liability for reinsurance in
unauthorized companies - - (1,901) (1,901)
---------------------------------------------------------------------
Balance at December 31, 1997 $2,660 $154,282 $272,420 $429,362
=====================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
PFL Life Insurance Company
Statements of Cash Flows - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Premiums and other considerations, net of reinsurance $ 1,119,936 $ 1,240,748 $ 1,353,407
Net investment income 452,091 431,456 398,051
Life and accident and health claims (154,383) (147,556) (140,798)
Surrender benefits and other fund withdrawals (658,071) (512,810) (498,626)
Other benefits to policyholders (126,462) (101,254) (88,519)
Commissions, other expenses and other taxes (225,042) (248,321) (278,241)
Net transfers to separate accounts (319,146) (210,312) (42,981)
Federal income taxes, excluding tax on capital gains (47,909) (35,551) (32,905)
Cash paid in conjunction with an amendment of a
reinsurance agreement (4,826) (5,812)
Repayment of intercompany notes and receivables, net - - (48,070)
Cash received in connection with a reinsurance
agreement 1,477 - -
Other, net 89,693 (41,677) 62,345
--------------------------------------------------------------
Net cash provided by operating activities 127,358 368,911 683,663
INVESTING ACTIVITIES
Proceeds from investment sold, matured or repaid:
Bonds and preferred stocks 3,284,095 2,112,831 1,757,229
Common stocks 34,004 27,214 20,338
Mortgage loans on real estate 138,162 74,351 36,550
Real estate 6,897 18,077 23,203
Cash received from ceding commissions associated
with the sale of a division 8 45 55
Other 57,683 22,568 8,258
--------------------------------------------------------------
3,520,849 2,255,086 1,845,633
Cost of investments acquired:
Bonds and preferred stocks (3,411,442) (2,270,105) (2,294,195)
Common stocks (37,339) (29,799) (23,284)
Mortgage loans on real estate (159,577) (324,381) (192,292)
Real estate (2,013) (222) (10,188)
Policy loans (2,922) (1,539) (877)
Cash paid in association with the sale of a division - (539) -
Cash paid in conjunction with sales of a division (591) (123) -
Other (15,674) (6,404) (2,670)
--------------------------------------------------------------
(3,629,558) (2,633,112) (2,523,506)
--------------------------------------------------------------
Net cash used in investing activities (108,709) (378,026) (677,873)
</TABLE>
7
<PAGE>
PFL Life Insurance Company
Statements of Cash Flows - Statutory Basis (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Issuance of short-term intercompany notes payable $ 16,400 $ - $ 40,000
Capital contribution 153 - -
Dividends to stockholder (62,000) (20,000) -
-----------------------------------------------------------
Net cash provided by (used in) financing activities (45,447) (20,000) 40,000
-----------------------------------------------------------
Increase (decrease) in cash and short-term
investments (26,798) (29,115) 45,790
Cash and short-term investments at beginning of year 50,737 79,852 34,062
-----------------------------------------------------------
Cash and short-term investments at end of year $ 23,939 $ 50,737 $ 79,852
===========================================================
</TABLE>
See accompanying notes.
8
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis
(Dollars in thousands)
December 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
PFL Life Insurance Company ("the Company") is a stock life insurance company and
is a wholly-owned subsidiary of First AUSA Life Insurance Company ("First
AUSA"), which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands.
In connection with the sale of certain affiliated companies, the Company has
assumed various blocks of business from these former affiliates through mergers.
In addition, the Company has canceled or entered into several coinsurance and
reinsurance agreements with affiliates and non-affiliates. The following is a
description of those transactions:
. During 1996, the Company sold its North Richland Hills, Texas health
administrative operations known as The Insurance Center. The transaction
resulted in the transfer of substantially all employees and office
facilities to United Insurance Companies, Inc. ("UICI"). All inforce
business will continue to be shared by UICI and the Company and its
affiliates through the existing coinsurance agreements. After a short
transition period, all new business produced by United Group Association, an
independent insurance agency, will be written by the insurance subsidiaries
of UICI and will not be shared with the Company and its affiliates through
coinsurance arrangements. As a result of the sale, during 1996 the Company
transferred $123 in assets, substantially all of which was cash, and $70 of
liabilities. The difference between the assets and liabilities of $(53) plus
a tax credit of $19 was charged directly to unassigned surplus. During 1997,
the Company transferred $591 in assets, substantially all of which was cash
and $343 of liabilities. The difference between the assets and liabilities
of $(248) net of a tax credit of $87 was charged directly to unassigned
surplus.
. Effective December 31, 1995, the Company canceled a coinsurance agreement
with its parent, First AUSA. As a result of the cancellation, the Company
transferred $825 of assets and $1,712 of liabilities. The difference between
the assets and liabilities, net of a tax effect of $302 was credited
directly to unassigned surplus.
9
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
. On January 1, 1994, the Company entered into an agreement with a non-
affiliate reinsurer to increase the reinsurance ceded by 2-1/2% each year
(primarily group health business). As a result, the Company transferred
$4,303 in assets and liabilities of $4,467 during 1995. The difference
between the assets and liabilities of $164, plus a tax credit of $255, was
credited directly to unassigned surplus. During 1996, the Company
transferred $5,991 in assets, including $5,812 of cash and short-term
investments and liabilities of $6,146. The difference between the assets and
liabilities of $155, plus a tax credit of $266 was credited directly to
unassigned surplus. During 1997, the Company transferred $5,045 in assets,
including $4,826 of cash and short-term investments, and liabilities of
$5,164. The difference between the assets and liabilities of $119 plus a tax
credit of $270 was credited directly to unassigned surplus.
. During 1993, the Company sold the Oakbrook Division (primarily group health
business). The initial transfer of risk occurred through an indemnity
reinsurance agreement. The policies will then be assumed by the reinsurer by
novation as state regulatory and policyholder approvals are received. During
1996, the Company paid $539 in association with this sale; the payment, net
of a tax credit of $189, were charged directly to unassigned surplus. In
addition, the Company will receive from the third party administrator a
ceding commission of one percent of the premiums collected between January
1, 1994 and December 31, 1996. As a result of the sale, in 1995, the Company
received $55 for ceding commissions; the commissions net of the related tax
effect of $20 was credited directly to unassigned surplus. During 1996, the
Company received $45 for ceding commissions; the commissions net of the
related tax effect of $(16) was charged directly to unassigned surplus. In
1997, the Company received $8 for ceding commissions; the commissions net of
the related tax effect of $3 was credited directly to unassigned surplus.
. During 1997, the Company entered into a reinsurance agreement with a non-
affiliate. As a result of the agreement, the Company received $1,480 of
assets, including $1,477 of cash and short-term securities, and $861 of
liabilities. The difference between the assets and liabilities of $619, net
of a tax effect of $217 was credited directly to unassigned surplus.
NATURE OF BUSINESS
The Company sells individual non-participating whole life, endowment and term
contracts, as well as a broad line of single fixed and flexible premium annuity
products. In addition, the Company offers group life, universal life, and
individual and specialty health coverages. The Company is licensed in 49 states
and the District of Columbia. Sales of the Company's products are primarily
through the Company's agents and financial institutions.
10
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract claim reserves, guaranty fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and assumptions
utilized which could have a material impact on the financial statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Division,
Department of Commerce, of the State of Iowa, which practices differ in some
respects from generally accepted accounting principles. The more significant of
these differences are as follows: (a) bonds are generally reported at amortized
cost rather than segregating the portfolio into held-to-maturity (reported at
amortized cost), available-for-sale (reported at fair value), and trading
(reported at fair value) classifications; (b) acquisition costs of acquiring new
business are charged to current operations as incurred rather than deferred and
amortized over the life of the policies; (c) policy reserves on traditional life
products are based on statutory mortality rates and interest which may differ
from reserves based on reasonable assumptions of expected mortality, interest,
and withdrawals which include a provision for possible unfavorable deviation
from such assumptions; (d) policy reserves on certain investment products use
discounting methodologies based on statutory interest rates rather than full
account values; (e) reinsurance amounts are netted against the corresponding
asset or liability rather than shown as gross amounts on the balance sheet; (f)
deferred income taxes are not provided for the difference between the financial
statement and income tax bases of assets and liabilities; (g) net realized gains
or losses attributed to changes in the level of interest rates in the market are
deferred and amortized over the remaining life of the bond or mortgage loan,
rather than recognized as gains or losses in the statement of operations when
the sale is completed; (h) potential declines in the estimated realizable value
of investments are provided for through the establishment of a formula-
determined statutory investment reserve (reported as a liability) changes to
which are charged directly to surplus, rather than through recognition in the
statement of operations for declines in value, when such declines are judged to
be other than temporary; (i) certain assets designated as "non-admitted assets"
have been charged to surplus rather than being reported as assets; (j) revenues
for universal life and investment products consist of premiums received rather
than policy charges for the cost of insurance, policy administration charges,
amortization of policy initiation fees and surrender charges assessed; (k)
pension expense is recorded as amounts are paid;
11
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) adjustments to federal income taxes of prior years are charged or credited
directly to unassigned surplus, rather than reported as a component of expense
in the statement of operations; (m) gains or losses on dispositions of business
are charged or credited directly to unassigned surplus rather than being
reported in the statement of operations; and (n) a liability is established for
"unauthorized reinsurers" and changes in this liability are charged or credited
directly to unassigned surplus. The effects of these variances have not been
determined by the Company.
The National Association of Insurance Commissioners (NAIC) currently is in the
process of recodifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in 1998,
will likely change, to some extent, prescribed statutory accounting practices
and may result in changes to the accounting practices that the Company uses to
prepare its statutory-basis financial statements.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with remaining maturity of one year or less when purchased to
be cash equivalents.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation Office of
the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortization is computed using methods which result in a
level yield over the expected life of the security. The Company reviews its
prepayment assumptions on mortgage and other asset backed securities at regular
intervals and adjusts amortization rates retrospectively when such assumptions
are changed due to experience and/or expected future patterns. Investments in
preferred stocks in good standing are reported at cost. Investments in preferred
stocks not in good standing are reported at the lower of cost or market. Common
stocks of affiliated and unaffiliated companies, which includes shares of mutual
funds (money market and other), are carried at market. Real estate is reported
at cost less allowances for depreciation. Depreciation is computed principally
by the straight-line method. Policy loans are reported at unpaid principal.
Other invested assets consist principally of investments in various joint
ventures and are recorded at equity in underlying net assets. Other "admitted
assets" are valued, principally at cost, as required or permitted by Iowa
Insurance Laws.
12
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for potential
losses in the event of default by issuers of certain invested assets. These
amounts are determined using a formula prescribed by the NAIC and are reported
as a liability. The formula for the AVR provides for a corresponding adjustment
for realized gains and losses. Under a formula prescribed by the NAIC, the
Company defers, in the Interest Maintenance Reserve (IMR), the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the security.
Interest income is recognized on an accrual basis. The Company does not accrue
income on bonds in default, mortgage loans on real estate in default and/or
foreclosure or which are delinquent more than twelve months, or on real estate
where rent is in arrears for more than three months. Further, income is not
accrued when collection is uncertain. At December 31, 1997, 1996 and 1995, the
Company excluded investment income due and accrued of $177, $1,541 and $2,272,
respectively, with respect to such practices.
The Company uses interest rate swaps and caps as part of its overall interest
rate risk management strategy for certain life insurance and annuity products.
The Company entered into several interest rate swap contracts to modify the
interest rate characteristics of the underlying liabilities. The net interest
effect of such swap transactions is reported as an adjustment of interest income
from the hedged items as incurred.
The Company has entered into interest-rate cap agreements to hedge the exposure
of changing interest rates. The cash flows from the interest rate caps will help
offset losses that might occur from changes in interest rates. The cost of such
agreements is included in interest expense ratably during the life of the
agreement. Income received as a result of the cap agreement will be recognized
in investment income as earned. Unamortized cost of the agreements is included
in other assets.
AGGREGATE POLICY RESERVES
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables based on
statutorily specified interest rates and valuation methods that will provide, in
the aggregate, reserves that are greater than or equal to the minimum required
by law.
13
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The aggregate policy reserves for life insurance policies are based principally
upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality and
American Experience Mortality Tables. The reserves are calculated using interest
rates ranging from 2.00 to 6.00 percent and are computed principally on the Net
Level Premium Valuation and the Commissioners' Reserve Valuation Methods.
Reserves for universal life policies are based on account balances adjusted for
the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners' Annuity
Reserve Valuation Method including excess interest reserves to cover situations
where the future interest guarantees plus the decrease in surrender charges are
in excess of the maximum valuation rates of interest. Reserves for immediate
annuities and supplementary contracts with and without life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 2.50 to 11.25 percent and mortality rates, where appropriate, from a
variety of tables.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims reported to
the Company and claims incurred but not yet reported through the statement date.
These reserves are estimated using either individual case-basis valuations or
statistical analysis techniques. These estimates are subject to the effects of
trends in claim severity and frequency. The estimates are continually reviewed
and adjusted as necessary as experience develops or new information becomes
available.
SEPARATE ACCOUNTS
Assets held in trust for purchases of variable annuity contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. The assets in the separate accounts are valued at market.
Income and gains and losses with respect to the assets in the separate accounts
accrue to the benefit of the policyholders and, accordingly, the operations of
the separate accounts are not included in the accompanying financial statements.
The separate accounts do not have any minimum guarantees and the investment
risks associated with market value changes are borne entirely by the
policyholders. The Company received variable contract premiums of $281,095,
$227,864 and $133,386 in 1997, 1996 and 1995, respectively. All variable account
contracts are subject to discretionary withdrawal by the policyholder at the
market value of the underlying assets less the current surrender charge.
14
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. SFAS No. 119,
Disclosures about Derivative Financial Instruments and Fair Value of Financial
Instruments, requires additional disclosure about derivatives. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparisons to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. Statement of
Financial Accounting Standards No. 107 and No. 119 exclude certain financial
instruments and all nonfinancial instruments from their disclosure requirements
and allow companies to forego the disclosures when those estimates can only be
made at excessive cost. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the balance
sheet for these instruments approximate their fair values.
Investment securities: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values are
estimated using values obtained from independent pricing services or, in the
case of private placements, are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality, and
maturity of the investments. The fair values for equity securities are based on
quoted market prices.
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans is assumed to equal their carrying value.
15
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.
Interest rate cap and interest rate swaps: Estimated fair value of the
interest rate cap is based upon the latest quoted market price.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of Statement of
Financial Accounting Standards No. 107 and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------ ------------------------------
CARRYING Carrying
VALUE FAIR VALUE Value FAIR VALUE
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds $4,913,144 $5,046,527 $4,773,433 $4,867,770
Preferred stocks 2,750 8,029 3,097 7,133
Common stocks 42,345 42,345 32,038 32,038
Affiliated common stock 8,031 8,031 6,934 6,934
Mortgage loans on real estate 935,207 983,720 911,705 922,010
Policy loans 57,136 57,136 54,214 54,214
Cash and short-term
investments 23,939 23,939 50,737 50,737
Interest rate cap 5,618 1,513 6,797 6,975
Interest rate swaps - 2,546 - -
Separate account assets 2,517,365 2,517,365 1,844,515 1,844,515
LIABILITIES
Investment contract liabilities 4,345,181 4,283,461 4,532,568 4,398,630
Separate account liabilities 2,452,205 2,452,205 1,803,057 1,803,057
</TABLE>
16
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
United States Government and agencies $ 188,241 $ 2,562 $ (21) $ 190,782
State, municipal and other government 61,532 2,584 (1,774) 62,342
Public utilities 121,582 5,384 (2,952) 124,014
Industrial and miscellaneous 1,955,587 85,233 (7,752) 2,033,068
Mortgage-backed securities 2,586,202 55,382 (5,263) 2,636,321
-----------------------------------------------------------------
4,913,144 151,145 (17,762) 5,046,527
Preferred stocks 2,750 5,279 - 8,029
-----------------------------------------------------------------
$4,915,894 $156,424 $(17,762) $5,054,556
=================================================================
DECEMBER 31, 1996
Bonds:
United States Government and agencies $ 136,450 $ 3,301 $ 180 $ 139,571
State, municipal and other government 59,644 1,906 177 61,373
Public utilities 147,918 5,616 1,020 152,514
Industrial and miscellaneous 1,958,681 64,710 8,105 2,015,286
Mortgage-backed securities 2,470,740 43,896 15,610 2,499,026
-----------------------------------------------------------------
4,773,433 119,429 25,092 4,867,770
Preferred stocks 3,097 4,036 - 7,133
-----------------------------------------------------------------
$4,776,530 $123,465 $ 25,092 $4,874,903
=================================================================
</TABLE>
The carrying value and estimated fair value of bonds at December 31, 1997, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
----------------------------
<S> <C> <C>
Due in one year or less $ 132,834 $ 133,608
Due after one year through five years 1,036,862 1,066,474
Due after five years through ten years 886,542 915,229
Due after ten years 270,704 294,895
----------------------------
2,326,942 2,410,206
Mortgage and other asset-backed securities 2,586,202 2,636,321
----------------------------
$4,913,144 $5,046,527
============================
</TABLE>
17
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Interest on bonds and notes $373,496 $364,356 $342,182
Dividends on equity investments 1,460 1,436 1,822
Interest on mortgage loans 80,266 69,418 52,702
Rental income on real estate 7,501 9,526 10,443
Interest on policy loans 3,400 3,273 3,112
Other investment income 613 1,799 1,803
--------------------------------------
Gross investment income 466,736 449,808 412,064
Investment expenses 20,312 21,471 19,379
--------------------------------------
Net investment income $446,424 $428,337 $392,685
======================================
</TABLE>
Proceeds from sales and maturities of debt securities and related gross realized
gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Proceeds $3,284,095 $2,112,831 $1,757,229
==============================================
Gross realized gains $ 30,094 $ 19,876 $ 19,721
Gross realized losses (17,265) (19,634) (34,399)
----------------------------------------------
Net realized gains (losses) $ 12,829 $ 242 $ (14,678)
==============================================
</TABLE>
At December 31, 1997, investments with an aggregate carrying value of $5,944,376
were on deposit with regulatory authorities or were restrictively held in bank
custodial accounts for the benefit of such regulatory authorities as required by
statute.
18
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
---------------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Debt securities $ 12,829 $ 242 $(14,678)
Short-term investments (19) (197) 24
Equity securities 6,972 1,798 504
Mortgage loans on real estate 2,252 (5,530) (1,053)
Real estate 4,252 1,210 (1,908)
Other invested assets 1,632 12 (970)
---------------------------------------
27,918 (2,465) (18,081)
Tax effect (10,572) (1,235) 7,878
Transfer to interest maintenance reserve (10,187) 197 (7,891)
---------------------------------------
Net realized gains (losses) $ 7,159 $(3,503) $(18,096)
=======================================
<CAPTION>
CHANGE IN UNREALIZED
---------------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Debt securities $40,289 $(115,867) $355,560
Equity securities 5,653 2,929 (16,379)
----------------------------------------
Change in unrealized appreciation
(depreciation) $45,942 $(112,938) $339,181
=======================================
</TABLE>
Gross unrealized gains and gross unrealized losses on equity securities were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Unrealized gains $10,356 $ 9,590 $ 6,833
Unrealized losses (3,836) (8,723) (8,895)
---------------------------------------
Net unrealized gains (losses) $ 6,520 $ 867 $(2,062)
=======================================
19
</TABLE>
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
During 1997, the Company issued mortgage loans with interest rates ranging from
7.32% to 8.62%. The maximum percentage of any one mortgage loan to the value of
the underlying real estate at origination was 80%. Mortgage loans with a
carrying value of $237 were non-income producing for the previous twelve months.
Accrued interest of $79 related to these mortgage loans was excluded from
investment income. The Company requires all mortgaged properties to carry fire
insurance equal to the value of the underlying property.
During 1996 and 1995, mortgage loans of $13,163 and $1,644, respectively, were
foreclosed and transferred to real estate. No mortgage loans were foreclosed
during 1997. At December 31, 1997 and 1996, the Company held a mortgage loan
loss reserve in the asset valuation reserve of $11,985 and $5,432, respectively.
The mortgage loan portfolio is diversified by geographic region and specific
collateral property type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION PROPERTY TYPE DISTRIBUTION
- -------------------------------------- --------------------------------------
DECEMBER 31 DECEMBER 31
1997 1996 1997 1996
--------------- ---------------
<S> <C> <C> <C> <C> <C>
South Atlantic 29% 26% Retail 35% 37%
Pacific 15 13 Office 31 34
E. North Central 12 15 Apartment 14 14
Mountain 10 10 Other 14 12
W. South Central 9 12 Industrial 6 3
E. South Central 8 9
Middle Atlantic 7 6
W. North Central 6 6
New England 4 3
</TABLE>
At December 31, 1997, the Company had the following investments (excluding U. S.
Government guaranteed or insured issues) which individually represented more
than ten percent of capital and surplus and the asset valuation reserve:
<TABLE>
<CAPTION>
DESCRIPTION OF SECURITY OR ISSUER CARRYING VALUE
- -------------------------------------------------- ----------------------
<S> <C>
Bonds:
Structured Asset Securities Corporation $66,650
Countrywide Mortgage Backed Securities, Inc. 94,918
</TABLE>
20
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
The Company utilizes a variety of off-balance sheet financial instruments as
part of its efforts to hedge and manage fluctuations in the market value of its
investment portfolio attributable to changes in general interest rate levels and
to manage duration mismatch of assets and liabilities. Those instruments include
interest rate exchange agreements (swaps and caps), options, and commitments to
extend credit and all involve elements of credit and market risks in excess of
the amounts recognized in the accompanying financial statements at a given point
in time. The contract or notional amounts of those instruments reflect the
extent of involvement in the various types of financial instruments.
The Company's exposure to credit risk is the risk of loss from a counterparty
failing to perform according to the terms of the contract. That exposure
includes settlement risk (i.e., the risk that the counterparty defaults after
the Company has delivered funds or securities under terms of the contract) that
would result in an accounting loss and replacement cost risk (i.e., the cost to
replace the contract at current market rates should the counterparty default
prior to settlement date). Credit loss exposure resulting from nonperformance by
a counterparty for commitments to extend credit is represented by the
contractual amounts of the instruments.
At December 31, 1997 and 1996, the Company's outstanding financial instruments
with on and off-balance sheet risks, shown in notional amounts, are summarized
as follows:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
1997 1996
-----------------------
<S> <C> <C>
Derivative securities:
Interest rate swaps:
Receive fixed pay floating $100,000 $ -
Receive floating (uncapped) - pay floating (capped) 67,229 -
Interest rate cap agreements 500,000 500,000
</TABLE>
4. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to meet
its obligation under the reinsurance treaty.
21
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
4. REINSURANCE (CONTINUED)
Reinsurance assumption and cession treaties are transacted primarily with
affiliates. Premiums earned reflect the following reinsurance assumed and ceded
amounts:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Direct premiums $1,312,446 $1,457,450 $1,591,531
Reinsurance assumed 2,038 1,796 2,356
Reinsurance ceded (246,372) (300,546) (324,993)
--------------------------------------------------
Net premiums earned $1,068,112 $1,158,700 $1,268,894
==================================================
</TABLE>
The Company received reinsurance recoveries in the amount of $183,638, $168,155
and $167,287 during 1997, 1996 and 1995, respectively. At December 31, 1997 and
1996, estimated amounts recoverable from reinsurers that have been deducted from
policy and contract claim reserves totaled $60,437 and $63,226, respectively.
The aggregate reserves for policies and contracts were reduced for reserve
credits for reinsurance ceded at December 31, 1997 and 1996 of $2,434,130 and
$2,737,441, respectively.
At December 31, 1997, amounts recoverable from unauthorized reinsurers of
$73,080 (1996 $73,434) and reserve credits for reinsurance ceded of $78,838
(1996 $55,035) were associated with a single reinsurer and its affiliates. The
Company holds collateral under these reinsurance agreements in the form of trust
agreements totaling $117,686 at December 31, 1997 that can be drawn on for
amounts that remain unpaid for more than 120 days.
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax return
filing with certain affiliated companies. Under the terms of a tax-sharing
agreement between the Company and its affiliates, the Company computes federal
income tax expense as if it were filing a separate income tax return, except
that tax credits and net operating loss carryforwards are determined on the
basis of the consolidated group. Additionally, the alternative minimum tax is
computed for the consolidated group and the resulting tax, if any, is allocated
back to the separate companies on the basis of the separate companies'
alternative minimum taxable income.
22
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
5. INCOME TAXES (CONTINUED)
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before taxes and
realized capital losses for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Computed tax at federal statutory rate (35%) $42,775 $37,256 $27,835
Tax reserve adjustment 2,004 2,211 2,405
Excess tax depreciation (392) (384) (365)
Deferred acquisition costs tax basis 4,308 5,583 4,581
Prior year over accrual (1,016) (499) (306)
Dividend received deduction (941) (454) (56)
Charitable contribution (848) - -
Other items net (2,509) (2,536) (759)
-------------------------------------------
Federal income tax expense $43,381 $41,177 $33,335
===========================================
</TABLE>
Prior to 1984, as provided for under the Life Insurance Company Tax Act of 1959,
a portion of statutory income was not subject to current taxation but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($20,387 at December 31, 1997). To the extent dividends are paid from
the amount accumulated in the policyholders' surplus account, net earnings would
be reduced by the amount of tax required to be paid. Should the entire amount in
the policyholders' surplus account become taxable, the tax thereon computed at
current rates would amount to approximately $7,135.
The Company's federal income tax returns have been examined and closing
agreements have been executed with the Internal Revenue Service through 1987.
During 1996, there was a $5,025 prior period adjustment to the tax accrual. This
included a $2,100 writeoff of an intangible asset for tax purposes, and a
federal income tax refund of $1,829 for tax years 1984-1986 and related interest
of $1,686, net of a tax effect of $590. An examination is underway for years
1988 through 1995.
6. POLICY AND CONTRACT ATTRIBUTES
Participating life insurance policies are issued by the Company which entitle
policyholders to a share in the earnings of the participating policies, provided
that a dividend distribution, which is determined annually based on mortality
and persistency experience of the participating policies, is authorized by the
Company. Participating insurance constituted approximately .9% and 1.0% of
ordinary life insurance in force at December 31, 1997 and 1996, respectively.
23
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
A portion of the Company's policy reserves and other policyholders' funds
(including separate account liabilities) relate to liabilities established on a
variety of the Company's products that are not subject to significant mortality
or morbidity risk; however, there may be certain restrictions placed upon the
amount of funds that can be withdrawn without penalty. The amount of reserves on
these products, by withdrawal characteristics are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------- --------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment $ 8,912 0% $ 20,800 0%
Subject to discretionary withdrawal at
book value less surrender charge 755,300 8 794,881 9
Subject to discretionary withdrawal at
market value 2,454,845 27 1,803,057 20
Subject to discretionary withdrawal at
book value (minimal or no charges or
adjustments) 5,821,049 63 6,284,876 69
Not subject to discretionary withdrawal
provision 203,522 2 174,416 2
------------------------------- --------------------------------
9,243,628 100% 9,078,030 100%
Less reinsurance ceded 2,372,495 2,677,432
------------------ ------------------
Total policy reserves on annuities and
deposit fund liabilities $6,871,134 $6,400,598
================== ==================
</TABLE>
A reconciliation of the amounts transferred to and from the separate accounts is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------
Transfers as reported in the summary of operations of the
separate accounts statement:
<S> <C> <C> <C>
Transfers to separate accounts $281,095 $227,864 $133,386
Transfers from separate accounts 9,819 75,172 104,219
---------------------------------------------------
Net transfers to separate accounts 271,276 152,692 29,167
Reconciling adjustments charges for investment
manage-ment, administration fees and contract guarantees 26,204 19,093 13,814
---------------------------------------------------
Transfers as reported in the summary of operations of the
life, accident and health annual statement $297,480 $171,785 $ 42,981
===================================================
</TABLE>
24
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next anniversary
date. At December 31, 1997 and 1996, these assets (which are reported as
premiums deferred and uncollected) and the amounts of the related gross premiums
and loadings, are as follows:
<TABLE>
<CAPTION>
GROSS LOADING NET
----------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1997
Life and annuity:
Ordinary direct first year business $ 2,316 $1,698 $ 618
Ordinary direct renewal business 22,724 6,834 15,890
Group life direct business 1,523 646 877
Reinsurance ceded (1,464) (81) (1,383)
----------------------------------------
25,099 9,097 16,002
Accident and health:
Direct 148 - 148
Reinsurance ceded (49) - (49)
----------------------------------------
Total accident and health 99 - 99
----------------------------------------
$25,198 $9,097 $16,101
========================================
DECEMBER 31, 1996
Life and annuity:
Ordinary direct first year business $ 2,657 $1,865 $ 792
Ordinary direct renewal business 23,307 7,180 16,127
Group life direct business 1,788 1,195 593
Reinsurance ceded (1,706) (438) (1,268)
----------------------------------------
26,046 9,802 16,244
Accident and health:
Direct 104 - 104
Reinsurance ceded (3) - (3)
-----------------------------------------
Total accident and health 101 - 101
----------------------------------------
$26,147 $9,802 $16,345
========================================
</TABLE>
At December 31, 1997 and 1996, the Company had insurance in force aggregating
$69,271 and $69,251, respectively, in which the gross premiums are less than the
net premiums required by the standard valuation standards established by the
Insurance Division, Department of Commerce, of the State of Iowa. The Company
established policy reserves of $1,128 and $1,252 to cover these deficiencies at
December 31, 1997 and 1996, respectively.
25
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. Companies were allowed to grade the effects of the change in reserving
methodologies over five years. A direct charge to surplus of $501 was made for
the year ended December 31, 1995, related to the change in reserve methodology.
7. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.
The Company paid dividends to its parent of $62,000 and $20,000 in 1997 and
1996, respectively. No dividends were paid in 1995.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the FASB
No. 87 expense as a percent of salaries. The benefits are based on years of
service and the employee's compensation during the highest five consecutive
years of employment. Pension expense aggregated $422, $1,056 and $942 for the
years ended December 31, 1997, 1996 and 1995, respectively. The plan is subject
to the reporting and disclosure requirements of the Employee Retirement and
Income Security Act of 1974.
The Company's employees also participate in a contributory defined contribution
plan sponsored by AEGON which is qualified under Section 401(k) of the Internal
Revenue Service Code. Employees of the Company who customarily work at least
1,000 hours during each calendar year and meet the other eligibility
requirements, are participants of the plan. Participants may elect to contribute
up to fifteen percent of their salary to the plan. The Company will match an
amount up to three percent of the participant's salary. Participants may direct
all of their contributions and plan balances to be invested in a variety of
investment options. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement and Income Security Act of 1974. Expense
related to this plan was $226, $297 and $465 for the years ended December 31,
1997, 1996 and 1995, respectively.
26
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
8. RETIREMENT AND COMPENSATION PLANS (CONTINUED)
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also sponsors
an employee stock option plan for individuals employed at least three years and
a stock purchase plan for its producers, with the participating affiliated
companies establishing their own eligibility criteria, producer contribution
limits and company matching formula. These plans have been accrued or funded as
deemed appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans sponsored by
AEGON that provide postretirement medical, dental and life insurance benefits to
employees meeting certain eligibility requirements. Portions of the medical and
dental plans are contributory. The expenses of the postretirement plans
calculated on the pay-as-you-go basis are charged to affiliates in accordance
with an intercompany cost sharing arrangement. The Company expensed $62, $184
and $164 for the years ended December 31, 1997, 1996 and 1995, respectively.
9. RELATED PARTY TRANSACTIONS
The Company shares certain offices, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1997, 1996
and 1995, the Company paid $18,705, $17,028 and $14,214, respectively, for these
services, which approximates their costs to the affiliates.
Payable to affiliates and intercompany borrowings bear interest at the thirty-
day commercial paper rate of 5.6% at December 31, 1997. During 1997, 1996 and
1995, the Company paid net interest of $1,188, $174 and $71, respectively, to
affiliates.
During 1997 and 1995, the Company received capital contributions of $153 and
$40,000, respectively, in cash from its parent.
At December 31, 1997, the Company has a $16,400 short-term note payable to an
affiliate. Interest on this note accrues at 5.6%.
27
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1995, the Company sold real estate with a book value of approximately
$13,270 to an affiliated entity in exchange for a short-term note receivable. No
gain was recognized on this sale. This note matured during 1996.
During the year ended December 31, 1995, the Company restructured demand notes
and accrued interest of $13,250 and $745, respectively, related to an affiliate.
The Company received 9,750 shares of preferred stock from the affiliate for
satisfaction of debt. The Company realized a loss of $8,695 related to this
transaction. At December 31, 1996 and 1995, the preferred stock related to this
affiliate was deemed to have no value and an unrealized loss of $4,555 was
recognized in 1995.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. Although
such litigation sometimes includes substantial demands for compensatory and
punitive damages, in addition to contract liability, it is management's opinion,
after consultation with counsel and a review of available facts, that damages
arising from such demands will not be material to the Company's financial
position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. Assessments are charged to operations when received
by the Company except where right of offset against other taxes paid is allowed
by law; amounts available for future offsets are recorded as an asset on the
Company's balance sheet. Potential future obligations for unknown insolvencies
are not determinable by the Company. The future obligation has been based on the
most recent information available from the National Organization of Life and
Health Insurance Guaranty Associations. The Company has established a reserve of
$17,700 and $21,774 and an offsetting premium tax benefit of $7,984 and $8,752
at December 31, 1997 and 1996, respectively, for its estimated share of future
guaranty fund assessments related to several major insurer insolvencies. The
guaranty fund expense (benefit) was $(975), $2,617 and $5,859 for December 31,
1997, 1996 and 1995, respectively.
28
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
11. YEAR 2000 (UNAUDITED)
AEGON has adopted and has in place a Year 2000 Assessment and Planning Project
(the "Project") to review and analyze its information technology and systems to
determine if they are Year 2000 compatible. The Company has begun to convert or
modify, where necessary, critical data processing systems. It is contemplated
that the plan will be substantially completed by early 1999. The Company does
not expect this project to have a significant effect on operations. However, to
mitigate the effect of outside influences upon the success of the project, the
Company has undertaken communications with its significant customers, suppliers
and other third parties to determine their Year 2000 compatibility and
readiness. Management believes that the issues associated with the Year 2000
will be resolved with no material financial impact on the Company.
Since the Year 2000 computer problem, and its resolution is complex and
multifaceted, the success of a response plan cannot be conclusively known until
the Year 2000 is reached (or an earlier date to the extent that systems or
equipment addresses Year 2000 date data prior to the Year 2000). Even with
appropriate and diligent pursuit of a well-conceived Project, including testing
procedures, there is no certainty that any company will achieve complete
success. Notwithstanding the efforts or results of the Company, its ability to
function unaffected to and through the Year 2000 may be adversely affected by
actions (or failure to act) of third parties beyond its knowledge or control.
29
<PAGE>
PFL Life Insurance Company
Summary of Investments - Other Than
Investments in Related Parties
(Dollars in thousands)
December 31, 1997
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and
government agencies and authorities $1,325,817 $1,355,098 $1,325,817
States, municipalities and political
subdivisions 136,058 139,110 136,058
Foreign governments 51,407 51,154 51,407
Public utilities 124,013 124,013 121,582
All other corporate bonds 3,275,849 3,377,152 3,278,280
Redeemable preferred stock 2,750 8,029 2,750
----------------------------------------------------
Total fixed maturities 4,915,894 5,054,556 4,915,894
EQUITY SECURITIES
Common stocks:
Banks, trust and insurance 7,593 9,046 9,046
Industrial, miscellaneous and all other 36,263 41,330 41,330
----------------------------------------------------
Total equity securities 43,856 50,376 50,376
Mortgage loans on real estate 935,207 935,207
Real estate 44,699 44,699
Real estate acquired in satisfaction of
debt 11,814 11,814
Policy loans 57,136 57,136
Other long-term investments 29,864 29,864
Cash and short-term investments 23,939 23,939
-------------- ----------------
Total investments $6,062,409 $6,068,929
============== ================
</TABLE>
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
30
<PAGE>
PFL Life Insurance Company
Supplementary Insurance Information
(Dollars in thousands)
SCHEDULE III
<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
--------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Individual life $ 882,003 $ - $ 8,550
Individual health 62,033 9,207 12,821
Group life and health 88,211 11,892 44,977
Annuity 4,204,125 - -
--------------------------------------------------
$5,236,372 $21,099 $66,348
==================================================
YEAR ENDED DECEMBER 31, 1996
Individual life $ 734,350 $ - $ 7,240
Individual health 39,219 8,680 13,631
Group life and health 78,418 14,702 53,486
Annuity 4,408,419 - -
--------------------------------------------------
$5,260,406 $23,382 $74,357
==================================================
YEAR ENDED DECEMBER 31, 1995
Individual life $ 594,274 $ - $ 6,066
Individual health 24,225 7,768 11,863
Group life and health 67,994 16,662 58,813
Annuity 4,220,274 -
--------------------------------------------------
$4,906,767 $ 24,430 $76,742
==================================================
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
NET BENEFITS, CLAIMS OTHER
PREMIUM INVESTMENT LOSSES AND SETTLEMENT OPERATING PREMIUMS
REVENUE INCOME* EXPENSES EXPENSES* WRITTEN
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 200,175 $ 75,914 $ 211,921 $ 36,185 -
63,548 5,934 37,706 29,216 $ 63,383
146,694 11,888 103,581 91,568 143,580
657,695 352,688 571,434 364,216 -
- ----------------------------------------------------------------------
$ 1,068,112 $446,424 $ 924,642 $521,185
======================================================================
$ 202,082 $ 66,538 $ 197,526 $ 38,067 -
55,871 5,263 32,903 29,511 $ 55,678
174,781 12,877 105,459 122,953 171,320
725,966 343,659 800,121 230,417 -
- ----------------------------------------------------------------------
$ 1,158,700 $428,337 $1,136,009 $420,948
======================================================================
$ 111,918 $ 49,929 $ 97,065 $ 37,933 -
47,692 4,091 25,793 26,033 $ 47,690
187,832 11,665 106,065 139,640 184,545
921,452 327,000 1,116,768 114,164 -
- ----------------------------------------------------------------------
$ 1,268,894 $392,685 $1,345,691 $317,770
======================================================================
</TABLE>
* Allocations of net investment income and other operating expenses are based on
a number of assumptions and estimates, and the results would change if
different methods were applied.
32
<PAGE>
PFL Life Insurance Company
Reinsurance
(Dollars in thousands)
SCHEDULE IV
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER
31, 1997
Life insurance in force $5,025,027 $420,519 $ 35,486 $4,639,994 .8%
=========================================================================
Premiums:
Individual life $ 201,691 $ 3,554 $ 2,038 $ 200,175 1.0%
Individual health 73,593 10,045 - 63,548 -
Group life and health 339,269 192,575 - 146,694 -
Annuity 697,893 40,198 - 657,695 -
-------------------------------------------------------------------------
$1,312,446 $ 246,372 $ 2,038 $1,068,112 .2%
=========================================================================
YEAR ENDED DECEMBER
31, 1996
Life insurance in force $4,863,416 $477,112 $30,685 $4,416,989 .7%
=========================================================================
Premiums:
Individual life $ 204,144 $ 3,858 $ 1,796 $ 202,082 .9%
Individual health 68,699 12,828 - 55,871 -
Group life and health 390,296 215,515 - 174,781 -
Annuity 794,311 68,345 - 725,966 -
-------------------------------------------------------------------------
$1,457,450 $300,546 $ 1,796 $1,158,700 .2%
=========================================================================
YEAR ENDED DECEMBER
31, 1995
Life insurance in force $4,594,434 $468,811 $22,936 $4,148,559 .6%
=========================================================================
Premiums:
Individual life $ 113,934 $ 3,841 $ 1,825 $ 111,918 1.6%
Individual health 60,309 12,617 - 47,692 -
Group life and health 408,097 220,265 - 187,832 -
Annuity 1,009,191 88,270 531 921,452 .05%
-------------------------------------------------------------------------
$1,591,531 $324,993 $ 2,356 $1,268,894 .2%
=========================================================================
</TABLE>
33
<PAGE>
PFL ENDEAVOR VA SEPARATE ACCOUNT
THE ENDEAVOR VARIABLE ANNUITY
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND CONTRACT OWNERS
OF THE ENDEAVOR VARIABLE ANNUITY,
PFL LIFE INSURANCE COMPANY
We have audited the accompanying balance sheet of certain subaccounts of
PFL Endeavor VA Separate Account, which comprise The Endeavor Variable
Annuity, formerly The PFL Endeavor Variable Annuity Account as of December
31, 1997, and the related statements of operations for the year then ended
and changes in contract owners' equity for each of the two years in the
period then ended. These financial statements are the responsibility of the
Variable Account'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 mutual fund shares
owned as of December 31, 1997 by correspondence with the mutual funds'
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 certain subaccounts of
the PFL Endeavor VA Separate Account which comprise The Endeavor Variable
Annuity at December 31, 1997 and the results of their operations for the
year then ended and changes in their contract owners' equity for each of
the two years in the period then ended in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Des Moines, Iowa
March 27, 1998
<PAGE>
PFL ENDEAVOR VA SEPARATE ACCOUNT
THE ENDEAVOR VARIABLE ANNUITY
BALANCE SHEET
December 31, 1997
<TABLE>
<CAPTION>
T. ROWE DREYFUS
ENDEAVOR ENDEAVOR PRICE ENDEAVOR SMALL
MONEY ASSET INT'L. VALUE CAP
MARKET ALLOCATION STOCK EQUITY VALUE
TOTAL SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
$ 643 641 - 2 - -
Cash
Investments in mutual funds,
at current market value (Note 2):
Endeavor Series Trust:
Endeavor Money Market Portfolio 35,508,568 35,508,568 - - - -
Endeavor Managed Asset Allocation
Portfolio 280,439,022 - 280,439,022 - - -
T. Rowe Price Int'l Stock Portfolio 139,956,389 - - 139,956,389 - -
Endeavor Value Equity Portfolio 176,855,816 - - - 176,855,816 -
Dreyfus Small Cap Value Portfolio 121,761,688 - - - - 121,761,688
Dreyfus U.S. Gov't Securities Portfolio 37,546,098 - - - - -
T. Rowe Price Equity Income Portfolio 160,936,635 - - - - -
T. Rowe Price Growth Stock Portfolio 95,087,945 - - - - -
Endeavor Opportunity Value Portfolio 20,599,664 - - - - -
Endeavor Enhanced Index Portfolio 13,738,676 - - - - -
WRL Series Fund, Inc.:
WRL Growth Portfolio 327,189,212 - - - - -
------------- ---------- ----------- ----------- ----------- -----------
Total investments in mutual funds 1,409,619,713 35,508,568 280,439,022 139,956,389 176,855,816 121,761,688
------------- ---------- ----------- ----------- ----------- -----------
------------- ---------- ----------- ----------- ----------- -----------
TOTAL ASSETS $1,409,620,356 35,509,209 280,439,022 139,956,391 176,855,816 121,761,688
============= ========== =========== =========== =========== ===========
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Contract terminations payable $ 1,354 - 190 - 73 193
------------- ---------- ----------- ----------- ----------- -----------
Total Liabilities 1,354 - 190 - 73 193
Contract Owners' Equity:
Deferred annuity contracts terminable
by owners (Note 3) 1,409,619,002 35,509,209 280,438,832 139,956,391 176,855,743 121,761,495
------------- ---------- ----------- ----------- ----------- -----------
Total liabilities and contract
owners' equity $1,409,620,356 35,509,209 280,439,022 139,956,391 176,855,816 121,761,688
============= ========== =========== =========== =========== ===========
<CAPTION>
DREYFUS T. ROWE T. ROWE
U.S. PRICE PRICE ENDEAVOR ENDEAVOR
GOV'T. EQUITY GROWTH OPPORTUNITY ENHANCED
SECURITIES INCOME STOCK VALUE INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash - - - - -
Investments in mutual funds,
at current market value (Note 2):
Endeavor Series Trust:
Endeavor Money Market Portfolio - - - - -
Endeavor Asset Allocation Portfolio - - - - -
T. Rowe Price Int'l Stock Portfolio - - - - -
Endeavor Value Equity Portfolio - - - - -
Dreyfus Small Cap Value Portfolio - - - - -
Dreyfus U.S. Gov't Securities Portfolio 37,546,098 - - - -
T. Rowe Price Equity Income Portfolio - 160,936,635 - - -
T. Rowe Price Growth Stock Portfolio - - 95,087,945 - -
Endeavor Opportunity Value Portfolio - - - 20,599,664 -
Endeavor Enhanced Index Portfolio - - - - 13,738,676
WRL Series Fund, Inc.:
WRL Growth Portfolio - - - - -
------------- ----------- ----------- ----------- -----------
Total investments in mutual funds 37,546,098 160,936,635 95,087,945 20,599,664 13,738,676
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
TOTAL ASSETS 37,546,098 160,936,635 95,087,945 20,599,664 13,738,676
============= =========== =========== =========== ===========
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Contract terminations payable 11 107 73 84 386
------------- ----------- ----------- ----------- -----------
Total Liabilities 11 107 73 84 386
Contract Owners' Equity:
Deferred annuity contracts terminable
by owners (Note 3) 37,546,087 160,936,528 95,087,872 20,599,580 13,738,290
------------- ----------- ----------- ----------- -----------
Total liabilities and contract
owners' equity 37,546,098 160,936,635 95,087,945 20,599,664 13,738,676
============= =========== =========== =========== ===========
<CAPTION>
WRL
GROWTH
SUBACCOUNT
----------
<S> <C>
ASSETS
Cash -
Investments in mutual funds,
at current market value (Note 2):
Endeavor Series Trust:
Endeavor Money Market Portfolio -
Endeavor Asset Allocation Portfolio -
T. Rowe Price Int'l Stock Portfolio -
Endeavor Value Equity Portfolio -
Dreyfus Small Cap Value Portfolio -
Dreyfus U.S. Gov't Securities Portfolio -
T. Rowe Price Equity Income Portfolio -
T. Rowe Price Growth Stock Portfolio -
Endeavor Opportunity Value Portfolio -
Endeavor Enhanced Index Portfolio -
WRL Series Fund, Inc.:
WRL Growth Portfolio 327,189,212
-----------
Total investments in mutual funds 327,189,212
-----------
-----------
TOTAL ASSETS 327,189,212
===========
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Contract terminations payable 237
-----------
Total Liabilities 237
Contract Owners' Equity:
Deferred annuity contracts terminable
by owners (Note 3) 327,188,975
-----------
327,189,212
===========
</TABLE>
See accompanying Notes to Financial Statements.
Page 1
<PAGE>
PFL ENDEAVOR VA SEPARATE ACCOUNT
THE ENDEAVOR VARIABLE ANNUITY
Statement of Operations
Year Ended December 31, 1997, Except as Noted
<TABLE>
<CAPTION>
T. ROWE
ENDEAVOR ENDEAVOR PRICE ENDEAVOR
MONEY ASSET INT'L. VALUE
MARKET ALLOCATION STOCK EQUITY
TOTAL SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends $ 60,377,511 1,862,314 3,284,015 927,034 4,928,354
Expenses (Note 4):
Administration fee 516,162 11,469 118,873 69,768 56,152
Mortality and expense risk charge 16,745,157 520,554 3,592,872 1,909,665 2,007,780
------------ ---------- ----------- ----------- -----------
Net investment income (loss) $ 43,116,192 1,330,291 (427,730) (1,052,399) 2,864,422
============ ========== =========== =========== ===========
NET REALIZED & UNREALIZED CAPITAL GAIN
FROM INVESTMENTS
Net realized capital gain from sales of investments:
Proceeds from sales 115,721,788 33,273,026 19,509,405 10,918,985 8,576,677
Cost of investments sold 89,489,508 33,273,026 13,063,638 9,030,327 4,556,732
------------ ---------- ----------- ----------- -----------
Net realized capital gain from sales of investments 26,232,280 - 6,445,767 1,888,658 4,019,945
Net change in unrealized appreciation/depreciation
of investments:
Beginning of the period 175,289,096 - 52,891,935 16,142,849 27,438,859
End of the period 289,880,477 - 89,718,354 16,211,906 50,136,268
------------ ---------- ----------- ----------- -----------
Net change in unrealized appreciation/
depreciation of investments 114,591,381 - 36,826,419 69,057 22,697,409
------------ ---------- ----------- ----------- -----------
Net realized and unrealized capital gain
from investments 140,823,661 - 43,272,186 1,957,715 26,717,354
------------ ---------- ----------- ----------- -----------
INCREASE FROM OPERATIONS $183,939,853 1,330,291 42,844,456 905,316 29,581,776
============ ========== =========== =========== ===========
<CAPTION>
DREYFUS DREYFUS T. ROWE T. ROWE
SMALL U.S. PRICE PRICE
CAP GOV'T. EQUITY GROWTH
VALUE SECURITIES INCOME STOCK
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends 10,292,263 899,852 2,739,626 514,044
Expenses (Note 4):
Administration fee 40,333 7,470 35,086 24,786
Mortality and expense risk charge 1,388,025 402,538 1,549,782 984,212
------------ ---------- ----------- ------------
Net investment income (loss) 8,863,905 489,844 1,154,758 (494,954)
============ ========== =========== ============
NET REALIZED & UNREALIZED CAPITAL GAIN
FROM INVESTMENTS
Net realized capital gain from sales of investments:
Proceeds from sales 6,870,346 3,432,371 3,314,444 7,054,149
Cost of investments sold 4,868,715 3,185,967 2,078,017 4,360,265
------------ ---------- ----------- ------------
Net realized capital gain from sales of investments 2,001,631 246,404 1,236,427 2,693,884
Net change in unrealized appreciation/depreciation
of investments:
Beginning of the period 15,835,918 454,659 9,137,767 7,517,491
End of the period 24,246,785 2,079,487 32,599,078 21,711,491
------------ ---------- ----------- ------------
Net change in unrealized appreciation/
depreciation of investments 8,410,867 1,624,828 23,461,311 14,194,000
------------ ---------- ----------- ------------
Net realized and unrealized capital gain
from investments 10,412,498 1,871,232 24,697,738 16,887,884
------------ ---------- ----------- ------------
INCREASE FROM OPERATIONS 19,276,403 2,361,076 25,852,496 16,392,930
============ ========== =========== ============
<CAPTION>
ENDEAVOR ENDEAVOR
OPPORTUNITY ENHANCED WRL
VALUE INDEX GROWTH
SUBACCOUNT SUBACCOUNT (1) SUBACCOUNT
---------- -------------- ----------
<S> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends 694 - 34,929,315
Expenses (Note 4):
Administration fee 1,373 204 150,648
Mortality and expense risk charge 136,018 75,518 4,178,193
----------- ------------ -----------
Net investment income (loss) (136,697) (75,722) 30,600,474
=========== ============ ===========
NET REALIZED & UNREALIZED CAPITAL GAIN
FROM INVESTMENTS
Net realized capital gain from sales of investments:
Proceeds from sales 390,754 80,972 22,300,659
Cost of investments sold 366,407 67,461 14,638,953
----------- ------------ -----------
Net realized capital gain from sales of investments 24,347 13,511 7,661,706
Net change in unrealized appreciation/depreciation
of investments:
Beginning of the period 408 - 45,869,210
End of the period 1,281,837 1,207,416 50,687,855
----------- ------------ -----------
Net change in unrealized appreciation/
depreciation of investments 1,281,429 1,207,416 4,818,645
----------- ------------ -----------
Net realized and unrealized capital gain
from investments 1,305,776 1,220,927 12,480,351
----------- ------------ -----------
INCREASE FROM OPERATIONS 1,169,079 1,145,205 43,080,825
=========== ============ ===========
</TABLE>
(1) Period from May 1, 1997 (commencement of operations) to December 31, 1997
See accompanying Notes to Financial Statements.
Page 2
<PAGE>
PFL ENDEAVOR VA SEPARATE ACCOUNT
The Endeavor Variable Annuity
Statements of Changes in Contract Owners' Equity
Years Ended December 31,1997 and 1996, Except as Noted
<TABLE>
<CAPTION>
Endeavor Endeavor
Money Asset
Market Allocation
Total Subaccount Subaccount
-------------------------------- -------------------------- ---------------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operations
Net investment income (loss) $ 43,116,192 16,223,757 1,330,291 870,588 (427,730) 727,157
Net realized capital gain 26,232,280 10,074,947 - - 6,445,767 2,964,316
Net change in unrealized appreciation/
depreciation of investments 114,591,381 96,426,903 - - 36,826,419 27,771,253
-------------------------------- -------------------------- ------------------------
Increase from operations 183,939,853 122,725,607 1,330,291 870,588 42,844,456 31,462,726
-------------------------------- -------------------------- ------------------------
Contract Transactions
Net contract purchase payments 138,269,473 150,050,130 11,624,857 12,210,636 12,860,591 13,250,589
Transfer payments from (to) other
subaccounts of general account 220,708,691 78,317,419 6,852,710 5,679,900 17,562,521 2,506,229
Contract terminations, withdrawals,
and other deductions (92,946,975) (52,552,928) (14,840,552) (11,765,251) (21,968,645)(12,118,367)
-------------------------------- -------------------------- -----------------------
Increase from contract transactions 266,031,189 175,814,621 3,637,015 6,125,285 8,454,467 3,638,451
-------------------------------- -------------------------- -----------------------
-------------------------------- -------------------------- -----------------------
Net increase in contract owner's equity 449,971,042 298,540,228 4,967,306 6,995,873 51,298,923 35,101,177
-------------------------------- -------------------------- -----------------------
Contract Owners' Equity
Beginning of the period $ 959,647,960 661,107,732 30,541,903 23,546,030 229,139,909 191,038,732
-------------------------------- -------------------------- -----------------------
End of the period $ 1,409,619,002 959,647,960 35,509,209 30,541,903 280,438,832 229,139,909
================================ ========================== =======================
<CAPTION>
T. Rowe Dreyfus
Price Endeavor Small
International Value Cap
Stock Equity Value
Subaccount Subaccount Subaccount
-------------------------------- -------------------------- -----------------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operations
Net investment income (loss) (1,052,399) (801,529) 2,864,422 735,800 8,863,905 1,792,388
Net realized capital gain 1,888,658 537,101 4,019,945 1,155,150 2,001,631 560,930
Net change in unrealized appreciation/
depreciation of investments 69,057 13,506,728 22,697,409 14,877,153 8,410,867 11,409,699
-------------------------------- -------------------------- ------------------------
Increase from operations 905,316 13,242,300 29,581,776 16,768,103 19,276,403 13,763,017
-------------------------------- -------------------------- ------------------------
Contract Transactions
Net contract purchase payments 13,236,900 16,256,902 16,313,887 20,562,070 11,107,879 11,125,682
Transfer payments from other subaccounts
of general account 13,758,181 10,431,383 28,950,236 13,551,123 21,648,973 5,636,679
Contract terminations, withdrawals,
and other deductions (9,647,406) (6,131,435) (8,540,729) (4,444,435) (6,757,831) (3,080,213)
-------------------------------- -------------------------- ------------------------
Increase from contract transactions 17,347,675 20,556,850 36,723,394 29,668,758 25,999,021 13,682,148
-------------------------------- -------------------------- ------------------------
-------------------------------- -------------------------- ------------------------
Net increase in contract owner's equity 18,252,991 33,799,150 66,305,170 46,436,661 45,275,424 27,445,165
-------------------------------- -------------------------- ------------------------
Contract Owners' Equity
Beginning of the period 121,703,400 87,904,250 110,550,573 64,113,712 76,486,071 49,040,906
-------------------------------- -------------------------- ------------------------
End of the period 139,956,391 121,703,400 176,855,743 110,550,573 121,761,495 76,486,071
================================ ========================== ========================
<CAPTION>
Dreyfus T. Rowe
U.S. Price
Gov't Equity
Securities Income
Subaccount Subaccount
---------------------------------- ------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operations
Net investment income (loss) 489,844 228,317 1,154,758 (201,278)
Net realized capital gain 246,404 189,102 1,236,427 274,281
Net change in unrealized appreciation
depreciation of investments 1,624,828 (107,945) 23,461,311 6,871,576
---------------------------------- ------------------------------
Increase from operations 2,361,076 309,474 25,852,496 6,944,579
---------------------------------- ------------------------------
Contract Transactions
Net contract purchase payments 3,862,119 6,793,235 21,429,035 21,213,472
Transfer payments from other subaccounts
of general account 13,350,264 4,192,955 53,043,260 19,065,305
Contract terminations, withdrawals,
and other deductions. (1,850,616) (980,293) (4,322,976) (1,524,332)
---------------------------------- ------------------------------
Increase from contract transactions 15,361,767 10,005,897 70,149,319 38,754,445
---------------------------------- ------------------------------
---------------------------------- ------------------------------
Net increase in contract owner's equity 17,722,843 10,315,371 96,001,815 45,699,024
---------------------------------- ------------------------------
Contract Owners' Equity
Beginning of the period 19,823,244 9,507,873 64,934,713 19,235,689
---------------------------------- ------------------------------
End of the period 37,546,087 19,823,244 160,936,528 64,934,713
================================== ==============================
<CAPTION>
T. Rowe
Price Endeavor
Growth Opportunity
Stock Value
Subaccount Subaccount
------------------------------------ ------------------------------------
1997 1996 1997 1996(1)
---- ---- ---- -------
<S> <C> <C> <C> <C>
Operations
Net investment income (loss) $ (494,954) 55,841 (136,697) (213)
Net realized capital gain (loss) 2,693,884 417,718 24,347 -
Net change in unrealized appreciation/
depreciation of investments 14,194,000 5,604,339 1,281,429 408
------------------------------------ ------------------------------------
Increase (decrease) from operations 16,392,930 6,077,898 1,169,079 195
------------------------------------ ------------------------------------
Contract Transactions
Net contract purchase payments 12,873,703 13,843,830 7,787,638 193,021
Transfer payments from (to) other subaccounts
of general account 20,689,453 10,829,886 11,427,372 166,339
Contract terminations, withdrawals,
and other deductions (3,599,923) (1,232,863) (99,996) (44,068)
------------------------------------ ------------------------------------
Increase (decrease) from contract
transactions 29,963,233 23,440,853 19,115,014 315,292
------------------------------------ ------------------------------------
------------------------------------ ------------------------------------
Net increase (decrease) in contract owner's
equity 46,356,163 29,518,751 20,284,093 315,487
------------------------------------ ------------------------------------
Contract Owners' Equity
Beginning of the period 48,731,709 19,212,958 315,487 -
------------------------------------ ------------------------------------
End of the period $ 95,087,872 48,731,709 20,599,580 315,487
==================================== ====================================
<CAPTION>
Endeavor
Enhanced WRL
Index Growth
Subaccount Subaccount
----------------- ------------------------------------
1997 (2) 1997 1996
------- ---- ----
<S> <C> <C> <C>
Operations
Net investment income (loss) (75,722) 30,600,474 12,816,686
Net realized capital gain (loss) 13,511 7,661,706 3,976,349
Net change in unrealized appreciation/
depreciation of investments 1,207,416 4,818,645 16,493,692
----------------- ------------------------------------
Increase (decrease) from operations 1,145,205 43,080,825 33,286,727
----------------- ------------------------------------
Contract Transactions
Net contract purchase payments 3,897,324 23,275,540 34,600,693
Transfer payments from (to) other subaccounts
of general account 8,753,680 24,672,041 6,257,620
Contract terminations, withdrawals,
and other deductions. (57,919) (21,260,382) (11,231,671)
----------------- -----------------------------------
Increase (decrease) from contract
transactions 12,593,085 26,687,199 29,626,642
----------------- -----------------------------------
----------------- -----------------------------------
Net increase (decrease) in contract
owners' equity 13,738,290 69,768,024 62,913,369
----------------- -----------------------------------
Contract Owners' Equity
Beginning of the period - 257,420,951 194,507,582
----------------- -----------------------------------
End of the period 13,738,290 327,188,975 257,420,951
================ ================ ==================
</TABLE>
(1) Period from November 18, 1996 (commencement of operations) to December 31,
1996
(2) Period from May 1, 1997 (commencement of operations) to December 31, 1997
See accompanying Notes to Financial Statements.
Page 3
<PAGE>
PFL ENDEAVOR VA SEPARATE ACCOUNT
THE ENDEAVOR VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. Organization and Summary of Significant Accounting Policies
Organization - The PFL Endeavor Variable Annuity Account ("Mutual Fund Account")
is a segregated investment account of PFL Life Insurance Company ("PFL Life"),
an indirect, wholly-owned subsidiary of AEGON nv,a holding company organized
under the laws of The Netherlands.
The Mutual Fund Account is registered with the Securities and Exchange
Commission as a Unit Investment Trust pursuant to provisions of the Investment
Company Act of 1940. The Mutual Fund Account consists of fourteen investment
subaccounts, ten of which are invested in specified portfolios of the Endeavor
Series Trust and one of which is invested in the Growth Portfolio of the WRL
Series Fund Inc. Activity in these eleven investment subaccounts is available
to contract owners of The Endeavor Variable Annuity and The Endeavor Platinum
Variable Annuity, also issued by PFL Life. The remaining three subaccounts,
which are invested in the Merrill Lynch Variable Series Funds, Inc., are
available to the contract owners of the Endeavor ML Variable Annuity.
The Enhanced Index Subaccount commenced operations on May 1, 1997. The
Opportunity Value Subaccount commenced operations on November 18, 1996.
The investment advisor of the Endeavor Series Trust is Endeavor Investment
Advisors, a general partnership between Endeavor Management Co. and AUSA
Financial Markets, Inc., an affiliate of PFL Life. The investment advisor of the
WRL Series Fund, Inc. is WRL Investment Management, Inc., a subsidiary of
Western Reserve Life Assurance Co. of Ohio, an affiliate of PFL Life.
Investments- Net purchase payments received by the Mutual Fund Account are
invested in the portfolios of the Endeavor Series Trust, and the Growth
Portfolio of the WRL Series Fund, Inc. (collectively the "Series Funds"), as
selected by the contract owner. Investments are stated at the closing net asset
values per share on December 31, 1997.
Realized capital gains and losses from sale of shares in the Series Funds are
determined on the first-in, first-out basis. Investment transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Unrealized gains or losses
from investments in the Series Funds are credited or charged to contract owners'
equity.
Dividend Income- Dividends received from the Series Funds investments are
reinvested to purchase additional mutal fund shares.
<PAGE>
PFL ENDEAVOR VA SEPARATE ACCOUNT
THE ENDEAVOR VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
2. Investments
A summary of the mutual fund investment at December 31, 1997 follows:
<TABLE>
<CAPTION>
Number of Net Asset Value
Shares Held Per Share Market Value Cost
---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Endeavor Series Trust:
Endeavor Money Market Portfolio 35,508,567.710 $ 1.00 $ 35,508,568 $ 35,508,568
Endeavor Asset Allocation Portfolio 12,553,223.923 22.34 280,439,022 190,720,668
T. Rowe Price Int'l Stock Portfolio 9,842,221.443 14.22 139,956,389 123,744,483
Endeavor Value Equity Portfolio 8,543,759.235 20.70 176,855,816 126,719,548
Dreyfus Small Cap Value Portfolio 7,419,968.804 16.41 121,761,688 97,514,903
Dreyfus U.S. Gov't Securities Portfolio 3,163,108.485 11.87 37,546,098 35,466,611
T. Rowe Price Equity Income Portfolio 8,321,439.226 19.34 160,936,635 128,337,557
T. Rowe Price Growth Stock Portfolio 4,575,935.761 20.78 95,087,945 73,376,454
Endeavor Opportunity Value Portfolio 1,753,162.902 11.75 20,599,664 19,317,827
Endeavor Enhanced Index Portfolio 1,117,874.363 12.29 13,738,676 12,531,260
WRL Series Fund, Inc.:
WRL Growth Portfolio 8,880,344.878 36.844201 327,189,212 276,501,357
-------------- --------------
$1,409,619,713 $1,119,739,236
============== ==============
</TABLE>
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31 or
Commencement of Operations to December 31
------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------
Purchases Sales Purchases Sales
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Endeavor Series Trust:
Endeavor Money Market Portfolio $ 38,239,132 33,273,026 31,789,481 24,792,658
Endeavor Asset Allocation Portfolio 27,534,413 19,509,405 19,593,987 15,227,824
T. Rowe Price Int'l Stock Portfolio 27,215,017 10,918,985 24,567,791 4,812,880
Endeavor Value Equity Portfolio 48,167,751 8,576,677 33,900,438 3,499,103
Dreyfus Small Cap Value Portfolio 41,737,335 6,870,346 19,535,213 4,064,654
Dreyfus U.S. Gov't Securities Portfolio 19,284,711 3,432,371 12,086,187 1,852,687
T. Rowe Price Equity Income Portfolio 74,619,010 3,314,444 39,523,411 970,645
T. Rowe Price Growth Stock Portfolio 36,523,153 7,054,149 25,124,343 1,628,487
Endeavor Opportunity Value Portfolio 19,369,155 390,754 352,162 37,083
Endeavor Enhanced Index Portfolio 12,598,721 80,972 - -
WRL Series Fund, Inc.:
WRL Growth Portfolio 79,588,805 22,300,659 56,405,202 13,961,955
------------- ------------- ------------- -------------
$ 424,877,203 115,721,788 262,878,215 70,847,976
============= ============= ============= =============
</TABLE>
<PAGE>
PFL ENDEAVOR VA SEPARATE ACCOUNT
The Endeavor Variable Annuity
Notes to Financial Statements
December 31, 1997
3 Contract Owners' Equity
Contract owners' equity at December 31, 1997, includes an amount of $4,958,754,
which represents the current value of PFL Life's capital contribution of
$2,900,000.
A summary of deferred annuity contracts terminable by owners at December 31,
1997 follows:
<TABLE>
<CAPTION>
Return of Premium Death Benefit
Accumulation Accumulation Total
Subaccount Units Owned Unit Value Contract Value
--------------- ------------------ --------------- ------------------
<S> <C> <C> <C>
Endeavor Money Market 28,678,037.042 $ 1.196418 34,310,920
Endeavor Asset 127,262,704.167 2.171948 276,407,976
T. Rowe Price Int'l Stock 101,220,764.948 1.346560 136,299,833
Endeavor Value Equity 82,171,833.799 2.086130 171,421,128
Dreyfus Small Cap Value 63,123,931.161 1.851229 116,856,852
Dreyfus U.S. Gov't. Securities 30,043,275.031 1.215033 36,503,571
T. Rowe Price Equity Income 79,662,847.306 1.925022 153,352,734
T. Rowe Price Growth Stock 44,624,829.320 2.043487 91,190,259
Endeavor Opportunity Value 14,927,829.243 1.156993 17,271,394
Endeavor Enhanced Index 9,296,582.067 1.217647 11,319,955
WRL Growth 16,307,024.863 19.665157 320,680,204
---------------
$ 1,365,614,826
===============
<CAPTION>
5% Annually Compounding Death Benefit
Annual Step-Up Death Benefit
Accumulation Accumulation Total
Subaccount Units Owned Unit Value Contract Value
--------------- ------------------ ----------------- ----------------
<S> <C> <C> <C>
Endeavor Money Market 1,002,462.071 $ 1.195346 1,198,289
Endeavor Asset 1,857,541.490 2.169995 4,030,856
T. Rowe Price Int'l Stock 2,717,945.242 1.345339 3,656,558
Endeavor Value Equity 2,607,465.410 2.084252 5,434,615
Dreyfus Small Cap Value 2,651,783.374 1.849564 4,904,643
Dreyfus U.S. Gov't. Securities 858,785.418 1.213942 1,042,516
T. Rowe Price Equity Income 3,943,109.487 1.923303 7,583,794
T. Rowe Price Growth Stock 1,909,047.791 2.041653 3,897,613
Endeavor Opportunity Value 2,879,146.147 1.155963 3,328,186
Endeavor Enhanced Index 1,987,857.002 1.216554 2,418,335
WRL Growth 331,277.459 19.647490 6,508,771
---------------
$ 44,004,176
===============
</TABLE>
At December 31, 1997 contract owners' equity was comprised of:
<TABLE>
<CAPTION>
T. Rowe
Endeavor Endeavor Price
Money Asset Int'l
Market Allocation Stock
Total Subaccount Subaccount Subaccount
----- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Unit transactions, accumulated
net investment income and
realized capital gains $ 1,119,738,525 35,509,209 190,720,478 123,744,485
Adjustment for appreciation/
depreciation to market value 289,880,477 - 89,718,354 16,211,906
--------------------- ------------ ------------- ----------------
Total Contract Owners' Equity $ 1,409,619,002 35,509,209 280,438,832 139,956,391
===================== ============ ============= ================
<CAPTION>
Dreyfus Dreyfus T. Rowe T. Rowe
Endeavor Small U.S. Price Price
Value Cap Gov't Equity Growth
Equity Value Securities Income Stock
Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Unit transactions, accumulated
net investment income and
realized capital gains 126,719,475 97,514,710 35,466,600 128,337,450 73,376,381
Adjustment for appreciation/
depreciation to market value 50,136,268 24,246,785 2,079,487 32,599,078 21,711,491
------------------ ------------- ----------- ------------ ------------
Total Contract Owners' Equity 176,855,743 121,761,495 37,546,087 160,936,528 95,087,872
=================== ============= =========== ============ ===========
<CAPTION>
Endeavor Endeavor
Opportunity Enhanced WRL
Value Index Growth
Subaccount Subaccount Subaccount
----------- ---------- ----------
<S> <C> <C> <C>
Unit transactions, accumulated
net investment income and
realized capital gains 19,317,743 12,530,874 276,501,120
Adjustment for appreciation/
depreciation to market value 1,281,837 1,207,416 50,687,855
------------------ ------------ -------------
Total Contract Owners' Equity 20,599,580 13,738,290 327,188,975
================== ============ =============
</TABLE>
A summary of changes in contract owners' account units follows:
<TABLE>
<CAPTION>
Endeavor Endeavor T. Rowe
Money Asset Int'l.
Market Allocation Stock
Subaccount Subaccount Subaccount
Units outstanding at 1/1/96 21,103,926 122,974,873 75,065,178
Units purchased 10,753,798 7,818,305 13,001,295
Units redeemed and transferred (5,396,625) (5,794,250) 3,395,831
--------------- ------------ -----------
Units outstanding 12/31/96 26,461,099 124,998,928 91,462,304
Units purchased 9,943,525 6,326,816 9,576,201
Units redeemed and transferred (6,724,125) (2,205,498) 2,900,205
--------------- ------------ -----------
Units outstanding 12/31/97 29,680,499 129,120,246 103,938,710
=============== ============ ===========
<CAPTION>
A summary of changes in contract owners' account units follows Dreyfus Dreyfus T. Rowe
Endeavor Small U.S. Price
Value Cap Gov't. Equity
Equity Value Securities Income
Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Units outstanding at 1/1/96 46,194,664 40,635,697 8,456,765 14,943,358
Units purchased 13,373,249 8,624,656 6,217,674 15,334,704
Units redeemed and transferred 5,659,283 1,864,478 2,887,387 12,394,978
------------- ---------- ------------ --------------
Units outstanding 12/31/96 65,227,196 51,124,831 17,561,826 42,673,040
Units purchased 8,741,423 6,378,819 3,328,912 12,544,614
Units redeemed and transferred 10,810,680 8,272,065 10,011,322 28,388,303
------------- ---------- ------------ --------------
Units outstanding 12/31/97 84,779,299 65,775,715 30,902,060 83,605,957
============= ========== ============ ==============
<CAPTION>
A summary of changes in contract owners' account units follows T. Rowe
Price Endeavor Endeavor
Growth Opportunity Enhanced WRL
Stock Value Index Growth
Subaccount Subaccount Subaccount Subaccount
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Units outstanding at 1/1/96 14,196,708 - - 13,337,197
Units purchased 9,588,386 192,397 - 2,157,890
Units redeemed and transferred 6,452,754 121,722 - (320,605)
--------------- ----------- ----------- ------------
Units outstanding 12/31/96 30,237,848 314,119 - 15,174,482
Units purchased 7,089,232 7,127,057 3,461,400 1,266,110
Units redeemed and transferred 9,206,797 10,365,799 7,823,039 197,710
--------------- ----------- ------------ ------------
Units outstanding 12/31/97 46,533,877 17,806,975 11,284,439 16,638,302
=============== =========== ============ ============
</TABLE>
<PAGE>
PFL ENDEAVOR VA SEPARATE ACCOUNT
THE ENDEAVOR VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
4 Administrative, Mortality and Expense Risk Charge
Administrative charges include an annual charge of the lesser of 2% of the
policy value or $35 per contract which will commence on the first policy
anniversary of each contract owner's account. For policies issued on or
after May 1, 1995, the fee is waived if the sum of the premium payments less
the sum of all partial withdrawals equals or exceeds $50,000 on the policy
anniversary. Charges for administrative fees to the variable annuity
contracts are an expense of the Mutual Fund Account.
PFL Life deducts a daily charge equal to an effective annual rate of 1.25%
of the value of the contract owners' individual account as a charge for
assuming certain mortality and expense risks.
5 Taxes
Operations of the Mutual Fund Account form a part of PFL Life, which is
taxed as a life insurance company under Subchapter L of the Internal Revenue
Code of 1986, as amended (the "Code"). The operations of the Mutual Fund
Account are accounted for separately from other operations of PFL Life for
purposes of federal income taxation. The Mutual Fund Account is not
separately taxable as a regulated investment company under Subchapter M of
the Code and is not otherwise taxable as an entity separate from PFL Life.
Under existing federal income tax laws, the income of the Mutual Fund
Account, to the extent applied to increase reserves under the variable
annuity contracts, is not taxable to PFL Life.
6. Year 2000 (Unaudited)
PFL Life and its parent have adopted and have in place a Year 2000
Assessment and Planning Project (the "Project") to review and analyze its
information technology and systems to determine if they are Year 2000
compatible. PFL Life has begun to convert, remediate or modify, where
necessary, critical data processing systems. It is contemplated that the
Project will be substantially completed by early 1999. PFL Life does not
expect this Project to have a significant effect on operations. However, to
mitigate the effect of outside influences upon the success of the Project,
PFL Life has undertaken communications with its significant customers,
suppliers and other third parties to determine their Year 2000 compatibility
and readiness. Management believes that the issues associated with the Year
2000 will be resolved with no material financial impact on PFL Life.
Since the Year 2000 computer problem, and its resolution, is complex and
multifaceted, the success of a response plan cannot be conclusively known
until the Year 2000 is reached (or an earlier date to the extent that
systems or equipment addresses Year 2000 date data prior to the Year 2000).
Even with appropriate and diligent pursuit of a well-conceived Project,
including testing procedures, there is no certainty that any company will
achieve complete success. Notwithstanding the efforts or results of PFL
Life, its ability to function unaffected to and through the Year 2000 may be
adversely affected by actions (or failure to act) of third parties beyond
its knowledge or control.
<PAGE>
PROSPECTUS__________________________________________________________ May 1, 1998
THE ENDEAVOR ML VARIABLE ANNUITY
Issued Through
PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
by
PFL LIFE INSURANCE COMPANY
The Endeavor ML Variable Annuity Policy is a Flexible Premium Variable
Annuity that is offered by PFL Life Insurance Company ("PFL"). You can use the
Policy to accumulate funds for retirement or other long-term financial planning
purposes. You are generally not taxed on any earnings on amounts you invest
until you withdraw them or begin to receive Annuity Payments. The Policy is a
"variable" annuity because the value of your investments can go up or down
based on the performance of the investment options that you select. It is a
flexible premium policy because after you purchase it you can generally make
additional investments of any amount of $50 or more, until the Annuity
Commencement Date when PFL begins making Annuity Payments to you.
You have several investment options to choose from offered through three
accounts: the Mutual Fund Account, the Target Account, and the Fixed Account.
These include the following variable investment options:
Merrill Lynch Basic Value Focus T. Rowe Price Growth Stock Portfolio
Fund Dreyfus Small Cap Value Portfolio
Merrill Lynch High Current Income Dreyfus U.S. Government Securities
Fund Portfolio
Merrill Lynch Developing Capital Endeavor Value Equity Portfolio
Markets Focus Fund Endeavor Opportunity Value Portfolio
Endeavor Asset Allocation Portfolio Endeavor Enhanced Index Portfolio
Endeavor Money Market Portfolio Endeavor Select 50 Portfolio
T. Rowe Price International Stock WRL Growth Portfolio
Portfolio
T. Rowe Price Equity Income
Portfolio
The Dow Target 10 Subaccount
The Dow Target 5 Subaccount
YOU AS THE OWNER OF THE POLICY, BEAR THE ENTIRE INVESTMENT RISK FOR ALL
AMOUNTS THAT YOU ALLOCATE TO ANY OF THE MUTUAL FUNDS. THIS MEANS THAT YOU COULD
LOSE THE AMOUNT THAT YOU INVEST. But if the mutual fund shares increase in
value, then the value of your Policy will also increase.
The Fixed Account is an additional investment option. If you invest in one of
the alternatives offered in the Fixed Account, then PFL guarantees to return
your investment with interest at rates that PFL will declare from time to time.
Of course, you can choose any combination of these investment options. You
can also transfer amounts among these options (subject to some restrictions).
LIKE ALL SECURITIES, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
You should only purchase a Policy as a long-term investment. However, you do
have access to all or some of the current cash value of your investments at any
time before the Annuity Commencement Date. But, if you do withdraw cash from
your Policy, there may be a surrender charge. You may also have to pay income
taxes on some or all of the amount you withdraw, and if you are under the age
59 1/2 there may also be a tax penalty. Finally, there may be an interest
penalty if you make a premature withdrawal from the Fixed Account (this is
called an "Excess Interest Adjustment," and it could also result in you earning
extra interest). PFL has the right to postpone withdrawals from the Fixed
Account.
- 1 -
<PAGE>
Prospectuses for the mutual fund portfolios are attached to the back of this
prospectus. This prospectus and the mutual fund prospectuses give you vital
information about the Policies and the mutual funds. Please read them
carefully before you invest. Keep them for future reference.
PLEASE NOTE THAT THE POLICIES AND THE MUTUAL FUNDS: ARE NOT BANK DEPOSITS,
ARE NOT FEDERALLY INSURED, ARE NOT ENDORSED BY ANY BANK OR GOVERNMENT AGENCY
AND ARE NOT GUARANTEED TO ACHIEVE THEIR GOAL.
This Prospectus sets forth the information that a prospective purchaser
should consider before purchasing a Policy. A Statement of Additional
Information about the Policy and the Mutual Fund Account which has the same
date as this Prospectus has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. The Statement of
Additional Information is available at no cost to any person requesting a copy
by writing PFL at the Administrative and Service Office or by calling 1-800-
525-6205. The table of contents of the Statement of Additional Information is
included at the end of this Prospectus.
This Prospectus and the Statement of Additional Information generally
describe only the Policies and the Mutual Fund Account, except when the Fixed
Account is specifically mentioned.
Administrative and Service Office:
Financial Markets Division--Variable Annuity Department
PFL Life Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
Please Read This Prospectus Carefully
Keep it For Future Reference.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESPERSON OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
- 2 -
<PAGE>
INTRODUCTION
There are three parts to this prospectus. Part I contains a summary and
certain financial data. Part II contains a detailed description of the
Policies and a brief description of the investment options. Part III describes
the Target Account. Separate prospectuses follow that describe the mutual fund
portfolios.
- 3 -
<PAGE>
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS............................................................... 6
SUMMARY OF THE POLICY..................................................... 9
ANNUITY POLICY FEE TABLE.................................................. 14
CONDENSED FINANCIAL INFORMATION........................................... 21
FINANCIAL STATEMENTS...................................................... 23
PART II
PFL LIFE INSURANCE COMPANY................................................ 24
THE ENDEAVOR ACCOUNTS..................................................... 24
The Mutual Fund Account................................................. 24
The Underlying Funds.................................................. 25
The Target Account...................................................... 28
The Target Subaccounts................................................ 28
The Fixed Account....................................................... 29
Guaranteed Periods.................................................... 29
Dollar Cost Averaging Fixed Account Option............................ 30
Current Interest Rates................................................ 30
Transfers............................................................... 31
Reinstatements.......................................................... 32
Telephone Transactions.................................................. 32
Dollar Cost Averaging (DCA)............................................. 32
Asset Rebalancing....................................................... 33
PUBLISHED RATINGS......................................................... 33
THE POLICY................................................................ 34
Policy Application and Issuance of Policies--Premium Payments........... 34
Additional Premium Payments........................................... 35
Maximum Total Premium Payments........................................ 35
Allocation of Premium Payments........................................ 35
Payment Not Honored by Bank........................................... 35
Policy Value............................................................ 35
The Mutual Fund Account Value......................................... 36
The Target Account Value.............................................. 36
Amendments.............................................................. 36
Non-participating Policy................................................ 36
DISTRIBUTIONS UNDER THE POLICY............................................ 36
Surrenders.............................................................. 36
Nursing Care and Terminal Condition Withdrawal Option................... 37
Excess Interest Adjustment (EIA)........................................ 38
Systematic Payout Option................................................ 38
Annuity Payments........................................................ 39
Annuity Commencement Date............................................. 39
Election of Payment Option............................................ 39
Premium Tax........................................................... 40
Supplementary Contract................................................ 40
Availability as an Immediate Annuity.................................. 40
Annuity Payment Options................................................. 40
Death Benefit........................................................... 43
</TABLE>
- 4 -
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Death of Owner........................................................... 45
Restrictions Under the Texas Optional Retirement Program................. 45
Restrictions Under Section 403(b) Plans.................................. 45
Restrictions Under Qualified Policies.................................... 45
CHARGES AND DEDUCTIONS..................................................... 45
Surrender Charge......................................................... 46
Mortality and Expense Risk Fee........................................... 46
Administrative Charges................................................... 47
Distribution Financing Charge............................................ 47
Premium Taxes............................................................ 48
Federal, State and Local Taxes........................................... 48
Transfer Fee............................................................. 48
Other Expenses Including Investment Advisory Fees........................ 48
Employee and Agent Purchases............................................. 48
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 49
Tax Status of the Policy................................................. 49
Taxation of Annuities.................................................... 50
DISTRIBUTOR OF THE POLICIES................................................ 55
VOTING RIGHTS.............................................................. 56
The Mutual Fund Account.................................................. 56
The Target Account....................................................... 56
YEAR 2000 MATTERS.......................................................... 57
LEGAL PROCEEDINGS.......................................................... 58
HISTORICAL PERFORMANCE DATA OF THE MUTUAL FUND ACCOUNT..................... 58
Standardized Performance Data............................................ 58
Non-Standardized Performance Data........................................ 60
Endeavor Enhanced Index and Endeavor Select 50 Portfolios................ 63
PART III
THE TARGET ACCOUNT......................................................... 64
Target Account Definitions............................................... 64
General.................................................................. 64
Investment Strategy...................................................... 65
The Dow Jones Industrial Average......................................... 67
Investment Risks......................................................... 68
PERFORMANCE INFORMATION.................................................... 70
Subaccounts of the Target Account--Performance Data...................... 70
COMPARISON OF TOTAL RETURN................................................. 71
Past Performance of the DJIA............................................. 72
Standardized Performance Data............................................ 72
Non-Standardized Performance Data........................................ 72
PORTFOLIO TURNOVER......................................................... 73
STATEMENT OF ADDITIONAL INFORMATION........................................ 73
APPENDIX A................................................................. A-1
APPENDIX B................................................................. B-1
</TABLE>
- 5 -
<PAGE>
DEFINITIONS
Accumulation Unit--An accounting unit of measure used in calculating the
Policy Value in the Mutual Fund Account and Target Account before the Annuity
Commencement Date.
Adjusted Policy Value--An amount equal to the Policy Value increased or
decreased by any Excess Interest Adjustments.
Administrative and Service Office--Financial Markets Division--Variable
Annuity Department, PFL Life Insurance Company, 4333 Edgewood Road, N.E.,
Cedar Rapids, Iowa 52499-0001.
Annuitant--The person entitled to receive Annuity Payments after the Annuity
Commencement Date and during whose life any Annuity Payments involving life
contingencies will continue.
Annuity Commencement Date--The date upon which Annuity Payments are to
commence. This date may be any date at least thirty days after the Policy Date
and may not be later than the last day of the policy month starting after the
Annuitant attains age 85, except as expressly allowed by PFL. In no event will
this date be later than the last day of the month following the month in which
the Annuitant attains age 95.
Annuity Payment Option or Payment Option--A method of receiving a stream of
Annuity Payments selected by the Owner.
Annuity Unit--An accounting unit of measure used in the calculation of the
amount of the second and each additional Variable Annuity Payment after the
Annuity Commencement Date.
Beneficiary--The person who has the right to the death benefit set forth in
the Policy.
Business Day--Any day when the New York Stock Exchange is open for business.
Cash Value--On or before the Annuity Commencement Date, is the amount equal
to the Adjusted Policy Value.
Code--The Internal Revenue Code of 1986, as amended.
Current Interest Rate--The interest rate or rates currently guaranteed to be
credited on amounts under a Policy allocated to the Fixed Account. This
interest rate will always equal or exceed a minimum effective annual rate of
3%. See Appendix B for variations in the minimum guaranteed effective annual
interest rate applicable to the Fixed Account.
Distribution Financing Charge--A daily charge for the first seven Policy
Years equal to an effective annual rate of 0.15% of the Mutual Fund Account's
and the Target Account's net assets. This charge is not deducted after the
Annuity Commencement Date.
Due Proof of Death--A certified copy of a death certificate, a certified
copy of a decree of a court of competent jurisdiction as to the finding of
death, a written statement by the attending physician, or any other proof
satisfactory to PFL will constitute Due Proof of Death.
Excess Interest Adjustment--A positive or negative adjustment to amounts
withdrawn upon Partial Withdrawals or surrenders, to amounts you transfer from
the Fixed Account Guaranteed Period Options, or to amounts applied to Annuity
Payment Options. The adjustment reflects changes in the interest rates
declared by PFL since the date any payment was received by, or an amount was
transferred to, the Guaranteed Period Option. The Excess
- 6 -
<PAGE>
Interest Adjustment (EIA) can either decrease or increase the amount you
receive upon surrender or commencement of Annuity Payments, depending upon
whether there has been an increase or decrease in interest rates,
respectively.
Fixed Account--A group of Investment Options under the Policy, other than
the Mutual Fund Account or the Target Account, that are part of the general
assets of PFL that are not in separate accounts.
Fixed Annuity Payments--Payments made pursuant to an Annuity Payment Option
which do not fluctuate in amount.
Guaranteed Period Options--The various guaranteed interest rate periods
which may be offered by PFL under the Fixed Account into which premiums may be
paid or amounts transferred.
Gross Partial Withdrawal--The amount of the requested partial withdrawal,
plus any applicable Surrender Charge, minus any applicable Excess Interest
Adjustment.
Investment Options--Any of the Guaranteed Period Options of the Fixed
Account, the Dollar Cost Averaging Fixed Account Option, and any of the
Subaccounts of the Mutual Fund Account or the Target Account.
Mutual Fund Account--That portion of the PFL Endeavor Variable Annuity
Account, which comprises a portion of the PFL Endeavor VA Separate Account, a
separate account established and registered as a unit investment trust under
the Investment Company Act of 1940, (the "1940 Act"), as amended, to which
Premium Payments under the Policies may be allocated and which invests in the
WRL Growth Portfolio of the WRL Series Fund, Inc., certain portfolios of the
Endeavor Series Trust, certain portfolios of the Merrill Lynch Variable Series
Funds, Inc. and such other mutual funds as PFL may determine from time-to-
time.
Mutual Fund Subaccount--A subdivision within the Mutual Fund Account, the
assets of which are invested in a specified portfolio of the Underlying Funds.
Nonqualified Policy--A Policy other than a Qualified Policy.
PFL--PFL Life Insurance Company, the issuer of the Policies.
Policy--One of the variable annuity policies offered by this Prospectus.
Policy Anniversary--Each anniversary of the Policy Date.
Policy Date--The date shown on the Policy data page attached to the Policy
and the date on which the Policy becomes effective.
Policy Owner or Owner--The person who may exercise all rights and privileges
under the Policy. The Policy Owner during the lifetime of the Annuitant and
prior to the Annuity Commencement Date is the person designated as the Policy
Owner or a Successor Owner in the application.
Policy Value--On or before the Annuity Commencement Date, this is an amount
equal to (a) the Premium Payments; minus (b) Gross Partial Withdrawals; plus
(c) interest credited in the Fixed Account; plus or minus (d) accumulated
gains or losses in the Mutual Fund Account and the Target Account; minus (e)
any applicable service charges, premium taxes, and transfer fees, if any.
Policy Year--Each 12-month period beginning on the Policy Date shown on the
Policy data page and each Policy Anniversary thereafter.
- 7 -
<PAGE>
Premium Payment--An amount you pay to PFL, or is paid to PFL on your behalf,
as consideration for the benefits provided by the Policy.
Qualified Policy--A Policy issued in connection with retirement plans that
qualify for special Federal income tax treatment under the Code.
Service Charge--An annual charge on each Policy Anniversary (and a charge at
the time of surrender) for Policy maintenance and related administrative
expenses. This annual charge is the lesser of 2% of the Policy Value or $35.
Successor Owner--A person appointed by the Policy Owner to succeed to
ownership of the Policy in the event of the death of the Policy Owner (if the
Policy Owner is not the Annuitant) before the Annuity Commencement Date.
Surrender Charge--A percentage of each Premium Payment in an amount from 7%
to 0% depending upon the length of time from the date of each Premium Payment.
The Surrender Charge is assessed on surrenders of, or partial withdrawals
from, the Policy. A Surrender Charge may also be referred to as a "Contingent
Deferred Sales Charge."
Target Account--A separate account established and registered as a
management investment company under the Investment Company Act of 1940 to
which Premium Payments under the Policies may be allocated.
Target Subaccount--A subdivision within the Target Account, the assets of
which are invested in common stocks selected according to a specified
investment strategy.
Underlying Funds--The WRL Growth Portfolio of the WRL Series Fund, Inc.,
designated portfolios of the Endeavor Series Trust, and designated portfolios
of the Merrill Lynch Variable Insurance Series Funds, Inc.
Valuation Period--The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of values.
Such determination shall be made on each Business Day.
Variable Annuity Payments--Payments made pursuant to an Annuity Payment
Option which fluctuate as to dollar amount or payment term in relation to the
investment performance of the specified Subaccounts within the Mutual Fund
Account or the Target Account.
Written Notice or Written Request--Written notice, signed by the Owner, that
gives PFL the information it requires and is received at the Administrative
and Service Office. For some transactions, PFL may accept an electronic notice
such as telephone instructions. Such electronic notice must meet the
requirements PFL establishes for such notices.
- 8 -
<PAGE>
SUMMARY OF THE POLICY
The following summary is intended to provide a brief overview of the Policy.
More detailed information can be found in the sections of this Prospectus that
follow, all of which should be read in their entirety.
THE POLICY
The Endeavor ML Variable Annuity is a Flexible Premium Variable Annuity
which can be purchased as a Nonqualified Policy or as a Qualified Policy. You
allocate the Premium Payments among the Mutual Fund Account, the Target
Account or the Fixed Account.
THE ENDEAVOR ACCOUNTS
The Mutual Fund Account. The Mutual Fund Account is a separate account of
PFL, which has dedicated a number of subaccounts to the Policy that invest
exclusively in shares of designated portfolios of the Merrill Lynch Variable
Series Funds, Inc., designated portfolios of the Endeavor Series Trust, and
the Growth Portfolio of the WRL Series Fund, Inc., (collectively, the
"Underlying Funds"). The Merrill Lynch Variable Series Funds, Inc. is an
investment company whose investment adviser is Merrill Lynch Asset Management,
L.P. ("MLAM"), an indirect wholly owned subsidiary of Merrill Lynch & Co.,
Inc. A separate prospectus accompanies this Prospectus for the portfolios
advised by MLAM, which describe further information about MLAM and the Merrill
Lynch Variable Series Funds, Inc. The Endeavor Series Trust is a mutual fund
managed by Endeavor Investment Advisers, a general partnership between
Endeavor Management Co. and AUSA Financial Markets, Inc. (an affiliate of
PFL), which contracts with several subadvisers (as described in separate
prospectuses that accompany this Prospectus) for investment advisory services.
The WRL Growth Portfolio is a portfolio within the WRL Series Fund, Inc. The
WRL Series Fund, Inc. is a mutual fund whose investment adviser is WRL
Investment Management, Inc., a subsidiary of Western Reserve Life Assurance
Co. of Ohio ("Western Reserve"), (an affiliate of PFL). WRL Investment
Management, Inc. contracts with Janus Capital Corporation as a sub-adviser to
the WRL Growth Portfolio for investment advisory services.
The portfolios of the Underlying Funds offered are as follows:
Merrill Lynch Basic Value Focus Fund Dreyfus Small Cap Value Portfolio
Merrill Lynch High Current Income Dreyfus U.S. Government Securities
Fund Portfolio
Merrill Lynch Developing Capital Endeavor Value Equity Portfolio
Markets Focus Fund Endeavor Opportunity Value Portfolio
Endeavor Asset Allocation Portfolio Endeavor Enhanced Index Portfolio
Endeavor Money Market Portfolio Endeavor Select 50 Portfolio
T. Rowe Price International Stock WRL Growth Portfolio
Portfolio
T. Rowe Price Equity Income Portfolio
T. Rowe Price Growth Stock Portfolio
Each of the Subaccounts of the Mutual Fund Account invests solely in a
corresponding Portfolio of the Underlying Funds. BECAUSE THE POLICY VALUE MAY
DEPEND ON THE INVESTMENT EXPERIENCE OF THE SELECTED SUBACCOUNTS, THE OWNER
BEARS THE ENTIRE INVESTMENT RISK WITH RESPECT TO PREMIUM PAYMENTS ALLOCATED
TO, AND AMOUNTS TRANSFERRED TO, THE MUTUAL FUND ACCOUNT. (See "THE ENDEAVOR
ACCOUNTS--The Mutual Fund Account," p. 24.)
The Target Account. The Target Account is a separate account of PFL, which
invests according to the specific investment strategies of its Subaccounts.
Interests in the Target Account are not expected to be available until mid-
1998. (See "THE TARGET ACCOUNT--General," p. 65.)
- 9 -
<PAGE>
The Dow Target 10 Subaccount will invest in the common stock of the ten
companies in the Dow Jones Industrial Average ("DJIA") that have the highest
dividend yield as of a specified business day and hold those stocks for a 12-
month period.
The Dow Target 5 Subaccount will invest in the common stock of the five
companies with the lowest per share stock price of the ten companies in the
DJIA that have the highest dividend yield as of a specified business day and
hold those stocks for a 12-month period.
BECAUSE THE POLICY VALUE WILL DEPEND ON THE INVESTMENT EXPERIENCE OF THE
SELECTED SUBACCOUNTS, THE OWNER BEARS THE ENTIRE INVESTMENT RISK WITH RESPECT
TO PREMIUM PAYMENTS ALLOCATED TO, AND AMOUNTS TRANSFERRED TO, THE TARGET
ACCOUNT. (See "THE ENDEAVOR ACCOUNTS--The Target Account," p. 28.)
The investment adviser for the Target Account is First Trust Advisers L.P.
The manager for the Target Account is Endeavor Investment Advisers. (See "THE
TARGET ACCOUNT--General," p. 65.)
The Fixed Account. The Fixed Account guarantees an annual effective interest
rate of at least 3% on: Premium Payments and transfers to, less partial
withdrawals and transfers from, the Fixed Account (see Appendix "B" for
variations in the minimum guaranteed effective annual interest rate for prior
versions of Policies and for Policies offered in certain states). Upon
surrender, PFL guaranteed return of at least the Premium Payments made to,
less prior partial withdrawals and transfers from, the Fixed Account. PFL may,
in its sole discretion, declare a higher Current Interest Rate. A Current
Interest Rate is guaranteed for at least one year, although certain Dollar
Cost Averaging programs may run for shorter periods. (See "THE ENDEAVOR
ACCOUNTS--The Fixed Account," p. 29.)
PREMIUM PAYMENTS
A Nonqualified Policy may be purchased with an initial Premium Payment of at
least $5,000. A Qualified Policy generally may be purchased with an initial
Premium Payment of at least $1,000, but policies purchased and used in
connection with a Tax Deferred 403(b) Annuity may be purchased with an initial
premium payment in any amount chosen by the purchaser; however, PFL must
receive the initial Premium Payment within 90 days following the Policy Date,
otherwise the Policy will be canceled. You may make additional Premium
Payments of at least $50 each at any time before the Annuity Commencement
Date. The maximum total Premium Payments allowed without prior approval of PFL
is $1,000,000. No charges or fees are deducted from Premium Payments, so the
entire Premium Payment is invested immediately, subject to the restrictions
below regarding the "Right to Cancel" period. (See "CHARGES AND DEDUCTIONS--
Surrender Charge," p. 46 and "CHARGES AND DEDUCTIONS--Premium Taxes," p. 48.)
You must allocate the initial Premium Payment among the Investment Options
according to allocation percentages in the Policy application or in
information provided in lieu thereof or transmittal form. Any allocation must
be in whole percents, and the total allocation must equal 100%. Allocations
you specify for the Initial Premium Payment will be used for additional
Premium Payments unless you request a change in allocation. Allocations of
additional Premium Payments may be changed by sending Written Notice to PFL's
Administrative and Service Office. (See "THE POLICY--Policy Application and
Issuance of Policies--Premium Payments," p. 34.)
RIGHT TO CANCEL PERIOD
You may, until the end of the period of time specified in the Policy ("Right
to Cancel Period"), examine the Policy and return it for a refund. The
applicable period will depend on the state in which the Policy is issued. In
some states the period is ten days after the Policy is delivered to you. Some
states allow for a longer period to return the Policy. The
- 10 -
<PAGE>
amount of the refund will also depend on the state in which the Policy is
issued. Ordinarily the amount of the refund will be the Policy Value. However,
some states may require a return of the Premium Payments, or the greater of
the Premium Payments or the Policy Value. PFL will pay the refund within seven
days after it receives written notice of cancellation and the returned Policy
within the applicable period. The Policy will then be deemed void.
TRANSFERS BEFORE THE ANNUITY COMMENCEMENT DATE
An Owner can transfer Policy Values from one Subaccount to another within
the Mutual Fund Account, the Target Account or the Fixed Account, or transfer
Policy Values or an amount equal to the interest credited from the Guaranteed
Period Options of the Fixed Account to the Mutual Fund Account or the Target
Account. Transfers of amounts equal to interest credited to a Guaranteed
Period Option are referred to as "Interest Transfers." Each Interest Transfer
will be subject to a minimum amount of $50. No Excess Interest Adjustment will
apply to such transfers of interest. For transfers other than Interest
Transfers, the minimum amount which may be transferred is $500, or the entire
subaccount (or Guaranteed Period Option) Policy Value, whichever is less.
However, following a transfer out of a particular Subaccount or Guaranteed
Period Option, at least $500 must remain in that Subaccount or Guaranteed
Period Option, otherwise PFL reserves the right to include remaining amounts
in the transfer. Transfers currently may be made either by telephone (subject
to the provisions described below under "Telephone Transactions," p. 32) or by
sending Written Notice to the Administrative and Service Office.
An Owner may choose which Guaranteed Period Option to or from transfers may
be made. Transfers of Policy Value from a Guaranteed Period Option prior to
the end of a Guaranteed Period are subject to an Excess Interest Adjustment
which may increase or decrease the amount removed from the Guaranteed Period
Option in order to honor the transfer amount requested. Interest Transfers are
not subject to an Excess Interest Adjustment. Due to the manner of crediting
interest in the Fixed Account, however, Interest Transfers may affect the rate
of interest credited on funds remaining in the Fixed Account. (See
"DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment," p. 38 and "THE
ENDEAVOR ACCOUNTS--Transfers," p. 31.)
Transfers from the Dollar Cost Averaging Fixed Account Option, except
through automatic Dollar Cost Averaging transfers, are not allowed. (See "THE
ENDEAVOR ACCOUNTS--Dollar Cost Averaging Fixed Account Option," p. 30.)
Prior versions of the Policy and Policies issued in certain states may have
additional restrictions on transfers. See Appendix B and the Policy or
endorsement for details. If the Excess Interest Adjustment (at the time of a
transfer request only) from any Guaranteed Period Option is a negative
adjustment, then the maximum amount of Policy Value that can be transferred is
25% of that Guaranteed Period Option's Policy Value, less amounts previously
transferred out of that Guaranteed Period Option during the current Policy
Year. No maximum will apply to amounts transferred from any Guaranteed Period
Option if the Excess Interest Adjustment is a positive adjustment at the time
of transfer.
A $10 charge may be imposed for each transfer in excess of twelve per Policy
Year. Currently PFL does not charge for any transfers. (See "THE ENDEAVOR
ACCOUNTS--Transfers," p. 31.)
SURRENDERS AND PARTIAL WITHDRAWALS
You may elect to surrender the Policy or make a partial withdrawal from the
Policy R($500 minimum) in exchange for a cash payment from PFL at any time
prior to the earlier of the Annuitant's death or the Annuity Commencement
Date. A surrender or partial withdrawal may be subject to deductions for
Surrender Charges, Excess Interest Adjustments, and
- 11 -
<PAGE>
Service Charges. (See "CHARGES AND DEDUCTIONS," p. 45.) A surrender or partial
withdrawal request must be made by Written Request, and a request for a
partial withdrawal must specify the Subaccount(s) or Guaranteed Period Options
from which the withdrawal is requested. There is currently no limit on the
frequency or timing of partial withdrawals, although for Qualified Policies
the retirement plan or applicable law may restrict or penalize partial
withdrawals. (See "DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 36). In
addition to the applicable charges and deductions under the Policy, surrenders
and partial withdrawals may be subject to premium taxes, income taxes and a
10% Federal penalty tax.
NURSING CARE AND TERMINAL CONDITION WITHDRAWAL OPTION
If you or your spouse (or Annuitant or Annuitant's spouse if the Owner is
not a natural person): (1) has been confined in a hospital or nursing facility
for 30 consecutive days or (2) has been diagnosed as having a terminal
condition, as defined in the Policy or endorsement (generally a life
expectancy of not more than 12 months), then partial withdrawals or surrenders
may be taken with no Surrender Charge and no Excess Interest Adjustment. (This
benefit may not be available in all states or for all policy forms. See
Appendix B and the Policy or endorsement for details.) (See "DISTRIBUTIONS
UNDER THE POLICY--Nursing Care and Terminal Condition Withdrawal Option,"
p. 37.)
CHARGES AND DEDUCTIONS
Surrender Charge. In order to permit investment of the entire Premium
Payment, PFL does not deduct sales or other charges at the time the Policy is
purchased (although in some states, a premium tax charge may be deducted).
However, a Surrender Charge of up to 7% of the amount withdrawn is imposed on
certain surrenders or partial withdrawals of Premium Payments in order to
cover expenses relating to the sale of the Policies. A Surrender Charge will
only be applied to withdrawals that exceed the amount available under certain
listed exceptions. The applicable Surrender Charge is based on the period of
time elapsed since payment of the Premium Payment(s) being withdrawn. There is
no Surrender Charge imposed seven or more years after a Premium Payment was
paid. For purposes of determining the applicable Surrender Charge, Premium
Payments are considered to be withdrawn on a "first in-, first-out" basis.
(See "CHARGES AND DEDUCTIONS--Surrender Charge," p. 46.) Note that for income
tax purposes, however, gains are deemed to be withdrawn first. (See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES," p. 49.) After the first Policy Year, up to
10% of the Policy Value may be withdrawn once per Policy Year without an
Excess Interest Adjustment and without a Surrender Charge if it is the first
withdrawal in that Policy Year.
Excess Interest Adjustment. Surrenders, partial withdrawals, transfers
(other than "10% Withdrawals" and "Interest Transfers"), and amounts applied
to a Payment Option from Guaranteed Period Options which occur prior to the
end of the Guaranteed Period, are subject to an Excess Interest Adjustment,
which could eliminate all credited interest in excess of the minimum
guaranteed effective annual interest rate of 3%. The Excess Interest
Adjustment, if a positive adjustment, could also result in the crediting of
additional interest. (See "DISTRIBUTIONS UNDER THE POLICY--Excess Interest
Adjustment," p. 38.)
Account Charges. PFL deducts a daily charge equal to a percentage of the net
assets in the Mutual Fund Account and the Target Account (the "Accounts") for
the mortality and expense risks assumed by PFL. For Guaranteed Minimum Death
Benefit Options "A" (5% Annually Compounding Death Benefit) and "B" (Double
Enhanced Death Benefit), the effective annual rate of this charge prior to the
Annuity Commencement Date is 1.25% of the value of each Account's net assets.
For Guaranteed Minimum Death Benefit Option "C" (Return of Premium Death
Benefit), the effective annual rate of this charge prior to the Annuity
Commencement Date is 1.10% of the value of each Account's net assets. After
the Annuity Commencement Date, the Mortality and Expense Risk Fee may be lower
than the
- 12 -
<PAGE>
Mortality and Expense Risk Fee in effect prior to the Annuity Commencement
Date. (See "CHARGES AND DEDUCTIONS--Mortality and Expense Risk Fee," p. 46,
"DISTRIBUTIONS UNDER THE POLICY--Death Benefit," p. 43, and Appendix B.)
PFL also deducts a daily Administrative Charge from the net assets of each
Account to partially cover expenses incurred by PFL in connection with the
administration of the Account and the Policies. The effective annual rate of
this charge is .15% of the value of each Account's net assets. (See "CHARGES
AND DEDUCTIONS--Administrative Charges," p. 47.)
PFL guarantees that the account charges for mortality and expense risks and
administrative expenses prior to the Annuity Commencement Date will not exceed
a total of 1.40% for the 5% Annually Compounding Death Benefit and the Double
Enhanced Death Benefit, and 1.25% for the Return of Premium Death Benefit.
After the Annuity Commencement Date, the total charge for mortality and
expense risks and administrative expenses will be less than or equal to that
charged before the Annuity Commencement Date (see Appendix B).
Distribution Financing Charges. During the first seven Policy Years, PFL
imposes a daily Distribution Financing Charge equal to an effective annual
rate of 0.15% of the Mutual Fund Account's and of the Target Account's net
assets. This charge is used by PFL to defray a portion of the cost of
distribution of the Policies. This charge will not be imposed after the
Annuity Commencement Date. (See "CHARGES AND DEDUCTIONS--Distribution
Financing Charge," p. 47.)
Service Charge. Prior to the Annuity Commencement Date, there is an annual
Service Charge on each Policy Anniversary (and a charge at the time of
surrender during any Policy Year) for Policy maintenance and related
administrative expenses. This annual charge is the lesser of 2% of the Policy
Value or $35. The Service Charge is deducted from each Investment Option in
proportion to each Investment Option's percentage of the Policy Value just
prior to such charge. This charge is waived if either the Policy Value or the
sum of all Premium Payments less the sum of all partial withdrawals equals or
exceeds $50,000 on a Policy Anniversary (or date of surrender). PFL guarantees
that this charge will not be increased in the future. (See "CHARGES AND
DEDUCTIONS--Administrative Charges," p. 47.)
Transfer Fee. Any transfers among the Subaccounts of the Separate Account
and/or the Guaranteed Period Options of the Fixed Account in excess of 12 per
Policy Year may be charged a $10 Transfer Fee per transfer. Currently, PFL
does not assess this fee.
Taxes. PFL may incur premium taxes relating to the Policies. When permitted
by state law, PFL will not deduct any premium taxes related to a particular
Policy from the Policy Value until withdrawal of the full Policy Value,
payment of the Death Benefit, or the Annuity Commencement Date. Premium taxes
currently range from 0% to 3.50% of Premium Payments. (See "CHARGES AND
DEDUCTIONS--Premium Taxes," p. 48.)
No charges are currently made against the Fixed Account, the Mutual Fund
Account, or the Target Account for federal, state, or local income taxes.
Should PFL determine that any such taxes may be imposed, PFL may deduct such
taxes from amounts held in the relevant Account. (See "CHARGES AND
DEDUCTIONS--Federal, State and Local Taxes," p. 48.)
Charges Against the Subaccounts. The value of the net assets of the Mutual
Fund Subaccounts will also reflect the investment advisory fee and other
expenses incurred by the Underlying Funds. Those fees and expenses are
detailed in the prospectuses for the Underlying Funds that accompany this
Prospectus. The value of the net assets of the Target Subaccounts will reflect
the investment advisory fee and other expenses incurred by the manager in
operating each Target Subaccount.
- 13 -
<PAGE>
Expense Data. The charges and deductions are summarized in the following Fee
Tables. This tabular information regarding expenses assumes that the entire
Policy Value is in either the Mutual Fund Account or the Target Account and
that the Policy Value has not been applied to purchase an Annuity Payment
Option. These tables reflect charges and expenses of the Mutual Fund Account
as well as the Underlying Funds for the fiscal year ended December 31, 1997,
except as otherwise noted. Expenses may be higher or lower in the future.
These tables do not reflect any premium taxes that may be applicable.
ANNUITY POLICY FEE TABLE
<TABLE>
<CAPTION>
POLICY OWNER TRANSACTION EXPENSES
<S> <C>
Sales Load On Pur-
chase Payments..... 0
Maximum Surrender
Charge
(as a % of Premium
Payments
Surrendered)(/1/)(/2/). 7%
Surrender Fees...... 0
Annual Service
Charge(/1/) ....... $35 Per Policy
Transfer Fee(/1/)... Currently No Fee
</TABLE>
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF ACCOUNT VALUE)
<S> <C>
Mortality and Expense Risk
Fees(/3/).................... 1.25%
Administrative Charge......... 0.15%
Distribution Financing Charge. 0.15%
TOTAL ANNUITY POLICY ANNUAL
EXPENSES..................... 1.55%
</TABLE>
PORTFOLIO ANNUAL EXPENSES
(as a percentage of average net assets and after expense reimbursements)
<TABLE>
<CAPTION>
TOTAL
PORTFOLIO TOTAL ACCOUNT
MANAGEMENT OTHER RULE 12B-1 ANNUAL AND PORTFOLIO
FEES EXPENSES FEES EXPENSES(/4/) EXPENSES
---------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC.(/5/)
Basic Value Focus....... 0.60% 0.05% -- 0.65% 2.20%
Developing Capital
Markets Focus.......... 0.83% 0.42% -- 1.25% 2.80%
High Current Income..... 0.47% 0.07% -- 0.54% 2.09%
ENDEAVOR SERIES TRUST
Endeavor Money Market... 0.50% 0.10% -- 0.60% 2.15%
Endeavor Asset
Allocation............. 0.75% 0.09% -- 0.84% 2.39%
T. Rowe Price
International Stock.... 0.90% 0.17% -- 1.07% 2.62%
Endeavor Value Equity... 0.80% 0.09% -- 0.89% 2.44%
Dreyfus Small Cap Value. 0.80% 0.11% -- 0.91% 2.46%
Dreyfus U.S. Government
Securities............. 0.65% 0.15% -- 0.80% 2.35%
T. Rowe Price Equity
Income................. 0.80% 0.14% -- 0.94% 2.49%
T. Rowe Price Growth
Stock.................. 0.80% 0.16% -- 0.96% 2.51%
Endeavor Opportunity
Value.................. 0.80% 0.35% -- 1.15% 2.70%
Endeavor Enhanced Index. 0.75% 0.55% -- 1.30% 2.85%
Endeavor Select 50...... 1.10% 0.40% -- 1.50% 3.05%
WRL SERIES FUND, INC.(/6/)
WRL Growth.............. 0.80% 0.07% -- 0.87% 2.42%
TARGET ACCOUNT(/7/)
The Dow Target Account
10..................... 0.75% 0.55% 1.30% 2.85%
The Dow Target Account
5...................... 0.75% 0.55% 1.30% 2.85%
</TABLE>
/1/The Surrender Charge and Transfer Fee, if any is imposed, apply to each
Policy, regardless of how the Policy Value is allocated among the Mutual
Fund Account, the Target Account and the Fixed Account. The Service Charge
is $35 per year, but not greater than 2% of the Policy Value. The Service
Charge applies to the Fixed Account, the Mutual Fund Account, and the
Target Account and is assessed on a prorata basis relative to each
Account's Policy Value as a percentage of the Policy's total Policy Value.
The Service Charge is deducted on each Policy Anniversary and at the time
of surrender, if surrender occurs during a Policy Year. (See "CHARGES AND
DEDUCTIONS--Administrative Charges," p. 47.) There is no fee for the first
12 transfers per year. For additional transfers PFL may charge a fee of $10
per transfer but currently does not charge for any transfers.
/2/The Surrender Charge is decreased based on the number of years since the
premium payment date in which the withdrawal is made. The charge is a
percentage of the Premium Payment: 7%, 7%, 6%, 6%, 5%, 4% and 2%; for years
one through seven, respectively, after the Premium Payment was made. If
applicable, a Surrender Charge will only be applied to withdrawals that
exceed the amount available under certain listed exceptions. (See "CHARGES
AND DEDUCTIONS--Surrender Charge," p. 46, and "DISTRIBUTIONS UNDER THE
POLICIES--Surrenders," p. 36.)
- 14 -
<PAGE>
/3/The Mortality and Expense Risk Fees shown (1.25%) are for the 5% Annually
Compounding Death Benefit and the Double Enhanced Death Benefit. The
corresponding fee for the Return of Premium Death Benefit is 1.10% for each
Subaccount. (See "DISTRIBUTIONS UNDER THE POLICY--Death Benefit," p. 43.)
/4/Endeavor Investment Advisers has agreed, until terminated by it, to assume
expenses of the Portfolios that exceed the following rates: Endeavor Money
Market--0.99%; Endeavor Asset Allocation--1.25%; T. Rowe Price
International Stock--1.53%; Endeavor Value Equity--1.30%; Dreyfus Small Cap
Value--1.30%; Dreyfus U.S. Government Securities--1.00%; T. Rowe Price
Equity Income--1.30%; T. Rowe Price Growth Stock--1.30%; Endeavor
Opportunity Value--1.30%; Endeavor Enhanced Index--1.30%; Endeavor Select
50--1.50%; The Dow Target 10--1.30%; and The Dow Target 5--1.30%. During
1997, Endeavor Investment Advisers waived fees relative to, or reimbursed,
the Endeavor Enhanced Index Portfolio. The annualized operating expense
ratio before waiver/reimbursement by Endeavor Investment Advisers for the
period ended December 31, 1997, was 1.56%. Amounts shown for the Endeavor
Select 50 Portfolio, The Dow Target 10 and The Dow Target 5 are estimated
for 1998. The annualized operating expense ratio before
waiver/reimbursement by Endeavor Investment Advisers for the Endeavor
Select 50, The Dow Target 10 and the Dow Target 5 are estimated to be
1.60%, 1.40% and 1.40%, respectively. The fee table information relating to
the Underlying Funds was provided to PFL by the Underlying Funds, and PFL
has not independently verified such information.
/5/These reflect expenses on Class A shares for the year ended December 31,
1997. Reimbursement agreements are in effect that limit operating expenses
exclusive of any distribution fees imposed on shares of Class B Common
Stock, paid by each portfolio of the Merrill Lynch Variable Series Funds,
Inc. in a given year to 1.25% of its average daily net assets. Any such
expenses in excess of 1.25% of the average daily net assets will be
reimbursed to the portfolio by MLAM, which in turn will be reimbursed by
Merrill Lynch Life Agency, Inc., an affiliate of MLAM. During 1997, MLAM
waived management fees and reimbursed expenses totaling 0.17% for the
Developing Capital Markets Focus Fund.
/6/Effective January 1, 1997, the WRL Series Fund, Inc. adopted a Plan of
Distribution pursuant to Rule 12b-1 under the Investment Company Act of
1940 ("Distribution Plan") and pursuant to the Distribution Plan, entered
into a Distribution Agreement with InterSecurities, Inc. ("ISI"), principal
underwriter for the WRL Series Fund, Inc. Under the Distribution Plan, the
WRL Series Fund, Inc., on behalf of the WRL Growth Portfolio, is authorized
to pay to various service providers, as direct payment for expenses
incurred in connection with the distribution of the Portfolio's shares,
amounts equal to actual expenses associated with distributing the
Portfolio's shares, up to a maximum rate of 0.15% (fifteen one-hundredths
of one percent) on an annualized basis of the average daily net assets.
This fee is measured and accrued daily and paid monthly. ISI has determined
that it would not seek payment by the WRL Series Fund, Inc. of distribution
expenses incurred with respect to any portfolio (including the WRL Growth
Portfolio) during the fiscal year ending December 31, 1998. Owners will be
notified in advance prior to ISI's seeking such reimbursement in the
future.
/7/For the Target Account, the Distribution Financing Charge included under
"Separate Account Annual Expenses" in this table is deducted pursuant to a
12b-1 plan.
Examples
I. An Owner would pay the following expenses on a $1,000 investment, assuming
5% Annually Compounding Death Benefit or Double Enhanced Death Benefit, a
hypothetical 5% annual return on assets, and assuming the entire Policy Value
is in the applicable Subaccount:
1. If the Policy is surrendered at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Focus Fund........... $ 93 $124 $165 $254
Merrill Lynch Developing Capital Markets Focus
Fund.......................................... $ 99 $142 $195 $313
Merrill Lynch High Current Income Fund......... $ 92 $121 $159 $242
Endeavor Money Market Portfolio................ $ 92 $122 $163 $248
Endeavor Asset Allocation Portfolio............ $ 95 $130 $175 $273
T. Rowe Price International Stock Portfolio.... $ 97 $137 $186 $296
Endeavor Value Equity Portfolio................ $ 95 $131 $177 $278
Dreyfus Small Cap Value Portfolio.............. $ 95 $132 $178 $280
Dreyfus U.S. Government Securities Portfolio... $ 94 $129 $173 $269
T. Rowe Price Equity Income Portfolio.......... $ 96 $133 $180 $283
T. Rowe Price Growth Stock Portfolio........... $ 96 $133 $181 $285
Endeavor Opportunity Value Portfolio........... $ 98 $139 $190 $303
Endeavor Enhanced Index Portfolio.............. $ 99 $144 $198 $318
Endeavor Select 50 Portfolio................... $101 $149 $207 $337
WRL Growth Portfolio........................... $ 95 $131 $176 $276
The Dow Target 10.............................. $ 99 $144 $198 $318
The Dow Target 5............................... $ 99 $144 $198 $318
</TABLE>
- 15 -
<PAGE>
2. If the Policy is annuitized at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Focus Fund........... $23 $ 70 $121 $254
Merrill Lynch Developing Capital Markets Focus
Fund.......................................... $29 $ 88 $151 $313
Merrill Lynch High Current Income Fund......... $22 $ 67 $115 $242
Endeavor Money Market Portfolio................ $22 $ 69 $118 $248
Endeavor Asset Allocation Portfolio............ $25 $ 76 $130 $273
T. Rowe Price International Stock Portfolio.... $27 $ 83 $142 $296
Endeavor Value Equity Portfolio................ $25 $ 78 $133 $278
Dreyfus Small Cap Value Portfolio.............. $25 $178 $134 $280
Dreyfus U.S. Government Securities Portfolio... $24 $ 75 $128 $269
T. Rowe Price Equity Income Portfolio.......... $26 $ 79 $135 $283
T. Rowe Price Growth Stock Portfolio........... $26 $ 80 $136 $285
Endeavor Opportunity Value Portfolio........... $28 $ 85 $146 $303
Endeavor Enhanced Index Portfolio.............. $29 $ 90 $153 $318
Endeavor Select 50 Portfolio................... $31 $ 96 $163 $337
WRL Growth Portfolio........................... $25 $ 77 $132 $276
The Dow Target 10.............................. $29 $ 90 $153 $318
The Dow Target 5............................... $29 $ 90 $153 $318
</TABLE>
3. If the Policy is not surrendered or annuitized:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Focus Fund........... $23 $ 70 $121 $254
Merrill Lynch Developing Capital Markets Focus
Fund.......................................... $29 $ 88 $151 $313
Merrill Lynch High Current Income Fund......... $22 $ 67 $115 $242
Endeavor Money Market Portfolio................ $22 $ 69 $118 $248
Endeavor Asset Allocation Portfolio............ $25 $ 76 $130 $273
T. Rowe Price International Stock Portfolio.... $27 $ 83 $142 $296
Endeavor Value Equity Portfolio................ $25 $ 78 $133 $278
Dreyfus Small Cap Value Portfolio.............. $25 $178 $134 $280
Dreyfus U.S. Government Securities Portfolio... $24 $ 75 $128 $269
T. Rowe Price Equity Income Portfolio.......... $26 $ 79 $135 $283
T. Rowe Price Growth Stock Portfolio........... $26 $ 80 $136 $285
Endeavor Opportunity Value Portfolio........... $28 $ 85 $146 $303
Endeavor Enhanced Index Portfolio.............. $29 $ 90 $153 $318
Endeavor Select 50 Portfolio................... $31 $ 96 $163 $337
WRL Growth Portfolio........................... $25 $ 77 $132 $276
The Dow Target 10.............................. $29 $ 90 $153 $318
The Dow Target 5............................... $29 $ 90 $153 $318
</TABLE>
- 16 -
<PAGE>
II. An Owner would pay the following expenses on a $1,000 investment, assuming
Return of Premium Death Benefit, a hypothetical 5% annual return on assets,
and assuming the entire Policy Value is in the applicable Subaccount:
1. If the Policy is surrendered at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Focus Fund........... $ 91 $119 $157 $238
Merrill Lynch Developing Capital Markets Focus
Fund.......................................... $ 97 $138 $188 $298
Merrill Lynch High Current Income Fund......... $ 90 $116 $152 $227
Endeavor Money Market Portfolio................ $ 91 $118 $155 $233
Endeavor Asset Allocation Portfolio............ $ 93 $125 $167 $258
T. Rowe Price International Stock Portfolio.... $ 96 $132 $179 $281
Endeavor Value Equity Portfolio................ $ 94 $127 $170 $263
Dreyfus Small Cap Value Portfolio.............. $ 94 $127 $171 $265
Dreyfus U.S. Government Securities Portfolio... $ 93 $124 $165 $254
T. Rowe Price Equity Income Portfolio.......... $ 94 $128 $172 $268
T. Rowe Price Growth Stock Portfolio........... $ 94 $129 $173 $270
Endeavor Opportunity Value Portfolio........... $ 96 $135 $183 $289
Endeavor Enhanced Index Portfolio.............. $ 98 $139 $190 $303
Endeavor Select 50 Portfolio................... $100 $145 $200 $322
WRL Growth Portfolio........................... $ 94 $126 $169 $261
The Dow Target 10.............................. $ 98 $139 $190 $303
The Dow Target 5............................... $ 98 $139 $190 $303
</TABLE>
2. If the Policy is annuitized at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Focus Fund........... $21 $66 $113 $238
Merrill Lynch Developing Capital Markets Focus
Fund.......................................... $27 $84 $143 $298
Merrill Lynch High Current Income Fund......... $20 $63 $108 $227
Endeavor Money Market Portfolio................ $21 $64 $111 $233
Endeavor Asset Allocation Portfolio............ $23 $72 $123 $258
T. Rowe Price International Stock Portfolio.... $26 $79 $134 $281
Endeavor Value Equity Portfolio................ $24 $73 $125 $263
Dreyfus Small Cap Value Portfolio.............. $24 $74 $126 $265
Dreyfus U.S. Government Securities Portfolio... $23 $70 $121 $254
T. Rowe Price Equity Income Portfolio.......... $24 $75 $128 $268
T. Rowe Price Growth Stock Portfolio........... $24 $75 $129 $270
Endeavor Opportunity Value Portfolio........... $26 $81 $138 $289
Endeavor Enhanced Index Portfolio.............. $28 $85 $146 $303
Endeavor Select 50 Portfolio................... $30 $91 $156 $322
WRL Growth Portfolio........................... $24 $73 $124 $261
The Dow Target 10.............................. $28 $85 $146 $303
The Dow Target 5............................... $28 $85 $146 $303
</TABLE>
- 17 -
<PAGE>
3. If the Policy is not surrendered or annuitized:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Focus Fund........... $21 $66 $113 $238
Merrill Lynch Developing Capital Markets Focus
Fund.......................................... $27 $84 $143 $298
Merrill Lynch High Current Income Fund......... $20 $63 $108 $227
Endeavor Money Market Portfolio................ $21 $64 $111 $233
Endeavor Asset Allocation Portfolio............ $23 $72 $123 $258
T. Rowe Price International Stock Portfolio.... $26 $79 $134 $281
Endeavor Value Equity Portfolio................ $24 $73 $125 $263
Dreyfus Small Cap Value Portfolio.............. $24 $74 $126 $265
Dreyfus U.S. Government Securities Portfolio... $23 $70 $121 $254
T. Rowe Price Equity Income Portfolio.......... $24 $75 $128 $268
T. Rowe Price Growth Stock Portfolio........... $24 $75 $129 $270
Endeavor Opportunity Value Portfolio........... $26 $81 $138 $289
Endeavor Enhanced Index Portfolio.............. $28 $85 $146 $303
Endeavor Select 50 Portfolio................... $30 $91 $156 $322
WRL Growth Portfolio........................... $24 $73 $124 $261
The Dow Target 10.............................. $28 $85 $146 $303
The Dow Target 5............................... $28 $85 $146 $303
</TABLE>
The above tables are intended to assist the Owner in understanding the costs
and expenses that will be borne, directly or indirectly. These include the
expenses of the Underlying Funds. (See "CHARGES AND DEDUCTIONS," p. 45, and
the Underlying Funds' prospectuses.) These examples include the 1.25%
Mortality and Expense Risk Fee for the 5% Annually Compounding and Double
Enhanced Death Benefits; and the 1.10% Mortality and Expense Risk Fee for the
Return of Premium Death Benefit. In addition to the expenses listed above,
premium taxes may be applicable.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. The
assumed 5% annual return used in these examples is purely hypothetical and
should not be considered a guarantee of past or future performance. PFL has
prepared the figures in the above examples. The data for the Underlying Funds
and Target Account annual expenses have been provided by WRL Investment
Management, Inc., Endeavor Investment Advisers, and Merrill Lynch Asset
Management, L.P. and while PFL does not dispute these figures, PFL has not
independently verified their accuracy.
In these examples, the $35 Annual Service Charge is reflected as a charge of
.0547% based on average Policy Value of $64,005. Normally, the $35 Service
Charge would be waived if either the Premium Payment(s) less Partial
Withdrawals, or the Policy Value is at least $50,000. However, it was included
in these examples for illustrative purposes.
Any transfers among the Subaccounts of the Separate Account and/or the
Guaranteed Period Options of the Fixed Account in excess of 12 per Policy Year
may be charged a $10 fee per transfer. Currently, PFL does not assess this
fee. This fee is not reflected in these examples.
DEATH BENEFIT
Upon receipt of proof that the Annuitant, who is the Owner, has died before
the Annuity Commencement Date, the Death Benefit is calculated and is payable
to the Beneficiary when PFL receives Due Proof of Death, an election of the
method of settlement and return of the Policy. The Death Benefit is only paid
if the Owner and Annuitant are the same person, and that person dies prior to
the Annuity Commencement Date. In the event that the Annuitant who is not the
Owner dies prior to the Annuity Commencement Date, the Owner will generally
become the Annuitant unless the Owner specifically requests on the
application,
- 18 -
<PAGE>
order form or in writing prior to Annuitant's death that the Death Benefit be
paid upon the Annuitant's death and PFL agrees to such an election.
The amount of the Death Benefit will depend on the state where the Policy is
purchased and will depend on the Death Benefit option you elect. However, the
Death Benefit will always be at least equal to the greater of the Policy Value
or the Cash Value on the date PFL receives the documentation it needs to
process the Death Benefit.
The Death Benefit is not paid on the death of an Owner if the Owner is not
the Annuitant. If an Owner who is not the Annuitant dies before the Annuity
Commencement Date, the amount payable under the Policy upon surrender will be
the Adjusted Policy Value. (See "DISTRIBUTIONS UNDER THE POLICY--Death
Benefit," p. 43, or the Policy or endorsement for details.) In certain
circumstances, if the Owner dies the Owners spouse may elect to continue the
Policy. If the Policy is continued, all future Surrender Charges would be
waived.
You have the "one-time" option of choosing a Guaranteed Minimum Death
Benefit at the time of purchase of the Policy. The Owner may choose among the
"5% Annually Compounding Death Benefit," the "Double Enhanced Death Benefit,"
or the "Return of Premium Death Benefit." The "5% Annually Compounding Death
Benefit" is only available for Annuitants and Owners under age 75 at issue.
The "Double Enhanced Death Benefit" is only available for Annuitants and
Owners under age 81 at issue. The "Return of Premium Death Benefit" is only
available for Annuitants and Owners under the age 85 at issue, and must be
chosen if either Owner or the Annuitant is 81 or older at issue. Prior
versions of the Policy or Policies offered in certain states may not offer all
Guaranteed Minimum Death Benefit Options. Appendix B contains information
regarding the Death Benefit in prior versions of the Policy and for Policies
that may be issued in certain states. See the Policy or endorsement for
details. If you do not make a Guaranteed Minimum Death Benefit Option
election, the contract will be issued with the Return of Premium Death
Benefit. The Death Benefit may be paid as either a lump sum cash benefit or as
an annuity as permitted by federal or state law.
VARIATIONS IN POLICY PROVISIONS
Certain provisions in prior versions of the Policies sold before May 1,
1998, and of Policies offered in certain states may vary from the descriptions
in this Prospectus in order to comply with different state laws. Any such
state variations will be included in the Policy itself or in riders or
endorsements attached to the Policy. A summary of certain differences is
contained in Appendix B to this Prospectus. See the Policy or endorsement for
details.
New Jersey residents: Annuity payments must begin on or before the Policy
Anniversary that is closest to the Annuitant's 70th birthday or the 10th
Policy Anniversary, whichever occurs last. You may not select a Guaranteed
Period Option that would extend beyond that date. Your options at the Annuity
Commencement Date are to elect a lump sum payment, or elect to receive annuity
payments under one of the Fixed Payment Options. New Jersey residents cannot
elect Variable Payment Options. Consult your agent and the policy form itself
for details regarding these and other terms applicable to policies sold in New
Jersey.
FEDERAL INCOME TAX CONSEQUENCES OF INVESTMENT IN THE POLICY
With respect to Owners who are natural persons, there should be no federal
income tax on increases in the Policy Value until a distribution under the
Policy occurs (for example, a surrender, partial withdrawal, or Annuity
Payment) or is deemed to occur (for example, a pledge or assignment of a
Policy). Generally, a portion of any distribution or deemed distribution will
be taxable as ordinary income. The taxable portion of certain distributions
will be subject to withholding unless the recipient elects otherwise. In
addition, a 10%
- 19 -
<PAGE>
Federal penalty tax may apply to certain distributions or deemed distributions
under the Policy. (See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," p. 49.)
INQUIRIES, WRITTEN NOTICES AND WRITTEN REQUESTS
Any questions about procedures or the Policy, or any Written Notice or
Written Request required to be sent to PFL, should be sent to the
Administrative and Service Office, Financial Markets Division--Variable
Annuity Department, 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001.
Telephone requests and inquiries may be made by calling 800-525-6205. All
inquiries, Notices and Requests should include the Policy number, the Owner's
name and the Annuitant's name.
* * *
Note: The foregoing summary is qualified in its entirety by the more
detailed information in the remainder of this Prospectus, in the Statement of
Additional Information, in the prospectuses for the Underlying Funds of the
Mutual Fund Account, and in the Policy itself. Prospective purchasers should
refer to those sources before purchasing a Policy. This Prospectus generally
describes only the Policy and the Mutual Fund Account and the Target Account.
Separate prospectuses describe the Underlying Funds. (There is no prospectus
for the Fixed Account since interests in the Fixed Account are not securities.
See "THE ENDEAVOR ACCOUNTS--The Fixed Account," p. 29.)
- 20 -
<PAGE>
CONDENSED FINANCIAL INFORMATION
The Accumulation Unit Values and the number of Accumulation Units outstanding
for each Mutual Fund Subaccount from the date of inception are shown in the
following tables.
5% Annually Compounding Death Benefit or Double Enhanced Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.55%)
<TABLE>
<CAPTION>
ACCUMULATION NUMBER OF
UNIT VALUE AT ACCUMULATION ACCUMULATION
BEGINNING OF UNIT VALUE AT UNITS AT END OF
YEAR END OF YEAR YEAR
------------- ------------- ---------------
<S> <C> <C> <C>
ENDEAVOR MONEY MARKET ML
SUBACCOUNT
1997(/1/)......................... $ 1.174747 $ 1.195541 237,144.180
ENDEAVOR ASSET ALLOCATION ML
SUBACCOUNT
1997(/1/)......................... $ 2.073492 $ 2.170350 560,006.492
T. ROWE PRICE INTERNATIONAL STOCK
ML SUBACCOUNT
1997(/1/)......................... $ 1.490376 $ 1.345562 1,418,820.061
ENDEAVOR VALUE EQUITY ML
SUBACCOUNT
1997(/1/)......................... $ 1.951455 $ 2.084599 695,791.985
DREYFUS SMALL CAP VALUE ML
SUBACCOUNT
1997(/1/)......................... $ 1.763002 $ 1.849865 1,303,710.955
DREYFUS U.S. GOVERNMENT SECURITIES
ML SUBACCOUNT
1997(/1/)......................... $ 1.156486 $ 1.214143 250,859.166
T. ROWE PRICE EQUITY INCOME ML
SUBACCOUNT
1997(/1/)......................... $ 1.757991 $ 1.923605 1,205,031.181
T. ROWE PRICE GROWTH STOCK ML
SUBACCOUNT
1997(/1/)......................... $ 1.905196 $ 2.041994 863,752.125
ENDEAVOR OPPORTUNITY VALUE ML
SUBACCOUNT
1997(/1/)......................... $ 1.103566 $ 1.156145 823,035.993
ENDEAVOR ENHANCED INDEX ML
SUBACCOUNT
1997(/1/)......................... $ 1.140312 $ 1.216754 842,854.350
MERRILL LYNCH BASIC VALUE FOCUS ML
SUBACCOUNT
1997(/1/)......................... $ 1.000000 $ 1.045149 1,158,912.186
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FOCUS ML SUBACCOUNT
1997(/1/)......................... $ 1.000000 $ .776036 731,215.174
MERRILL LYNCH HIGH CURRENT INCOME
ML SUBACCOUNT
1997(/1/)......................... $ 1.000000 $ 1.036753 1,515,274.846
WRL GROWTH ML SUBACCOUNT
1997(/1/)......................... $19.367467 $19.650673 134,838.617
</TABLE>
- 21 -
<PAGE>
Return of Premium Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.40%)
<TABLE>
<CAPTION>
ACCUMULATION NUMBER OF
UNIT VALUE AT ACCUMULATION ACCUMULATION
BEGINNING OF UNIT VALUE AT UNITS AT END OF
YEAR END OF YEAR YEAR
------------- ------------- ---------------
<S> <C> <C> <C>
ENDEAVOR MONEY MARKET ML
SUBACCOUNT
1997(/1/)......................... $ 1.17475 $ 1.196418 186,769.997
ENDEAVOR ASSET ALLOCATION ML
SUBACCOUNT
1997(/1/)......................... $ 2.073492 $ 2.171948 146,972.115
T. ROWE PRICE INTERNATIONAL STOCK
ML SUBACCOUNT
1997(/1/)......................... $ 1.490376 $ 1.346560 396,884.393
ENDEAVOR VALUE EQUITY ML
SUBACCOUNT
1997(/1/)......................... $ 1.951455 $ 2.086130 185,606.823
DREYFUS SMALL CAP VALUE ML
SUBACCOUNT
1997(/1/)......................... $ 1.763002 $ 1.851229 427,723.238
DREYFUS U.S. GOVERNMENT SECURITIES
ML SUBACCOUNT
1997(/1/)......................... $ 1.156486 $ 1.215033 142,705.078
T. ROWE PRICE EQUITY INCOME ML
SUBACCOUNT
1997(/1/)......................... $ 1.757991 $ 1.925022 399,676.687
T. ROWE PRICE GROWTH STOCK ML
SUBACCOUNT
1997(/1/)......................... $ 1.905196 $ 2.043487 275,873.510
ENDEAVOR OPPORTUNITY VALUE ML
SUBACCOUNT
1997(/1/)......................... $ 1.103566 $ 1.156993 278,938.732
ENDEAVOR ENHANCED INDEX ML
SUBACCOUNT
1997(/1/)......................... $ 1.140312 $ 1.217647 517,261.206
MERRILL LYNCH BASIC VALUE FOCUS ML
SUBACCOUNT
1997(/1/)......................... $ 1.000000 $ 1.045922 279,869.269
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FOCUS ML SUBACCOUNT
1997(/1/)......................... $ 1.000000 $ .776606 190,773.375
MERRILL LYNCH HIGH CURRENT INCOME
ML SUBACCOUNT
1997(/1/)......................... $ 1.000000 $ 1.037515 296,791.692
WRL GROWTH ML SUBACCOUNT
1997(/1/)......................... $19.367467 $19.665157 22,707.469
</TABLE>
- ----------------------------
(1) Period from July 3, 1997 through December 31, 1997.
The Endeavor Select 50 ML Subaccount and the Target ML Subaccounts had not
commenced operations as of December 31, 1997. Accordingly, no comparable data
is available for those Subaccounts.
- 22 -
<PAGE>
FINANCIAL STATEMENTS
The financial statements of the Mutual Fund Account and PFL and the
independent auditors' reports thereon are in the Statement of Additional
Information which is available free upon request to the Administrative and
Service Office. There are no financial statements for the Target Account
because the Target Account had not commenced operations as of the date of this
Prospectus.
- 23 -
<PAGE>
PART II
INTRODUCTION. The following information in Part II describes the Policy in
detail and gives a very brief description of the investment options which are
described in detail in Part III (the Target Account) or in separate
prospectuses (the Mutual Fund Account). The Mutual Fund Account invests in
mutual fund portfolios. The Target Account invests directly in securities.
PFL LIFE INSURANCE COMPANY
PFL Life Insurance Company ("PFL"), 4333 Edgewood Road, N.E., Cedar Rapids,
Iowa 52499-0001, is a stock life insurance company. It was incorporated under
the name NN Investors Life Insurance Company, Inc. under the laws of the State
of Iowa on April 19, 1961. It is principally engaged in the sale of life
insurance and annuity policies, and is licensed in the District of Columbia,
Guam, and in all states except New York. As of December 31, 1997, PFL had
assets of approximately $8.7 billion. PFL i s a wholly-owned indirect
subsidiary of AEGON USA, Inc., which conducts substantially all of its
operations through subsidiary companies engaged in the insurance business or
in providing non-insurance financial services. All of the stock of AEGON USA,
Inc. is indirectly owned by AEGON n.v. of the Netherlands. AEGON n.v., a
holding company, conducts its business through subsidiary companies engaged
primarily in the insurance business.
THE ENDEAVOR ACCOUNTS
Premium Payments made under a Policy may be allocated to the Mutual Fund
Account, to the Target Account, to the Fixed Account, or to a combination of
these Accounts.
The PFL Endeavor Variable Annuity Account comprises a portion of the PFL
Endeavor VA Separate Account of PFL Life Insurance Company. The PFL Endeavor
VA Separate Account was established as a separate investment account under the
laws of the State of Iowa on January 19, 1990.
THE MUTUAL FUND ACCOUNT
The Mutual Fund Account is registered with the SEC under the 1940 Act as a
unit investment trust and meets the definition of a separate account under
federal securities laws. However, the SEC does not supervise the management or
the investment practices or policies of the Mutual Fund Account or PFL.
The Mutual Fund Account receives and invests the Premium Payments under the
Policies that are allocated to it for investment in shares of certain
management investment companies. The shares available to be allocated under
the Policy are those certain portfolios of the Merrill Lynch Variable Series
Funds, Inc., the Endeavor Series Trust, and the WRL Growth Portfolio.
The Mutual Fund Account currently has dedicated fifteen Subaccounts to the
Policy. Additional Subaccounts may be established at the discretion of PFL.
The Mutual Fund Account also may include other subaccounts which are not
available under the Policy. Each Subaccount invests exclusively in shares of
one of the Portfolios of the Underlying Funds. Under Iowa law, the assets of
the Mutual Fund Account are owned by PFL, but they are held separately from
the other assets of PFL. To the extent that these assets are attributable to
the Cash Value of the Policies, these assets are not chargeable with
liabilities incurred in any other business operation of PFL. Income, gains,
and losses incurred on the assets in the Subaccounts of the Mutual Fund
Account, whether or not realized, are credited to or charged
- 24 -
<PAGE>
against that Subaccount without regard to other income, gains or losses of any
other Account or Subaccount of PFL. Therefore, the investment performance of
any Subaccount is entirely independent of the investment performance of PFL's
general account assets or any other Account or Subaccount maintained by PFL.
The Underlying Funds. The Mutual Fund Account will invest in shares of the
Merrill Lynch Variable Series Funds, Inc., the Endeavor Series Trust and the
WRL Growth Portfolio of the WRL Series Fund, Inc. (collectively the
"Underlying Funds"). Merrill Lynch Variable Series Funds, Inc., Endeavor
Series Trust, and the WRL Series Fund, Inc., and are each a series-type mutual
fund registered with the SEC under the 1940 Act as an open-end, management
investment company. The registration of the Underlying Funds does not involve
supervision of the management or investment practices or policies of the
Underlying Funds by the SEC.
The following Portfolios are currently available in the Mutual Fund Account
under the Policies:
Merrill Lynch Basic Value Focus Fund Dreyfus Small Cap Value Portfolio
Merrill Lynch High Current Income Dreyfus U.S. Government Securities
Fund Portfolio
Merrill Lynch Developing Capital Endeavor Value Equity Portfolio
Markets Focus Fund Endeavor Opportunity Value Portfolio
Endeavor Asset Allocation Portfolio Endeavor Enhanced Index Portfolio
Endeavor Money Market Portfolio Endeavor Select 50 Portfolio
T. Rowe Price International Stock WRL Growth Portfolio
Portfolio
T. Rowe Price Equity Income Portfolio
T. Rowe Price Growth Stock Portfolio
The assets of each Portfolio are held separate from the assets of the other
Portfolios, and each Portfolio has its own distinct investment objectives and
policies. Each Portfolio operates as a separate investment fund, and the
income or losses of one Portfolio generally have no effect on the investment
performance of any other Portfolio.
Merrill Lynch Asset Management, L.P. is the Adviser for the portfolios of
the Merrill Lynch Variable Series Funds, Inc. including the Merrill Lynch
Basic Value Focus Fund, the Merrill Lynch Developing Capital Markets Focus
Fund, and the Merrill Lynch High Current Income Fund.
Endeavor Investment Advisers (the "Manager"), an investment adviser
registered with the SEC under the Investment Advisers Act of 1940, is the
Endeavor Series Trust's manager. The Manager is a general partnership between
Endeavor Management Co. and AUSA Financial Markets, Inc. (an affiliate of
PFL). The Manager selects and contracts with advisers for investment services
for the Portfolios of Endeavor Series Trust, reviews the advisers' activities,
and otherwise performs administerial and managerial functions for the Endeavor
Series Trust. The following seven advisers each perform investment advisory
services for particular Portfolios of Endeavor Series Trust, (the "Advisers"):
MORGAN STANLEY ASSET MANAGEMENT INC. (a subsidiary of Morgan Stanley, Dean
Witter, Discover & Co.)
T. ROWE PRICE ASSOCIATES, INC.
ROWE PRICE-FLEMING INTERNATIONAL, INC. (a joint venture between T. Rowe Price
Associates, Inc., and Robert Fleming Holdings Limited)
OPCAP ADVISORS (an affiliate of PIMCO Advisers, L.P.)
J.P. MORGAN INVESTMENT MANAGEMENT INC. (a wholly-owned subsidiary of J.P.
Morgan and Co. Incorporated)
- 25 -
<PAGE>
THE DREYFUS CORPORATION (a wholly-owned subsidiary of Mellon Bank, N.A.)
MONTGOMERY ASSET MANAGEMENT, LLC (a wholly-owned subsidiary of Commerzbank AG)
Morgan Stanley Asset Management Inc. is the Adviser for the Endeavor Asset
Allocation Portfolio and the Endeavor Money Market Portfolio. Prior to May 1,
1998, TCW Funds Management, Inc. was the Adviser to the Endeavor Money Market
Portfolio and the Endeavor Asset Allocation Portfolio. T. Rowe Price
Associates, Inc. is the Adviser for the T. Rowe Price Equity Income Portfolio
and the T. Rowe Price Growth Stock Portfolio. Rowe Price-Fleming
International, Inc. (a joint venture between T. Rowe Price Associates, Inc.
and Robert Fleming Holdings Limited), is the Adviser for the T. Rowe Price
International Stock Portfolio. OpCap Advisors (formerly known as Quest for
Value Advisors), is the Adviser for the Endeavor Value Equity Portfolio and
the Endeavor Opportunity Value Portfolio. J.P. Morgan Investment Management
Inc. ("Morgan") is the Adviser for the Endeavor Enhanced Index Portfolio. The
Dreyfus Corporation is the Adviser for the Dreyfus U.S. Government Securities
Portfolio, and the Dreyfus Small Cap Value Portfolio. Montgomery Asset
Management, LLC is the Adviser for the Endeavor Select 50 Portfolio.
WRL Investment Management, Inc., a subsidiary of Western Reserve Life
Assurance Co. of Ohio, (an affiliate of PFL), is the Adviser for the WRL
Series Fund, Inc. and contracts with Janus Capital Corporation (also an
"Adviser") as a sub-adviser to the WRL Growth Portfolio.
The Adviser of a Portfolio is responsible for selecting the investments of
the Portfolio consistent with the investment objectives and policies of the
Portfolio, and will conduct securities trading for the Portfolio. All Advisers
are investment advisers registered with the SEC under the Investment Advisers
Act of 1940. The investment objectives and certain investment policies of each
Portfolio are summarized as follows:
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Merrill Lynch Basic Value Focus Fund--seeks capital appreciation and,
secondarily, income by investment in securities, primarily equities, that
management of the Fund believes are undervalued and therefore represent basic
investment value.
Merrill Lynch Developing Capital Markets Focus Fund--seeks long-term capital
appreciation by investing in securities, principally equities, of issuers in
countries having smaller capital markets. For purposes of its objective, the
Fund considers countries having smaller capital markets to be all countries
other than the four countries having the largest equity market
capitalizations. Investing on an international basis involves special
considerations. Investing in smaller capital markets entails the risk of
significant volatility in the Fund's security prices. See "Other Portfolio
Strategies-Foreign Securities" in the Merrill Lynch Variable Series Funds,
Inc. prospectus.
Merrill Lynch High Current Income Fund--seeks as a primary objective the
highest level of current income that is consistent with its investment
policies and prudent investment management, and as a secondary objective
capital appreciation when consistent with its primary objective. The Fund
invests principally in fixed-income securities that are rated in the lower
rating categories of the established rating services or in unrated securities
of comparable quality. These securities (including those known as "junk
bonds") present special risks. Because investment in such high-yield
securities entail relatively greater risk of loss of income or principal. An
investment in the High Current Income Fund may not be appropriate as the
exclusive investment to fund the Contracts for all Contract Owners. See "Risks
of High Yield Securities" in the Merrill Lynch Variable Series Funds, Inc.
prospectus.
- 26 -
<PAGE>
ENDEAVOR SERIES TRUST.
Endeavor Money Market Portfolio (formerly, TCW Money Market Portfolio)--
seeks current income, preservation of capital and maintenance of liquidity
through investment in short-term money market securities. The Portfolio seeks
to maintain a constant net asset value of $1.00 per share although no
assurances can be given that such constant net asset value will be maintained.
Endeavor Asset Allocation Portfolio (formerly, TCW Managed Asset Allocation
Portfolio)--seeks high total return through a managed asset allocation
portfolio of equity, fixed income and money market securities.
T. Rowe Price International Stock Portfolio--seeks long-term growth of
capital through investments primarily in common stocks of established non-U.S.
companies.
Endeavor Value Equity Portfolio (formerly, Value Equity Portfolio)--seeks
long-term capital appreciation through investment in securities (primarily
equity securities) of companies that are believed by the Portfolio's Adviser
to be undervalued in the marketplace in relation to factors such as the
companies' assets or earnings.
Dreyfus Small Cap Value Portfolio--seeks capital appreciation through
investments in a diversified portfolio consisting primarily of equity
securities of companies with a median capitalization of approximately $750
million, provided that under normal market conditions at least 75% of the
Portfolio's investments will be in equity securities of companies with
capitalizations at the time of purchase between $150 million and $1.5 billion.
Dreyfus U.S. Government Securities Portfolio--seeks as high a level of total
return as is consistent with prudent investment strategies by investing under
normal circumstances at least 65% of its assets in debt obligations and
mortgage-backed securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
T. Rowe Price Equity Income Portfolio--seeks to provide substantial dividend
income and also capital appreciation by investing primarily in dividend paying
stocks of established companies.
T. Rowe Price Growth Stock Portfolio--seeks long-term growth of capital and
to increase dividend income through investment primarily in common stocks of
well established growth companies.
Endeavor Opportunity Value Portfolio (formerly, Opportunity Value
Portfolio)--seeks growth of capital over time through investment in a
portfolio consisting of common stocks, bonds and cash equivalents, the
percentages of which will vary based upon the Portfolio Adviser's assessment
of relative values.
Endeavor Enhanced Index Portfolio (formerly, Enhanced Index Portfolio)--
seeks to earn a total return modestly in excess of the total return
performance of the S&P 500 Composite Stock Index (the "S&P 500 Index") while
maintaining a volatility of return similar to the S&P 500 Index.
Endeavor Select 50 Portfolio (formerly, Select 50 Portfolio)--seeks capital
appreciation by investing at least 65% of its total assets in at least 50
different equity securities of companies of all sizes throughout the world.
Each of five teams from different investment management disciplines of the
Portfolio's Adviser selects ten equity securities based on the potential for
capital appreciation.
- 27 -
<PAGE>
WRL SERIES FUND, INC.
WRL Growth Portfolio (Janus)--seeks growth of capital. At most times, this
Portfolio will be invested primarily in equity securities which are selected
solely for their capital growth potential; investment income is not a
consideration.
PFL may from time to time receive revenue or fees from the underlying funds
or their advisers or sub-advisers. The amount of the fees, if any, may be
based on the amount of assets that PFL or the Mutual Fund Account invests in
the underlying funds.
THE TARGET ACCOUNT
The Target Account is registered with the SEC under the 1940 Act as an open-
end management investment company and meets the definition of a separate
account under federal securities laws. However, the SEC does not supervise the
management or the investment practices of policies of the Target Account. The
Target Account is a managed separate account and currently is divided into two
Subaccounts, The Dow Target 10 Subaccount and The Dow Target 5 Subaccount,
both of which are non-diversified. Endeavor Investment Advisers is the Target
Account's manager, and First Trust Advisers, L.P. is the Target Account's
adviser.
The Target Subaccounts. The following two subaccounts are currently
available under the Target Account:
The Dow Target 10 Subaccount will invest in the common stock of the ten
companies in the DJIA that have the highest dividend yield as of a
specified business day and hold those stocks for a 12-month period.
The Dow Target 5 Subaccount will invest in the five companies with the
lowest per share stock price of the ten companies in the DJIA that have the
highest dividend yield as of a specified business day and hold those stocks
for a 12-month period.
The objective of each Target Subaccount is to provide an above-average total
return through a combination of dividend income and capital appreciation. Each
Target Subaccount may have different investment portfolios running
simultaneously for different 12-month periods.
* * *
THERE IS NO ASSURANCE THAT ANY MUTUAL FUND ACCOUNT PORTFOLIO OR TARGET
ACCOUNT PORTFOLIO WILL ACHIEVE ITS STATED OBJECTIVE. MORE DETAILED
INFORMATION, INCLUDING A DESCRIPTION OF EACH PORTFOLIO'S INVESTMENT OBJECTIVE
AND POLICIES AND A DESCRIPTION OF RISKS INVOLVED IN INVESTING IN EACH OF THE
PORTFOLIOS AND OF EACH PORTFOLIO'S FEES AND EXPENSES IS CONTAINED IN THE
PROSPECTUSES FOR THE UNDERLYING FUNDS, CURRENT COPIES OF WHICH ARE ATTACHED TO
THIS PROSPECTUS. MORE DETAILED INFORMATION REGARDING THE TARGET SUBACCOUNTS IS
CONTAINED IN PART III OF THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL
INFORMATION. INFORMATION CONTAINED IN THE UNDERLYING FUNDS' PROSPECTUSES AND
THE STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ CAREFULLY BEFORE
INVESTING IN A MUTUAL FUND OR TARGET SUBACCOUNT.
An investment in the Mutual Fund Account, the Target Account, or in any
Portfolio, including the Endeavor Money Market Portfolio and the Dreyfus U.S.
Government Securities Portfolio, is not insured or guaranteed by the U.S.
government or any government agency.
- 28 -
<PAGE>
THE FIXED ACCOUNT
This Prospectus is generally intended to serve as a disclosure document only
for the Policy, the Mutual Fund Account and the Target Account. In addition,
some Policy forms do not contain a Fixed Account. For complete details
regarding the applicable Fixed Account, see the Policy itself.
Premium Payments allocated and amounts transferred to the Fixed Account
become part of the general account of PFL, which supports insurance and
annuity obligations. Interests in the general account have not been registered
under the Securities Act of 1933 (the "1933 Act"), nor is the general account
registered as an investment company under the 1940 Act. Accordingly, neither
the general account nor any interests therein are generally subject to the
provisions of the 1933 or 1940 Acts and PFL has been advised that the staff of
the SEC has not reviewed the disclosures in this Prospectus which relate to
the Fixed Account.
The Fixed Account comprises a part of all the general assets of PFL, other
than those in the Mutual Fund Account, the Target Account or in any other
segregated asset account. The Owner may allocate Premium Payments to the Fixed
Account at the time of Premium Payment or by subsequent transfers from the
Mutual Fund Account and the Target Account. Instead of the Owner bearing the
investment risk, as is the case for Policy Value in the Mutual Fund Account
and the Target Account, PFL bears the full investment risk for all Policy
Value in the Fixed Account. PFL has sole discretion to invest the assets of
its general account, including the Fixed Account, subject to applicable law.
All guaranteed rates or benefits provided by PFL are subject to PFL's claims-
paying ability.
Premium payments applied to and any amounts transferred to the Fixed Account
will reflect a fixed interest rate. The interest rates PFL sets will be
credited for increments of at least one year measured from each premium
payment or transfer date. These rates will never be less than a minimum
effective annual interest rate of 3%. Upon Surrender of the Policy, the Owner
will receive at least the Premium Payments applied to, less prior partial
withdrawals and transfers from, the Fixed Account.
Guaranteed Periods. PFL may offer optional guaranteed interest rate periods
("Guaranteed Period Options" or "GPOs") into which Premium Payments may be
paid or amounts transferred. For example, PFL may, from time to time, offer
Guaranteed Period Options for periods of 1, 3, 5, or 7 years. The current
interest rate PFL sets for funds entering each Guaranteed Period Option will
apply to those funds until the end of the Guaranteed Period. At the end of the
Guaranteed Period, the Premium Payment or amount transferred into the
Guaranteed Period Option less any Gross Partial Withdrawals or transfers from
that Guaranteed Period Option, plus accrued interest, will be rolled into a
new Guaranteed Period Option.
The Owner may choose the Guaranteed Period Option into which the funds are
to be placed by giving PFL notice within 30 days before the end of the
expiring Guaranteed Period. In the absence of such election, the new
Guaranteed Period will be the same as the expiring one. If that Guaranteed
Period Option is no longer offered by PFL, the next shorter Guaranteed Period
Option then being offered will be used. PFL reserves the right, for new
Premium Payments, transfers, or rollovers, whether or not to offer any
Guaranteed Period Option. PFL will, however, always offer at least a one-year
Guaranteed Period Option.
Surrenders, Partial Withdrawals, transfers, and amounts applied to a Payment
Option from a Guaranteed Period Option prior to the end of the Guaranteed
Period may be subject to an Excess Interest Adjustment. An Excess Interest
Adjustment may result in a loss of interest credited, but the Owner's Fixed
Account Policy Values will always be credited with an effective annual
interest rate of at least 3%. Surrender charges, if any, are applied after the
Excess Interest Adjustment. However, upon full surrender the Owner is
guaranteed
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return of Premium Payments to the Fixed Account, less partial withdrawals and
transfers from the Fixed Account. (See "DISTRIBUTIONS UNDER THE POLICY--Excess
Interest Adjustment (EIA)," p. 38.)
For purposes of crediting interest, the oldest Premium Payment or transfer
into a Guaranteed Period Option within the Fixed Account, plus interest
allocable to that Premium Payment or transfer, is considered to be withdrawn
or transferred out first; the next oldest Premium Payment plus interest is
considered to be transferred out next, and so on (this is a "first-in, first-
out" procedure).
Dollar Cost Averaging Fixed Account Option. PFL may offer a Dollar Cost
Averaging Fixed Account Option separate from the Guaranteed Period Option(s).
This option will generally have a one-year interest rate guarantee for amounts
in the DCA Fixed Account and will only be available under a Dollar Cost
Averaging (DCA) program. If the Owner, for any reason, discontinues the DCA
program before its completion, then the interest credited on amounts in the
DCA account may be adjusted downward, but not below the minimum guaranteed
effective annual interest rate of 3%. The current interest rate PFL credits
for the DCA Fixed Account may differ from the rates credited on other
Guaranteed Period Option(s) in the Fixed Account. In addition, the current
interest rate may vary on different portions of the DCA Fixed Account. PFL may
credit different interest rates for DCA programs of varying time periods.
Interest credited on the amounts in the DCA Fixed Account will always be at
least an annual effective rate of 3%.
Prior to the Annuity Commencement Date, you can instruct PFL to make
automatic transfers from the Dollar Cost Averaging Fixed Account to one or
more subaccounts of the Mutual Fund Account and the Target Account. Transfers
must be scheduled for at least six but not more than 24 months, or for at
least four, but not more than eight quarters. Transfers will continue until
the elected Subaccount or DCA Fixed Account value is depleted. The amount
transferred each time must be at least $500. All transfers from the DCA
account will be the same amount as the initial transfer unless subsequently
changed. Changes to the amount transferred will only be allowed when
additional premium is allocated or a new amount is transferred into the DCA
account. Changes can be made to the Subaccounts to which these transfers are
allowed. Dollar Cost Averaging transfers from the Dollar Cost Averaging Fixed
Account will not be subject to an Excess Interest Adjustment. (See "Dollar
Cost Averaging (DCA)" p. 32.)
Current Interest Rates. PFL periodically will establish an applicable
Current Interest Rate for each of the Guaranteed Period Options within the
Fixed Account, and the Dollar Cost Averaging Fixed Account Option. Current
Interest Rates may be changed by PFL frequently or infrequently depending on
interest rates on investments available to PFL and other factors as described
below, but once established, the rate will be guaranteed for the entire
duration of the Guaranteed Period. Each Guaranteed Period will have a duration
of at least one year. However, except for limited situations, any amount
withdrawn or transferred will be subject to an Excess Interest Adjustment,
except at the end of the Guaranteed Period Option. (See "Excess Interest
Adjustment," p. 38.)
The Current Interest Rate will not be less than 3% per year, regardless of
any application of the Excess Interest Adjustment. PFL has no specific formula
for determining the rate of interest that it will declare as a Current
Interest Rate, as this rate will be reflective of interest rates available on
the types of debt instruments in which PFL intends to invest amounts allocated
to the Fixed Account. In addition, PFL's management may consider other factors
in determining Current Interest Rates for a particular Guaranteed Period
including but not limited to: regulatory and tax requirements; sales
commissions and administrative expenses borne by the Company; general economic
trends; and competitive factors. There is no obligation to declare a rate in
excess of 3%; you assume the risk that declared rates will
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not exceed 3%. PFL has complete discretion to declare any rate of at least 3%,
regardless of market interest rates, the amounts earned by PFL on its
investments, or any other factors.
PFL'S MANAGEMENT HAS COMPLETE AND SOLE DISCRETION TO DETERMINE THE CURRENT
INTEREST RATES. PFL CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE CURRENT
INTEREST RATES, EXCEPT THAT PFL GUARANTEES THAT FUTURE CURRENT EFFECTIVE
INTEREST RATES WILL NOT BE BELOW 3% PER YEAR.
TRANSFERS
You can transfer Policy Values or an amount equal to the interest credited
from one Investment Option to another within certain limits. Transfers (from
the Guaranteed Period Option(s) of the Fixed Account) of an amount up to the
interest credited (that is, "Interest Transfers") are not subject to an Excess
Interest Adjustment, but may affect the interest crediting rates on the
remaining funds in the Guaranteed Period Option.
Subject to the limitations and restrictions described below, transfers from
an Investment Option may be made, up to thirty days prior to the Annuity
Commencement Date, by sending Written Notice, signed by you, to the
Administrative and Service Office. Each interest Transfer will be subject to a
minimum amount of $50. For transfers other than Interest Transfers, the
minimum amount which may be transferred is the lesser of $500 or the entire
Subaccount or Guaranteed Period Option Value. If the Subaccount or Guaranteed
Period Option Value remaining after a transfer is less than $500, PFL reserves
the right, at its discretion, either to deny the transfer request or to
include that amount as part of the transfer.
If the Excess Interest Adjustment (at time of a transfer request) from any
Guaranteed Period Option is a negative adjustment, then the maximum amount of
Policy Value that can be transferred is 25% of the Guaranteed Period Option's
Policy Value, less amounts previously transferred out of that Guaranteed
Period Option during the current Policy Year. No maximum will apply to amounts
transferred from any Guaranteed Period Option if the Excess Interest
Adjustment is a positive adjustment at the time of transfer. You must notify
PFL within 30 days prior to the end of any expiring Guaranteed Period Option
to instruct PFL regarding any transfers to be performed at that time.
Transfers prior to the Annuity Commencement Date currently may be made
without charge as often as the Owner wishes, subject to the minimum amount
specified above. PFL reserves the right to limit these transfers to no more
than 12 per Policy Year in the future, or to charge up to $10 per transfer in
excess of 12 per Policy Year.
You may transfer an amount up to the interest credited in any of the
Guaranteed Period Option(s) to any Investment Option prior to the end of the
Guaranteed Period. No Excess Interest Adjustment will apply to such Interest
Transfers. Interest Transfers may affect the interest crediting rates on the
remaining funds in the Guaranteed Period Option. This is because Interest
Transfers may have the effect of reducing or eliminating principal amounts in
the Guaranteed Period Options since, for purposes of crediting interest, PFL
considers the oldest Premium Payment or transfer into the Guaranteed Period
Option, plus interest allocable to that particular Premium Payment or
transfer, to be withdrawn first.
Transfers out of the Dollar Cost Averaging Fixed Account, except through an
automatic Dollar Cost Averaging program, are not allowed.
After the Annuity Commencement Date, transfers out of the Fixed Account are
not permitted, and transfers between Subaccounts or from Subaccounts to the
Fixed Account
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may be limited to once per Policy Year. (See "DISTRIBUTIONS UNDER THE POLICY--
Annuity Payment Options," p. 40.)
Transfers may be made by telephone, subject to the provisions described
below under "Telephone Transactions."
REINSTATEMENTS
Requests are occasionally received by PFL to reinstate funds which had been
transferred to another insurance company pursuant to a Section 1035 exchange
or trustee-to-trustee transfer. In this situation PFL will require the Owner
to replace the same total amount of money in the applicable Subaccounts and/or
Fixed Accounts as taken from them to effect the exchange. The total dollar
amount of funds reapplied to the Mutual Fund Account or theTarget Account will
be used to purchase a number of units available for each Subaccount based on
the unit prices at the date of reinstatement (within two days after the date
the funds are received by PFL). The number of units available on the
reinstatement date may be more or less than the number surrendered for the
exchange. Amounts reapplied to the Fixed Account will receive the interest
rate they would otherwise have received, had they not been withdrawn. However,
an adjustment will be made to the amount reapplied to compensate PFL for the
additional interest credited during the period of time between the withdrawal
and the reapplication of the funds. You should consult a qualified tax adviser
concerning the tax consequences of any Section 1035 exchanges or
reinstatements.
TELEPHONE TRANSACTIONS
You (or your designated account executive) may make transfers and/or change
the allocation of additional Premium Payments by telephone. Telephone
transfers are only allowed if the "Telephone Transfer/Reallocation
Authorization" box in the Policy application, if any, has been checked or you
have subsequently authorized telephone transfers in writing on a form provided
to PFL. PFL and/or the Administrative and Service Office will not be liable
for following instructions communicated by telephone that it reasonably
believes to be genuine. PFL will employ reasonable procedures, however, to
confirm that instructions communicated by telephone are genuine. If PFL fails
to do so, certain Government regulators believe it may be liable for any
losses due to unauthorized or fraudulent instructions. All telephone requests
will be recorded on voice recorder equipment for your protection. When making
telephone requests, you may be required to provide a social security number
and/or other information for identification purposes.
Telephone requests must be received at the Administrative and Service Office
while the New York Stock Exchange is open to assure same day pricing of the
transaction.
At its discretion, PFL may discontinue the telephone transaction privilege
at any time as to some or all Owners, and PFL may require written confirmation
of any transaction request.
DOLLAR COST AVERAGING (DCA)
Under the Dollar Cost Averaging program, prior to the Annuity Commencement
Date, you can instruct PFL to automatically transfer a specified dollar amount
from the Dollar Cost Averaging Fixed Account Option, the Endeavor Money Market
Subaccount or the Dreyfus U.S. Government Securities Subaccount to any other
Subaccount or Subaccounts of the Mutual Fund Account and the Target Account.
The automatic transfers can occur monthly or quarterly and will occur on the
28th day of the month. If the Dollar Cost Averaging request is received prior
to the 28th day of any month, the first transfer will occur on the 28th day of
that month. If the Dollar Cost Averaging request is received on or after the
28th day of any month, the first transfer will occur on the 28th day of the
following month. The amount transferred each time must be at least $500. A
minimum of six monthly or four quarterly transfers are required and a maximum
of 24 monthly or eight quarterly transfers are allowed from the DCA Fixed
Account.
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All transfers from the DCA account will be the same amount as the initial
transfer unless subsequently changed. Changes to the amount transferred will
only be allowed after the minimums discussed above are satisfied or when
additional premium is allocated or a new amount is transferred into the DCA
account. If the amount transferred is changed, the minimums discussed above
must be met again (that is, transfers must be scheduled for at least six more
but not more than 24 months, or for at least four more, but not more than
eight quarters).
Dollar Cost Averaging results in the purchase of more units when the Unit
Value is low, and fewer units when the Unit Value is high. However, there is
no guarantee that the Dollar Cost Averaging program will result in higher
Policy Values or will otherwise be successful. Dollar Cost Averaging requires
regular investment regardless of fluctuating prices and does not guarantee
profits nor prevent losses in a declining market. Before electing this option,
individuals should consider their financial ability to continue transfers
through periods of both high and low price levels.
You may request Dollar Cost Averaging when purchasing the Policy or at a
later date. The program will terminate when the amount in the Dollar Cost
Averaging Fixed Account, the Endeavor Money Market Subaccount or the Dreyfus
U.S. Government Securities Subaccount is insufficient for the next transfer,
at which time the entire remaining balance is transferred.
You may discontinue the program at any time after satisfying the minimum
number of required transfers by sending a Written Notice to the Administrative
and Service Office. The minimum number of transfers (6 monthly or 4 quarterly)
requirement must be satisfied each time the Dollar Cost Averaging program is
restarted following termination of the program for any reason. Discontinuance
of a DCA program may result in PFL reducing interest rates credited to amounts
remaining in the DCA Fixed Account if the conditions established for a
particular DCA program are not met. There is no charge for participation in
the Dollar Cost Averaging program.
ASSET REBALANCING
Prior to the Annuity Commencement Date you may instruct PFL to automatically
transfer amounts among the Subaccounts of the Mutual Fund Account and the
Target Account on a regular basis to maintain a desired allocation of the
Policy Value among the various Subaccounts offered. Rebalancing will occur on
a monthly, quarterly, semi-annual, or annual basis, beginning on a date you
select. If no date is selected, the account will be rebalanced on the day of
the month the Policy was effective. You must select the percentage of the
Policy Value desired in each of the various Subaccounts offered (totaling
100%). Any amounts in the Fixed Account are ignored for purposes of asset
rebalancing. Rebalancing may be started, stopped, or changed at any time,
except that rebalancing will not be available when:
(1) Automatic Dollar Cost Averaging transfers are being made; or
(2) any other transfer is requested.
There is no charge for participation in the asset rebalancing program.
PUBLISHED RATINGS
PFL may from time to time publish in advertisements, sales literature and
reports to Owners, the ratings and other information assigned to it by one or
more independent rating organizations such as A.M. Best Company, Standard &
Poor's Insurance Ratings Services, Moody's Investors Service and Duff & Phelps
Credit Rating Co. The purpose of the ratings is
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to reflect the financial strength and/or claims-paying ability of PFL and the
ratings should not be considered as bearing on the investment performance of
assets held in the Mutual Fund Account or the Target Account, or of the safety
or riskiness of an investment in the Mutual Fund Account or the Target
Account. Each year the A.M. Best Company reviews the financial status of
thousands of insurers, culminating in the assignment of Best's Ratings. These
ratings reflect their current opinion of the relative financial strength and
operating performance of an insurance company in comparison to the norms of
the life/health insurance industry. In addition, the claims-paying ability of
PFL as measured by Standard & Poor's Insurance Ratings Services, Moody's
Investors Service or Duff & Phelps Credit Rating Co. may be referred to in
advertisements or sales literature or in reports to Owners. These ratings are
opinions of an operating insurance company's financial capacity to meet the
obligations of its insurance policies in accordance with their terms. Claims-
paying ability ratings do not refer to an insurer's ability to meet non-policy
obligations (i.e., debt/commercial paper).
THE POLICY
The Endeavor Variable Annuity Policy is a Flexible Premium Variable Annuity
Policy. The rights and benefits under the Policy are summarized below;
however, the description of the Policy contained in this Prospectus is
qualified in its entirety by reference to the Policy itself, a copy of which
is available upon request from PFL. The Policy may be purchased on a non-tax
qualified basis ("Nonqualified Policy"). The Policy may also be purchased and
used in connection with retirement plans or individual retirement accounts
that qualify for favorable federal income tax treatment ("Qualified Policy").
POLICY APPLICATION AND ISSUANCE OF POLICIES--PREMIUM PAYMENTS
Before it will issue a Policy, PFL must receive a completed Policy
application, transmittal form, or other information provided in lieu thereof,
and a minimum initial Premium Payment of $5,000 for a Nonqualified Policy, or
$1,000 for a Qualified Policy. There is no minimum initial Premium Payment
required for tax deferred 403(b) annuity purchases; any amount you select in
such case, up to the maximum total Premium Payment allowed by PFL, may be used
to start a Policy. The initial Premium Payment for tax deferred 403(b)
purchases must be received within 90 days following the Policy Date, otherwise
the Policy will be canceled. The initial Premium Payment is the only Premium
Payment required to be paid under a Policy. A Policy ordinarily will be issued
only in respect of Annuitants Age 0 through 84. Acceptance or declination of
an application, transmittal form, or other information, shall be based on
PFL's underwriting standards, and PFL reserves the right to reject any
application, transmittal form, or other information, or Premium Payment based
on those underwriting standards.
If the application, transmittal form, or other information, can be accepted
in the form received, the initial Premium Payment will be credited to the
Policy Value within two Business Days after the later of receipt of the
information needed to issue the Policy or receipt of the initial Premium
Payment. If the initial Premium Payment cannot be credited because the
application, transmittal form, or other information, or other issuing
requirements are incomplete, the applicant will be contacted within five
Business Days and given an explanation for the delay and the initial Premium
Payment will be returned at that time unless the applicant consents to PFL's
retaining the initial Premium Payment and crediting it as soon as the
necessary requirements are fulfilled.
The date on which the initial Premium Payment is credited to the Policy
Value is the Policy Date. The Policy Date is the date used to determine Policy
Years and Policy Anniversaries.
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All checks or drafts for Premium Payments should be made payable to PFL Life
Insurance Company and sent to the Administrative and Service Office. The Death
Benefit will not take effect until the Premium Payment is received and any
check or draft for the Premium Payment is honored.
Additional Premium Payments. While the Annuitant is living and prior to the
Annuity Commencement Date, you may make additional Premium Payments at any
time, and in any frequency. The minimum additional Premium Payment under both
a Nonqualified Policy and a Qualified Policy is $50. Additional Premium
Payments will be credited to the Policy and added to the Policy Value as of
the Business Day when the premium and required information are received.
Maximum Total Premium Payments. The maximum total Premium Payments allowed
without prior approval of PFL is $1,000,000.
Allocation of Premium Payments. You must allocate Premium Payments to one or
more of the Investment Options. You must specify the initial allocation in the
Policy application or transmittal form. This allocation will be used for
Additional Premium Payments unless you request a change of allocation. All
allocations must be made in whole percentages and must total 100%. If Premium
Payments are allocated to the Dollar Cost Averaging Fixed Account, directions
regarding the Subaccount(s) to which transfers are to be made must be
specified on the Application or other proper Written Request. If you fail to
specify how Premium Payments are to be allocated, the Premium Payment(s)
cannot be accepted.
You may change the allocation instructions for future additional Premium
Payments by sending Written Notice, signed by you, to PFL's Administrative and
Service Office, or by telephone (subject to the provisions described under
"Telephone Transactions," p.41.) The allocation change will apply to Premium
Payments received after the date the Written Notice or telephone request is
received.
Payment Not Honored by Bank. Any payment due under the Policy which is
derived, all or in part, from any amount paid to PFL by check or draft may be
postponed until such time as PFL determines that such instrument has been
honored.
POLICY VALUE
On the Policy Date, the Policy Value equals the initial Premium Payment.
Thereafter, the Policy Value equals the sum of the values in the Mutual Fund
Account, the Target Account, and the Fixed Account. The Policy Value will
increase by: (1) any additional Premium Payments received by PFL; (2) any
increases in the Policy Value due to investment results of the selected
Subaccount(s); (3) any positive Excess Interest Adjustments on transfers, and
(4) interest credited in the Fixed Account. The Policy Value will decrease by
(1) Gross Partial Withdrawals; (2) any decreases in the Policy Value due to
investment results of the selected Subaccounts; (3) the charges and deductions
imposed by PFL; (4) any negative Excess Interest Adjustments on transfers, and
(5) premium taxes, if any.
The Policy Value is expected to change from Valuation Period to Valuation
Period, reflecting the investment experience of the selected Subaccount(s), as
well as the deductions for charges. A Valuation Period is the period between
successive Business Days. It begins at the close of business on each Business
Day and ends at the close of business on the next succeeding Business Day. A
Business Day is each day that the New York Stock Exchange is open for trading.
Holidays are generally not Business Days.
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When a Premium Payment is allocated or an amount is transferred to a
Subaccount of the Mutual Fund Account or the Target Account, it is credited to
the Policy Value in the form of Accumulation Units. Each Subaccount of the
Mutual Fund Account or the Target Account has a distinct Accumulation Unit
value (the "Unit Value"). The number of units credited is determined by
dividing the Premium Payment or amount transferred by the Unit Value of the
Subaccount as of the end of the Valuation Period during which the allocation
is made. When amounts are transferred out of, or surrendered or withdrawn from
a Subaccount, units are canceled or redeemed in a similar manner.
The Mutual Fund Account Value. For each Mutual Fund Subaccount, the Unit
Value for a given Business Day is based on the net asset value of a share of
the corresponding Portfolio of the Underlying Funds. Therefore, the Unit
Values will fluctuate from day to day based on the investment experience of
the corresponding Portfolio. The determination of Subaccount Unit Values is
described in detail in the Statement of Additional Information.
The Target Account Value. For each Target Subaccount, the Unit Value for a
given Business Day is computed by dividing the value of the net assets of the
Target Subaccount (that is, the value of the assets of the Target Subaccount
minus its liabilities) by the total number of the Target Subaccount's
Accumulation Units outstanding at such time and adjusting the quotient to the
nearest cent per unit. Securities in the Target Subaccount will be valued as
of the close of trading at the end of the Valuation Period. Therefore, the
Unit Values will fluctuate from day to day based on the investment experience
and expenses of the corresponding Target Subaccount. The determination of Unit
Values is described in detail in the Statement of Additional Information.
AMENDMENTS
No change in the Policy is valid unless made in writing by PFL and approved
by one of PFL's officers. No registered representative has authority to change
or waive any provision of the Policy.
PFL reserves the right to amend the Policies to meet the requirements of the
Code, regulations or published rulings. You can refuse such a change by giving
Written Notice, but a refusal may result in adverse tax consequences.
NON-PARTICIPATING POLICY
The Policy does not participate or share in the profits or surplus earnings
of PFL. No dividends are payable on the Policy.
DISTRIBUTIONS UNDER THE POLICY
SURRENDERS
Prior to or on the Annuity Commencement Date, you may surrender all or a
portion of the Cash Value in exchange for a cash withdrawal payment from PFL.
Prior to or on the Annuity Commencement Date, the Cash Value is the Policy
Value increased or decreased by any applicable Excess Interest Adjustments and
less any applicable Surrender Charge. (See "Annuity Payment Options," p. 40.)
The Policy cannot be surrendered after the Annuity Commencement Date. (See
"Annuity Payments," p. 39.)
When requesting a partial withdrawal ($500 minimum), you must tell PFL how
the withdrawal is to be allocated from among various Investment Options. If
your request for a Partial Withdrawal from an Investment Option is greater
than the Cash Value of that Option, PFL will pay you the amount of the Cash
Value of that Option. If no allocation instructions are given, the withdrawal
will be deducted from each Investment Option in the same
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proportion that your interest in each Investment Option bears to the Policy's
total Policy Value. PFL reserves the right to defer payment of the Cash Value
from the Fixed Account for up to six months.
Beginning in the second Policy Year, you may surrender up to 10% of the
Policy Value ("10% Withdrawals") at the time of withdrawal without an Excess
Interest Adjustment and without a Surrender Charge if no withdrawal has been
made in the current Policy Year. Amounts withdrawn from the Policy in excess
of the 10% Withdrawal or withdrawn in the same Policy Year as any previous
withdrawal (and all surrenders in the first Policy Year) are subject to the
Excess Interest Adjustment. Neither a Surrender Charge nor an Excess Interest
Adjustment will be assessed if the withdrawal is necessary to meet the minimum
distribution requirements for that Policy specified by the IRS for tax-
qualified plans.
The Gross Partial Withdrawal is the total amount which will be deducted from
your Policy Value as a result of each partial withdrawal. The Gross Partial
Withdrawal may be more or less than your requested partial withdrawal amount,
depending on whether Surrender Charges and/or Excess Interest Adjustments
apply at the time you request the partial withdrawal. The Excess Partial
Withdrawal amount is the portion of the request partial withdrawal that is
subject to Surrender Charge.
The formula for determining the Gross Partial Withdrawal is as follows:
Gross Partial Withdrawal = R--E + SC
where:Ris the requested partial withdrawal;
Eis the Excess Interest Adjustment; and
SCis the Surrender Charge on (EPW--E); where
EPWis the Excess Partial Withdrawal amount.
For a discussion of the Surrender Charge, see "CHARGES AND DEDUCTIONS--
Surrender Charge," p. 46. For a discussion of the Excess Interest Adjustment,
see "DISTRIBUTIONS UNDER THE POLICY-- Excess Interest Adjustment (EIA),"
p. 38, and Appendix A.
Since you assume the investment risk with respect to Premium Payments
allocated to the Mutual Fund Account and the Target Account, and because
Partial Withdrawals are subject to an Excess Interest Adjustment and to a
Surrender Charge, and possibly income taxes or premium taxes, the total amount
paid upon total surrender of the Cash Value (taking any prior surrenders into
account) may be more or less than the total Premium Payments made. Following a
surrender of the total Cash Value, or at any time the Policy Value is zero,
all rights of the Owner and Annuitant will terminate.
In addition to the Excess Interest Adjustment any applicable premium taxes,
surrenders may be subject to income taxes and, if prior to age 59 1/2, a ten
percent Federal penalty tax. (See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES,"
p. 49.)
NURSING CARE AND TERMINAL CONDITION WITHDRAWAL OPTION
If you or your spouse (Annuitant or Annuitant's spouse if the Owner is not a
natural person): (1) has been confined in a hospital or nursing facility for
30 consecutive days, or (2) has been diagnosed as having a terminal condition
as defined in the Policy or endorsement (generally a life expectancy of 12
months or less), then the Surrender Charge and Excess Interest Adjustment are
not imposed on surrenders or Partial Withdrawals. (This benefit may not be
available in all states or in all Policy forms--see the Policy or endorsement
for details.)
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EXCESS INTEREST ADJUSTMENT (EIA)
Surrenders, Partial Withdrawals, transfers, and amounts applied to a Payment
Option (prior to the end of a Guaranteed Period) from the Fixed Account
Guaranteed Period Options will be subject to an Excess Interest Adjustment
except as provided for under "Surrenders" or "Nursing Care and Terminal
Condition Withdrawal Option" above or "Systematic Payout Option," below. Prior
versions of the Policy or Policies offered in certain states may not be
subject to an Excess Interest Adjustment. (See Appendix B to this Prospectus.)
The Excess Interest Adjustment partially compensates PFL for the foregoing
early removal of funds from the Guaranteed Period Options where interest rates
declared by PFL have risen since the date of the guarantee. Conversely, the
Excess Interest Adjustment allows PFL to share the benefit of falling interest
rates with the Owner upon such withdrawals.
Generally, if interest rates declared by PFL have risen since the date of
the guarantee, the application of the Excess Interest Adjustment (a negative
Excess Interest Adjustment in this case) will result in a lower payment upon
surrender. Conversely, if interest rates have fallen since the date of the
guarantee, the application of the Excess Interest Adjustment (a positive
Excess Interest Adjustment in this case) will result in a higher payment upon
surrender.
Excess Interest Adjustments will not reduce the Adjusted Policy Value for a
Guaranteed Period Option below the Premium Payments and transfers to that
Guaranteed Period Option, less any prior Partial Withdrawals and transfers
from that Guaranteed Period Option, plus interest at the Policy's minimum
guaranteed effective annual interest rate of 3%.
The formula for calculating the Excess Interest Adjustment and examples of
the application of the Excess Interest Adjustments are set forth in Appendix A
to this Prospectus.
SYSTEMATIC PAYOUT OPTION
Under the Systematic Payout Option, if no withdrawals have been made in the
current Policy year, you can instruct PFL to make automatic payments to you
monthly, quarterly, semi-annually or annually from a specified Subaccount.
Monthly and quarterly payments can only be sent by electronic funds transfer
directly to a checking or savings account. The minimum payment is $50. The
maximum payment is 10% of the Policy Value at the time the Systematic Payout
is made divided by the number of payouts made per year (for example, 12 for
monthly). If this requested amount is below the minimum distribution
requirements for that policy specified by the IRS for tax qualified plans, the
maximum payment will be increased to this minimum required distribution
amount. The "Request for Systematic Payout" form must specify a date for the
first payment, which must be at least 30 days but not more than one year after
the form is submitted (that is, Systematic Payouts will start at the end of
the payment mode selected, but not earlier than 30 days from the date of
request).
The Surrender Charge and Excess Interest Adjustment will be waived for
Policy Owners of Qualified Policies who are under age 59 1/2 if they take
Systematic Payouts using one of the payout methods described in IRS Notice 89-
25, Q&A-12 (the Life Expectancy Recalculation Option, Amortization, or Annuity
Factor) which generally require payments for life or life expectancy. These
payments must be continued until the later of age 59 1/2 or five years from
their commencement. No additional partial withdrawal may be taken during this
time. For Qualified Policies, when the Policy Owner is age 59 1/2 or older,
the Excess Interest Adjustment will be waived if payments are made using the
Life Expectancy Recalculation Option.
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<PAGE>
In addition, for either Qualified or Nonqualified Policies, the Excess
Interest Adjustment will not be imposed on Systematic Payouts.
In certain circumstances amounts withdrawn pursuant to a Systematic Payout
may be included in the income and may be subject to penalty taxes. In
addition, Qualified Policies are subject to complex rules with respect to
restrictions on and taxation of distributions, including the applicability of
penalty taxes. Therefore, the Policy Owner should consult a qualified tax
adviser before requesting a Systematic Payout. (See "CERTAIN FEDERAL INCOME
TAX CONSEQUENCES," p. 49.)
ANNUITY PAYMENTS
Annuity Commencement Date. Unless the Annuity Commencement Date is changed,
Annuity Payments under a Policy will begin on the Annuity Commencement Date
you select at the time you apply for the Policy. You may change the Annuity
Commencement Date from time to time by Written Notice to PFL, provided that
notice of each change is received by PFL at its Administrative and Service
Office at least thirty (30) days prior to the then current Annuity
Commencement Date. Except as otherwise permitted by PFL, a new Annuity
Commencement Date must be a date which is: (1) at least thirty (30) days after
the date notice of the change is received by PFL; and (2) not later than the
last day of the policy month starting after the Annuitant attains age 85. In
no event will an Annuity Commencement Date be permitted to be later than the
last day of the month following the month in which the Annuitant attains age
95. The laws of some states may require earlier Annuity Commencement Dates.
The Annuity Commencement Date may also be changed by the Beneficiary's
election of the Annuity Option after the Annuitant's death.
Election of Payment Option. During the lifetime of the Annuitant and prior
to the Annuity Commencement Date, you may choose an Annuity Payment Option or
change the election, but Written Notice of any election or change of election
must be received by PFL at its Administrative and Service Office at least
thirty (30) days prior to the Annuity Commencement Date. If no election is
made prior to the Annuity Commencement Date, Annuity Payments will be made
under (i) Payment Option 3, life income with level payments for 10 years
certain, using the existing Policy Value of the Fixed Account, or (ii) under
Payment Option 3-V, life income with variable payments for 10 years certain
using the existing Policy Value of the Mutual Fund Account and the Target
Account, or (iii) in a combination of (i) and (ii). If the Policy Value on the
Annuity Commencement Date is less than $2000, PFL reserves the right to pay it
in one lump sum in lieu of applying it under an Annuity Payment Option.
Prior to the Annuity Commencement Date, the Beneficiary may elect to receive
the Death Benefit in a lump sum or under one of the Payment Options, to the
extent allowed by law and subject to the terms of any settlement agreement.
(See "Death Benefit," p.54.) Subject to the restrictions of certain state
laws, Annuity Payments will be made on either a fixed basis or a variable
basis as selected by you (or the Beneficiary, after the Annuitant's death).
The person who elects a Payment Option can also name one or more successor
payees to receive any unpaid amount PFL has at the death of a payee. Naming
these payees cancels any prior choice of a successor payee.
A payee who did not elect the Payment Option does not have the right to
advance or assign payments, take the payments in one sum, or make any other
change. However, the payee may be given the right to do one or more of these
things if the person who elects the option tells PFL in writing and PFL
agrees.
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<PAGE>
Unless you specify otherwise, the payee shall be the Annuitant, or, after
the Annuitant's death, the Beneficiary. PFL may require written proof of the
age of any person who has an annuity purchased under Payment Option 3, 3-V, 5
or 5-V.
Premium Tax. PFL may be required by state law to pay premium tax on the
amount applied to a Payment Option, upon Surrender, or upon payment of death
proceeds. If so, PFL will deduct the premium tax before applying or paying the
proceeds.
Supplementary Contract. Once proceeds become payable and a Payment Option
has been chosen, PFL will issue a Supplementary Contract in settlement of the
option elected under the Policy setting forth the terms of the option elected.
The Supplementary Contract will name the payees and will describe the payment
schedule.
Availability as Immediate Annuity. The Policy may be purchased and
immediately annuitized, without the need for an accumulation period. The
Annuity Commencement Date must be a date at least thirty days after notice of
such election is received by PFL.
ANNUITY PAYMENT OPTIONS
The Policy provides five Payment Options which are described below. Three of
these are offered as either "Fixed Payment Options" or "Variable Payment
Options," and three are only available as Fixed Payment Options. You may elect
a Fixed Payment Option, a Variable Payment Option, or a combination of both.
If you elect a combination, he must specify what part of the Policy proceeds
are to be applied to the Fixed and Variable Options (and you must also specify
which Subaccounts for the Variable Options).
Payments under Payment Options 3 and 5 and the first payment under Payment
Options 3-V and 5-V are determined based on the adjusted age of the annuitant.
The adjusted age is the annuitants actual age on the annuitants nearest
birthday, at the Annuity Commencement Date, adjusted as follows:
<TABLE>
<CAPTION>
ANNUITY COMMENCEMENT DATE ADJUSTED AGE
------------------------- --------------------
<S> <C>
Before 2001 Actual Age
2001-2010 Actual Age minus 1
2011-2020 Actual Age minus 2
2021-2030 Actual Age minus 3
2031-2040 Actual Age minus 4
After 2040 As determined by PFL
</TABLE>
This adjustment assumes an increase in life expectancy, and therefore it
results in lower payments than without such an adjustment.
NOTE CAREFULLY: Under Payment Options 3(1) and 5 (including 3-V(1) and 5-V),
it would be possible for only one Annuity Payment to be made if the
Annuitant(s) were to die before the due date of the second annuity payment;
only two Annuity Payments if the Annuitant(s) were to die before the due date
of the third annuity payment; and so forth.
On the Annuity Commencement Date, the Policy's Adjusted Policy Value will be
applied to provide for Annuity Payments under the selected Annuity Option as
specified. The Adjusted Policy Value is the Policy Value (for the Valuation
Period which ends immediately preceding the Annuity Commencement Date),
increased or decreased by any applicable Excess Interest Adjustment.
The effect of choosing a Fixed Annuity Option is that the amount of each
payment will be set on the Annuity Commencement Date and will not change. If a
Fixed Annuity Option is
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<PAGE>
selected, the Adjusted Policy Value will be transferred to the general account
of PFL, and the Annuity Payments will be fixed in amount by the fixed annuity
provisions selected and the age and sex (if consideration of sex is allowed
under applicable law) of the Annuitant. For further information, contact PFL
at its Administrative and Service Office.
Guaranteed Values. There are five Fixed Payment Options. Payment Options 1,
2 and 4 are based on a guaranteed interest rate of 3%. Payment Options 3 and 5
are based on a guaranteed effective annual interest rate of 3% using the "1983
Table a" (male, female, and unisex if required by law) mortality table
improved to the year 2000 with projection scale G. ("The 1983 Table a"
mortality rates are adjusted based on improvements in mortality since 1983 to
more appropriately reflect increased longevity. This is accomplished using a
set of improvement factors referred to as projection scale G.)
Payment Option 1--Interest Payments. The policy proceeds may be left with
PFL for any term agreed to. PFL will pay the interest in equal payments or it
may be left to accumulate. Withdrawal rights will be agreed upon by you and
PFL when the option is elected.
Payment Option 2--Income for a Specified Period. Level payments of the
proceeds with interest are made for the fixed period elected, at which time
the funds are exhausted.
Payment Option 3--Life Income. An election may be made between:
1. "No Period Certain"--Level payments will be made during the lifetime
of the Annuitant.
2. "10 Years Certain"--Level Payments will be made for the longer of the
Annuitant's lifetime or ten years.
3. "Guaranteed Return of Policy Proceeds"--Level payments will be made
for the longer of the Annuitant's lifetime or the number of payments which,
when added together, equals the proceeds applied to the income option.
Payment Option 4--Income of a Specified Amount. Payments are made for any
specified amount until the proceeds with interest are exhausted.
Payment Option 5--Joint and Survivor Annuity. Payments are made during the
joint lifetime of the payee and a joint payee you select. Payments will be
made as long as either person is living.
Other Payment options may be arranged by agreement with PFL. Certain options
may not be available in some states.
Current immediate annuity rates for the same class of annuities will be used
if higher than the guaranteed amount (guaranteed amounts are based upon the
tables contained in the Policy). Current amounts may be obtained from PFL.
Variable Payment Options. The dollar amount of the first Variable Annuity
Payment will be determined in accordance with the annuity payment rates set
forth in the applicable table contained in the Policy. The tables are based on
a 5% effective annual assumed investment return and the "1983 Table a" (male,
female, and unisex if required by law) mortality table improved to the year
2000 with projection Scale G. ("The 1983 Table a" mortality rates are adjusted
based on improvements in mortality since 1983 to more appropriately reflect
increased longevity. This is accomplished using a set of improvement factors
referred to as projection scale G.) The dollar amount of additional Variable
Annuity Payments will vary based on the investment performance of the
Subaccount of the Mutual Fund Account or the Target Account selected by the
Annuitant or Beneficiary. If the actual
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<PAGE>
investment performance exactly matched the Assumed Investment Return of 5% at
all times, the amount of each Variable Annuity Payment would remain equal. If
actual investment performance exceeds the Assumed Investment Return, the
amount of the payments would increase. Conversely, if actual investment
performance is worse than the Assumed Investment Return, the amount of the
payments would decrease.
The following Variable Payment Options generally are available:
Payment Option 3-V--Life Income. An election may be made between:
1. "No Period Certain"--Payments will be made during the lifetime of the
Annuitant.
2. "10 Years Certain"--Payments will be made for the longer of the
Annuitant's lifetime or ten years.
Payment Option 5-V--Joint and Survivor Annuity. Payments are made as long as
either the payee or the joint payee is living.
Certain Payment options may not be available in some states.
Determination of Variable Payments other than the First. All Variable
Annuity Payments other than the first are calculated using "Annuity Units"
which are credited to the Policy. The number of Annuity Units to be credited
in respect of a particular Subaccount is determined by dividing that portion
of the first Variable Annuity Payment attributable to that Subaccount by the
Annuity Unit Value of that Subaccount for the Annuity Commencement Date. The
number of Annuity Units of each particular Subaccount credited to the Policy
then remains fixed. The dollar value of variable Annuity Units in the chosen
Subaccount will increase or decrease reflecting the investment experience of
the chosen Subaccount. The dollar amount of each Variable Annuity Payment
after the first may increase, decrease or remain constant, and is equal to the
sum of the amounts determined by multiplying the number of Annuity Units of
each particular Subaccount credited to the Policy by the Annuity Unit Value
for the particular Subaccount on the date the payment is made.
Transfers. You may transfer the value of the Annuity Units from one
Subaccount to another within the Mutual Fund Account, the Target Account or to
the Fixed Account. However, after the Annuity Commencement Date no transfers
may be made from the Fixed Account to the Mutual Fund Account or the Target
Account. The minimum amount which may be transferred is the lesser of $10 of
monthly income or the entire monthly income of the variable Annuity Units in
the Subaccount from which the transfer is being made. The remaining Annuity
Units in the Subaccount must provide at least $10 of monthly income. If, after
a transfer, the monthly income of the remaining Annuity Units in a Subaccount
would be less than $10, PFL reserves the right to include those Annuity Units
as part of the transfer. PFL reserves the right to limit transfers between
Subaccounts after the Annuity Commencement Date to once per Policy Year.
Tax Withholding. A portion or the entire amount of the Annuity Payments may
be taxable as ordinary income. If, at the time the Annuity Payments begin, you
have not provided PFL with a written election not to have federal income taxes
withheld, PFL must by law withhold such taxes from the taxable portion of such
annuity payments and remit that amount to the federal government. Withholding
is mandatory for certain Qualified Policies. (See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES," p. 49.)
Adjustment of Annuity Payments. Payments will be made at 1, 3, 6, or 12
month intervals. If the individual payments provided for would be or become
less than $50, PFL may change, at its discretion, the frequency of payments to
such intervals as will result in payments of at least $50. If the Adjusted
Policy Value on the Annuity Commencement Date is less than $2,000, PFL may pay
such value in one sum in lieu of the payments otherwise provided for.
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<PAGE>
DEATH BENEFIT
Death of Annuitant/Owner Prior to Annuity Commencement Date. A Death Benefit
will be paid to the Beneficiary if the Owner, who is the Annuitant, dies prior
to the Annuity Commencement Date. The amount of the Death Benefit is the
greatest of the Policy Value, the Cash Value or the Guaranteed Minimum Death
Benefit selected. Prior versions of the Policy or Policies offered in certain
states may provide for a different definition or calculation of the Death
Benefit. See Appendix B and the Policy or endorsement for details. The Death
Benefit is not payable upon the death of the Annuitant if the Annuitant and
the Owner are not the same person unless the Owner makes a separate election
to do so. The Death Benefit is determined when PFL receives both due proof of
death and an election of a settlement option.
In certain circumstances, if the Owner dies the spouse may elect to continue
the Policy. If the Policy is continued, all future Surrender Charges will be
waived.
There are three Guaranteed Minimum Death Benefit Options available: (A) The
"5% Annually Compounding Death Benefit," (B) the "Double Enhanced Death
Benefit," and (C) the "Return of Premium Death Benefit."
The "5% Annually Compounding Death Benefit" is the total Premium Payments
less any Adjusted Partial Withdrawals plus interest at an effective annual
rate of 5% from the payment or withdrawal date up to the date of death (even
after age 81).
The "Double Enhanced Death Benefit" is equal to the greater of (1) and (2)
where (1) is a 5% Annually Compounding Death Benefit, equal to the total
Premium Payments, minus Adjusted Partial Withdrawals (defined below), plus
interest accumulated at 5% per annum from the payment or withdrawal date to
the earlier of the date of death or the Owner's 81st birthday, and (2) is a
Step-Up Death Benefit, equal to the largest Policy Value on any Policy
Anniversary prior to the earlier of the date of death or the Owner's 81st
birthday, plus any Premium Payments subsequent to the date of any Policy
Anniversary with the largest Policy Value, minus any Adjusted Partial
Withdrawals (defined below), subsequent to the date of the Policy Anniversary
with the largest Policy Value.
The "Return of Premium Death Benefit" is the total Premium Payments less any
Adjusted Partial Withdrawals as of the date of death.
For the purpose of calculating the Death Benefit, the Policy Date will be
treated as a Policy Anniversary. Any applicable Excess Interest Adjustments on
transfers or partial withdrawals from the Fixed Account will affect the value
of the Guaranteed Minimum Death Benefit.
Under all three Death Benefit Options, if the surviving spouse elects to
continue the Policy in lieu of receiving the Death Benefit, an amount equal to
the excess, if any, of the Guaranteed Minimum Death Benefit over the Policy
Value, will then be added to the Policy Value. This amount will be added only
once, at the time of such election. Thereafter, the amount paid on the death
of the surviving spouse is based on the Guaranteed Minimum Death Benefit
elected on the Policy Date and the surviving spouse's age.
The 5% Annually Compounding Death Benefit is not available if either the
Annuitant or the Owner is age 75 or higher on the Policy Date. The Double
Enhanced Death Benefit is not available if either the Annuitant or the Owner
is age 81 or higher on the Policy Date. If no choice is made in the Policy
application then the Return of Premium Death Benefit will apply. After the
Policy Date, an election cannot be made and the Guaranteed Minimum Death
Benefit option cannot be changed.
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<PAGE>
Adjusted Partial Withdrawal. A partial withdrawal will reduce the Guaranteed
Minimum Death Benefit by an amount referred to as the "Adjusted Partial
Withdrawal." The Adjusted Partial Withdrawal may be a different amount than
the Gross Partial Withdrawal. Each Adjusted Partial Withdrawal is equal to the
Gross Partial Withdrawal multiplied by an Adjustment Factor. The Adjustment
Factor is equal to the Death Benefit prior to the partial withdrawal divided
by the Policy Value prior to the partial withdrawal.
If a partial withdrawal is taken when the Guaranteed Minimum Death Benefit
exceeds the Policy Value, then the amount deducted from the Guaranteed Minimum
Death Benefit as a result of the partial withdrawal (that is, the Adjusted
Partial Withdrawal) will exceed the amount of the partial withdrawal request.
In that case, the total proceeds of a partial withdrawal followed by payment
of a Death Benefit could be less than total Premium Payments.
Payment of Death Benefit. Due Proof of Death of the Annuitant is proof that
the Annuitant who is the Owner died prior to the commencement of Annuity
Payments. Upon receipt of this proof, an election of a method of settlement
and return of the Policy, the Death Benefit generally will be paid within
seven days, or as soon thereafter as PFL has sufficient information about the
Beneficiary to make the payment. The Beneficiary may receive the amount
payable in a lump sum cash benefit, or, subject to any limitation under any
state or federal law, rule, or regulation, under one of the Annuity Payment
Options described above, unless a settlement agreement is effective at the
death of the Owner preventing such election.
Required Distribution. If the Annuitant was the Owner, and the Beneficiary
was not the Annuitant's spouse, the Death Benefit must (1) be distributed
within five years of the date of the deceased Owner's death, or (2) payments
under a Payment Option must begin within one year of the deceased Owner's
death and must be made for the Beneficiary's lifetime or for a period certain
(so long as any certain period does not exceed the Beneficiary's life
expectancy). Death proceeds which are not paid to or for the benefit of a
natural person must be distributed within five years of the date of the
deceased Owner's death. If the sole Beneficiary is the deceased Owner's
surviving spouse, such spouse may elect to continue the Policy as the new
Annuitant and Policy Owner instead of receiving the Death Benefit. (See
"Federal Tax Matters" in the Statement of Additional Information.)
If the Annuitant is not an Owner, and any Owner dies prior to the Annuity
Commencement Date, a Successor Owner may surrender the Policy at any time for
the Adjusted Policy Value. If the Successor Owner is not the deceased Owner's
surviving spouse, however, this amount must be distributed within five years
after the date of death of the Owner, or payments under a Payment Option must
begin within one year of the deceased Owner's death and must be made for the
Beneficiary's lifetime or for a period certain (so long as any certain period
does not exceed the Beneficiary's life expectancy). If the Successor Owner is
the deceased Owners surviving spouse, the surviving spouse may elect to
continue the Policy, in which case all future Surrender Charges will be
waived.
Death On or After Annuity Commencement Date. The death benefit payable on or
after the Annuity Commencement Date depends on the Payment Option selected. If
any Owner dies on or after the Annuity Commencement Date, but before the
entire interest in the Policy is distributed, the remaining portion of such
interest in the Policy will be distributed at least as rapidly as under the
method of distribution being used as of the date of that Owner's death.
Beneficiary. The Beneficiary designation in the application will remain in
effect until changed. The Policy Owner may change the designated Beneficiary
by sending Written Notice to PFL. The Beneficiary's consent to such change is
not required unless the Beneficiary was irrevocably designated or consent is
required by law. (If an irrevocable
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<PAGE>
Beneficiary dies, the Policy Owner may then designate a new Beneficiary.) The
change will take effect as of the date the Policy Owner signs the Written
Notice, whether or not the Policy Owner is living when the Notice is received
by PFL. PFL will not be liable for any payment made before the Written Notice
is received. If more than one Beneficiary is designated, and the Policy Owner
fails to specify their interests, they will share equally.
DEATH OF OWNER
Federal tax law requires that if the Owner (including any joint Owner or any
Successor Policy Owner who has become a current Owner) dies before the Annuity
Commencement Date, then the entire value of the Policy must generally be
distributed within five years of the date of death of such Owner. Certain
rules apply where 1) the spouse of the deceased Owner is the sole beneficiary,
2) the Owner is not a natural person and the primary Annuitant dies or is
changed, or 3) any Owner dies after the Annuity Commencement Date. See
"Federal Tax Matters" in the Statement of Additional Information for a
detailed description of these rules. Other rules may apply to Qualified
Policies. (See also "DISTRIBUTIONS UNDER THE POLICY--Death Benefit" p. 43.)
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Section 36.105 of the Texas Educational Code permits participants in the
Texas Optional Retirement Program (ORP) to withdraw their interest in a
variable annuity Policy issued under the ORP only upon: (1) termination of
employment in the Texas public institutions of higher education; (2)
retirement; or (3) death. Accordingly, a participant in the ORP (or the
participant's estate if the participant has died) will be required to obtain a
certificate of termination from the employer or a certificate of death before
the account can be redeemed.
RESTRICTIONS UNDER SECTION 403(B) PLANS
Section 403(b) of the Internal Revenue Code provides for tax-deferred
retirement savings plans for employees of certain non-profit and educational
organizations. In accordance with the requirements of Section 403(b), any
Policy used for a 403(b) plan will prohibit distributions of elective
contributions and earnings on elective contributions except upon death of the
employee, attainment of age 59 1/2, separation from service, disability, or
financial hardship. In addition, income attributable to elective contributions
may not be distributed in the case of hardship.
RESTRICTIONS UNDER QUALIFIED POLICIES
Other restrictions with respect to the election, commencement, or
distribution of benefits may apply under Qualified Policies or under the terms
of the plans in respect of which Qualified Policies are issued.
CHARGES AND DEDUCTIONS
No deductions are made from Premium Payments, so that the full amount of
each Premium Payment is invested in one or more of the Accounts. PFL will make
certain charges and deductions in connection with the Policy in order to
compensate it for incurring expenses in distributing the Policy, bearing
mortality and expense risks under the Policy, and administering the Accounts
and the Policies. Charges may also be made for premium taxes, federal, state
or local taxes, or for certain transfers or other transactions. Charges and
expenses are also deducted from the Underlying Funds and the Target
Subaccounts.
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<PAGE>
SURRENDER CHARGE
PFL will incur expenses relating to the sale of Policies, including
commissions to registered representatives and other promotional expenses. PFL
may deduct a Surrender Charge from any amount surrendered (i.e., withdrawn) in
connection with a partial withdrawal or a surrender in order to cover a
portion of such distribution expenses. A Surrender Charge will not be deducted
from a withdrawal, after the first Policy Year, of up to 10% of the Policy
Value, if there have been no partial withdrawals in the current Policy Year.
(See "DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 36.)
The Surrender Charge is not imposed upon exercise of the Nursing Care and
Terminal Condition Option. This feature may not be available in all states.
(See "DISTRIBUTIONS UNDER THE POLICY," p. 36.)
The amount of the Surrender Charge is determined by multiplying the amount
of the Premium Payments withdrawn by the applicable Surrender Charge
Percentage. The applicable Surrender Charge Percentage will depend upon the
number of years that have elapsed since the Premium Payment that is being
withdrawn was made. For this purpose, surrenders are allocated to Premium
Payments on a "first-in, first-out" basis, that is, first to the oldest
Premium Payment, then to the next oldest Premium Payment, and so on. Premium
Payments are deemed to be withdrawn before earnings, and after all Premium
Payments have been withdrawn, the remaining Adjusted Policy Value may be
withdrawn without any Surrender Charge. The following is the table of
Surrender Charge Percentages:
<TABLE>
<CAPTION>
APPLICABLE SURRENDER
CHARGE PERCENTAGE
(AS PERCENTAGE OF
NUMBER OF YEARS SINCE PREMIUM PAYMENT
PREMIUM PAYMENT DATE WITHDRAWN)
--------------------- --------------------
<S> <C>
Less than 1 7%
At least 1 and less than 2 7%
At least 2 and less than 3 6%
At least 3 and less than 4 6%
At least 4 and less than 5 5%
At least 5 and less than 6 4%
At least 6 and less than 7 2%
</TABLE>
PFL anticipates that the Surrender Charge will not generate sufficient funds
to pay the cost of distributing the Policies. If this charge is insufficient
to cover the distribution expenses, the deficiency will be met from PFL's
general funds, which will include amounts derived from the fee for mortality
and expense risks and the Distribution Financing Charge.
MORTALITY AND EXPENSE RISK FEE
PFL imposes a daily charge as compensation for bearing certain mortality and
expense risks in connection with the Policies. Prior to the Annuity
Commencement Date, for the 5% Annually Compounding Death Benefit and the
Double Enhanced Death Benefit, this charge is equal to an effective annual
rate of 1.25% of the daily net asset value of the Mutual Fund Account and the
Target Account. For the Return of Premium Death Benefit, the corresponding
charge is equal to an effective annual rate of 1.10% of the daily net asset
value of the Mutual Fund Account and the Target Account. After the Annuity
Commencement Date, the Mortality and Expense Risk Fee may be lower than the
Mortality and Expense Risk Fee in effect prior to the Annuity Commencement
Date (See Appendix B). The Mortality and Expense Risk Fee is reflected in the
Accumulation or Annuity Unit Values for the Policy for each Subaccount, and is
deducted from the Subaccount of the Mutual Fund Account and the Target Account
both before and after the Annuity Commencement Date.
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<PAGE>
Policy Values and Annuity Payments are not affected by changes in actual
mortality experience nor by actual expenses incurred by PFL. The mortality
risks assumed by PFL arise from its contractual obligations to make Annuity
Payments (determined in accordance with the Annuity tables and other
provisions contained in the Policy) and to pay Death Benefits prior to the
Annuity Commencement Date. Thus, you are assured that neither an Annuitant's
own longevity nor an unanticipated improvement in general life expectancy will
adversely affect the monthly Annuity payments that the Annuitant will receive
under the Policy.
PFL also bears substantial risk in connection with the Death Benefit
Guarantee since PFL will pay a Death Benefit equal to the Guaranteed Minimum
Death Benefit if that amount is higher than the Policy Value.
The expense risk assumed by PFL is the risk that PFL's actual expenses in
administering the Policy and the Accounts will exceed the amount recovered
through the Administrative Charges.
If the Mortality and Expense Risk Fee is insufficient to cover PFL's actual
costs, PFL will bear the loss; conversely, if the charge is more than
sufficient to cover costs, the excess will be profit to PFL. PFL expects a
profit from this charge. To the extent that the Surrender Charge is
insufficient to cover the actual cost of Policy distribution, the deficiency
will be met from PFL's general corporate assets, which may include amounts, if
any, derived from the Distribution Financing Charge and, if necessary, the
Mortality and Expense Risk Fee. A Mortality and Expense Risk Fee is also
assessed after the Annuity Commencement Date for all Variable Annuity Options.
ADMINISTRATIVE CHARGES
Service Charge. In order to cover the costs of administering the Policies,
PFL deducts an annual Service Charge from the Policy Value of each Policy. The
annual Service Charge is deducted from the Policy Value of each Policy on each
Policy Anniversary prior to the Annuity Commencement Date. The charge is not
deducted after the Annuity Commencement Date. The annual Service Charge is the
lesser of 2% of the Policy Value or $35, and it will not be increased in the
future. This charge is waived if either the Policy Value or the sum of all
Premium Payments less the sum of all partial withdrawals equals or exceeds
$50,000 on a Policy Anniversary (or date of surrender). PFL also reserves the
right to charge up to $35 at the time of surrender during any Policy Year. The
Service Charge will be deducted from the Investment Option(s) in the same
proportion that the Owner's interest in each Investment Option bears to your
total Policy Value.
Administrative Charge. PFL also deducts a daily Administrative Charge from
the net assets of the Mutual Fund Account and the Target Account to partially
cover expenses incurred by PFL in connection with the administration of the
Account and the Policies. The effective annual rate of this charge is 0.15% of
the net assets in the Mutual Fund Account and the Target Account. This charge
is reflected in the Accumulation or Annuity Unit Values for the Policy for
each Subaccount.
DISTRIBUTION FINANCING CHARGE
During the first seven Policy Years, but only prior to the Annuity
Commencement Date, PFL deducts a daily Distribution Financing Charge equal to
an effective annual rate of 0.15% of the daily net asset value of the Mutual
Fund Account and the Target Account. The Distribution Financing Charge is paid
to PFL and is designed to partially compensate PFL for the cost of
distributing the Policies. The Distribution Financing Charge will be used to
support marketing efforts, training of representatives and reimbursement of
expenses incurred by broker/dealers who sell the Policies. The staff of the
SEC deems such charge to constitute a deferred sales charge.
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PREMIUM TAXES
PFL currently makes no deduction from the Premium Payments when they are
paid to PFL for any state premium taxes PFL pays in connection with Premium
Payments it receives under the Policies. However, PFL will deduct the
aggregate premium taxes that it pays on behalf of a particular Policy on (i)
the Annuity Commencement Date, (ii) the total surrender of a Policy, or (iii)
payment of the death proceeds of a Policy. Premium taxes currently range from
0% to 3.50% of Premium Payments.
FEDERAL, STATE AND LOCAL TAXES
No charges are currently made for federal, state, or local taxes other than
premium taxes. However, PFL reserves the right to deduct charges in the future
for any taxes or other economic burden resulting from the application of any
tax laws that PFL determines to be attributable to the accounts or the
policies.
TRANSFER FEE
PFL will not impose a transfer fee for the first 12 transfers between
Investment Options in each Policy Year. PFL reserves the right to impose a $10
charge for the thirteenth and each subsequent transfer request you make during
a single Policy Year. For the purpose of determining whether a transfer fee is
payable, Premium Payment allocations are not considered transfers. All
transfer requests made simultaneously will be treated as a single request. No
transfer fee will be imposed for any transfer which is not at your request.
OTHER EXPENSES INCLUDING INVESTMENT ADVISORY FEES
Each of the Mutual Fund Account Portfolios and the Target Subaccounts is
responsible for all of its expenses. In addition, charges will be made against
each of the Portfolios of the Mutual Fund Account and the Target Subaccounts
for investment advisory services provided to them. The net assets of each
Portfolio of the Mutual Fund Account and the Target Subaccounts will reflect
deductions in connection with the investment advisory fee and other expenses.
For more information concerning the investment advisory fee and other
expenses of the Portfolios, see the prospectuses for the Underlying Funds,
current copies of which accompany this Prospectus. Investment advisory fees
and other expenses of the Target Subaccounts are described more fully in Part
III of this Prospectus.
EMPLOYEE AND AGENT PURCHASES
The Policy may be acquired by an employee or registered representative of
any broker/dealer authorized to sell the Policy or their spouse or minor
children, or by an officer, director, trustee or bona-fide full-time employee
of PFL or its affiliated companies or their spouse or minor children. In such
a case, PFL may credit an amount equal to a percentage of each Premium Payment
to the Policy due to lower acquisition costs PFL experiences on those
purchases. The credit will be reported to the Internal Revenue Service as
taxable income to the employee or registered representative. PFL may offer
certain employer sponsored savings plans, in its discretion reduced fees and
charges including, but not limited to, the Surrender Charges, the Mortality
and Expense Risk Fee and the Administrative Charge for certain sales under
circumstances which may result in savings of certain costs and expenses. In
addition, there may be other circumstances of which PFL is not presently aware
which could result in reduced sales or distribution expenses. Credits to the
Policy or reductions in these fees and charges will not be unfairly
discriminatory against any Owner.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary does not constitute tax advice. It is a general
discussion of certain of the expected federal income tax consequences of
investment in and distributions with respect to a Policy, based on the
Internal Revenue Code of 1986, as amended (the "Code"), proposed and final
Treasury Regulations thereunder, judicial authority, and current
administrative rulings and practice. This summary discusses only certain
federal income tax consequences to "United States Persons," and does not
discuss state, local, or foreign tax consequences. United States Persons means
citizens or residents of the United States, domestic corporations, domestic
partnerships and trusts or estates that are subject to United States federal
income tax regardless of the source of their income.
At the time the initial Premium Payment is paid, a prospective purchaser
must specify whether he or she is purchasing a Nonqualified Policy or a
Qualified Policy. If the initial Premium Payment is derived from an exchange
or surrender of another annuity policy, PFL may require that the prospective
purchaser provide information with regard to the federal income tax status of
the previous annuity policy. PFL will require that persons purchase separate
Policies if they desire to invest monies qualifying for different annuity tax
treatment under the Code. Each such separate Policy would require the minimum
initial Premium Payment stated above. Additional Premium Payments under a
Policy must qualify for the same federal income tax treatment as the initial
Premium Payment under the Policy; PFL will not accept an Additional Premium
Payment under a Policy if the federal income tax treatment of such Premium
Payment would be different from that of the initial Premium Payment.
The Qualified Policies were designed for use by retirement plans and
individual retirement accounts that qualify for special federal income tax
treatment under Sections 401(a), 403(b), 408(a), 408A or 457 of the Code and
individuals purchasing individual retirement annuities that qualify for
special federal income tax treatment under Section 408(b) of the Code. Certain
requirements must be satisfied in purchasing a Qualified Policy in order for
the plan, account or annuity to retain its special tax treatment. This summary
is not intended to cover such requirements, and assumes that Qualified
Policies are purchased pursuant to retirement plans or individual retirement
accounts, or are individual retirement annuities, that qualify for such
special tax treatment. This summary was prepared by PFL after consultation
with tax counsel, but no opinion of tax counsel has been obtained.
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL PURPOSES ONLY. EACH
POTENTIAL PURCHASER IS URGED TO CONSULT HIS/HER OWN TAX ADVISER AS TO THE
CONSEQUENCES OF INVESTMENT IN A POLICY UNDER FEDERAL AND APPLICABLE STATE,
LOCAL AND FOREIGN TAX LAWS
TAX STATUS OF THE POLICY
Diversification Requirements. Section 817(h) of the Code provides that in
order for a variable contract which is based on a segregated asset account to
qualify as an annuity contract under the Code, the investments made by such
account must be "adequately diversified" in accordance with Treasury
regulations. The Treasury regulations issued under Section 817(h) (Treas. Reg.
(S)1.817-5) apply a diversification requirement to each of the Mutual Fund
Subaccounts and the Target Subaccounts. The Mutual Fund Account, through its
Underlying Funds and their Portfolios, and the Target Account, through its
Subaccounts, intends to comply with the diversification requirements of the
Treasury. PFL has entered into agreements regarding participation in the
Endeavor Series Trust and WRL Series Fund, Inc. that requires the Portfolios
to be operated in compliance with the Treasury regulations. PFL has entered
into an agreement with First Trust Advisers, L.P., the adviser of the Target
Account, that requires the Target Subaccounts to be operated in compliance
with the Treasury regulations.
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<PAGE>
Owner Control. In certain circumstances, owners of variable annuity
contracts may be considered the owners, for Federal income tax purposes, of
the assets of the separate account used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includable in the variable annuity contract owner's gross income. Several
years ago, the IRS stated in published rulings that a variable annuity
contract owner will be considered the owner of separate account assets if the
contract owner possesses incidents of ownership in those assets, such as the
ability to exercise investment control over the assets. More recently, the
Treasury Department announced, in connection with the issuance of regulations
concerning investment diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., you),
rather than the insurance company, to be treated as the owner of the assets in
the account." This announcement also stated that guidance would be issued by
way of regulations or rulings on the "extent to which policyholders may direct
their investments to particular subaccounts without being treated as owners of
the underlying assets."
The ownership rights under the contract are similar to, but different in
certain respects from those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets.
For example, you have the choice of one or more Subaccounts in which to
allocate premiums and Policy Values, and may be able to transfer among these
accounts more frequently than in such rulings. Moreover, the investment
strategies for the Target Subaccounts are innovative and have not been
addressed by the IRS. These differences could result in you being treated as
the owner of the assets of the Mutual Fund Account or the Target Account. In
addition, PFL does not know what standards will be set forth, if any, in the
regulations or rulings that the Treasury Department has stated it expects to
issue. PFL therefore reserves the right to modify the Policies as necessary to
attempt to prevent you from being considered the owner of a pro rata share of
the assets of the Mutual Fund Account or the Target Account.
The Statement of Additional Information discusses other tax requirements for
qualifying as an annuity contract.
The following discussion is based on the assumption that the Policy
qualifies as an annuity contract for federal income tax purposes.
TAXATION OF ANNUITIES
The discussion below applies only to those Policies owned by natural
persons, and that qualify as annuity contracts for federal income tax
purposes. With respect to Owners who are natural persons, the Policy should be
treated as an annuity contract for federal income tax purposes.
In General. Except as described below with respect to Owners who are not
natural persons, an Owner who holds a Policy satisfying the diversification
and distribution requirements described in the Statement of Additional
Information should not be taxed on increases in the Policy Value until an
amount is received or deemed received, e.g., upon a partial withdrawal or
surrender or as Annuity Payments under the Annuity Option selected. Generally,
any amount received or deemed received under a Nonqualified Annuity Contract
prior to the Annuity Commencement Date is deemed to come first from any
"Income on the Contract" and then from the "Investment in the Contract." The
"Investment in the Contract" generally equals total premium payments less
amounts received which were not includable in gross income. To the extent that
the Policy Value (Cash Value in the event of a surrender) exceeds the
"Investment in the Contract," such excess constitutes the "Income on the
Contract." For these purposes such "Income on the Contract" shall be computed
by reference to the aggregation rules described below, and the amount
includable in gross income will be taxable as ordinary income. If at the time
that any amount is received or
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deemed received there is no "Income on the Contract" (e.g., because the gross
Policy Value does not exceed the "Investment in the Contract" and no
aggregation rule applies), then such amount received or deemed received will
not be includable in gross income, and will simply reduce the "Investment in
the Contract."
For this purpose, the assignment, pledge or agreement to assign or pledge
any portion of the Policy Value (including assignment of Owner's right to
receive Annuity Payments prior to the Annuity Commencement Date) generally
will be treated as a distribution in the amount of such portion of the Policy
Value. Additionally, if an Owner designates a new Owner prior to the Annuity
Commencement Date without receiving full and adequate consideration, the old
Owner generally will be treated as receiving a distribution under the Policy
in an amount equal to the Policy Value. A transfer of ownership or an
assignment of a Policy, or designation of an Annuitant or Beneficiary who is
not also the Owner, as well as the selection of certain Annuity Commencement
Dates, may result in certain tax consequences to the Owner that are not
discussed herein. An Owner contemplating any such transfer, designation,
selection or assignment of a Policy should contact a competent tax adviser
with respect to the potential tax effects of such a transaction.
Aggregation Rules. Generally all nonqualified deferred annuity contracts
issued by the same company (or an affiliated company) to the same owner during
any calendar year shall be treated as one annuity contract, and "aggregated"
for purposes of determining the amount includable in gross income. In
addition, for such purposes all Traditional individual retirement annuities
and accounts under Section 408 of the Code for an individual are aggregated,
and generally all distributions therefrom during a calendar year are treated
as one distribution made as of the end of such year. The same aggregation
rules apply to Roth individual retirement annuities and accounts. The Roth
IRAs and Traditional IRAs shall be treated separately for distribution
purposes.
Surrenders or Partial Withdrawals. In the case of a partial withdrawal
(including systematic Partial Withdrawals) under a Nonqualified Policy, the
amount received generally will be includable in gross income to the extent
that it does not exceed the "Income on the Contract," which is generally equal
to the excess of the Policy Value immediately before the partial withdrawal
over the "Investment in the Contract" at that time. However, for these
purposes the Policy Value immediately before a partial withdrawal may have to
be increased by any positive Excess Interest Adjustment which results from
such a partial withdrawal or which could result from a simultaneous surrender,
and may need further adjustments if the aggregation rules apply. There is,
however, no definitive guidance on the proper tax treatment of Excess Interest
Adjustments, and the Owner should contact a competent tax adviser with respect
to the potential tax consequences of an Excess Interest Adjustment that may
apply in the case of a Non-Qualified Policy or a Qualified Policy. In the case
of a partial withdrawal (including systematic partial withdrawals) under a
Qualified Policy (other than one qualified under Section 457 of the Code), a
ratable portion of the amount received is generally excludable from gross
income, based on the ratio of the "Investment in the Contract" to the
individual's total Policy Value or accrued benefit under the retirement plan
at the time of each such payment. For a Qualified Policy, the "Investment in
the Contract" can be zero. Special tax rules may be available for certain
distributions from a Qualified Policy. In the case of a surrender under a
Nonqualified Policy or a Qualified Policy, the amount received generally will
be taxable only to the extent it exceeds the "Investment in the Contract",
unless the aggregation rules apply.
Annuity Payments. Although the tax consequences may vary depending on the
Annuity Payment Option elected under the Policy, in general only a portion of
the Annuity Payments received after the Annuity Commencement Date will be
includable in the gross income of the recipient.
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For Fixed Annuity Payments, in general the excludable portion of each
payment is determined by dividing the "Investment in the Contract" on the
Annuity Commencement Date by the total expected return resulting from the
Annuity Payments for the term of the payments. The remainder of each Annuity
Payment is includable in gross income. Once the "Investment in the Contract"
has been fully recovered, the full amount of any additional Annuity Payments
received is includable in gross income.
For Variable Annuity Payments, the includable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is excludable from gross income. This dollar amount is determined
by dividing the "Investment in the Contract" on the Annuity Commencement Date
by the total number of expected periodic payments. The remainder of each
Annuity Payment is includable in gross income. Once the "Investment in the
Contract" has been fully recovered, the full amount of any additional Annuity
Payments is includable in gross income.
Where an Owner allocates a portion of the Adjusted Policy Value on the
Annuity Commencement Date to more than one Annuity Payment Option (fixed or
variable), special rules govern the allocation of the Policy's entire
"Investment in the Contract" on such date to each such option, for purposes of
determining the excludable amount of each payment received under that option.
PFL makes no attempt to describe these allocation rules, because they would
prescribe a complex variety of results, depending on how the allocations were
made among the various types of Annuity Payment Options. Instead, you are
advised to consult a competent tax adviser as to the potential tax effects of
allocating any amount of Adjusted Policy Value to any particular Annuity
Payment Option.
If, after the Annuity Commencement Date, Annuity Payments cease by reason of
the death of the Annuitant, the excess (if any) of the "Investment in the
Contract" as of the Annuity Commencement Date over the aggregate amount of
Annuity Payments received on or after the Annuity Commencement Date that was
excluded from gross income is allowable as a deduction for the last taxable
year of the Annuitant.
Taxation of Death Benefit Proceeds. Amounts may be distributed from the
Policy because of the death of an Owner or the Annuitant. Generally, such
amounts are includable in the income of the recipient as follows: (1) if
distributed in a lump sum, they are taxed in the same manner as a surrender,
as described above, or (2) if distributed under an Annuity Payment Option,
they are taxed in the same manner as Annuity Payments, as described above. For
these purposes, the "Investment in the Contract" is not affected by the
Owner's or Annuitant's death. That is, the "Investment in the Contract"
remains generally the total premium payments less amounts received which were
not includable in gross income.
Penalty Taxes. In the case of any amount received or deemed received from
the Policy, e.g., upon a surrender of a Policy (including systematic
withdrawals) or a deemed distribution under a Policy resulting from a pledge,
assignment or agreement to pledge or assign or an Annuity Payment with respect
to a Policy, there may be imposed on the recipient a federal penalty tax equal
to 10% of the amount includable in gross income. The penalty tax generally
will not apply to any distribution: (i) made on or after the date on which the
taxpayer attains age 59 1/2; (ii) made as a result of the death of the holder
(generally the Owner); (iii) attributable to the disability of the taxpayer;
or (iv) which is part of a series of substantially equal periodic payments
made (not less frequently than annually) for the life (or life expectancy) of
the taxpayer or the joint lives (or joint life expectancies) of such taxpayer
and the taxpayer's beneficiary. Other rules may apply to Qualified Policies.
Withholding. The portion of any distribution under a Policy that is
includable in gross income will be subject to federal income tax withholding
unless the recipient of such distribution elects not to have federal income
tax withheld. Election forms will be provided
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at the time distributions are requested or made. For certain Qualified
Policies, certain distributions are subject to mandatory withholding. The
withholding rate varies according to the type of distribution and the Owner's
tax status. For qualified policies, "eligible rollover distributions" from
section 401(a) plans and section 403(b) tax-sheltered annuities are subject to
a mandatory federal income tax withholding of 20%. An eligible rollover
distribution is the taxable portion of any distribution from such a plan,
except certain distributions such as distributions required by the Code or
distributions in a specified annuity form. The 20% withholding does not apply,
however, if the Owner chooses a "direct rollover" from the plan to another
tax-qualified plan or IRA.
Qualified Policies. The Qualified Policy is designed for use with several
types of tax-qualified retirement plans. The tax rules applicable to
participants and beneficiaries in tax-qualified retirement plans vary
according to the type of plan and the terms and conditions of the plan.
Special favorable tax treatment may be available for certain types of
contributions and distributions. Adverse tax consequences may result from
contributions in excess of specified limits; distributions prior to age 59 1/2
(subject to certain exceptions); distributions that do not conform to
specified commencement and minimum distribution rules; and in other specified
circumstances. Some retirement plans are subject to distribution and other
requirements that are not incorporated into our Policy administration
procedures. Owners, participants and beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the Policies comply with applicable law.
For qualified plans under section 401(a), 403(a), 403(b), and 457, the Code
requires that distributions generally must commence no later than the later of
April 1 of the calendar year following the calendar year in which the Owner
(or plan participant) (i) reaches age 70 1/2 or (ii) retires, and must be made
in a specified form or manner. If the plan participant is a "5 percent owner"
(as defined in the Code), distributions generally must begin no later than
April 1 of the calendar year in which the Owner (or plan participant) reaches
age 70 1/2. Each Owner is responsible for requesting distributions under the
Policy that satisfy applicable tax rules.
PFL makes no attempt to provide more than general information about use of
the Policy with the various types of retirement plans. Purchasers of Policies
for use with any retirement plan should consult their legal counsel and tax
adviser regarding the suitability of the Policy.
Individual Retirement Annuities. In order to qualify as an Traditional
individual retirement annuity under Section 408(b) of the Code, a Policy must
contain certain provisions: (i) the Owner must be the Annuitant; (ii) the
Policy generally is not transferable by the Owner, e.g., the Owner may not
designate a new Owner, designate a Contingent Owner or assign the Policy as
collateral security; (iii) the total Premium Payments for any calendar year
may not exceed $2,000, except in case of a rollover amount or contribution
under Sections 402(c), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code; (iv)
Annuity Payments or partial withdrawals must begin no later than April 1 of
the calendar year following the calendar year in which the Annuitant attains
age 70 1/2; (v) an Annuity Payment Option with a Period Certain that will
guarantee Annuity Payments beyond the life expectancy of the Annuitant and the
Beneficiary may not be selected; and (vi) certain payments of Death Benefits
must be made in the event the Annuitant dies prior to the distribution of the
Policy Value. Policies intended to qualify as individual retirement annuities
under Section 408(b) of the Code contain such provisions. Amounts in the IRA
(other than nondeductible contributions are taxed when distributed from the
IRA. Distributions prior to age 59 1/2 (unless certain exceptions apply) are
subject to a 10% penalty tax.
Section 408 of the Code also indicates that no part of the funds for a
Traditional individual retirement account or annuity ("IRA") should be
invested in a life insurance contract, but the regulations thereunder allow
such funds to be invested in an annuity
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contract that provides a death benefit that equals the greater of the premiums
paid or the cash value for the contract. The Policy provides an enhanced death
benefit that could exceed the amount of such a permissible death benefit, but
it is unclear to what extent such an enhanced death benefit could disqualify
the Policy under Section 408 of the Code. The Internal Revenue Service has not
reviewed the Policy for qualification as an IRA, and has not addressed in a
ruling of general applicability whether an enhanced death benefit provision,
such as the provision in the Policy, comports with IRA qualification
requirements.
Roth Individual Retirement Annuities (Roth IRA). The Roth IRA, under Section
408A of the Code, contains many of the same provisions as a Traditional IRA.
However, there are some differences. First, the contributions are not
deductible and must be made in cash or as a rollover or transfer from another
Roth IRA or other IRA. A rollover from or conversion of an IRA to a Roth IRA
may be subject to tax and other special rules may apply. You should consult a
tax adviser before combining any converted amounts with any other Roth IRA
contributions, including any other conversion amounts from other tax years.
The Roth IRA is available to individuals with earned income and whose adjusted
gross income is under $110,000 for single filers, $160,000 for married filing
jointly, and $10,000 for married filing separately. The amount per individual
that may be contributed to all IRAs (Roth and Traditional) is $2,000.
Secondly, the distributions are taxed differently. The Roth IRA offers tax-
free distributions when made from assets which have been held in the account
for 5 tax years and are made after attaining age 59 1/2, to pay for qualified
first time homebuyer expenses (lifetime maximum of $10,000) or due to death or
disability. All other distributions are subject to income tax when made from
earnings and may be subject to a premature withdrawal penalty tax unless an
exception applies. Unlike the Traditional IRA, there are no minimum required
distributions during the Owner's lifetime; however, required distributions at
death are the same.
Section 403(b) Plans. Under Section 403(b) of the Code, payments made by
public school systems and certain tax exempt organizations to purchase
Policies for their employees are excludable from the gross income of the
employee, subject to certain limitations. However, such payments may be
subject to FICA (Social Security) taxes. The Policy includes a Death Benefit
that in some cases may exceed the greater of the Premium Payments or the
Policy Value. The Death Benefit could be characterized as an incidental
benefit, the amount of which is limited in any tax-sheltered annuity under
section 403(b). Because the Death Benefit may exceed this limitation,
employers using the Policy in connection with such plans should consult their
tax adviser. Additionally, in accordance with the requirements of the Code,
Section 403(b) annuities generally may not permit distribution of (i) elective
contributions made in years beginning after December 31, 1988, and (ii)
earnings on those contributions and (iii) earnings on amounts attributed to
elective contributions held as of the end of the last year beginning before
January 1, 1989. Distributions of such amounts will be allowed only upon the
death of the employee, on or after attainment of age 59 1/2, separation from
service, disability, or financial hardship, except that income attributable to
elective contributions may not be distributed in the case of hardship.
Corporate Pension and Profit-Sharing Plans and H.R. 10 Plans. Sections
401(a) and 403(a) of the Code permit corporate employers to establish various
types of retirement plans for employees and self-employed individuals to
establish qualified plans for themselves and their employees. Such retirement
plans may permit the purchase of the Policies to accumulate retirement
savings. Adverse tax consequences to the plan, the participant or both may
result if the Policy is assigned or transferred to any individual as a means
to provide benefit payments. The Policy includes a Death Benefit that in some
cases may exceed the greater of the Premium Payments or the Policy Value. The
Death Benefit could be characterized as an incidental benefit, the amount of
which is limited in a pension or profit-sharing plan. Because the Death
Benefit may exceed this limitation, employers using the Policy in connection
with such plans should consult their tax adviser.
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Deferred Compensation Plans. Section 457 of the Code, while not actually
providing for a qualified plan as that term is normally used, provides for
certain deferred compensation plans with respect to service for state
governments, local governments, political sub-divisions, agencies,
instrumentalities and certain affiliates of such entities and tax exempt
organizations which enjoy special treatment. The Policies can be used with
such plans. Under such plans a participant may specify the form of investment
in which his or her participation will be made. All such investments, however,
are owned by, and are subject to, the claims of the general creditors of the
sponsoring employer. Depending on the terms of the particular plan, the
employer may be entitled to draw on deferred amounts for purposes unrelated to
its Section 457 plan obligations. In general, all amounts received under a
Section 457 plan are taxable and are subject to federal income tax withholding
as wages.
Non-natural Persons. Pursuant to Section 72(u) of the Code, an annuity
contract held by a taxpayer other than a natural person generally will not be
treated as an annuity contract under the Code; accordingly, an Owner who is
not a natural person will recognize as ordinary income for a taxable year the
excess of (i) the sum of the Annuity Purchase Value as of the close of the
taxable year and all previous distributions under the Policy over (ii) the sum
of the Premium Payments paid for the taxable year and any prior taxable year
and the amounts includable in gross income for any prior taxable year with
respect to the Policy. For these purposes, the Policy Value at year end may
have to be increased by any positive Excess Interest Adjustment which could
result from a surrender at such time. There is, however, no definitive
guidance on the proper tax treatment of Excess Interest Adjustments, and the
Owner should contact a competent tax adviser with respect to the potential tax
consequences of an Excess Interest Adjustment. Notwithstanding the preceding
sentences in this paragraph, Section 72(u) of the Code does not apply to (i) a
Policy the nominal Owner of which is not a natural person but the beneficial
Owner of which is a natural person, (ii) a Policy acquired by the estate of a
decedent by reason of such decedent's death, (iii) a Qualified Policy (other
than one qualified under Section 457) or (iv) a single-payment annuity the
Annuity Commencement Date for which is no later than one year from the date of
the single Premium Payment; instead, such Policies are taxed as described
above under the heading "Taxation of Annuities."
Possible Changes in Taxation. Although the likelihood of legislative change
is uncertain, there is always the possibility that the tax treatment of the
Policies could change by legislation or other means. For instance, the
President's 1999 Budget Proposal recommended legislation that, if enacted,
would adversely modify the federal taxation of the Policies. It is also
possible that any change could be retroactive (that is, effective prior to the
date of the change). A tax adviser should be consulted with respect to
legislative developments and their effect on the Policy.
DISTRIBUTOR OF THE POLICIES
AFSG Securities Corporation, 4333 Edgewood Road NE, Cedar Rapids, IA 52499-
0001, an affiliate of PFL, is the principal underwriter of the Policies. AFSG
Securities Corporation has entered or will enter into one or more agreements
with various broker-dealers for the distribution of the Policies. Commissions
on Policy sales are paid to broker/dealers. Commissions payable to
broker/dealers will be up to 6% of Premium Payments, or 5% plus an annual
continuing fee based on Policy Values. In addition, certain broker/dealers may
receive additional commissions, expense allowances, and additional annual
continuing fees based upon sales volume, agent or service training
responsibilities, and other factors. The Distribution Financing Charge will be
used by PFL to support these activities and reimbursements. These commissions
are not deducted from Premium Payments, they are paid by PFL.
- 55 -
<PAGE>
The Target Account has adopted a distribution plan in accordance with Rule
12b-1 under the 1940 Act for the Distribution Financing Charge (the
"Distribution Plan"). The Distribution Plan has been approved by a majority of
the disinterested members of the Board of Managers of the Target Account. The
Distribution Plan is designed to partially compensate PFL for the cost of
distributing the Policies. Charges under the Distribution Plan will be used to
support marketing efforts, training of representatives and reimbursement of
expenses incurred by broker/dealers who sell the Policies, and will be based
on a percentage of the daily net assets of the Target Account. The
Distribution Plan may be terminated at any time by a vote of a majority of the
disinterested members of the Target Account's Board of Managers, or by a vote
of the majority of its outstanding shares. (See "CHARGES AND DEDUCTIONS--
Distribution Financing Charge," p. 47.)
VOTING RIGHTS
THE MUTUAL FUND ACCOUNT
To the extent required by law, PFL will vote the Underlying Funds shares
held by the Mutual Fund Account at regular and special shareholder meetings of
the Underlying Funds in accordance with instructions received from persons
having voting interests in the portfolios, although the Underlying Funds do
not hold regular annual shareholders' meetings. If, however, the 1940 Act or
any regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result PFL determines that it is permitted to
vote the Underlying Funds' shares in its own right, it may elect to do so.
Before the Annuity Commencement Date, you hold the voting interest in the
selected Portfolios. The number of votes that you have the right to instruct
will be calculated separately for each Subaccount. The number of votes that
you have the right to instruct for a particular Subaccount will be determined
by dividing your Policy Value in the Subaccount by the net asset value per
share of the corresponding Portfolio in which the Subaccount invests.
Fractional shares will be counted.
After the Annuity Commencement Date, the person receiving Annuity Payments
has the voting interest, and the number of votes decreases as Annuity Payments
are made and as the reserves for the Policy decrease. The person's number of
votes will be determined by dividing the reserve for the Policy allocated to
the applicable Subaccount by the net asset value per share of the
corresponding Portfolio. Fractional shares will be counted.
The number of votes that you or the person receiving income payments has the
right to instruct will be determined as of the date established by the
Underlying Funds for determining shareholders eligible to vote at the meeting
of the Underlying Funds. PFL will solicit voting instructions by sending
Owners or other persons entitled to vote written requests for instructions
prior to that meeting in accordance with procedures established by the
Underlying Funds. Portfolio shares as to which no timely instructions are
received and shares held by PFL in which Owners or other persons entitled to
vote have no beneficial interest will be voted in proportion to the voting
instructions that are received with respect to all Policies participating in
the same Subaccount.
Each person having a voting interest in a Subaccount will receive proxy
material, reports, and other materials relating to the appropriate Portfolio.
THE TARGET ACCOUNT
The Target Account is the legal owner of the common stock held in the
Subaccounts and as such has the right to vote upon any matter that may be
voted by shareholders. However, you or persons receiving income payments may
vote on certain aspects of the governance of the Subaccounts. Matters on which
persons holding voting interests may vote
- 56 -
<PAGE>
include the following: (1) approval of any change in the investment advisory
agreement corresponding to a Subaccount; (2) any change in the fundamental
investment policies of a Subaccount; or (3) any other matter requiring a vote
of persons holding voting interests in the Subaccount. With respect to
approval of the investment advisory agreements or any change in a fundamental
investment policy, Policy Owners participating in that Subaccount will vote
separately on the matter pursuant to the requirements of Rule 18f-2 under the
1940 Act.
Before the Annuity Commencement Date, you hold the voting interest in the
selected Subaccounts. The number of votes that you have will be calculated
separately for each Subaccount. The number of votes that you have for a
Subaccount will be determined by dividing your Policy Value in the Subaccount
into the total assets of the Subaccount and multiplying this by the total
number of votes.
After the Annuity Commencement Date, the person receiving Annuity Payments
has the voting interest, and the number of votes decreases as Annuity Payments
are made and as the reserves for the Policy decrease. The person's number of
votes will be determined by dividing the reserve for the Policy allocated to
the applicable Subaccount into the total assets of the Subaccount and
multiplying this by the total number of votes.
PFL does not intend to hold annual or other periodic meetings of Policy
Owners. PFL will solicit proxies by sending you or other persons entitled to
vote written requests for proxies prior to the vote. Where timely proxies are
not received, the voting interests will be voted in proportion to the proxies
that are received with respect to all Policies participating in the same
Subaccount.
PFL may, if required by state insurance officials, disregard proxies which
would require voting to cause a change in the subclassification or investment
objectives or policies of one or more of the Subaccounts, or to approve or
disapprove an investment adviser or principal underwriter for one or more of
the Subaccounts. In addition, PFL may disregard proxies that would require
changes in the investment objectives or policies of any Subaccount or in an
investment adviser or principal underwriter, if PFL reasonably disapproves
those changes in accordance with applicable federal regulations. If PFL
disregards proxies, it will advise those persons who may give proxies of that
action and its reasons for the action in the next semiannual report.
YEAR 2000 MATTERS
In October, 1996, PFL adopted and presently has in place a Year 2000
Assessment and Planning Project (the "Plan") to review and analyze existing
hardware and software systems, as well as voice and data communications
systems, to determine if they are Year 2000 compatible. The Plan provides for
a management process which ensures that when a particular system, or software
application, is determined to be "non-compliant" the proper steps are in place
to either remedy the "non-compliance" or cease using the particular system or
software. The Plan also provides that the Chief Information Officer report to
the Board of Directors as to the status of the efforts under the Plan on a
regular and routine basis. PFL has engaged the services of a third-party
provider that is specialized in Year 2000 issues to work on the project.
The Plan has four specific objectives (1) develop an inventory of all
applications; (2) evaluate all applications in the inventory to determine the
most prudent manner to move them to Year 2000 compliance, if required; (3)
estimate budgets, resources and schedules for the migration of the "affected"
applications to Year 2000 compliance; and (4) define testing and deployment
requirements to successfully manage validation and re-deployment of any
changed code. It is anticipated that all compliance issues will be resolved by
December 1998.
- 57 -
<PAGE>
As of the date of this Prospectus, PFL has identified and made available
what it believes are the appropriate resources of hardware, people, and
dollars, including the engagement of outside third parties, to ensure that the
Plan will be completed.
The Year 2000 computer problem, and its resolution, is complex and
multifaceted, and the success of a response plan cannot be conclusively known
until the Year 2000 is reached (or an earlier date to the extent that the
systems or equipment addresses Year 2000 data prior to the Year 2000). Even
with appropriate and diligent pursuit of a well-conceived response plan,
including testing procedures, there is no certainty that any company will
achieve complete success. Further, notwithstanding its efforts or results,
PFL's ability to function unaffected to and through the Year 2000 may be
adversely affected by actions (or failure to act) of third parties beyond its
knowledge or control.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Mutual Fund Account or the
Target Account is a party or to which the assets of the Account are subject.
PFL, like other life insurance companies, is a defendant in lawsuits. In some
class action and other lawsuits involving other insurers, substantial damages
have been sought and/or material settlement payments have been made. Although
the outcome of any litigation cannot be predicted with certainty, PFL believes
that at the present time there are no pending or threatened lawsuits that are
reasonably likely to have a material adverse impact on the Mutual Fund
Account, the Target Account or PFL.
HISTORICAL PERFORMANCE DATA OF THE MUTUAL FUND ACCOUNT
The following is a discussion of the historical performance data for the
Mutual Fund Account. A discussion of the historical performance data for the
Target Account is found in Part III of this Prospectus.
STANDARDIZED PERFORMANCE DATA
From time to time, PFL may advertise historical yields and total returns for
the Subaccounts of the Mutual Fund Account. In addition, PFL may advertise the
effective yield of the Subaccount investing in the Endeavor Money Market
Portfolio (the "Endeavor Money Market Subaccount"). These figures will be
calculated according to standardized methods prescribed by the SEC. They will
be based on historical earnings and are not intended to indicate future
performance.
Endeavor Money Market Subaccount. The yield of the Endeavor Money Market
Subaccount for a Policy refers to the annualized income generated by an
investment under a Policy in the Subaccount over a specified seven-day period.
The yield is calculated by assuming that the income generated for that seven-
day period is generated each seven-day period 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 under a
Policy in the Subaccount is assumed to be reinvested. The effective yield will
be slightly higher than the yield because of the compounding effect of this
assumed reinvestment. For the seven days ended December 31, 1997, the yield of
the Endeavor Money Market Subaccount was 3.054%, and the effective yield was
3.100% for the 5% Annually Compounding Death Benefit and the Double Enhanced
Death Benefit. For the seven days ended December 31, 1997, the yield of the
Endeavor Money Market Subaccount was 3.199%, and the effective yield was
3.250% for the Return of Premium Death Benefit.
- 58 -
<PAGE>
Other Subaccounts. The yield of a Subaccount of the Mutual Fund Account
(other than the Endeavor Money Market Subaccount) for a Policy refers to the
annualized income generated by an investment under a Policy in the Subaccount
over a specified thirty-day period. The yield is calculated by assuming that
the income generated by the investment during that thirty-day period is
generated each thirty-day period over a 12-month period and is shown as a
percentage of the investment.
The total return of a Subaccount refers to return quotations assuming an
investment under a Policy has been held in the Subaccount for various periods
of time including a period measured from the date the Subaccount commenced
operations. When a Subaccount has been in operation for one, five, and ten
years, respectively, the total return for these periods will be provided. The
total return quotations for a Subaccount will represent the average annual
compounded rates of return that equate an initial investment of $1,000 in the
Subaccount to the redemption value of that investment as of the first day of
each of the periods for which total return quotations are provided. In
addition to the Standard data discussed above, similar performance data for
other periods may also be shown.
The yield and total return calculations for a Subaccount do not reflect the
effect of any premium taxes that may be applicable to a particular Policy. To
the extent that any or all of a premium tax is applicable to a particular
Policy, the yield and/or total return of that Policy will be reduced. For
additional information regarding yields and total returns calculated using the
standard formats briefly summarized above, please refer to the Statement of
Additional Information, a copy of which may be obtained from the
Administrative and Service Office upon request.
Based on the method of calculation described in the Statement of Additional
Information, the average annual total returns for periods from inception of
the Subaccounts to December 31, 1997, and for the one and five year periods
ended December 31, 1997 are shown below. Total returns shown reflect
deductions for the Mortality and Expense Risk Fee, the Distribution Financing
Charge, and the Administrative Charges. The total return for each Target
Subaccount will also reflect the Manager's Fee and other operating expenses.
Total return calculations will reflect the effect of Surrender Charges that
may be applicable to a particular period.
AVERAGE ANNUAL TOTAL RETURNS
5% Annually Compounding Death Benefit or Double Enhanced Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.55%)
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS INCEPTION OF THE SUBACCOUNT
PERIOD ENDED ENDED SUBACCOUNT TO INCEPTION
SUBACCOUNT 12/31/97 12/31/97 12/31/97 DATE(/4/)
- ---------- ------------ ---------- ---------------- -----------------
<S> <C> <C> <C> <C>
Endeavor Managed Asset
Allocation............. 12.95% 11.97% 11.85% April 8, 1991
T. Rowe Price
International
Stock(/1/)............. (4.41%) 5.86% 4.10% April 8, 1991
Endeavor Value Equity... 17.57% N/A 16.70% May 27, 1993
Dreyfus Small Cap Value. 18.23% N/A 13.45% May 4, 1993
Dreyfus U.S. Government
Securities............. 2.07% N/A 4.23% May 9, 1994
T. Rowe Price Equity
Income................. 21.01% N/A 23.13% January 3, 1995
T. Rowe Price Growth
Stock.................. 21.30% N/A 25.68% January 3, 1995
Endeavor Opportunity
Value.................. 9.79% N/A 9.16% November 18, 1996
Endeavor Enhanced Index. N/A N/A 14.66% May 1, 1997
Endeavor Select 50(/2/). N/A N/A N/A February 2, 1998
WRL Growth.............. 10.28% 12.20% 12.66% July 1, 1992
Merrill Lynch Basic
Value Focus(/3/)....... N/A N/A (3.35%) July 3, 1997
Merrill Lynch Developing
Capital Markets
Focus(/3/)............. N/A N/A (29.42%) July 3, 1997
Merrill Lynch High
Current Income(/3/).... N/A N/A (2.51%) July 3, 1997
</TABLE>
- 59 -
<PAGE>
Return of Premium Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.40%)
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS INCEPTION OF THE SUBACCOUNT
PERIOD ENDED ENDED SUBACCOUNT TO INCEPTION
SUBACCOUNT 12/31/97 12/31/97 12/31/97 DATE(/4/)
- ---------- ------------ ---------- ---------------- -----------------
<S> <C> <C> <C> <C>
Endeavor Managed Asset
Allocation............. 13.12% 12.14% 12.02% April 8, 1991
T. Rowe Price
International
Stock(/1/)............. (4.26%) 6.01% 4.26% April 8, 1991
Endeavor Value Equity... 17.74% N/A 16.87% May 27, 1993
Dreyfus Small Cap Value. 18.40% N/A 13.62% May 4, 1993
Dreyfus U.S. Government
Securities............. 2.22% N/A 4.39% May 9, 1994
T. Rowe Price Equity
Income................. 21.18% N/A 23.31% January 3, 1995
T. Rowe Price Growth
Stock.................. 21.48% N/A 25.87% January 3, 1995
Endeavor Opportunity
Value.................. 9.89% N/A 9.25% November 18, 1996
Endeavor Enhanced Index. N/A N/A 14.76% May 1, 1997
Endeavor Select 50(/2/). N/A N/A N/A February 2, 1998
WRL Growth.............. 10.54% 12.38% 12.83% July 1, 1992
Merrill Lynch Basic
Value Focus(/3/)....... N/A N/A (3.28%) July 3, 1997
Merrill Lynch Developing
Capital Markets
Focus(/3/)............. N/A N/A (29.37%) July 3, 1997
Merrill Lynch High
Current Income(/3/).... N/A N/A (2.44%) July 3, 1997
</TABLE>
- ----------------------------
(/1/)Effective January 1, 1995, Rowe Price-Fleming International, Inc. became
the new adviser to the Global Growth Portfolio. The Portfolio's name
changed to the T. Rowe Price International Stock Portfolio and the
Portfolio's shareholders approved a change in investment objective from
investments in small capitalization companies on a global basis to
investments in a broad range of companies on an international basis (that
is, non-U.S. companies).
(/2/)The Endeavor Select 50 Portfolio began operations on February 2, 1998,
therefore comparable information is not available.
(/3/)The Subaccounts invest in Class A shares of Merrill Lynch Variable Series
Funds, Inc. portfolios. There are no 12b-1 fees deducted from Class A
shares.
(/4/)Performance prior to July 3, 1997, reflects performance of PFL Endeavor
Variable Annuity Subaccounts prior to the offering of the Policies through
Merrill Lynch.
The figures for the "five year" and "from inception" periods in the above
tables reflect waiver of advisory fees and reimbursement of other expenses for
all portfolios except the T. Rowe Price Equity Income Portfolio and the T.
Rowe Price Growth Stock Portfolio. In the absence of such waivers, the average
annual total return figures above from the five year and from inception
periods would have been lower.
NON-STANDARDIZED PERFORMANCE DATA
PFL may from time to time also advertise or disclose average annual total
return or other performance data in non-standard formats for a Subaccount of
the Mutual Fund Account. The non-standard performance data may assume that no
Surrender Charge is applicable, and may also make other assumptions such as
the amount invested in a Subaccount, differences in time periods to be shown,
or the effect of partial withdrawals or annuity payments.
All non-standard performance data will be advertised only if the standard
performance data is also disclosed. For additional information regarding the
calculation of other performance data, please refer to the Statement of
Additional Information, a copy of which may be obtained from the
Administrative and Service Office upon request.
The following non-standardized average annual total return figures are based
on the assumption that the Policy is not surrendered, and therefore the
Surrender Charge is not imposed.
- 60 -
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS (ASSUMING NO SURRENDER CHARGE)
5% Annually Compounding Death Benefit or Double Enhanced Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.55%)
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS INCEPTION OF THE SUBACCOUNT
PERIOD ENDED ENDED SUBACCOUNT TO INCEPTION
SUBACCOUNT 12/31/97 12/31/97 12/31/97 DATE(/4/)
- ---------- ------------ ---------- ---------------- -----------------
<S> <C> <C> <C> <C>
Endeavor Managed Asset
Allocation............. 18.24% 12.18% 11.98% April 8, 1991
T. Rowe Price
International
Stock(/1/)............. 0.99% 6.13% 4.30% April 8, 1991
Endeavor Value Equity... 22.83% N/A 17.09% May 27, 1993
Dreyfus Small Cap Value. 23.49% N/A 13.88% May 4, 1993
Dreyfus U.S. Government
Securities............. 7.42% N/A 5.30% May 9, 1994
T. Rowe Price Equity
Income................. 26.25% N/A 24.19% January 3, 1995
T. Rowe Price Growth
Stock.................. 26.54% N/A 26.69% January 3, 1995
Endeavor Opportunity
Value.................. 15.09% N/A 13.84% November 18, 1996
Endeavor Enhanced Index. N/A N/A 21.66% May 1, 1997
Endeavor Select 50(/2/). N/A N/A N/A February 2, 1998
WRL Growth.............. 15.59% 12.40% 12.83% July 1, 1992
Merrill Lynch Basic
Value Focus(/3/)....... N/A N/A 3.65% July 3, 1997
Merrill Lynch Developing
Capital Markets
Focus(/3/)............. N/A N/A (22.42%) July 3, 1997
Merrill Lynch High
Current Income(/3/).... N/A N/A 4.49% July 3, 1997
</TABLE>
Return of Premium Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.40%)
<TABLE>
<CAPTION>
INCEPTION OF
ONE YEAR FIVE YEARS THE SUBACCOUNT
PERIOD ENDED ENDED SUBACCOUNT TO INCEPTION
SUBACCOUNT 12/31/97 12/31/97 12/31/97 DATE(/4/)
- ---------- ------------ ---------- ------------- -----------------
<S> <C> <C> <C> <C>
Endeavor Managed Asset
Allocation............. 18.41% 12.34% 12.14% April 8, 1991
T. Rowe Price
International
Stock(/1/)............. 1.13% 6.29% 4.46% April 8, 1991
Endeavor Value Equity... 23.01% N/A 17.26% May 27, 1993
Dreyfus Small Cap Value. 23.66% N/A 14.05% May 4, 1993
Dreyfus U.S. Government
Securities............. 7.57% N/A 5.45% May 9, 1994
T. Rowe Price Equity
Income................. 26.42% N/A 24.37% January 3, 1995
T. Rowe Price Growth
Stock.................. 26.72% N/A 26.87% January 3, 1995
Endeavor Opportunity
Value.................. 15.20% N/A 13.93% November 18, 1996
Endeavor Enhanced Index. N/A N/A 21.76% May 1, 1997
Endeavor Select 50(/2/). N/A N/A N/A February 2, 1998
WRL Growth.............. 15.85% 12.58% 13.00% July 1, 1992
Merrill Lynch Basic
Value Focus(/3/)....... N/A N/A 3.72% July 3, 1997
Merrill Lynch Developing
Capital Markets
Focus(/3/)............. N/A N/A (22.37%) July 3, 1997
Merrill Lynch High
Current Income(/3/).... N/A N/A 4.56% July 3, 1997
</TABLE>
- ----------------------------
(/1/)Effective January 1, 1995, Rowe Price-Fleming International, Inc. became
the new adviser to the Global Growth Portfolio. The Portfolio's name
changed to the T. Rowe Price International Stock Portfolio and the
Portfolio's shareholders approved a change in investment objective from
investments in small capitalization companies on a global basis to
investments in a broad range of companies on an international basis (that
is, non-U.S. companies).
(/2/)The Endeavor Select 50 Portfolio began operations on February 2, 1998,
therefore comparable information is not available.
(/3/)The Subaccounts invest in Class A shares of Merrill Lynch Variable Series
Funds, Inc. portfolios. There are no 12b-1 fees deducted from Class A
shares.
(/4/)Performance prior to July 3, 1997, reflects performance of PFL Endeavor
Variable Annuity Subaccounts prior to the offering of the Policies through
Merrill Lynch.
The figures for the "five year" and "from inception" periods in the above
tables reflect waiver of advisory fees and reimbursement of other expenses for
all portfolios except the T. Rowe Price Equity Income Portfolio and the T.
Rowe Price Growth Stock Portfolio. In the absence of such waivers, the average
annual total return figures above from the five year and from inception
periods would have been lower.
- 61 -
<PAGE>
All non-standard performance data will be advertised only if the standard
performance data is also disclosed. For additional information regarding the
calculation of other performance data, please refer to the Statement of
Additional Information, a copy of which may be obtained from the
Administrative and Service office upon request.
Merrill Lynch Variable Series Funds, Inc.--Adjusted Historical Data. Prior
to July 3, 1997, Merrill Lynch Basic Value Focus Subaccount, the Merrill Lynch
Developing Capital Markets Focus Subaccount and the Merrill Lynch High Current
Income Subaccount (the "Merrill Lynch Subaccounts"), had not yet commenced
operations. However, the following is average annual total return information
based on the hypothetical assumption that those Subaccounts have been
available to the PFL Endeavor Variable Annuity Account since inception of the
underlying portfolios.
5% Annually Compounding Death Benefit or Double Enhanced Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.55%)
<TABLE>
<CAPTION>
CORRESPONDING
10 YEARS PORTFOLIO
ONE FIVE OR INCEPTION
SUBACCOUNT YEAR YEAR INCEPTION DATE *
- ---------- ------ ---- --------- --------------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Focus....... 3.89% 8.46% 10.37%** April 20, 1982
Merrill Lynch Developing Capital
Markets Focus........................ (13.46%) N/A (3.69%) May 2, 1994
Merrill Lynch High Current Income..... 15.01% N/A 15.30% July 1, 1993
</TABLE>
Return of Premium Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.40%)
<TABLE>
<CAPTION>
CORRESPONDING
10 YEARS PORTFOLIO
ONE FIVE OR INCEPTION
SUBACCOUNT YEAR YEAR INCEPTION DATE *
---------- ------ ---- --------- --------------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Focus....... 4.05% 8.62% 10.54%** April 20, 1982
Merrill Lynch Developing Capital
Markets Focus........................ (12.93%) N/A (3.42%) May 2, 1994
Merrill Lynch High Current Income..... 15.04% N/A 15.55% July 1, 1993
</TABLE>
- ----------------------------
* The Subaccounts invest in Class A shares of the Merrill Lynch Variable
Series Funds, Inc. portfolios. The performance data for periods prior to
the date the Merrill Lynch Subaccounts commenced operations is based on the
performance of the underlying portfolios and the assumption that the
Merrill Lynch Subaccounts were in existence for the same period as the
corresponding portfolios, with a level of charges equal to those currently
assessed against the Subaccount or against Owners' contract values under
the Policies. The Merrill Lynch Basic Value Fund commenced operations on
July 1, 1993; the Merrill Lynch Developing Capital Markets Focus Fund
commenced operations on May 2, 1994; and the Merrill Lynch High Current
Income Fund commenced operations on April 20, 1982. For purposes of the
calculation of the performance data prior to dates of inception of the
Subaccounts, the deductions for the Mortality and Expense Risk Fee, and
Administrative Charge are made on a monthly basis, rather than a daily
basis. The monthly deduction is made at the beginning of each month and in
PFL's opinion generally approximates the performance which would have
resulted if the Merrill Lynch Subaccounts had actually been in existence
since the inception of the underlying portfolios. Performance data for
periods of less than seven years reflect deduction of the Surrender Charge.
**Ten Year Figure
- 62 -
<PAGE>
WRL Growth Subaccount--Adjusted Historical Data. Prior to July 1, 1992, the
WRL Growth Subaccount had not yet commenced operations. However, the following
is average annual total return information based on the hypothetical
assumption that the WRL Growth Subaccount had been available to the PFL
Endeavor Variable Annuity Account since inception of the WRL Growth Portfolio:
5% Annually Compounding Death Benefit or Annual Step-Up Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.55%)
<TABLE>
<CAPTION>
CORRESPONDING
10 YEAR PORTFOLIO
ONE FIVE OR INCEPTION
SUBACCOUNT YEAR YEAR INCEPTION DATE *
- ---------- ----- ----- --------- ---------------
<S> <C> <C> <C> <C>
WRL Growth.............................. 10.28% 12.20% 16.69%** October 2, 1986
</TABLE>
Return of Premium Death Benefit
(Total Mutual Fund Account Annual Expenses: 1.40%)
<TABLE>
<CAPTION>
CORRESPONDING
10 YEAR PORTFOLIO
ONE FIVE OR INCEPTION
SUBACCOUNT YEAR YEAR INCEPTION DATE *
- ---------- ----- ----- --------- ---------------
<S> <C> <C> <C> <C>
WRL Growth.............................. 10.54% 12.38% 16.87%** October 2, 1986
</TABLE>
- ----------------------------
* The performance data for periods prior to the date the WRL Growth
Subaccount commenced operations (July 1, 1992) is based on the performance
of the WRL Growth Portfolio and the assumption that the WRL Growth
Subaccount was in existence for the same period as the WRL Growth
Portfolio, with a level of charges equal to those currently assessed
against the Subaccount or against Owners' contract values under the
Policies. The WRL Growth Portfolio commenced operations on October 2, 1986.
For purposes of the calculation of the performance data prior to July 1,
1992, the deductions for the Mortality and Expense Risk Fee, and
Administrative Charge are made on a monthly basis, rather than a daily
basis. The monthly deduction is made at the beginning of each month and
generally approximates the performance which would have resulted if the
Subaccount had actually been in existence since the inception of the WRL
Growth Portfolio. Performance data for periods of less than seven years
reflect deduction of the Surrender Charge.
** Ten Year Figure
ENDEAVOR ENHANCED INDEX AND ENDEAVOR SELECT 50 PORTFOLIOS
The Enhanced Index Portfolio and the Endeavor Select 50 Portfolio commenced
operations on May 1, 1997 and February 2, 1998, respectively, and therefore
these Portfolios do not have significant historical performance data. However,
their investment managers (J.P. Morgan Investment Management Inc. and
Montgomery Asset Management, LLC, respectively) have experience managing
similar portfolios with substantially the same investment objectives and
policies. Historical performance data showing the results the investment
managers achieved for those other portfolios is in the prospectus for the
Endeavor Series Trust, which accompanies this Prospectus. See "Performance
Information" in the Endeavor Series Trust's prospectus. That performance
information in the Endeavor Series Trust's prospectus does not take into
account the fees and charges under the Policy; if those fees and charges were
reflected, the investment returns would be lower.
- 63 -
<PAGE>
PART III
THE TARGET ACCOUNT
INTRODUCTION. Part III gives further background information on the Target
Account, The Dow Target 10 Subaccount and The Dow Target 5 Subaccount,
including their management and investment strategies and policies.
THE TARGET ACCOUNT
TARGET ACCOUNT DEFINITIONS
Adviser--First Trust Advisers L.P., the investment adviser to the Target
Account.
Annual Stock Selection Date--The last Business Day of a specified 12-month
period.
Common Shares--The common stock held in a Target Subaccount, selected
according to specified investment criteria.
DJIA--The Dow Jones Industrial Average SM. Thirty stocks chosen by the
editors of The Wall Street Journal as representative of the broad market and
of American industry.
Initial Stock Selection Date--June 30, 1998.
GENERAL
Interests in the Target Account are not expected to be available for
allocation of Premium Payments prior to the Initial Stock Selection Date.
The Target Account is a managed separate account and currently is divided
into two Subaccounts. Additional Subaccounts may be established in the future
at the discretion of PFL. Each Subaccount invests according to specific
investment strategies. Under Iowa law, the assets of the Target Account are
owned by PFL, but they are held separately from the other assets of PFL. To
the extent that these assets are attributable to the Policy Value of the
Policies, these assets are not chargeable with liabilities incurred in any
other business operation of PFL. Income, gains, and losses incurred on the
assets in a Subaccount of the Target Account, whether or not realized, are
credited to or charged against that Subaccount without regard to other income,
gains or losses of any other Account or Subaccount of PFL. Each Subaccount
operates as a separate investment fund. Therefore, the investment performance
of any Subaccount should be entirely independent of the investment performance
of PFL's general account assets or any other Account or Subaccount maintained
by PFL.
The Target Account is registered with the SEC under the 1940 Act as an open-
end management investment company and meets the definition of a separate
account under federal securities laws. However, the SEC does not supervise the
management or the investment practices or policies of the Target Account or
PFL. The Dow Target 10 Subaccount and The Dow Target 5 Subaccount are non-
diversified Subaccounts of the Target Account. The investments and
administration of each managed Subaccount are under the direction of a Board
of Managers. The Board of Managers for each Subaccount annually selects an
independent public accountant, reviews the terms of the management and
investment advisory agreements, recommends any changes in the fundamental
investment policies, and takes any other actions necessary in connection with
the operation and management of the Subaccounts.
Management of the Target Account. Endeavor Investment Advisers (the
"Manager"), an investment adviser registered with the SEC under the Investment
Advisers Act of 1940 (the "Advisers Act"), is the Target Account's manager.
The Manager performs administerial and managerial functions for the Target
Account. (see "The Mutual Fund Account," supra.)
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First Trust Advisers L.P. (the "Adviser" or "First Trust"), an Illinois
limited partnership formed in 1991 and an investment adviser registered with
the SEC under the Advisers Act, is the Target Account's investment adviser.
The Adviser's address is 1001 Warrenville Road, Lisle, Illinois 60532. First
Trust Advisers L.P. is a limited partnership with one limited partner, Grace
Partners of Dupage L.P., and one general partner, Nike Securities Corporation.
Grace Partners of Dupage L.P. is a limited partnership with one general
partner, Nike Securities Corporation, and a number of limited partners (none
of whom have more than a 25% interest). Nike Securities Corporation is an
Illinois corporation controlled by Robert Donald Van Kampen. The Adviser is
responsible for selecting the investments of each Subaccount consistent with
the investment objectives and policies of that Subaccount, and will conduct
securities trading for the Subaccount.
At December 31, 1997, and as of the date of this Prospectus, the Target
Subaccounts had not commenced operations. However, the Adviser is also the
portfolio supervisor of certain unit investment trusts sponsored by Nike
Securities L.P. ("Nike Securities") which are substantially similar to the
Target Subaccounts in that they have the same investment objectives as the
Subaccounts but have a life of approximately one year. Nike Securities
specializes in the underwriting, trading and distribution of unit investment
trusts and other securities. Nike Securities, an Illinois limited partnership
formed in 1991, acts as sponsor for successive series of The First Trust
Combined Series, The First Trust Special Situations Trust, the First Trust
Insured Corporate Trust, The First Trust of Insured Municipal Bonds and the
First Trust GNMA. First Trust introduced the first insured unit investment
trust in 1974 and to date more than $11 billion in First Trust unit investment
trusts have been deposited.
Management Fee. For its services to the Target Account, the Manager is paid
a fee of 0.75% of the average daily net assets of each Target Subaccount. For
its services to the Target Account, the Adviser is paid a fee equal to 0.35%
of the average daily net assets of each Target Subaccount. This fee is paid by
the Manager.
Operating Expenses. In addition to the management fees, the Target Account
pays all expenses not assumed by the Manager, including, without limitation,
expenses for legal, accounting and auditing services, interest, taxes, costs
of printing and distributing reports to shareholders, proxy materials and
prospectuses, charges of its custodian, transfer agent and dividend disbursing
agent, registration fees, fees and expenses of the Board of Managers who are
not affiliated persons of the Manager or an Adviser, insurance, brokerage
costs, litigation, and other extraordinary or nonrecurring expenses. All
general Target Account expenses are allocated among and charged to the assets
of the Target Subaccounts on a basis that the Board of Managers deems fair and
equitable, which may be on the basis of relative net assets of each Target
Subaccount or the nature of the services performed and relative applicability
to each Target Subaccount. The Manager has agreed to limit each Target
Subaccount's management fee and operating expenses during its first year of
operations to an annual rate of 1.30% of the Subaccount's average net assets.
(This limit does not include other fees and deductions such as the Mortality
and Expense Risk Fee, Administrative Charge, and Distribution Financing
Charge.)
Portfolio Manager. There is no one individual primarily responsible for
portfolio management decisions for the Target Account. Investments are made
according to the prescribed strategy under the direction of a committee.
INVESTMENT STRATEGY
The Dow Target 10 Subaccount will invest in the common stock of the ten
companies in the DJIA that have the highest dividend yield as of a specified
business day and hold those stocks for the following 12-month period.
The Dow Target 5 Subaccount will invest in the common stock of the five
companies with the lowest per share stock price of the ten companies in the
DJIA that have the highest
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dividend yield as of a specified business day and hold those stocks for the
following 12-month period.
The objective of each Subaccount is to provide an above-average total return
through a combination of dividend income and capital appreciation. Each
Subaccount will function in a similar manner. Each Subaccount will initially
invest in substantially equal amounts in the common stock of the companies
described above for each Subaccount (as held in a Subaccount, such common
stock is referred to as the "Common Shares") determined as of a specified
business day (the "Initial Stock Selection Date"). Each Target Subaccount may
have different investment portfolios running simultaneously for different 12-
month periods. For example, within the Target 10 Subaccount there may be more
than one Portfolio, each with a different Initial Stock Selection Date. At the
Initial Stock Selection Date, a percentage relationship among the number of
Common Shares in a Portfolio will be established.
When additional funds are deposited into the Portfolio, additional Common
Shares will be purchased in such numbers reflecting as nearly as practicable
the percentage relationship of the number of Common Shares established at the
initial purchase. Sales of Common Shares by the Portfolio will likewise
attempt to replicate the percentage relationship of Common Shares. The
percentage relationship among the number of Common Shares in the Portfolio
should therefore remain stable. However, given the fact that the market price
of such Common Shares will vary throughout the year, the value of the Common
Shares of each of the companies as compared to the total assets of the
Portfolio will fluctuate during the year, above and below the proportion
established on a Stock Selection Date. As of the last Business Day of the
specified 12-month period following each preceding stock selection date
("Annual Stock Selection Date"), a new percentage relationship will be
established among the number of Common Shares described below for each
Portfolio on such date. Common Shares may be sold or new equity securities
bought so that the Portfolio is equally invested in the common stock of each
company meeting the Portfolio's investment criteria. Thus the Portfolio may or
may not hold equity securities of the same companies as the previous year. Any
purchase or sale of additional Common Shares during the year will duplicate,
as nearly as practicable, the percentage relationship among the number of
Common Shares as of the Annual Stock Selection Date since the relationship
among the value of the Common Shares on the date of any subsequent
transactions may be different than the original relationship among their
value.
The Target Account may determine to offer additional subaccounts in the
future, which may have different selection criteria or stock selection dates.
Units of both The Dow Target 10 Subaccount and The Dow Target 5 Subaccount
have not been designed so that their prices will parallel or correlate with
movements in the DJIA, and it is expected that their prices will not do so.
An investment in a Target Subaccount involves the purchase of a portfolio of
attractive equities with high dividend yields in one convenient purchase.
Investing in the stocks of the DJIA with the highest dividend yields amounts
to a contrarian strategy because these shares are often out of favor. Such
strategy may be effective in achieving a Target Subaccount's investment
objectives because regular dividends are common for established companies and
dividends have accounted for a substantial portion of the total return on
stocks of the DJIA as a group. However, there is no guarantee that either a
Target Subaccount's objective will be achieved or that a Target Subaccount
will provide for capital appreciation in excess of such Target Subaccount's
expenses.
Each Target Subaccount may also invest in futures and options, hold
warrants, and lend its Common Shares.
Tax Limitations. Section 817(h) of the Code provides that in order for a
variable contract which is based on a segregated asset account to qualify as
an annuity contract under the Code, the investments made by such account must
be "adequately diversified" in
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accordance with Treasury regulations. The Treasury regulations issued under
Section 817(h) (Treas. Reg.(S)1.817-5) apply a diversification requirement to
each of the Subaccounts of the Target Account. To qualify as "adequately
diversified," each Subaccount may have:
(i) No more than 55% of the value of its total assets represented by any
one investment;
(ii) No more than 70% of the value of its total assets represented by any
two investments;
(iii) No more than 80% of the value of its total assets represented by
any three investments; and
(iv) No more than 90% of the value of its total assets represented by any
four investments.
The Target Account, through the Subaccounts, intends to comply with the
diversification requirements of the Treasury. PFL has entered into an
agreement with the Manager, who in turn, has entered into a contract with the
Advisor that requires the Subaccounts to be operated in compliance with the
Treasury regulations. The Adviser reserves the right to depart from either
Target Subaccount's investment strategy in order to meet these diversification
requirements.
THE DOW JONES INDUSTRIAL AVERAGE SM
The DJIA was first published in The Wall Street Journal in 1896. Initially
consisting of just 12 stocks, the DJIA expanded to 20 stocks in 1916 and to
its present size of 30 stocks on October 1, 1928. The stocks are chosen by the
editors of The Wall Street Journal as representative of the broad market and
of American industry. The companies are major factors in their industries and
their stocks are widely held by individuals and institutional investors.
Changes in the components of the DJIA are made entirely by the editors of The
Wall Street Journal without consultation with the companies, the stock
exchange or any official agency. For the sake of continuity, changes are made
rarely. Most substitutions have been the result of mergers, but from time to
time, changes may be made to achieve a better representation. The components
of the DJIA may be changed at any time, for any reason. Any changes in the
components of the DJIA made after the Initial Stock Selection Date will not
cause a change in the identity of the Common Shares included in a Target
Subaccount, including any equity securities deposited in the Target
Subaccount, except on an Annual Stock Selection Date. The following is a list
of the companies which currently comprise the DJIA.
AT&T Corporation International Business Machines Corporation
Allied Signal International Paper Company
Aluminum Company of America Johnson & Johnson
American Express Company McDonald's Corporation
Boeing Company Merck & Company, Inc.
Caterpillar Inc. Minnesota Mining & Manufacturing Company
Chevron Corporation J.P. Morgan & Company, Inc.
Coca-Cola Company Philip Morris Companies, Inc.
Walt Disney Company Procter & Gamble Company
E.I. du Pont de Nemours & Sears, Roebuck & Company.
Company Travelers Group
Eastman Kodak Company Union Carbide Corporation
Exxon Corporation United Technologies Corporation
General Electric Company Wal-Mart Stores, Inc.
General Motors Corporation
Goodyear Tire & Rubber Company
Hewlett-Packard Company
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The Target Account is not sponsored, endorsed, sold or promoted by Dow
Jones. Dow Jones makes no representation or warranty, express or implied, to
the owners of the Target Account or any member of the public regarding the
advisability of purchasing the Target Account. Dow Jones' only relationship to
First Trust Advisers, Endeavor and PFL is the licensing of certain copyrights,
trademarks, servicemarks and service names of Dow Jones. Dow Jones has no
obligation to take the needs of First Trust Advisers, Endeavor, PFL or the
owners of the Target Account into consideration in determining, composing or
calculating the Dow Jones Industrial Average SM. Dow Jones is not responsible
for and has not participated in the determination of the terms and conditions
of the Target Account to be issued, including the pricing or the amount
payable under the contract. Dow Jones has no obligation or liability in
connection with the administration or marketing of the Target Account.
DOW JONES DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE DOW
JONES INDUSTRIAL AVERAGE SM OR ANY DATA INCLUDED THEREIN AND DOW JONES SHALL
HAVE NO LIABILITY FOR ANY ERRORS, OMISSION, OR INTERRUPTIONS THEREIN. DOW
JONES MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY
FIRST TRUST ADVISERS, ENDEAVOR, PFL, OWNERS OF THE TARGET ACCOUNT OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE DOW JONES INDUSTRIAL AVERAGE SM OR ANY
DATA INCLUDED THEREIN. DOW JONES MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE DOW JONES INDUSTRIAL AVERAGE SM
OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO
EVENT SHALL DOW JONES HAVE ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT,
PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INVESTMENT RISKS
THERE IS NO ASSURANCE THAT ANY SUBACCOUNT WILL ACHIEVE ITS STATED OBJECTIVE.
More detailed information, including a description of each Subaccount's
investment objective and policies and a description of risks involved in
investing in each of the Subaccounts and of each Subaccount's fees and
expenses is contained in the Statement of Additional Information. INFORMATION
CONTAINED IN THE STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ CAREFULLY
BEFORE INVESTING IN A SUBACCOUNT OF THE TARGET ACCOUNT.
The Subaccounts consist of different issues of equity securities, all of
which are listed on a securities exchange. In addition, each of the companies
whose equity securities are included in a portfolio are actively-traded, well-
established corporations.
Common Shares from time to time may be sold under certain circumstances
described herein. Common Shares, however, will not be sold by a Subaccount to
take advantage of market fluctuations or changes in anticipated rates of
appreciation or depreciation or if the Common Shares no longer meet the
criteria by which they were selected for a Subaccount. However, Common Shares
will be sold on or about each Annual Stock Selection Date in accordance with
the Adviser's stock selection strategy.
Whether or not the Common Shares are listed on a securities exchange, the
principal trading market for the Common Shares may be in the over-the-counter
market. As a result, the existence of a liquid trading market for the Common
Shares may depend on whether dealers will make a market in the Common Shares.
There can be no assurance that a market will be made for any of the Common
Shares, that any market for the Common Shares will be maintained or that there
will be sufficient liquidity of the Common Shares in any markets made. The
price at which the Common Shares may be sold to meet transfers, partial
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withdrawals or surrenders and the value of a Subaccount will be adversely
affected if trading markets for the Common Shares are limited or absent.
Investors should be aware of certain other considerations before making a
decision to invest in a Subaccount. The value of common stocks is subject to
market fluctuations for as long as the common stocks remain outstanding, and
thus, the value of the Common Shares will fluctuate over the life of a
Subaccount and may be more or less than the price at which they were purchased
by such Subaccount. The Common Shares may appreciate or depreciate in value
(or pay dividends) depending on the full range of economic and market
influences affecting these securities, including the impact of the
Subaccounts' purchase and sale of the Common Shares and other factors.
An investment in a Subaccount should be made with an understanding of the
risks which an investment in common stocks entails. In general, the value of
your investment will decline if the financial condition of the issuers of the
common stocks becomes impaired or if the general condition of the relevant
stock market worsens. Common stocks are especially susceptible to general
stock market movements and to volatile increases and decreases of value, as
market confidence in and perceptions of the issuers change. These perceptions
are based on unpredictable factors including expectations regarding
government, economic, monetary and fiscal policies, inflation and interest
rates, economic expansion or contraction, and global or regional political,
economic or banking crises. In addition, due to the objective nature of the
investment selection criteria, Subaccounts may be for certain periods
considered concentrated in various industries. PFL cannot predict the
direction or scope of any of these factors. Common stocks have generally
inferior rights to receive payments from the issuer in comparison with the
rights of creditors of, or holders of debt obligations or preferred stocks
issued by, the issuer. Moreover, common stocks do not represent an obligation
of the issuer and therefore do not offer any assurance of income or provide
the degree of protection of capital provided by debt securities.
An investment in The Dow Target 5 Subaccount may subject you to additional
risk due to the relative lack of diversity in its portfolio since the
portfolio contains only five stocks. Therefore, The Dow Target 5 Subaccount
may be subject to greater market risk than other subaccounts which contain a
more diversified portfolio of securities. Each Subaccount is not actively
managed and common shares will not be sold to take advantage of market
fluctuations or changes in anticipated rates of appreciation. Finally, each
strategy has under performed the DJIA in certain years.
PFL, the Manager and the Adviser shall not be liable in any way for any
default, failure or defect in any Common Share.
To the best of the Adviser's knowledge, there is no litigation pending as of
the date of the Prospectus with respect to any equity security which might
reasonably be expected to have a material adverse effect on the Subaccounts.
At any time after the date of the Prospectus, litigation may be instituted on
a variety of grounds with respect to the Common Shares. PFL is unable to
predict whether any such litigation will be instituted, or if instituted,
whether such litigation might have a material adverse effect on the
Subaccounts.
Legislation. Further, at any time after the date of the Prospectus,
legislation may be enacted that could negatively affect the Common Shares in
the Subaccounts or the issuers of the Common Shares. Changing approaches to
regulation, particularly with respect to the environment or with respect to
the petroleum industry, may have a negative impact on certain companies
represented in the Subaccounts. There can be no assurance that future
legislation, regulation or deregulation will not have a material adverse
effect on the Subaccounts or will not impair the ability of the issuers of the
Common Shares to achieve their business goals.
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PERFORMANCE INFORMATION
SUBACCOUNTS OF THE TARGET ACCOUNT--PERFORMANCE DATA
At December 31, 1997 and as of the date of this Prospectus, the Target
Subaccounts had not commenced operations. However, certain aspects of the
investment strategies can be demonstrated using historical data.
The following table contains three columns that show the performance of:
Column One: the Ten Highest Dividend Yielding Stocks Strategy for the
DJIA;
Column Two: Five Lowest Priced Stocks of the Ten Highest Dividend Yielding
Stocks Strategies in the DJIA; and
Column Three: the performance of the DJIA.
The returns shown in the following table and graphs are not guarantees of
future performance and should not be used as predictors of returns to be
expected in connection with a Subaccount. Both stock prices (which may
appreciate or depreciate) and dividends (which may be increased, reduced or
eliminated) will affect the returns. Each strategy under performed its
respective index in certain years. Accordingly, there can be no assurance that
a Subaccount will outperform its respective index over the life of a
Subaccount or over consecutive rollover periods, if available.
An investor in a Subaccount would not necessarily realize as high a total
return on an investment in the stocks upon which the hypothetical returns are
based for the following reasons: the total return figures shown do not reflect
brokerage commissions, Subaccount expenses or taxes; the Subaccounts are
established at different times of the year; and the Subaccounts may not be
fully invested at all times or equally weighted in all stocks comprising a
strategy. If the above-mentioned charges were reflected in the hypothetical
returns, the returns would be lower than those presented here. (See "CHARGES
AND DEDUCTIONS," p. 45.)
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These figures are for calendar years; the Target Account may use different
12-month periods.
COMPARISON OF TOTAL RETURN(/2/)
<TABLE>
<CAPTION>
INDEX
STRATEGY TOTAL RETURNS TOTAL RETURNS
-------------------------------------------------- -------------
5 LOWEST PRICED
10 HIGHEST DIVIDEND OF THE 10 HIGHEST
YEAR YIELDING STOCKS(/1/) DIVIDEND YIELDING STOCKS(/1/) DJIA
- ---- -------------------- ----------------------------- -------------
<S> <C> <C> <C>
1973.......... 4.01% 20.01% (13.20)%
1974.......... (1.02)% (5.40)% (23.64)%
1975.......... 56.10% 64.77% 44.46%
1976.......... 35.18% 40.96% 22.80%
1977.......... (1.95)% 5.49% (12.91)%
1978.......... 0.03% 1.23% 2.66%
1979.......... 13.01% 9.84% 10.60%
1980.......... 27.90% 41.69% 21.90%
1981.......... 7.46% 3.19% (3.61)%
1982.......... 27.12% 43.37% 26.85%
1983.......... 39.07% 36.38% 25.82%
1984.......... 6.22% 11.12% 1.29%
1985.......... 29.54% 38.34% 33.28%
1986.......... 35.63% 30.89% 27.00%
1987.......... 5.59% 10.69% 5.66%
1988.......... 24.57% 21.47% 16.03%
1989.......... 26.97% 10.55% 32.09%
1990.......... (7.82)% (15.74)% (0.73)%
1991.......... 34.20% 62.03% 24.19%
1992.......... 7.69% 22.90% 7.39%
1993.......... 27.08% 34.01% 16.87%
1994.......... 4.21% 8.27% 5.03%
1995.......... 36.85% 30.50% 36.67%
1996.......... 28.35% 26.20% 28.71%
1997.......... 21.68% 19.97% 24.82%
</TABLE>
- ----------------------------
(1) The Ten Highest Dividend Yielding Stocks and the Five Lowest Priced Stocks
of the Ten Highest Dividend Yielding Stocks in the DJIA for any given
period were selected by ranking the dividend yields for each of the stocks
in the index, as of the beginning of the period, and dividing by the
stock's market value on the first trading day on the exchange where that
stock principally trades in the given period.
(2) Total Return represents the sum of the percentage change in market value
of each group of stocks between the first trading day of a period and the
total dividends paid on each group of stocks during the period divided by
the opening market value of each group of stocks as of the first trading
day of a period. Total Return does not take into consideration any sales
charges, commissions, expenses or taxes. Total Return does not take into
consideration any reinvestment of dividend income and all returns are
stated in terms of the United States dollar. Based on the year-by-year
returns contained in the table, over the twenty-five years listed above,
the Ten Highest Dividend Yielding Stocks in the DJIA achieved an average
annual total return of 18.44%, while the Five Lowest Priced Stocks of the
Ten Highest Dividend Yielding Stocks in the DJIA achieved an average
annual total return of 21.39%. In addition, over this period, the
individual strategies achieved a greater average annual total return than
that of the DJIA, which was 13.08%. Although each Target Subaccount seeks
to achieve a better performance than the index as a whole, there can be no
assurance that a Target Subaccount will achieve a better performance.
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PAST PERFORMANCE OF THE DJIA
LOGO
The chart above represents past performance of the DJIA, the Ten Highest
Dividend Yielding DJIA Stocks and the Five Lowest Priced Stocks of the Ten
Highest Yielding DJIA Stocks (but not The Dow Target 10 Subaccount or The Dow
Target 5 Subaccount) from January 1, 1973 through December 31, 1997 and should
not be considered indicative of future results. Further, these results are
hypothetical. The chart assumes that all dividends during a year are
reinvested at the end of that year and does not reflect sales charges,
commissions, expenses or taxes. There can be no assurance that either The Dow
Target 10 Subaccount or The Dow Target 5 Subaccount will outperform the DJIA.
Investors should not rely on the preceding financial information as an
indication of the past or future performance of the Target Subaccounts.
STANDARDIZED PERFORMANCE DATA
From time to time, PFL may advertise historical total returns for the Target
Subaccounts. These figures will be calculated according to standardized
methods prescribed by the SEC. They will be based on historical earnings and
are not intended to indicate future performance.
The total return calculations for a Subaccount do not reflect the effect of
any premium taxes that may be applicable to a particular Policy. To the extent
that any or all of a premium tax is applicable to a particular Policy, the
total return of that Policy will be reduced. For additional information
regarding total returns calculated using the standard formats briefly
summarized above, please refer to the Statement of Additional Information, a
copy of which may be obtained from the Administrative and Service Office upon
request.
NON-STANDARDIZED PERFORMANCE DATA
PFL may from time to time also advertise or disclose average annual total
return or other performance data in non-standard formats for a Target
Subaccount. The non-standardized data may assume that the Policy remains in
force and therefore not reflect the Surrender Charge. The non-standard
performance data may make other assumptions such as the amount invested in a
Subaccount, differences in time periods to be shown, or the effect of partial
withdrawals or annuity payments and may also make other assumptions.
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All non-standard performance data will be advertised only if the standard
performance data is also disclosed. For additional information regarding the
calculation of other performance data, please refer to the Statement of
Additional Information, a copy of which may be obtained from the
Administrative and Service office upon request.
PORTFOLIO TURNOVER
It is anticipated that each Target Subaccount's annual rate of portfolio
turnover normally will not exceed 100%. Portfolio turnover for each Target
Subaccount will vary from year to year, and depending on market conditions,
the portfolio turnover rate could be greater in periods of unusual market
movement. A higher turnover rate would result in heavier brokerage commissions
or other transactional expenses which must be borne, directly or indirectly by
each subaccount, and ultimately by you.
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information is available (at no cost) which
contains more details concerning the subjects discussed in this Prospectus.
The following is the Table of Contents for that Statement:
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TABLE OF CONTENTS
PART I
<TABLE>
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PAGE
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<S> <C>
THE POLICY--GENERAL PROVISIONS............................................. 4
Owner.................................................................... 4
Entire Policy............................................................ 4
Delay of Payment and Transfers........................................... 5
Misstatement of Age or Sex............................................... 5
Reallocation of Policy Values After the Annuity Commencement Date........ 5
Assignment............................................................... 5
Evidence of Survival..................................................... 6
Non-Participating........................................................ 6
Amendments............................................................... 6
Addition, Deletion, or Substitution of Investments....................... 6
FEDERAL TAX MATTERS........................................................ 7
Tax Status of the Policy................................................. 7
Taxation of PFL.......................................................... 7
INVESTMENT EXPERIENCE...................................................... 8
Accumulation Units....................................................... 8
Annuity Unit Value and Annuity Payment Rates............................. 9
HISTORICAL PERFORMANCE DATA................................................ 11
Money Market Yields...................................................... 11
Other Subaccount Yields.................................................. 12
Total Returns............................................................ 13
Other Performance Data................................................... 14
Adjusted Performance Data--The Mutual Fund Account....................... 14
PART II
THE TARGET ACCOUNT......................................................... 14
What is the Investment Strategy?......................................... 14
Determination of Unit Value; Valuation of Securities..................... 15
MANAGEMENT................................................................. 16
The Board of Managers.................................................... 16
The Investment Advisory Services......................................... 19
The Manager.............................................................. 19
Transfer Agent and Custodian............................................. 20
BROKERAGE ALLOCATION....................................................... 20
INVESTMENT RESTRICTIONS.................................................... 20
Fundamental Policies..................................................... 21
Operating Policies....................................................... 21
Options and Futures Strategies........................................... 21
Securities Lending....................................................... 23
PART III
STATE REGULATION OF PFL.................................................... 24
ADMINISTRATION............................................................. 24
RECORDS AND REPORTS........................................................ 24
DISTRIBUTION OF THE POLICIES............................................... 24
OTHER PRODUCTS............................................................. 25
CUSTODY OF ASSETS.......................................................... 25
LEGAL MATTERS.............................................................. 25
OTHER INFORMATION.......................................................... 25
FINANCIAL STATEMENTS....................................................... 26
INDEPENDENT AUDITORS....................................................... 26
</TABLE>
- 74 -
<PAGE>
APPENDIX A
EXCESS INTEREST ADJUSTMENT(1)
The formula which will be used to determine the Excess Interest Adjustment
(EIA) is:
S* (G - C)* (M/12)
S=Gross amount being withdrawn that is subject to the EIA
G=Guaranteed Interest Rate in effect for the policy
C= Current Guaranteed Interest Rate then being offered on new premiums for
the next longer option period than "M". If this policy form or such an
option period is no longer offered, "C" will be the U.S. Treasury rate for
the next longer maturity (in whole years) than "M" on the 25th day of the
previous calendar month, plus up to 2%.
M= Number of months remaining in the current option period, rounded up to the
next higher whole number of months.
EXAMPLE 1 (SURRENDER, RATES INCREASE BY 3%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Surrender: Middle of Contract Year 3
Policy Value at middle of
Contract Year 3
= 50,000* (1.055) R 2.5 = 57,161.18
Penalty Free Amount at
middle of Contract Year 3
= 57,161.18* .10 = 5,716.12
Amount Subject to EIA = 57,161.18 - 5,716.12 = 51,445.06
EIA Floor = 50,000* (1.03) R 2.5 = 53,834.80
Excess Interest Adjustment
G=.055
C=.085
M=30
Excess Interest Adjustment = S* (G - C)* (M/12)
= 51,445.06* (.055 - .085)* (30/12)
= -3,858.38, but Excess Interest Adjustment
cannot cause the Adjusted Policy Value to fall
below the floor, so the adjustment is limited
to 53,834.80 - 57,161.18 = -3,326.38
Adjusted Policy Value = PV + EIA = 57,161.18 + (-3,326.38) =
("APV") 53,834.80
Surrender Charges = (50,000 - 5,716.12)* .06
= 2,657.03
Net Surrender Value at
middle of Contract Year 3
= 53,834.80 - 2,657.03
= 51,177.77
- ----------------------------
(1) * represents multiplication
R represents exponentiation
A-1
<PAGE>
EXAMPLE 2 (SURRENDER, RATES DECREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Surrender: Middle of Contract Year 3
Policy Value at middle of
Contract Year 3
= 50,000* (1.055) R 2.5 = 57,161.18
Penalty Free Amount at
middle of Contract Year 3
= 57,161.18* .10 = 5,716.12
Amount Subject to EIA = 57,161.18 - 5,716.12 = 51,445.06
EIA Floor = 50,000* (1.03) R 2.5 = 53,834.80
Excess Interest Adjustment
G=.055
C=.045
M=30
Excess Interest Adjustment = S* (G - C)* (M/12)
= 51,445.06* (.055 - .045)* (30/12)
= 1,286.13
Adjusted Policy Value = 57,161.18 + 1,286.13 = 58,447.31
Surrender Charges = (50,000 - 5,716.12)* .06
= 2,657.03
Net Surrender Value at
middle of Contract Year 3
= 58,447.31 - 2,657.03
= 55,790.28
On a partial withdrawal, PFL will pay the policy holder the full amount of
withdrawal requested (as long as the Policy Value is sufficient.) Amounts
withdrawn will reduce the Policy Value by an amount equal to:
R - E + SC
R= the requested partial withdrawal;
E= the Excess Interest Adjustment; and
SC= the Surrender Charge on (EPW - E); where
EPW= the Excess Partial Withdrawal amount.
A-2
<PAGE>
EXAMPLE 3 (PARTIAL WITHDRAWAL, RATES INCREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Withdrawal: $20,000; Middle of Contract Year 3
Policy Value at middle of
Contract Year 3
= 50,000* (1.055) R 2.5 = 57,161.18
Penalty Free Amount at
middle of Contract Year 3
= 57,161.18* .10 = 5,716.12
Excess Interest/Surrender Charge (SC) Adjustment
S=20,000 - 5,716.12 = 14,283.88
G=.055
C=.065
M=30
E=14,283.88* (.055 - .065)* (30/12) = -357.10
EPW=20,000 - 5,716.12 = 14,283.88
SC=.06* (14,283.88 - (-357.10)) = 878.46
Remaining Policy Value at
middle of Contract Year 3
= 57,161.18 - (R - E + SC)
= 57,161.18 - (20,000 - (-357.10) + 878.46)
= 35,925.62
A-3
<PAGE>
EXAMPLE 4 (PARTIAL WITHDRAWAL, RATES DECREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Withdrawal: $20,000; Middle of Contract Year 3
Policy Value at middle of
Contract Year 3
= 50,000* (1,055) R 2.5 = 57,161.18
Penalty Free Amount at
middle of Contract Year 3
= 57,161.18* .10 = 5,716.12
Excess Interest/Surrender Charge Adjustment
S=20,000 - 5,716.12 = 14,283.88
G=.055
C=.045
M=30
E=14.283.88* (.055 - .045)* (30/12) = 357.10
EPW=20,000 - 5,716.12 = 14,283.88
SC=.06* (14,283.88 - 357.10) = 835.61
Remaining Policy Value at
middle of Contract Year 3
= 57,161.18 - (R - E + SC)
= 57,161.18 - (20,000 - 357.10 + 835.61)
= 36,682.67
A-4
<PAGE>
APPENDIX B
The dates shown below are the approximate first issue dates of the various
versions of the Policy. These dates will vary by state in many cases. This
Appendix describes certain of the more significant differences in features of
the various versions of the Policy. There may be additional variations. Please
see your actual policy and any attachments for determining your specific
coverage.
<TABLE>
- -------------------------------------------------------------
<S> <C>
Policy Form/Endorsement Approximate First Issue Date
- -------------------------------------------------------------
AV201 101 65 189 (Policy Form) January 1991
- -------------------------------------------------------------
AE830 292 (endorsement) May 1992
- -------------------------------------------------------------
AE847 394 (endorsement) June 1994
- -------------------------------------------------------------
AE871 295 (endorsement) May 1995
- -------------------------------------------------------------
AV254 101 87 196 (Policy Form) June 1996
- -------------------------------------------------------------
AE909 496 (endorsement) June 1996
- -------------------------------------------------------------
AE890 196 (endorsement) June 1996
- -------------------------------------------------------------
AV320 101 99 197 (Policy Form) May 1997
- -------------------------------------------------------------
AE945 197 (endorsement) May 1997
- -------------------------------------------------------------
AV376 101 106 198 (Policy Form) Anticipated: May 1998
- -------------------------------------------------------------
</TABLE>
B-1
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Product AV201 101 65 189 AV201 101 65 189, AV201 101 65 189, AV254 101 87 196, AV320 101 99 197, AV376 101 106 1197,
Feature AE830 292, and AE847 394, and 496, and and AE945 197 and AE 945 197
AE847 394 AE871 295 AE890 196
- ----------------------------------------------------------------------------------------------------------------------------
Excess N/A N/A N/A yes yes yes
Interest
Adjustment
- ----------------------------------------------------------------------------------------------------------------------------
Guaranteed Total Premiums 5% Annually 5% Annually 5% Annually 5% Annually 5% Annually
Minimum Paid, less any Compounding Compounding Compounding Compounding Compounding (Option
Death partial (Option A). (Option A) or (Option A) or (Option A), A), Double Enhanced
Benefit withdrawals and Annual Step-Up Annual Step-Up Annual Step-Up (Option B), or
Option(s) any surrender (Option B). (Option B). (Option B), or Return of Premium
charges made Option A is only Option A is only Return of Premium (Option C). Option
before death, available if available if (Option C). A is only available
accumulated at Owner and Owner and Option A is only if Owner and
4% to the date Annuitant are Annuitant are available if Annuitant are both
we receive due both under age both under age Owner and under age 75.
proof of death 75. 75. Annuitant are Option B is only
or the Policy both under age available if Owner
Value on the 75. Option B is and Annuitant are
date we receive only available if both under age 81.
due proof of Owner and
death, which Annuitant are
ever is greater. under age 81.
- ----------------------------------------------------------------------------------------------------------------------------
Guaranteed 1 and 3 year 1 and 3 year 1 and 3 year 1, 3, 5, and 7 1, 3, 5, and 7 1, 3, 5, and 7 year
Period guaranteed guaranteed guaranteed year guaranteed year guaranteed guaranteed periods
Options periods periods periods periods periods available.
(available available. available. available. available. available.
in the Fixed
Account)
- ----------------------------------------------------------------------------------------------------------------------------
Minimum 4% 4% 4% 3% 3% 3%
effective
annual
interest
rate
applicable
to the fixed
account
- ----------------------------------------------------------------------------------------------------------------------------
Asset N/A N/A N/A Yes Yes Yes
Rebalancing
- ----------------------------------------------------------------------------------------------------------------------------
Death Greater of 1) Greater of (a) Greatest of (a) Greatest of (a) Greatest of (a) Greatest of (a)
Proceeds the Policy Value Policy Value and Annuity Purchase Annuity Purchase Policy Value, (b) Policy Value, (b)
on the date we (b) 5% Annually Value, (b) Cash Value, (b) Cash Cash Value, and Cash Value, and (c)
receive due Compounding Death Value, and (c) Value, and (c) (c) Guaranteed Guaranteed Minimum
proof of death, Benefit Guaranteed Guaranteed Minimum Death Death Benefit.
or 2) the total Minimum Death Minimum Death Benefit.
premiums paid Benefit Benefit.
for this policy,
less any partial
withdrawals and
any surrender
charges made
before death,
accumulated at
4% interest per
annum to the
date we receive
due proof of
death
- ----------------------------------------------------------------------------------------------------------------------------
Distribution N/A N/A N/A N/A Applicable Applicable
Financing
Charge
- ----------------------------------------------------------------------------------------------------------------------------
Is Mortality No No No No No Yes (1.10%, plus
& Expense Administrative
Risk Fee Charge, regardless
different of death benefit
after the chosen prior to the
Annuity Annuity
Commencement Commencement Date)
Date?
- ----------------------------------------------------------------------------------------------------------------------------
Dollar Cost N/A N/A N/A yes yes yes
Averaging
Fixed
Account
Option
</TABLE>
B-2
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Product AV201 101 65 189 AV201 101 65 189, AV201 101 65 189, AV254 101 87 196, AV320 101 99 197, AV376 101 106 1197,
Feature AE830 292, and AE847 394, and 496, and and AE945 197 and AE 945 197
AE847 394 AE871 295 AE890 196
- ---------------------------------------------------------------------------------------------------------------------------
Service $35 assessed on $35 assessed on Assessed only on Assessed only on Assessed either Assessed either on
Charge each Policy each Policy a Policy a Policy on a Policy a Policy
Anniversary. Not Anniversary. Not Anniversary; Anniversary; Anniversary or on Anniversary or on
deducted from deducted from the Waived if Sum of Waived if Sum of Surrender; Waived Surrender; Waived
the Fixed Fixed Account. Premium Payments Premium Payments if Sum of Premium if Sum of Premium
Account. less partial less partial Payments less Payments less
withdrawals is at withdrawals is at partial partial withdrawals
least $50,000 on least $50,000 on withdrawals or or the Policy Value
the Policy the Policy the Policy Value is at least $50,000
Anniversary. Not Anniversary. Not is at least on the Policy
deducted from the deducted from the $50,000 on the Anniversary or at
Fixed Account. Fixed Account. Policy the time of
Anniversary or at Surrender. The
the time of Service Charge is
Surrender. The deducted pro-rata
Service Charge is from the Investment
deducted pro-rata Options.
from the
Investment
Options.
- ---------------------------------------------------------------------------------------------------------------------------
Nursing Care N/A yes yes yes yes yes
and Terminal
Condition
Withdrawal
Option
</TABLE>
B-3
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE ENDEAVOR ML VARIABLE ANNUITY
Issued through
PFL ENDEAVOR VARIABLE ANNUITY ACCOUNTS
Offered by
PFL LIFE INSURANCE COMPANY
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
This statement of additional information expands upon subjects discussed in
the current prospectus for the Endeavor ML Variable Annuity (the "Policy")
offered by PFL Life Insurance company. You may obtain a copy of the Prospectus
dated May 1, 1998 by calling 1-800-525-6205, or by writing to the
Administrative and Service Office, Financial Markets Division--Variable
Annuity Dept., 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001. Terms
used in the current prospectus for the policy are incorporated in this
Statement of Additional Information.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE POLICY AND TARGET
ACCOUNT, ENDEAVOR SERIES TRUST, THE GROWTH PORTFOLIO OF THE WRL SERIES FUND,
INC., AND THE MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Dated: May 1, 1998
- 1 -
<PAGE>
TABLE OF CONTENTS
PART I
<TABLE>
<S> <C>
THE POLICY--GENERAL PROVISIONS.............................................. 4
Owner..................................................................... 4
Entire Policy............................................................. 4
Delay of Payment and Transfers............................................ 5
Misstatement of Age or Sex................................................ 5
Reallocation of Policy Values After the Annuity Commencement Date......... 5
Assignment................................................................ 5
Evidence of Survival...................................................... 6
Non-Participating......................................................... 6
Amendments................................................................ 6
Addition, Deletion, or Substitution of Investments........................ 6
FEDERAL TAX MATTERS......................................................... 7
Tax Status of the Policy.................................................. 7
Taxation of PFL........................................................... 7
INVESTMENT EXPERIENCE....................................................... 8
Accumulation Units........................................................ 8
Annuity Unit Value and Annuity Payment Rates.............................. 9
HISTORICAL PERFORMANCE DATA................................................. 11
Money Market Yields....................................................... 11
Other Subaccount Yields................................................... 12
Total Returns............................................................. 13
Other Performance Data.................................................... 14
Adjusted Performance Data--The Mutual Fund Account........................ 14
PART II
THE TARGET ACCOUNT.......................................................... 14
What is the Investment Strategy?.......................................... 14
Determination of Unit Value; Valuation of Securities...................... 15
MANAGEMENT.................................................................. 16
The Board of Managers..................................................... 16
The Investment Advisory Services.......................................... 19
The Manager............................................................... 19
Transfer Agent and Custodian.............................................. 20
BROKERAGE ALLOCATION........................................................ 20
INVESTMENT RESTRICTIONS..................................................... 20
Fundamental Policies...................................................... 21
Operating Policies........................................................ 21
Options and Futures Strategies............................................ 21
Securities Lending........................................................ 23
PART III
STATE REGULATION OF PFL..................................................... 24
ADMINISTRATION.............................................................. 24
RECORDS AND REPORTS......................................................... 24
DISTRIBUTION OF THE POLICIES................................................ 24
CUSTODY OF ASSETS........................................................... 25
OTHER PRODUCTS.............................................................. 25
</TABLE>
- 2 -
<PAGE>
<TABLE>
<S> <C>
LEGAL MATTERS............................................................... 25
OTHER INFORMATION........................................................... 25
FINANCIAL STATEMENTS........................................................ 26
INDEPENDENT AUDITORS........................................................ 26
</TABLE>
- 3 -
<PAGE>
In order to supplement the description in the Prospectus, the following
provides additional information about the Policy which may be of interest to
you. Part I of this Statement of Additional Information provides additional
information regarding the Policy. Part II of this Statement of Additional
Information (beginning on p. 14) provides information regarding the operations
and investment activities of the Target Account, including its investment
policies. Part III provides miscellaneous additional information about PFL and
the Accounts.
PART I
THE POLICY--GENERAL PROVISIONS
OWNER
The Policy shall belong to you, as the Owner, upon issuance of the Policy
after completion of an application and delivery of the initial Premium
Payment. While the Annuitant is living, you may: (1) assign the Policy; (2)
surrender the Policy; (3) amend or modify the Policy with PFL's consent; (4)
receive annuity payments or name a Payee to receive the payments; and (5)
exercise, receive and enjoy every other right and benefit contained in the
Policy. The exercise of these rights may be subject to the consent of any
assignee or irrevocable Beneficiary; and of your spouse in a community or
marital property state.
Unless PFL been notified of a community or marital property interest in the
Policy, it will rely on its good faith belief that no such interest exists and
will assume no responsibility for inquiry.
A Successor Owner can be named in the Policy application or information
provided in lieu thereof or in a Written Notice. The Successor Owner will
become the new Owner upon the your death, if you predecease the Annuitant. If
no Successor Owner survives you and you predecease the Annuitant, your estate
will become the Owner.
You may change the ownership of the Policy in a Written Notice. When this
change takes effect, all rights of ownership in the Policy will pass to the
new Owner. A change of ownership may have adverse tax consequences.
When there is a change of Owner or Successor Owner, the change will take
effect as of the date the Owner signs the Written Notice, subject to any
payment PFL has made or action PFL has taken before recording the change.
Changing the Owner or naming a new Successor Owner cancels any prior choice of
Successor Owner, but does not change the designation of the Beneficiary or the
Annuitant.
If ownership is transferred (except to your spouse) because you die before
the Annuitant, the Cash Value generally must be distributed to the Successor
Owner within five years of your death, or payments must be made for a period
certain or for the Successor Owner's lifetime so long as any period certain
does not exceed that Successor Owner's life expectancy, if the first payment
begins within one year of your death.
ENTIRE POLICY
The Policy and any endorsements thereon and the Policy application (or
information provided in lieu thereof) constitute the entire contract between
PFL and you. All statements in the application are representations and not
warranties. No statement will cause the Policy to be void or to be used in
defense of a claim unless contained in the application or information provided
in lieu thereof.
- 4 -
<PAGE>
DELAY OF PAYMENT AND TRANSFERS
Payment of any amount due from the Mutual Fund Account or the Target Account
in respect of a surrender, partial withdrawal, the Death Benefit or the death
of the Owner of a Nonqualified Policy generally will occur within seven
business days from the date the Written Notice (and any other required
documentation or information) is received, except that PFL may be permitted to
defer such payment from the Mutual Fund Account or the Target Account if: (1)
the New York Stock Exchange is closed for other than usual weekends or
holidays or trading on the Exchange is otherwise restricted; or (2) an
emergency exists as defined by the Securities and Exchange Commission (the
"SEC")or the SEC requires that trading be restricted; or (3) the SEC permits a
delay for your protection. In addition, transfers of amounts from the
Subaccounts may be deferred under these circumstances.
Certain delays and restrictions apply to transfers of amounts out of the
Fixed Account. See "The Endeavor Accounts--The Fixed Account," p. 29 of the
Prospectus.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Annuitant or Owner has been misstated, PFL will
change the annuity benefit payable to that which the Premium Payments would
have purchased for the correct age or sex. The dollar amount of any
underpayment made by PFL shall be paid in full with the next payment due such
person or the Beneficiary. The dollar amount of any overpayment made by PFL
due to any misstatement shall be deducted from payments subsequently accruing
to such person or Beneficiary. Any underpayment or overpayment will include
interest at 5% per year, from the date of the wrong payment to the date of the
adjustment. The age of the Annuitant or Owner may be established at any time
by the submission of proof satisfactory to PFL.
REALLOCATION OF POLICY VALUES AFTER THE ANNUITY COMMENCEMENT DATE
After the Annuity Commencement Date, you may reallocate the value of a
designated number of Annuity Units of a Subaccount of the Mutual Fund Account
("Mutual Fund Subaccount")or of a Subaccount of the Target Account ("Target
Subaccount") then credited to a Policy into an equal value of Annuity Units of
one or more other Mutual Fund Subaccounts, Target Subaccounts, or the Fixed
Account. The reallocation shall be based on the relative value of the Annuity
Units of the Account(s) or Subaccount(s) at the end of the Business Day on the
next payment date. The minimum amount which may be reallocated is the lesser
of (1) $10 of monthly income or (2) the entire monthly income of the Annuity
Units in the Account or Subaccount from which the transfer is being made. If
the monthly income of the Annuity Units remaining in an Account or Subaccount
after a reallocation is less than $10, PFL reserves the right to include the
value of those Annuity Units as part of the transfer. The request must be in
writing to PFL's Administrative and Service Office. There is no charge
assessed in connection with such reallocation. PFL reserves the right to limit
the number of times a reallocation of Annuity Units may be made in any given
Policy Year.
ASSIGNMENT
During the lifetime of the Annuitant you may assign any rights or benefits
provided by the Policy. An assignment will not be binding on PFL until a copy
has been filed at its Administrative and Service Office. Your rights and
benefits and those of the Beneficiary are subject to the rights of the
assignee. PFL assumes no responsibility for the validity or effect of any
assignment. Any claim made under an assignment shall be subject to proof of
interest and the extent of the assignment. An assignment may have tax
consequences.
- 5 -
<PAGE>
Unless you so direct by filing Written Notice with PFL, no Beneficiary may
assign any payments under the Policy before they are due. To the extent
permitted by law, no payments will be subject to the claims of any
Beneficiary's creditors.
EVIDENCE OF SURVIVAL
PFL reserves the right to require satisfactory evidence that a person is
alive if a payment is based on that person being alive. No payment will be
made until PFL receives such evidence.
NON-PARTICIPATING
The Policy will not share in PFL's surplus earnings; no dividends will be
paid.
AMENDMENTS
No change in the Policy is valid unless made in writing by PFL and approved
by one of PFL's officers. No Registered Representative has authority to change
or waive any provision of the Policy.
PFL reserves the right to amend the Policies to meet the requirements of the
Internal Revenue Code (the "Code"), regulations or published rulings. You can
refuse such a change by giving Written Notice, but a refusal may result in
adverse tax consequences.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
PFL cannot and does not guarantee that any of the Portfolios or Subaccounts
will always be available for Premium Payments, allocations, or transfers. PFL
retains the right, subject to any applicable law, to make certain changes in
the Mutual Fund Account and its investments. PFL reserves the right to
eliminate the shares of any Portfolio held by a Mutual Fund Subaccount and to
substitute shares of another Portfolio of the Underlying Funds, or of another
registered open-end management investment company for the shares of any
Portfolio, if the shares of the Portfolio are no longer available for
investment or if, in PFL's judgment, investment in any Portfolio would be
inappropriate in view of the purposes of the Mutual Fund Account. To the
extent required by the 1940 Act, substitutions of shares attributable to your
interest in a Mutual Fund Subaccount will not be made without prior notice to
you and the prior approval of the SEC. PFL retains the right, subject to any
applicable law, to make certain changes in the Target Account and its
investments. PFL reserves the right to eliminate a Target Subaccount if, in
PFL's judgment, investment in any Target Subaccount would be inappropriate in
view of the purposes of the Policy. Nothing contained herein shall prevent the
Mutual Fund Account from purchasing other securities for other series or
classes of variable annuity policies, or from effecting an exchange between
series or classes of variable annuity policies on the basis of your requests.
New Subaccounts may be established when, in the sole discretion of PFL,
marketing, tax, investment or other conditions warrant. Any new Subaccounts
may be made available to existing Owners on a basis to be determined by PFL.
Each additional Subaccount will purchase shares in a mutual fund portfolio,
other investment vehicle, or, in the case of the Target Account, in shares of
common stock. PFL may also eliminate one or more Subaccounts if, in its sole
discretion, marketing, tax, investment or other conditions warrant such
change. In the event any Subaccount is eliminated, PFL will notify you and
request a reallocation of the amounts invested in the eliminated Subaccount.
If no such reallocation is provided by you, PFL will reinvest the amounts in
the Subaccount that invests in the Endeavor Money Market Portfolio (or in a
similar portfolio of money market instruments), in another Subaccount, or in
the Fixed Account, if appropriate.
- 6 -
<PAGE>
In the event of any such substitution or change, PFL may, by appropriate
endorsement, make such changes in the Policies as may be necessary or
appropriate to reflect such substitution or change. Furthermore, if deemed to
be in the best interests of persons having voting rights under the Policies,
the Mutual Fund Account may be (i) operated as a management company under the
1940 Act or any other form permitted by law, (ii) deregistered under the 1940
Act in the event such registration is no longer required or (iii) combined
with one or more other separate accounts, and the Target Account may be (i)
operated in any form permitted by law, (ii) deregistered under the 1940 Act in
the event such registration is no longer required or (iii) combined with one
or more other separate accounts. To the extent permitted by applicable law,
PFL also may transfer the assets of the Mutual Fund Account or the Target
Account associated with the Policies to another account or accounts.
FEDERAL TAX MATTERS
TAX STATUS OF THE POLICY
Distribution Requirements. The Code requires that Nonqualified Policies
contain specific provisions for distribution of Policy proceeds upon the death
of any Owner. In order to be treated as an annuity contract for federal income
tax purposes, the Code requires that such Policies provide that if any Owner
dies on or after the Annuity Commencement Date and before the entire interest
in the Policy has been distributed, the remaining portion must be distributed
at least as rapidly as under the method in effect on such Owner's death. If
any Owner dies before the Annuity Commencement Date, the entire interest in
the Policy must generally be distributed within 5 years after such Owner's
date of death or be used to purchase an immediate annuity under which payments
will begin within one year of such Owner's death and will be made for the life
of the Beneficiary or for a period not extending beyond the life expectancy of
the "Designated Beneficiary" as defined in section 72(s) of the Code. However,
if upon such Owner's death prior to the Annuity Commencement Date, such
Owner's surviving spouse becomes the sole new Owner under the Policy, then the
Policy may be continued with the surviving spouse as the new Owner. Under the
Policy, the Beneficiary is the Designated Beneficiary of an Owner/Annuitant
and the Successor Owner is the Designated Beneficiary of an Owner who is not
the Annuitant. If any Owner is not a natural person, then for purposes of
these distribution requirements, the primary Annuitant shall be treated as the
Owner and any death or change of such primary Annuitant shall be treated as
the death of the Owner. The Nonqualified Policies contain provisions intended
to comply with these requirements of the Code. No regulations interpreting
these requirements of the Code have yet been issued and thus no assurance can
be given that the provisions contained in the Policies satisfy all such Code
requirements. The provisions contained in the Policies will be reviewed and
modified if necessary to assure that they comply with the Code requirements
when clarified by regulation or otherwise.
TAXATION OF PFL
PFL at present is taxed as a life insurance company under part I of
Subchapter L of the Code. The Mutual Fund Account and the Target Account are
treated as part of PFL and, accordingly, will not be taxed separately as
"regulated investment companies" under Subchapter M of the Code. PFL does not
expect to incur any federal income tax liability with respect to investment
income and net capital gains arising from the activities of the Mutual Fund
Account or the Target Account retained as part of the reserves under the
Policy. Based on this expectation, it is anticipated that no charges will be
made against the Mutual Fund Account or the Target Account for federal income
taxes. If, in future years, any federal income taxes are incurred by PFL with
respect to the Mutual Fund Account or the Target Account, PFL may make a
charge to that Account.
- 7 -
<PAGE>
INVESTMENT EXPERIENCE
A "Net Investment Factor" is used to determine the value of Accumulation
Units and Annuity Units, and to determine annuity payment rates.
ACCUMULATION UNITS
Upon allocation to the selected Mutual Fund Subaccount or Target Subaccount,
Premium Payments are converted into Accumulation Units of the Subaccount. The
number of Accumulation Units to be credited is determined by dividing the
dollar amount allocated to each Subaccount by the value of an Accumulation
Unit for that Subaccount as next determined after the Premium Payment is
received at the Administrative and Service Office or, in the case of the
initial Premium Payment, when the Policy application is completed, whichever
is later. The value of an Accumulation Unit was arbitrarily established at $1
(except the WRL Growth Subaccount and the Target Subaccounts which were
established at $10) at the inception of each Subaccount. Thereafter, the value
of an Accumulation Unit is determined as of the close of trading on each day
the New York Stock Exchange and PFL's Administrative and Service Office are
open for business.
For the Mutual Fund Account, an index (the "Net Investment Factor") which
measures the investment performance of a Subaccount during a Valuation Period
is used to determine the value of an Accumulation Unit for the next subsequent
Valuation Period. The Net Investment Factor may be greater or less than or
equal to one; therefore, the value of an Accumulation Unit may increase,
decrease or remain the same from one Valuation Period to the next. You bear
this investment risk. The Net Investment Performance of a Subaccount and
deduction of certain charges affect the Accumulation Unit Value.
The Net Investment Factor for any Mutual Fund Subaccount for any Valuation
Period is determined by dividing (a) by (b) and subtracting (c) from the
result, where:
(a) is the net result of:
(1) the net asset value per share of the shares held in the
Subaccount determined at the end of the current Valuation Period, plus
(2) the per share amount of any dividend or capital gain distribution
made with respect to the shares held in the Subaccount if the ex-
dividend date occurs during the current Valuation Period, plus or minus
(3) a per share credit or charge for any taxes determined by PFL to
have resulted during the Valuation Period from the investment
operations of the Subaccount;
(b) is the net asset value per share of the shares held in the Subaccount
determined as of the end of the immediately preceding Valuation Period.
(c) is the charge for Mortality and Expense Risk during the Valuation
Period, equal on an annual basis to 1.25% (for both the 5% Annually
Compounding Death Benefit and the Double Enhanced Death Benefit) and 1.10%
(for the Return of Premium Death Benefit) of the daily net asset value of
the Subaccount, plus the .15% Administrative Charge plus the Distribution
Financing Charge of .15%. The Distribution Financing Charge is assessed
only during the first seven Policy Years and prior to the Annuity
Commencement Date.
- 8 -
<PAGE>
ILLUSTRATION OF MUTUAL FUND ACCOUNT ACCUMULATION UNIT VALUE CALCULATIONS
FORMULA AND ILLUSTRATION FOR DETERMINING THE NET INVESTMENT FACTOR
Net Investment Factor = (A + B - C) - E
-----------
D
Where: A = The Net Asset Value of an Underlying Fund share as of the end of
the current Valuation Period.
Assume..........................................A = $11.57
B = The per share amount of any dividend or capital gains
distribution since the end of the immediately preceding
Valuation Period.
Assume...............................................B = 0
C = The per share charge or credit for any taxes reserved for at the
end of the current Valuation Period.
Assume...............................................C = 0
D = The Net Asset Value of an Underlying Fund share at the end of the
immediately preceding Valuation Period.
Assume..........................................D = $11.40
E = The daily deduction for the Mortality and Expense Risk Fee, the
Administrative Charge, and the Distribution Financing Charge,
which totals 1.55% on an annual basis for the first seven years
and 1.40% thereafter. On a daily basis, E equals .0000421409 for
the first seven years and .0000380909 thereafter.
Then, the Net Investment Factor = (11.57 + 0 - 0) -
---------------
(11.40)
.0000421409 = Z = 1.0148701398
for the first seven years, and (11.57 + 0 - 0) - .0000380909 = 1.0148741898
---------------
11.40
thereafter.
FORMULA AND ILLUSTRATION FOR DETERMINING ACCUMULATION UNIT VALUE
Accumulation Unit Value = A X B
Where: A = The Accumulation Unit Value for the immediately preceding
Valuation Period.
Assume.............................................. = $ X
B = The Net Investment Factor for the current Valuation Period.
Assume................................................ = Y
Then, the Accumulation Unit Value = $ X X Y = $ Z
ANNUITY UNIT VALUE AND ANNUITY PAYMENT RATES
For both the Mutual Fund Account and the Target Account, the amount of
Variable Annuity Payments will vary with Annuity Unit Values. Annuity Unit
Values rise if the net investment performance of the Subaccount exceeds the
assumed interest rate of 5% annually. Conversely, Annuity Unit Values fall if
the net investment performance of the Subaccount is less than the assumed
rate. The value of a variable Annuity Unit in each Subaccount was established
at $1.00 on the date operations began for that Subaccount. For the Mutual Fund
Account, the value of a
- 9 -
<PAGE>
variable Annuity Unit on any subsequent Business Day is equal to (a)
multiplied by (b) multiplied by (c), where:
(a) is the variable Annuity Unit Value on the immediately preceding
Business Day;
(b) is the Net Investment Factor for the valuation period; and
(c) is the investment result adjustment factor for the valuation period.
The investment result adjustment factor for the valuation period is the
product of discount factors of .99986634 per day to recognize the 5% effective
annual Assumed Investment Return. The valuation period is the period from the
close of the immediately preceding Business Day to the close of the current
Business Day.
For the Target Account, at the end of each Valuation Period, the Annuity
Unit Value is established by multiplying the value of an Annuity Unit
determined at the end of the immediately preceding Valuation Period by a Net
Investment Factor for the current Valuation Period, and then multiplying that
product by an investment result adjustment factor for the purpose of
offsetting the effect of an Assumed Investment Return of 5.0% per annum which
is assumed in the Annuity Conversion Rates for the Contracts. The Net
Investment Factor for the Target Subaccounts is very similar to the Net
Investment Factor for the Mutual Fund Account, except that it is based upon
the value of the assets in the subaccount instead of the net asset value for a
mutual fund share. The Net Investment Factor includes a charge for mortality
and expense risks, that is, the Mortality and Expense Risk Fee, and
Administrative Charge (see "Charges and Deductions" at page 58 of the
Prospectus).
The dollar amount of subsequent Variable Annuity Payments will depend upon
changes in applicable Annuity Unit Values.
The annuity payment rates vary according to the Annuity Option elected and
the sex and adjusted age of the Annuitant at the Annuity Commencement Date.
The Policy also contains a table for determining the adjusted age of the
Annuitant.
ILLUSTRATION OF CALCULATIONS FOR ANNUITY UNIT VALUE
AND VARIABLE ANNUITY PAYMENTS
FORMULA AND ILLUSTRATION FOR DETERMINING ANNUITY UNIT VALUE
Annuity Unit Value = A X B X C
Where: A = Annuity Unit Value for the immediately preceding Valuation Period.
Assume.............................................. = $ X
B = Net Investment Factor for the Valuation Period for which the
Annuity Unit Value is being calculated.
Assume................................................ = Y
C = A factor to neutralize the assumed interest rate of 5% built into
the Annuity Tables used.
Assume................................................ = Z
Then, the Annuity Unit Value is:
$ X X Y X Z = $ Q
- 10 -
<PAGE>
FORMULA AND ILLUSTRATION FOR DETERMINING AMOUNT OF FIRST MONTHLY VARIABLE
ANNUITY PAYMENT
First Monthly Variable Annuity Payment = A X B
------
$1,000
Where: A = The Adjusted Policy Value as of the Annuity Commencement Date.
Assume.............................................. = $ X
B = The Annuity purchase rate per $1,000 of Adjusted Policy Value
based upon the option selected, the sex and adjusted age of the
Annuitant according to the tables contained in the Policy.
Assume.............................................. = $ Y
Then, the first Monthly Variable Annuity
Payment = $ X X $ Y = $ Z
---------
1,000
FORMULA AND ILLUSTRATION FOR DETERMINING THE NUMBER OF ANNUITY UNITS
REPRESENTED BY EACH MONTHLY VARIABLE ANNUITY PAYMENT
Number of Annuity Units = A
---
B
Where: A = The dollar amount of the first monthly Variable Annuity Payment.
Assume.............................................. = $ X
B = The Annuity Unit Value for the Valuation Date on which the first
monthly payment is due.
Assume.............................................. = $ Y
Then, the number of Annuity Units $ X = Z
---
$ Y
HISTORICAL PERFORMANCE DATA
MONEY MARKET YIELDS
PFL may from time to time disclose the current annualized yield of the
Endeavor Money Market Subaccount, which invests in the Endeavor Money Market
Portfolio, for a 7-day period in a manner which does not take into
consideration any realized or unrealized gains or losses on shares of the
Endeavor Money Market Portfolio or on its portfolio securities. This current
annualized yield is computed by determining the net change (exclusive of
realized gains and losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment income) at the
end of the 7-day period in the value of a hypothetical account having a
balance of 1 unit of the Endeavor Money Market Subaccount at the beginning of
the 7-day period, dividing such net change in account value by the value of
the account at the beginning of the period to determine the base period
return, and annualizing this quotient on a 365-day basis. The net change in
account value reflects (i) net income from the Portfolio attributable to the
hypothetical account; and (ii) charges and deductions imposed under a Policy
that are attributable to the hypothetical account. The charges and deductions
include the per unit charges for the hypothetical account for (i) the
Administrative Charges; (ii) the Mortality and Expense Risk Fee,
- 11 -
<PAGE>
and (iii) the Distribution Financing Charge. Current Yield will be calculated
according to the following formula:
Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
NCS = The net change in the value of the Portfolio (exclusive of realized
gains and losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment
income) for the 7-day period attributable to a hypothetical account
having a balance of 1 Subaccount unit.
ES = Per unit expenses of the Subaccount for the 7-day period.
UV = The unit value on the first day of the 7-day period.
Because of the charges and deductions imposed under a Policy, the yield for
the Endeavor Money Market Subaccount will be lower than the yield for the
Endeavor Money Market Portfolio. The yield calculations do not reflect the
effect of any premium taxes that may be applicable to a particular Policy.
PFL may also disclose the effective yield of the Endeavor Money Market
Subaccount for the same 7-day period, determined on a compounded basis. The
effective yield is calculated by compounding the base period return according
to the following formula:
Effective Yield = (1 + ((NCS - ES)/UV))/365/7/ - 1
Where:
NCS = The net change in the value of the Portfolio (exclusive of realized
gains and losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment
income) for the 7-day period attributable to a hypothetical account
having a balance of 1 Subaccount unit.
ES = Per unit expenses of the Subaccount for the 7-day period.
UV = The unit value on the first day of the 7-day period.
The yield on amounts held in the Endeavor Money Market Subaccount normally
will fluctuate on a daily basis. Therefore, the disclosed yield for any given
past period is not an indication or representation of future yields or rates
of return. The Endeavor Money Market Subaccount's actual yield is affected by
changes in interest rates on money market securities, average portfolio
maturity of the Endeavor Money Market Portfolio, the types and quality of
portfolio securities held by the Endeavor Money Market Portfolio and its
operating expenses. For the seven days ended December 31, 1997, the yield of
the Endeavor Money Market Subaccount was 3.054%, and the effective yield was
3.100% for the 5% Annually Compounding Death Benefit and the Double Enhanced
Death Benefit. For the seven days ended December 31, 1997, the yield of the
Endeavor Money Market Subaccount was 3.199%, and the effective yield was
3.250% for the Return of Premium Death Benefit.
OTHER SUBACCOUNT YIELDS
PFL may from time to time advertise or disclose the current annualized yield
of one or more of the Mutual Fund Subaccounts and the Target Subaccounts
(except the Endeavor Money Market Subaccount) for 30-day periods. The
annualized yield of a Subaccount refers to income generated by the Subaccount
over a specific 30-day period. Because the yield is annualized, the yield
generated by a Subaccount during the 30-day period is assumed to be generated
each 30-day period over a 12-month period. The yield is computed by: (i)
dividing the net investment income of the Subaccount less Subaccount expenses
for the period, by (ii) the maximum offering price per unit on the last day of
the period times the daily average number of units outstanding for the
- 12 -
<PAGE>
period, (iii) compounding that yield for a 6-month period, and (iv)
multiplying that result by 2. Expenses attributable to the Subaccount include
(i) the Administrative Charges; (ii) the Mortality and Expense Risk Fee; and
(iii) the Distribution Financing Charge. The 30-day yield is calculated
according to the following formula:
Yield = 2 X ((((NI - ES)/(U X UV)) + 1)/6/ - 1)
Where:
NI = Net investment income of the Subaccount for the 30-day period
attributable to the Subaccount's unit.
ES = Expenses of the Subaccount for the 30-day period.
U = The average number of units outstanding.
UV = The unit value at the close (highest) of the last day in the 30-day
period.
Because of the charges and deductions imposed by the Mutual Fund Account,
the yield for a Mutual Fund Subaccount will be lower than the yield for its
corresponding Portfolio. The yield calculations do not reflect the effect of
any premium taxes that may be applicable to a particular Policy.
The yield on amounts held in the Mutual Fund Subaccounts and the Target
Subaccounts normally will fluctuate over time. Therefore, the disclosed yield
for any given past period is not an indication or representation of future
yields or rates of return. A Subaccount's actual yield is affected by the
types and quality of its investments and its operating expenses.
TOTAL RETURNS
PFL may from time to time also advertise or disclose total returns for one
or more of the Mutual Fund Subaccounts or the Target Subaccounts for various
periods of time. One of the periods of time will include the period measured
from the date the Subaccount commenced operations. When a Subaccount has been
in operation for 1, 5 and 10 years, respectively, the total return for these
periods will be provided. Total returns for other periods of time may from
time to time also be disclosed. Total returns represent the average annual
compounded rates of return that would equate an initial investment of $1,000
to the redemption value of that investment as of the last day of each of the
periods. The ending date for each period for which total return quotations are
provided will be for the most recent month end practicable, considering the
type and media of the communication and will be stated in the communication.
Total returns will be calculated using Subaccount Unit Values which PFL
calculates on each Business Day based on the performance of the Mutual Fund
Account's underlying Portfolio, and the Target Subaccount's common shares, and
the deductions for the Mortality and Expense Risk Fee, the Distribution
Financing Charges, and the Administrative Charges. The total return for each
Target Subaccount will also reflect the Manager's Fee and other operating
expenses. Total return calculations will reflect the effect of Surrender
Charges that may be applicable to a particular period. The total return will
then be calculated according to the following formula:
P (1 + T)/n/ = ERV
Where:
T = The average annual total return net of Subaccount recurring charges.
ERV = The ending redeemable value of the hypothetical account at the end of
the period.
P = A hypothetical initial payment of $1,000.
N = The number of years in the period.
- 13 -
<PAGE>
OTHER PERFORMANCE DATA
PFL may from time to time also disclose average annual total returns in a
non-standard format in conjunction with the standard format described above.
The non-standard format will be identical to the standard format except that
the surrender charge percentage will be assumed to be 0%.
PFL may from time to time also disclose cumulative total returns in
conjunction with the standard format described above. The cumulative returns
will be calculated using the following formula.
CTR = (ERV / P) - 1
Where:
CTR = The cumulative total return net of Subaccount recurring charges for
the period.
ERV = The ending redeemable value of the hypothetical investment at the end
of the period.
P = A hypothetical initial payment of $1,000.
All non-standard performance data will only be advertised if the standard
performance data for the same period, as well as for the required period, is
also disclosed.
ADJUSTED PERFORMANCE DATA--THE MUTUAL FUND ACCOUNT
From time to time, sales literature or advertisements may quote average
annual total returns for periods prior to the date a particular Mutual Fund
Subaccount commenced operations. Such performance information for the Mutual
Fund Subaccounts will be calculated based on the performance of the various
Portfolios and the assumption that the Mutual Fund Subaccounts were in
existence for the same periods as those indicated for the Portfolios, with the
level of Policy charges that are currently in effect.
PART II
THE TARGET ACCOUNT
WHAT IS THE INVESTMENT STRATEGY?
The objective of each of the Target Subaccounts is to provide an above-
average total return through a combination of dividend income and capital
appreciation. While the objectives of the Target Subaccounts are the same,
each Target Subaccount follows a different investment strategy (set forth
below) in order to achieve its stated objective.
Each Target Subaccount will initially invest in equal amounts in the common
stock described below for each Target Subaccount (the "Common Shares")
determined as of a specified business day (the "Initial Stock Selection
Date"). The Dow Target 10 Subaccount will invest in the common stock of the
ten companies in the Dow Jones Industrial Average (the "DJIA") that have the
highest dividend yield. The Dow Target 5 Subaccount will invest in the common
stock of the five companies with the lowest per share stock price of the ten
companies in The Dow Target 10 Subaccount. These stocks will be held for one
year.
At the Initial Stock Selection Date, a percentage relationship among the
number of Common Shares in a Target Subaccount will be established. When
additional funds are deposited into the Target Subaccount, additional Common
Shares will be purchased in such numbers reflecting as
- 14 -
<PAGE>
nearly as practicable the percentage relationship of the number of Common
Shares established at the initial purchase. Sales of Common Shares by the
Target Subaccount will likewise attempt to replicate the percentage
relationship of Common Shares. The percentage relationship among the number of
Common Shares in the Target Subaccount should therefore remain stable.
However, given the fact that the market price of such Common Shares will vary
throughout the year, the value of the Common Shares of each of the companies
as compared to the total assets of the Target Subaccount will fluctuate during
the year, above and below the proportion established on a Stock Selection
Date. On the last Business Day of the 12-month period following the preceding
Stock Selection Date ("Annual Stock Selection Date"), a new percentage
relationship will be established among the number of Common Shares described
above for each Target Subaccount on such date. Common Shares may be sold or
new equity securities bought so that the Target Subaccount is equally invested
in the common stock of each company meeting the Target Subaccount's investment
criteria. Thus the Target Subaccount may or may not hold equity securities of
the same companies as the previous year. Any purchase or sale of additional
Common Shares during the year will duplicate, as nearly as practicable, the
percentage relationship among the number of Common Shares as of the Annual
Stock Selection Date since the relationship among the value of the Common
Shares on the date of any subsequent transactions may be different than the
original relationship among their value.
The yield for each equity security listed on the DJIA is calculated by
annualizing the last quarterly or semi-annual ordinary dividend declared and
dividing the result by the market value of such equity security as of the
close of business on the Stock Selection Date.
The publishers of the DJIA are not affiliated with PFL, Endeavor, or First
Trust Advisers L.P. and have not participated in the creation of the Target
Subaccounts or the selection of the equity securities included therein. Any
changes in the components of any of the respective indices made after a Stock
Selection Date will not cause a change in the identity of the Common Shares
included in a Target Subaccount, including any additional Common Shares
purchased thereafter, until the next Annual Stock Selection Date.
Investors should note that the above criteria were applied and will in the
future be applied to the Common Shares selected for inclusion in the Target
Subaccounts as of the respective Stock Selection Date. Additional Common
Shares which were originally selected through this process may be purchased
throughout the year, as investors may continue to invest in the Target
Subaccounts, even though the yields on these Common Shares may have changed
subsequent to the previous Stock Selection Date. These Common Shares may no
longer be included in the index, or may not meet a Target Subaccount's
selection criteria at that time, and therefore, such Common Shares would no
longer be chosen for inclusion in the Target Subaccounts if the selection
process were to be performed again at that time. The equity securities
selected as Common Shares and the percentage relationship among the number of
shares will not change for purchase or sales by a Target Subaccount until the
next Annual Stock Selection Date.
DETERMINATION OF UNIT VALUE; VALUATION OF SECURITIES
PFL determines the Unit Value of each Target Subaccount each Business Day.
This daily determination of Unit Value is made as of the close of regular
trading on the New York Stock Exchange, currently 4:00 p.m. New York time
unless the Exchange closes earlier, by dividing the total assets of a Target
Subaccount less all of its liabilities, by the total number of units
outstanding at the time the determination is made. Purchases and redemptions
will be effected at the time of determination of Unit Value next following the
receipt of any purchase or redemption order deemed to be in good order.
- 15 -
<PAGE>
Equity securities are valued at the last sale price on the exchange on which
they are primarily traded or at the ask price on the NASDAQ system for
unlisted national market issues, or at the last quoted bid price for
securities in which there were no sales during the day or for unlisted
securities not reported on the NASDAQ system. Short-term obligations which
mature in 60 days or less are valued at amortized cost, which approximates
fair value as determined by the Board of Managers. Futures and option
contracts that are traded on commodities or securities exchanges are normally
valued at the settlement price on the exchange on which they are traded.
Securities (other than short-term obligations) for which there are no such
quotations or valuations are valued at fair value as determined in good faith
by or at the direction of the Board of Managers of the Target Subaccounts.
MANAGEMENT
THE BOARD OF MANAGERS
The members of the Board of Managers of the Target Account, and their
principal occupations during the past five years are set forth below. Their
titles may have varied during that period. Unless otherwise indicated, the
address of each member is 2101 East Coast Highway, Suite 300, Corona del Mar,
California 92625.
<TABLE>
<CAPTION>
NAME, AGE AND ADDRESS HELD WITH REGISTRANT DURING PAST 5 YEARS
--------------------- ------------------------ ------------------------------------
<S> <C> <C>
*+Vincent J. McGuinness, President and Manager From January, 1997 to December 1997,
Jr. (32) Executive Vice-President of
Operations and since December, 1997,
Chief Financial Officer of Endeavor
Group; from September, 1996 to June,
1997, Chief Financial Officer and
since May, 1996, Director, and since
June, 1997, Executive Vice
President--Administration of
Endeavor Management Co.; since
August, 1996, Chief Financial
Officer of VJM Corporation; from
May, 1996 to January 1997, Executive
Vice President and Director of
Sales, Western Division of Endeavor
Group; since May, 1996, Chief
Financial Officer of McGuinness &
Associates; from July, 1993 to
August, 1995 Rocky Mountain Regional
Marketing Director for Endeavor
Group; President and Trustee of
Endeavor Series Trust.
*Vincent J. McGuinness Manager Chairman, Chief Executive Officer
(63) and Director of McGuinness &
Associates, Endeavor Group, VJM
Corporation (oil and gas), until
July, 1996 McGuinness Group
(insurance marketing) and until
January, 1994 Swift Energy Marketing
Company and since September, 1988
Endeavor Management Co.; President
of VJM Corporation, Endeavor
Management Co. and, since February,
1996, McGuinness & Associates;
Trustee, Endeavor Series Trust.
</TABLE>
- 16 -
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND ADDRESS HELD WITH REGISTRANT DURING PAST 5 YEARS
--------------------- ------------------------ ------------------------------------
<S> <C> <C>
Timothy A. Devine (63) Manager Prior to September, 1993, President
1424 Dolphin Terrace and Chief Executive Officer, Devine
Corona del Mar, Califor- Properties, Inc. Since September,
nia 1993, Vice President, Plaint
92625 Control, Inc. (landscape contracting
and maintenance); Trustee, Endeavor
Series Trust.
Thomas J. Hawekotte (63) Manager President, Thomas Hawekotte, P.C.
1200 Lake Shore Drive (law practice); Trustee, Endeavor
Chicago, Illinois 60610 Series Trust.
Steven L. Klosterman Manager Since July, 1995, President of
(46) Klosterman Capital Corporation
5973 Avenida Encinas, (investment adviser); Investment
#300 Counselor, Robert J. Metcalf &
Carlsbad, California Associates, Inc. (investment adviser)
92008 from August, 1990 to June, 1995;
Trustee, Endeavor Series Trust.
*Halbert D. Lindquist Manager President, Lindquist Associates,
(52) Inc. (investment adviser) and since
1650 E. Fort Lowell Road December, 1987 Tucson Asset
Tucson, Arizona 85719- Management Inc. (commodity trading
2324 advisor), and since November, 1987,
Presidio Government Securities,
Incorporated (broker-dealer);
Trustee, Endeavor Series Trust since
January 1998, Chief Investment
Officer, Blackstone Alternative
Asset Management.
R. Daniel Olmstead, Jr. Manager Rancher until January, 1997. Since
(66) January, 1997, real estate
2661 Point Del Mar consultant; Trustee, Endeavor Series
Corona Del Mar, Califor- Trust.
nia
92625
Keith H. Wood (62) Manager Since 1972, Chairman and Chief
Executive Officer of Jameson, Eaton
& Wood (investment adviser) and
since 1979, President of Ivory &
Sime International, Inc. (investment
adviser); Trustee, Endeavor Series
Trust.
*William. L. Busler (55) Manager President, PFL Life Insurance
4333 Edgewood Road N.E. Company; Trustee, Endeavor Series
Cedar Rapids, Iowa Trust.
52499-0001
</TABLE>
- 17 -
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND ADDRESS HELD WITH REGISTRANT DURING PAST 5 YEARS
--------------------- ------------------------ ------------------------------------
<S> <C> <C>
Michael J. Roland (39) Chief Financial Since June, 1996, Chief Financial
Officer (Treasurer) Officer of Endeavor Group, Endeavor
Management Co. and Endeavor Series
Trust; from January, 1995 to April,
1997, Senior Vice President,
Treasurer and Chief Financial
Officer of Pilgrim America Group,
Pilgrim America Investments, Inc.,
Pilgrim America Securities and of
each of the funds in the Pilgrim
America Group of Funds; from July,
1994 to December, 1994, partner at
the consulting firm of Corporate
Savings Group; From March, 1992 to
June, 1994, Vice President of PIMCO
Advisors, LP and of the PIMCO
Institutional Funds.
Pamela A. Shelton (48) Secretary Since October, 1993, Executive
Secretary to Chairman of the Board
and Chief Executive Officer of, and
since April, 1996, Secretary of
McGuinness & Associates, Endeavor
Group, VJM Corporation, McGuinness
Group (until July, 1996) and
Endeavor Management Co.; from July,
1992 to October, 1993,
Administrative Secretary, Mayor and
City Council, City of Laguna Niguel,
California; Secretary, Endeavor
Series Trust.
</TABLE>
- --------
* An "interested person" of the Target Account as defined in the 1940 Act.
+ Vincent J. McGuinness, Jr. is the son of Vincent J. McGuinness.
The Rules and Regulations of the Target Account provide that the Target
Account will indemnify its Board of Managers and officers against liabilities
and expenses incurred in connection with litigation in which they may be
involved because of their offices with the Target Account, except if it is
determined in the manner specified in the Rules and Regulations that they have
not acted in good faith in the reasonable belief that their actions were in
the best interests of the Target Account or that such indemnification would
relieve any officer or member of the Board of Managers of any liability to the
Target Account or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of his duties. The Target
Account, at its expense, provides liability insurance for the benefit of its
Board of Managers and officers.
- 18 -
<PAGE>
Compensation. For the first full year of the Target Account, the following
compensation is estimated to be paid to members of the Board of Managers:
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM ACCOUNT AND FUND
NAME OF PERSON FROM ACCOUNT COMPLEX PAID TO TRUSTEES
- -------------- ------------ ------------------------
<S> <C> <C>
Vicent J. McGuinness...................... $0 $0
Timothy A. Devine......................... $1,500 $14,000
Thomas J. Hawekotte....................... $1,500 $14,000
Steven L. Klosterman...................... $1,500 $14,000
Halbert D. Lindquist...................... $1,500 $14,000
R. Daniel Olmstead........................ $1,500 $14,000
Keith H. Wood............................. $1,500 $14,000
Vincent J. McGuinness, Jr................. $0 $0
William L. Busler......................... $0 $0
</TABLE>
THE INVESTMENT ADVISORY SERVICES
First Trust Advisers L.P. (the "Adviser") is the Target Account's investment
adviser. The Adviser manages the assets of each Target Subaccount, consistent
with the investment objective and policies described herein and in the
Prospectus, pursuant to an investment advisory agreement (the "Advisory
Agreement") with Endeavor Investment Advisers, the Target Account's Manager.
Under the Advisory Agreement, the Adviser provides each Target Subaccount
with discretionary investment services. Specifically, the Adviser is
responsible for supervising and directing the investments of each Target
Subaccount in accordance with each Target Subaccount's investment objective,
program, and restrictions as provided in the Prospectus and this Statement of
Additional Information. The Adviser is also responsible for effecting all
security transactions on behalf of each Target Subaccount.
As compensation for its services, the Adviser receives a fee of 0.35% of the
average daily net assets of each Target Subaccount, which is paid by the
Manager. Each Target Subaccount's Advisory Agreement also provides that the
Adviser, its directors, officers, employees, and certain other persons
performing specific functions for the Target Subaccounts will only be liable
to the Target Subaccount for losses resulting from willful misfeasance, bad
faith, gross negligence, or reckless disregard of duty.
THE MANAGER
The Target Account is managed by Endeavor Investment Advisers ("the
Manager") which, subject to the supervision and direction of the Target
Account's Board of Managers, has overall responsibility for the general
management and administration of the Target Account. The Manager is a general
partnership of which Endeavor Management Co. is the managing partner. Endeavor
Management Co., by whose employees all management services performed under the
management agreement are rendered to the Target Account, holds a 50.01%
interest in the Manager and AUSA Financial Markets, Inc., an affiliate of PFL,
holds the remaining 49.99% interest therein. Vincent J. McGuinness, a member
of the Board of Managers of the Target Account, together with his family
members and trusts for the benefit of his family members, own all of Endeavor
Management Co.'s outstanding common stock. Mr. McGuinness is Chairman, Chief
Executive Officer and President of Endeavor Management Co.
The Manager is responsible for providing investment management to the Target
Account and in the exercise of such responsibility selects an investment
adviser for each of the Target
- 19 -
<PAGE>
Subaccounts (the "Adviser") and monitors the Adviser's investment program and
results, reviews brokerage matters, oversees compliance by the Target Account
with various federal and state statutes, and carries out the directives of the
Board of Managers. The Manager is responsible for providing the Target Account
with office space, office equipment, and personnel necessary to operate and
administer the Target Account's business, and also supervises the provision of
services by third parties such as the Target Account's custodian, transfer
agent, and administrator. Pursuant to an administration agreement, First Data
Investor Services Group, Inc. ("FDISG") assists the Manager in the performance
of its administrative responsibilities to the Target Account. For its
administrative responsibilities, the Target Account pays FDISG a flat fee of
$10,000 per annum per Subaccount and all out-of-pocket fees and expenses.
As compensation for its services, the Manager receives a fee equal to 0.75%
of the average daily net assets of each Target Subaccount.
TRANSFER AGENT AND CUSTODIAN
All cash and securities of each Target Subaccount are held by Boston Safe
Deposit and Trust Company as custodian. FDISG, located at 4400 Computer Drive,
Westborough, Massachusetts 01581, serves as transfer agent for the Target
Account.
BROKERAGE ALLOCATION
The Adviser invests all assets of the Target Subaccounts in common stock and
incurs brokerage costs in connection therewith.
Allocations of transactions by the Target Subaccounts, including their
frequency, to various dealers is determined by the Adviser in its best
judgment and in a manner deemed to be in the best interest of the investors in
the Target Subaccount rather than by any formula. The primary consideration is
prompt execution of orders in an effective manner at the most favorable price.
Purchases and sales of securities may be principal transactions; that is,
securities may be purchased directly from the issuer or from an underwriter or
market maker for the securities. Any transactions for which the Target
Subaccounts pays a brokerage commission will be effected at the best price and
execution available. Purchases from underwriters of securities include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers include the spread between the bid and
the asked price. Brokerage may be allocated based on the sale of Policies by
dealers or activities in support of sales of the Policies. The Target Account
has adopted a Brokerage Enhancement Plan, whereby all or a portion of certain
brokerage commission paid by the Target Subaccounts may be allocated or
credited to the Distributor or other entities marketing the Policies, to help
to finance sales activities.
INVESTMENT RESTRICTIONS
Fundamental policies of the Target Subaccounts may not be changed without
the approval of the lesser of (1) 67% of the persons holding voting interests
(generally Policy Owners) present at a meeting if the holders of more than 50%
are present in person or by proxy or (2) more than 50% of the persons holding
voting interests. Other restrictions, in the form of operating policies, are
subject to change by the Board of Managers without the approval of persons
holding a voting interest. Any investment restriction which involves a maximum
percentage of securities or assets shall not be considered to be violated
unless an excess over the percentage occurs immediately after, and is caused
by, an acquisition of securities or assets of, or borrowings by, a Target
Subaccount.
- 20 -
<PAGE>
FUNDAMENTAL POLICIES
As a matter of fundamental policy, each Target Subaccount may not:
(1) Borrowing. Borrow money, except each Target Subaccount may borrow as
a temporary measure for extraordinary or emergency purposes, and then only
in amounts not exceeding 30% of its total assets valued at market. Each
Target Subaccount will not borrow in order to increase income (leveraging),
but only to facilitate redemption requests which might otherwise require
untimely investment liquidations;
(2) Loans. Make loans, although the Target Subaccounts may purchase money
market securities and enter into repurchase agreements; and they may lend
their Common Shares.
(3) Margin. Purchase securities on margin;
(4) Mortgaging. Mortgage, pledge, hypothecate or, in any manner, transfer
any security owned by the Target Subaccounts as security for indebtedness
except as may be necessary in connection with permissible borrowings, in
which event such mortgaging, pledging, or hypothecating may not exceed 30%
of each Target Subaccount's total assets, valued at market;
(5) Real Estate. Purchase or sell real estate;
(6) Senior Securities. Issue senior securities (except permitted
borrowings);
(7) Short Sales. Effect short sales of securities; or
(8) Underwriting. Underwrite securities issued by other persons, except
to the extent the Target Subaccounts may be deemed to be underwriters
within the meaning of the Securities Act of 1933 in connection with the
purchase and sale of their portfolio securities in the ordinary course of
pursuing their investment programs.
In addition, as a matter of fundamental policy, each Target Subaccount may
engage in futures and options transactions and hold warrants.
OPERATING POLICIES
As a matter of operating policy, each Target Subaccount may not:
(1) Control of Companies. Invest in companies for the purpose of
exercising management or control;
(2) Illiquid Securities. Purchase a security if, as a result of such
purchase, more than 15% of the value of each Target Subaccount's net assets
would be invested in illiquid securities or other securities that are not
readily marketable.
(3) Oil and Gas Programs. Purchase participations or other direct interests
or enter into leases with respect to, oil, gas, other mineral exploration
or development program.
OPTIONS AND FUTURES STRATEGIES.
A Subaccount may at times seek to hedge against either a decline in the
value of its portfolio securities or an increase in the price of securities
which the Adviser plans to purchase through the writing and purchase of
options and the purchase or sale of future contracts and related options.
Expenses and losses incurred as a result of such hedging strategies will
reduce a Subaccount's current return.
The ability of a Subaccount to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. It is impossible to predict the amount of trading interest that
may exist in various types of options or futures. Therefore no assurance can
be given that a Subaccount will be able to utilize these instruments
effectively for the purposes stated below.
- 21 -
<PAGE>
Writing Covered Options on Securities. A Subaccount may write covered call
options and covered put options on optionable securities of the types in which
it is permitted to invest from time to time as the Adviser determines is
appropriate in seeking to attain the Subaccount's investment objective. Call
options written by a Subaccount give the holder the right to buy the
underlying security from the Subaccount at a started exercise price; put
options give the holder the right to sell the underlying security to the
Subaccount at a stated price.
A Subaccount may only write call options on a covered basis or for cross-
hedging purposes and will only write covered put options. A put option would
be considered "covered" if the Subaccount owns an option to sell the
underlying security subject to the option having an exercise price equal to or
greater than the exercise price of the "covered" option at all times while the
put option is outstanding. A call option is covered if the Subaccount owns or
has the right to acquire the underlying securities subject to the call option
(or comparable securities satisfying the cover requirements of securities
exchanges) at all times during the option period. A call option is for cross-
hedging purposes if it is not covered, but is designed to provide a hedge
against another security which the Subaccount owns or has the right to
acquire. In the case of a call written for cross-hedging purposes or a put
option, the Subaccount will maintain in a segregated account at the
Subaccount's custodian bank cash or short-term U.S. government securities with
a value equal to or greater than the Subaccount's obligation under the option.
A Subaccount may also write combinations of covered puts and covered calls on
the same underlying security.
A Subaccount will receive a premium from writing an option, which increases
the Subaccount's return in the event the option expires unexercised or is
terminated at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option, and the volatility of
the market price of the underlying security. By writing a call option, a
Subaccount will limit its opportunity to profit from any increase in the
market value of the underlying security above the exercise price of the
option. By writing a put option, a Subaccount will assume the risk that it may
be required to purchase the underlying security for an exercise price higher
than its then current market price, resulting in a potential capital loss if
the purchase price exceeds the market price plus the amount of the premium
received.
A Subaccount may terminate an option which it has written prior to its
expiration by entering into a closing purchase transaction in which it
purchases an option having the same terms as the option written. The
Subaccount will realize a profit (or loss) from such transaction if the cost
of such transaction is less (or more) than the premium received from the
writing of the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option may be
offset in whole or in part by unrealized appreciation of the underlying
security owned by the Subaccount.
Purchasing Put and Call Options on Securities. A Subaccount may purchase put
options to protect its portfolio holdings in an underlying security against a
decline in market value. This protection is provided during the life of the
put option since the Subaccount, as holder of the put, is able to sell the
underlying security at the exercise price regardless of any decline in the
underlying security's market price. For the purchase of a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs. By using put options in this manner, any profit which the Subaccount
might otherwise have realized on the underlying security will be reduced by
the premium paid for the put option and by transaction costs.
A Subaccount may also purchase a call option to hedge against an increase in
price of a security that it intends to purchase. This protection is provided
during the life of the call option
- 22 -
<PAGE>
since the Subaccount, as holder of the call, is able to buy the underlying
security at the exercise price regardless of any increase in the underlying
security's market price. For the purchase of a call option to be profitable,
the market price of the underlying security must rise sufficiently above the
exercise price to cover the premium and transaction costs. By using call
options in this matter, any profit which the Subaccount might have realized
had it brought the underlying security at the time it purchased the call
option will be reduced by the premium paid for the call option and by
transaction costs.
No Subaccount intends to purchase put or call options if, as a result of any
such transaction, the aggregate cost of options held by the Subaccount at the
time of such transaction would exceed 5% of its total assets.
Limitations. A Subaccount will not purchase or sell futures contracts or
options on futures contracts for non-hedging purposes if, as a result, the sum
of the initial margin deposits on its existing futures contracts and related
options positions and premiums paid for options on futures contracts would
exceed 5% of the net assets of the Subaccount unless the transaction meets
certain "bona fide hedging" criteria.
Risks of Options and Futures Strategies. The effective use of options and
futures strategies depends, among other things, on a Subaccount's ability to
terminate options and futures positions at times when the Adviser deems it
desirable to do so. Although a Subaccount will not enter into an option or
futures position unless the Adviser believes that a liquid market exists for
such option or future, there can be no assurance that a Subaccount will be
able to effect closing transactions at any particular time or at an acceptable
price. The Adviser generally expects that options and futures transactions for
the Subaccounts will be conducted on recognized exchanges. In certain
instances, however, a Subaccount may purchase and sell options in the over-
the-counter market. The staff of the Securities and Exchange Commission
considers over-the-counter options to be illiquid. A Subaccount's ability to
terminate option positions established in the over-the-counter market may be
more limited than in the case of exchange traded options and may also involve
the risk that securities dealers participating in such transactions would fail
to meet their obligations to the Subaccount.
The use of options and futures involves the risk of imperfect correlation
between movements in options and futures prices and movements in the price of
the securities that are the subject of the hedge. The successful use of these
strategies also depends on the ability of the Subaccounts' Adviser to forecast
correctly interest rate movements and general stock market price movements.
The risk increases as the composition of the securities held by the Subaccount
diverges from the composition of the relevant option or futures contract.
SECURITIES LENDING
Each Target Subaccount may also lend Common Shares to broker-dealers and
financial institutions to realize additional income. As an operating policy,
the Target Subaccounts will not lend Common Shares or other assets, if as a
result, more than 33% of each Subaccount's total assets would be lent to other
parties. Under applicable regulatory requirements (which are subject to
change), the following conditions apply to securities loans: (a) the loan must
be continuously secured by liquid assets maintained on a current basis in an
amount at least equal to the market value of the securities loaned; (b) each
Target Subaccount must receive any dividends or interest paid by the issuer on
such securities; (c) each Target Subaccount must have the right to call the
loan and obtain the securities loaned at any time upon notice of not more than
five business days, including the right to call the loan to permit voting of
the securities; and (d) each Target Subaccount must receive either interest
from the investment of collateral or a fixed fee from the borrower.
- 23 -
<PAGE>
Securities loaned by a Target Subaccount remain subject to fluctuations in
market value. A Target Subaccount may pay reasonable finders, custodian and
administrative fees in connection with a loan. Securities lending, as with
other extensions of credit, involves the risk that the borrower may default.
Although securities loans will be fully collateralized at all times, a Target
Subaccount may experience delays in, or be prevented from, recovering the
collateral. During the period that the Target Subaccount seeks to enforce its
rights against the borrower, the collateral and the securities loaned remain
subject to fluctuations in market value. The Target Subaccount do not have the
right to vote securities on loan, but would terminate the loan and regain the
right to vote if it were considered important with respect to the investment.
A Target Subaccounts may also incur expenses in enforcing its rights. If a
Target Subaccount has sold a loaned security, it may not be able to settle the
sale of the security and may incur potential liability to the buyer of the
security on loan for its costs to cover the purchase.
PART III
STATE REGULATION OF PFL
PFL is subject to the laws of Iowa governing insurance companies and to
regulation by the Iowa Division of Insurance. An annual statement in a
prescribed form is filed with the Division of Insurance each year covering the
operation of PFL for the preceding year and its financial condition as of the
end of such year. Regulation by the Division of Insurance includes periodic
examination to determine PFL's contract liabilities and reserves so that the
Division may determine the items are correct. PFL's books and accounts are
subject to review by the Division of Insurance at all times and a full
examination of its operations is conducted periodically by the National
Association of Insurance Commissioners. In addition, PFL is subject to
regulation under the insurance laws of other jurisdictions in which it may
operate.
ADMINISTRATION
PFL performs administrative services for the Policies. These services
include issuance of the Policies, maintenance of records concerning the
Policies, and certain valuation services.
RECORDS AND REPORTS
All records and accounts relating to the Mutual Fund Account and the Target
Account will be maintained by PFL. As presently required by the Investment
Company Act of 1940, as amended,
and regulations promulgated thereunder, PFL will mail to all Policy Owners at
their last known address of record, at least annually, reports containing such
information as may be required under that Act or by any other applicable law
or regulation. Policy Owners will also receive confirmation of each financial
transaction and any other reports required by law or regulation.
DISTRIBUTION OF THE POLICIES
The Policies are offered to the public through brokers licensed under the
federal securities laws and state insurance laws. The offering of the Policies
is continuous and PFL does not anticipate discontinuing the offering of the
Policies. However, PFL reserves the right to discontinue the offering of the
Policies.
AFSG Securities Corporation, an affiliate of PFL, is the principal
underwriter of the Policies and may enter into agreements with broker-dealers
for the distribution of the Policies. Prior to
- 24 -
<PAGE>
April 30, 1998, AEGON USA Securities, Inc. (also an affiliate of PFL) was the
principal underwriter. During 1997, 1996, and 1995, the amount paid to AEGON
USA Securities, Inc. and/or the broker-dealers for their services was
$29,678,498, $19,668,001, and $13,569,474, respectively.
The Target Account has adopted a distribution plan in accordance with Rule
12b-1 under the 1940 Act for the Distribution Financing Charge (the
"Distribution Plan"). The Distribution Plan has been approved by a majority of
the disinterested members of the Board of Managers of the Target Account. The
Distribution Plan is designed to partially compensate PFL for the cost of
distributing the Policies. Charges under the Distribution Plan will be used to
support marketing efforts, training of representatives and reimbursement of
expenses incurred by broker/dealers who sell the Policies, and will be based
on a percentage of the daily net assets of the Target Account. The
Distribution Plan may be terminated at any time by a vote of a majority of the
disinterested members of the Target Account's Board of Managers, or by a vote
of the majority of its outstanding shares. (See "CHARGES AND DEDUCTIONS--
Distribution Financing Charge," p. 60.)
CUSTODY OF ASSETS
The assets of each of the Mutual Fund Subaccounts and the Target Subaccounts
are held by PFL. The assets of each of the Subaccounts are segregated and held
separate and apart from the assets of the other Subaccounts and from PFL's
general account assets. PFL maintains records of all purchases and redemptions
of shares of the Underlying Funds held by each of the Mutual Fund Subaccounts,
and of all purchases and sales of common stock held by each of the Target
Subaccounts. Additional protection for the assets of the Mutual Fund Account
and the Target Account is afforded by PFL's fidelity bond, presently in the
amount of $5,000,000, covering the acts of officers and employees of PFL.
OTHER PRODUCTS
PFL makes other variable annuity policies available that may also be funded
through the Mutual Fund Account and/or the Target Account. These variable
annuity policies may have different features, such as different investment
options or charges.
LEGAL MATTERS
Legal advice relating to certain matters under the federal securities laws
applicable to the issue and sale of the Policies has been provided to PFL by
Sutherland, Asbill & Brennan LLP, of Washington D.C.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
Policies discussed in this Statement of Additional Information. Not all of the
information set forth in the Registration Statement, amendments and exhibits
thereto has been included in the Prospectus or this Statement of Additional
Information. Statements contained in the Prospectus and this Statement of
Additional Information concerning the content of the Policies and other legal
instruments are intended to be summaries. For a complete statement of the
terms of these documents, reference should be made to the instruments filed
with the Securities and Exchange Commission.
- 25 -
<PAGE>
FINANCIAL STATEMENTS
The values of your interest in the Mutual Fund Account or the Target Account
will be affected solely by the investment results of the selected
Subaccount(s). Financial Statements of The PFL Endeavor Variable Annuity
Account (which comprises a portion of the PFL Endeavor VA Separate Account)
are contained herein. The financial statements of PFL, which are included in
this Statement of Additional Information, should be considered only as bearing
on the ability of PFL to meet its obligations under the Policies. They should
not be considered as bearing on the investment performance of the assets held
in the Mutual Fund Account or the Target Account.
There are no financial statements for the Target Account because as of the
date hereof it had not commenced operations and had no assets or liabilities.
INDEPENDENT AUDITORS
The Financial Statements of PFL as of December 31, 1997 and 1996, and for
each of the three years in the period ended December 31, 1997, and the
Financial Statements of certain subaccounts of PFL Endeavor VA Separate
Account (which comprises The Endeavor ML Variable Annuity) at December 31,
1997 and for each of the two years in the period then ended, included in this
Statement of Additional Information have been audited by Ernst & Young LLP,
Independent Auditors, 801 Grand Avenue, Suite 3400, Des Moines, Iowa 50309.
Ernst & Young LLP will also be the independent auditors for the Target
Account.
- 26 -
<PAGE>
FINANCIAL STATEMENTS - STATUTORY BASIS
PFL LIFE INSURANCE COMPANY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
PFL Life Insurance Company
Financial Statements - Statutory Basis
Years ended December 31, 1997, 1996 and 1995
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors................................. 1
Audited Financial Statements
Balance Sheets - Statutory Basis................................ 3
Statements of Operations - Statutory Basis...................... 5
Statements of Changes in Capital and Surplus - Statutory Basis.. 6
Statements of Cash Flows - Statutory Basis...................... 7
Notes to Financial Statements - Statutory Basis................. 9
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
PFL Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of PFL Life
Insurance Company as of December 31, 1997 and 1996, and the related statutory-
basis statements of operations, changes in capital and surplus, and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the accompanying statutory-basis financial statement schedules
required by Article 7 of Regulation S-X. These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules 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.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Division, Department of Commerce, of the State of
Iowa, which practices differ from generally accepted accounting principles. The
variances between such practices and generally accepted accounting principles
also are described in Note 1. The effects on the financial statements of these
variances are not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matters described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of PFL Life Insurance Company at December 31, 1997 and 1996, or the results of
its operations or its cash flows for each of the three years in the period ended
December 31, 1997.
1
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PFL Life Insurance Company
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with accounting practices prescribed or permitted by the Insurance
Division, Department of Commerce, of the State of Iowa. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic statutory-basis financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ Ernst & Young LLP
February 27, 1998
2
<PAGE>
PFL Life Insurance Company
Balance Sheets - Statutory Basis
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments $ 23,939 $ 50,737
Bonds 4,913,144 4,773,433
Stocks:
Preferred 2,750 3,097
Common (cost: 1997 - $33,058; 1996 - $23,212) 42,345 32,038
Affiliated entities (cost: 1997 - $10,798; 1996 -
$14,893) 8,031 6,934
Mortgage loans on real estate 935,207 911,705
Real estate, at cost less accumulated depreciation
($8,655 in 1997; $11,338 in 1996):
Home office properties 8,283 10,372
Properties acquired in satisfaction of debt 11,814 12,260
Investment properties 36,416 35,922
Policy loans 57,136 54,214
Other invested assets 29,864 16,343
--------------------------------
Total cash and invested assets 6,068,929 5,907,055
Premiums deferred and uncollected 16,101 16,345
Accrued investment income 69,662 70,401
Short-term notes receivable from affiliate -- 53,900
Federal income taxes recoverable -- 4,018
Transfers from separate accounts 60,193 38,528
Other assets 37,624 31,215
Separate account assets 2,517,365 1,844,515
--------------------------------
Total admitted assets $8,769,874 $7,965,977
================================
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life $ 884,018 $ 736,100
Annuity 4,204,125 4,408,419
Accident and health 169,328 139,269
Policy and contract claim reserves:
Life 8,635 7,369
Accident and health 57,713 66,988
Other policyholders' funds 143,831 126,672
Remittances and items not allocated 153,745 64,064
Asset valuation reserve 69,825 54,851
Interest maintenance reserve 30,287 23,745
Federal income taxes payable 1,889 --
Short-term notes payable to affiliates 16,400 --
Other liabilities 75,070 70,663
Payable to affiliates 13,240 4,975
Separate account liabilities 2,512,406 1,844,515
--------------------------------
Total liabilities 8,340,512 7,547,630
Commitments and contingencies
Capital and surplus:
Common stock, $10 par value, 500 shares authorized,
266 issued and outstanding 2,660 2,660
Paid-in surplus 154,282 154,129
Unassigned surplus 272,420 261,558
--------------------------------
Total capital and surplus 429,362 418,347
--------------------------------
Total liabilities and capital and surplus $8,769,874 $7,965,977
================================
</TABLE>
See accompanying notes.
4
<PAGE>
PFL Life Insurance Company
Statements of Operations - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of
reinsurance:
Life $ 202,435 $ 204,872 $ 114,704
Annuity 657,695 725,966 921,452
Accident and health 207,982 227,862 232,738
Net investment income 446,424 428,337 392,685
Amortization of interest maintenance reserve 3,645 2,434 4,341
Commissions and expense allowances on reinsurance
ceded 49,859 73,931 77,071
--------------------------------------------------------
1,568,040 1,663,402 1,742,991
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits 146,583 147,024 146,346
Surrender benefits 658,071 512,810 498,626
Other benefits 126,495 101,288 88,607
Increase (decrease) in aggregate reserves for
policies and contracts:
Life 149,575 140,126 50,071
Annuity (203,139) 188,002 528,330
Accident and health 30,059 26,790 17,694
Other 16,998 19,969 16,017
--------------------------------------------------------
924,642 1,136,009 1,345,691
Insurance expenses:
Commissions 157,300 177,466 200,706
General insurance expenses 57,571 57,282 57,623
Taxes, licenses and fees 8,715 13,889 15,700
Net transfers to separate accounts 297,480 171,785 42,981
Other expenses 119 526 760
--------------------------------------------------------
521,185 420,948 317,770
--------------------------------------------------------
1,445,827 1,556,957 1,663,461
--------------------------------------------------------
Gain from operations before federal income taxes and
net realized capital gains (losses) on investments 122,213 106,445 79,530
Federal income tax expense 43,381 41,177 33,335
--------------------------------------------------------
Gain from operations before net realized capital
gains (losses) on investments 78,832 65,268 46,195
Net realized capital gains (losses) on investments
(net of related federal income taxes and amounts
transferred to interest maintenance reserve) 7,159 (3,503) (18,096)
--------------------------------------------------------
Net income $ 85,991 $ 61,765 $ 28,099
========================================================
</TABLE>
See accompanying notes.
5
<PAGE>
PFL Life Insurance Company
Statements of Changes in Capital and Surplus - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
TOTAL CAPITAL
COMMON STOCK PAID-IN UNASSIGNED AND SURPLUS
SURPLUS SURPLUS
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $2,660 $114,129 $211,552 $328,341
Capital contribution - 40,000 - 40,000
Net income for 1995 - - 28,099 28,099
Net unrealized capital losses - - (7,574) (7,574)
Decrease in non-admitted assets - - 50 50
Increase in asset valuation reserve - - (5,946) (5,946)
Surplus effect of ceding commissions
associated with the sale of a division - - 35 35
Cancellation of reinsurance agreement - - 585 585
Amendment of reinsurance agreement - - 419 419
Transfer of subsidiary investment to
stockholder - - (3,250) (3,250)
Change in reserve valuation methodology - - (501) (501)
Increase in liability for reinsurance in
unauthorized companies - - (2,730) (2,730)
---------------------------------------------------------------------
Balance at December 31, 1995 2,660 154,129 220,739 377,528
Net income for 1996 - - 61,765 61,765
Net unrealized capital gains - - 2,351 2,351
Increase in non-admitted assets - - (148) (148)
Increase in asset valuation reserve - - (10,930) (10,930)
Dividend to stockholder - - (20,000) (20,000)
Prior period adjustment - - 5,025 5,025
Surplus effect of sale of a division - - (384) (384)
Surplus effect of ceding commission
associated with the sale of a division - - 29 29
Amendment of reinsurance agreement - - 421 421
Decrease in liability for reinsurance in
unauthorized companies - - 2,690 2,690
---------------------------------------------------------------------
Balance at December 31, 1996 2,660 154,129 261,558 418,347
Capital contribution - 153 - 153
Net income for 1997 - - 85,991 85,991
Net unrealized capital gains - - 3,592 3,592
Increase in non-admitted assets - - (481) (481)
Increase in asset valuation reserve - - (14,974) (14,974)
Dividend to stockholder - - (62,000) (62,000)
Surplus effect of sale of a division - - (161) (161)
Surplus effect of ceding commissions
associated with the sale of a division - - 5 5
Surplus effect of amendment of reinsurance - - 389 389
agreement
Surplus effect of reinsurance agreement - - 402 402
Increase in liability for reinsurance in
unauthorized companies - - (1,901) (1,901)
---------------------------------------------------------------------
Balance at December 31, 1997 $2,660 $154,282 $272,420 $429,362
=====================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
PFL Life Insurance Company
Statements of Cash Flows - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Premiums and other considerations, net of reinsurance $ 1,119,936 $ 1,240,748 $ 1,353,407
Net investment income 452,091 431,456 398,051
Life and accident and health claims (154,383) (147,556) (140,798)
Surrender benefits and other fund withdrawals (658,071) (512,810) (498,626)
Other benefits to policyholders (126,462) (101,254) (88,519)
Commissions, other expenses and other taxes (225,042) (248,321) (278,241)
Net transfers to separate accounts (319,146) (210,312) (42,981)
Federal income taxes, excluding tax on capital gains (47,909) (35,551) (32,905)
Cash paid in conjunction with an amendment of a
reinsurance agreement (4,826) (5,812)
Repayment of intercompany notes and receivables, net - - (48,070)
Cash received in connection with a reinsurance
agreement 1,477 - -
Other, net 89,693 (41,677) 62,345
--------------------------------------------------------------
Net cash provided by operating activities 127,358 368,911 683,663
INVESTING ACTIVITIES
Proceeds from investment sold, matured or repaid:
Bonds and preferred stocks 3,284,095 2,112,831 1,757,229
Common stocks 34,004 27,214 20,338
Mortgage loans on real estate 138,162 74,351 36,550
Real estate 6,897 18,077 23,203
Cash received from ceding commissions associated
with the sale of a division 8 45 55
Other 57,683 22,568 8,258
--------------------------------------------------------------
3,520,849 2,255,086 1,845,633
Cost of investments acquired:
Bonds and preferred stocks (3,411,442) (2,270,105) (2,294,195)
Common stocks (37,339) (29,799) (23,284)
Mortgage loans on real estate (159,577) (324,381) (192,292)
Real estate (2,013) (222) (10,188)
Policy loans (2,922) (1,539) (877)
Cash paid in association with the sale of a division - (539) -
Cash paid in conjunction with sales of a division (591) (123) -
Other (15,674) (6,404) (2,670)
--------------------------------------------------------------
(3,629,558) (2,633,112) (2,523,506)
--------------------------------------------------------------
Net cash used in investing activities (108,709) (378,026) (677,873)
</TABLE>
7
<PAGE>
PFL Life Insurance Company
Statements of Cash Flows - Statutory Basis (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Issuance of short-term intercompany notes payable $ 16,400 $ - $ 40,000
Capital contribution 153 - -
Dividends to stockholder (62,000) (20,000) -
-----------------------------------------------------------
Net cash provided by (used in) financing activities (45,447) (20,000) 40,000
-----------------------------------------------------------
Increase (decrease) in cash and short-term
investments (26,798) (29,115) 45,790
Cash and short-term investments at beginning of year 50,737 79,852 34,062
-----------------------------------------------------------
Cash and short-term investments at end of year $ 23,939 $ 50,737 $ 79,852
===========================================================
</TABLE>
See accompanying notes.
8
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis
(Dollars in thousands)
December 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
PFL Life Insurance Company ("the Company") is a stock life insurance company and
is a wholly-owned subsidiary of First AUSA Life Insurance Company ("First
AUSA"), which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands.
In connection with the sale of certain affiliated companies, the Company has
assumed various blocks of business from these former affiliates through mergers.
In addition, the Company has canceled or entered into several coinsurance and
reinsurance agreements with affiliates and non-affiliates. The following is a
description of those transactions:
. During 1996, the Company sold its North Richland Hills, Texas health
administrative operations known as The Insurance Center. The transaction
resulted in the transfer of substantially all employees and office
facilities to United Insurance Companies, Inc. ("UICI"). All inforce
business will continue to be shared by UICI and the Company and its
affiliates through the existing coinsurance agreements. After a short
transition period, all new business produced by United Group Association, an
independent insurance agency, will be written by the insurance subsidiaries
of UICI and will not be shared with the Company and its affiliates through
coinsurance arrangements. As a result of the sale, during 1996 the Company
transferred $123 in assets, substantially all of which was cash, and $70 of
liabilities. The difference between the assets and liabilities of $(53) plus
a tax credit of $19 was charged directly to unassigned surplus. During 1997,
the Company transferred $591 in assets, substantially all of which was cash
and $343 of liabilities. The difference between the assets and liabilities
of $(248) net of a tax credit of $87 was charged directly to unassigned
surplus.
. Effective December 31, 1995, the Company canceled a coinsurance agreement
with its parent, First AUSA. As a result of the cancellation, the Company
transferred $825 of assets and $1,712 of liabilities. The difference between
the assets and liabilities, net of a tax effect of $302 was credited
directly to unassigned surplus.
9
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
. On January 1, 1994, the Company entered into an agreement with a non-
affiliate reinsurer to increase the reinsurance ceded by 2-1/2% each year
(primarily group health business). As a result, the Company transferred
$4,303 in assets and liabilities of $4,467 during 1995. The difference
between the assets and liabilities of $164, plus a tax credit of $255, was
credited directly to unassigned surplus. During 1996, the Company
transferred $5,991 in assets, including $5,812 of cash and short-term
investments and liabilities of $6,146. The difference between the assets and
liabilities of $155, plus a tax credit of $266 was credited directly to
unassigned surplus. During 1997, the Company transferred $5,045 in assets,
including $4,826 of cash and short-term investments, and liabilities of
$5,164. The difference between the assets and liabilities of $119 plus a tax
credit of $270 was credited directly to unassigned surplus.
. During 1993, the Company sold the Oakbrook Division (primarily group health
business). The initial transfer of risk occurred through an indemnity
reinsurance agreement. The policies will then be assumed by the reinsurer by
novation as state regulatory and policyholder approvals are received. During
1996, the Company paid $539 in association with this sale; the payment, net
of a tax credit of $189, were charged directly to unassigned surplus. In
addition, the Company will receive from the third party administrator a
ceding commission of one percent of the premiums collected between January
1, 1994 and December 31, 1996. As a result of the sale, in 1995, the Company
received $55 for ceding commissions; the commissions net of the related tax
effect of $20 was credited directly to unassigned surplus. During 1996, the
Company received $45 for ceding commissions; the commissions net of the
related tax effect of $(16) was charged directly to unassigned surplus. In
1997, the Company received $8 for ceding commissions; the commissions net of
the related tax effect of $3 was credited directly to unassigned surplus.
. During 1997, the Company entered into a reinsurance agreement with a non-
affiliate. As a result of the agreement, the Company received $1,480 of
assets, including $1,477 of cash and short-term securities, and $861 of
liabilities. The difference between the assets and liabilities of $619, net
of a tax effect of $217 was credited directly to unassigned surplus.
NATURE OF BUSINESS
The Company sells individual non-participating whole life, endowment and term
contracts, as well as a broad line of single fixed and flexible premium annuity
products. In addition, the Company offers group life, universal life, and
individual and specialty health coverages. The Company is licensed in 49 states
and the District of Columbia. Sales of the Company's products are primarily
through the Company's agents and financial institutions.
10
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract claim reserves, guaranty fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and assumptions
utilized which could have a material impact on the financial statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Division,
Department of Commerce, of the State of Iowa, which practices differ in some
respects from generally accepted accounting principles. The more significant of
these differences are as follows: (a) bonds are generally reported at amortized
cost rather than segregating the portfolio into held-to-maturity (reported at
amortized cost), available-for-sale (reported at fair value), and trading
(reported at fair value) classifications; (b) acquisition costs of acquiring new
business are charged to current operations as incurred rather than deferred and
amortized over the life of the policies; (c) policy reserves on traditional life
products are based on statutory mortality rates and interest which may differ
from reserves based on reasonable assumptions of expected mortality, interest,
and withdrawals which include a provision for possible unfavorable deviation
from such assumptions; (d) policy reserves on certain investment products use
discounting methodologies based on statutory interest rates rather than full
account values; (e) reinsurance amounts are netted against the corresponding
asset or liability rather than shown as gross amounts on the balance sheet; (f)
deferred income taxes are not provided for the difference between the financial
statement and income tax bases of assets and liabilities; (g) net realized gains
or losses attributed to changes in the level of interest rates in the market are
deferred and amortized over the remaining life of the bond or mortgage loan,
rather than recognized as gains or losses in the statement of operations when
the sale is completed; (h) potential declines in the estimated realizable value
of investments are provided for through the establishment of a formula-
determined statutory investment reserve (reported as a liability) changes to
which are charged directly to surplus, rather than through recognition in the
statement of operations for declines in value, when such declines are judged to
be other than temporary; (i) certain assets designated as "non-admitted assets"
have been charged to surplus rather than being reported as assets; (j) revenues
for universal life and investment products consist of premiums received rather
than policy charges for the cost of insurance, policy administration charges,
amortization of policy initiation fees and surrender charges assessed; (k)
pension expense is recorded as amounts are paid;
11
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) adjustments to federal income taxes of prior years are charged or credited
directly to unassigned surplus, rather than reported as a component of expense
in the statement of operations; (m) gains or losses on dispositions of business
are charged or credited directly to unassigned surplus rather than being
reported in the statement of operations; and (n) a liability is established for
"unauthorized reinsurers" and changes in this liability are charged or credited
directly to unassigned surplus. The effects of these variances have not been
determined by the Company.
The National Association of Insurance Commissioners (NAIC) currently is in the
process of recodifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in 1998,
will likely change, to some extent, prescribed statutory accounting practices
and may result in changes to the accounting practices that the Company uses to
prepare its statutory-basis financial statements.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with remaining maturity of one year or less when purchased to
be cash equivalents.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation Office of
the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortization is computed using methods which result in a
level yield over the expected life of the security. The Company reviews its
prepayment assumptions on mortgage and other asset backed securities at regular
intervals and adjusts amortization rates retrospectively when such assumptions
are changed due to experience and/or expected future patterns. Investments in
preferred stocks in good standing are reported at cost. Investments in preferred
stocks not in good standing are reported at the lower of cost or market. Common
stocks of affiliated and unaffiliated companies, which includes shares of mutual
funds (money market and other), are carried at market. Real estate is reported
at cost less allowances for depreciation. Depreciation is computed principally
by the straight-line method. Policy loans are reported at unpaid principal.
Other invested assets consist principally of investments in various joint
ventures and are recorded at equity in underlying net assets. Other "admitted
assets" are valued, principally at cost, as required or permitted by Iowa
Insurance Laws.
12
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for potential
losses in the event of default by issuers of certain invested assets. These
amounts are determined using a formula prescribed by the NAIC and are reported
as a liability. The formula for the AVR provides for a corresponding adjustment
for realized gains and losses. Under a formula prescribed by the NAIC, the
Company defers, in the Interest Maintenance Reserve (IMR), the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the security.
Interest income is recognized on an accrual basis. The Company does not accrue
income on bonds in default, mortgage loans on real estate in default and/or
foreclosure or which are delinquent more than twelve months, or on real estate
where rent is in arrears for more than three months. Further, income is not
accrued when collection is uncertain. At December 31, 1997, 1996 and 1995, the
Company excluded investment income due and accrued of $177, $1,541 and $2,272,
respectively, with respect to such practices.
The Company uses interest rate swaps and caps as part of its overall interest
rate risk management strategy for certain life insurance and annuity products.
The Company entered into several interest rate swap contracts to modify the
interest rate characteristics of the underlying liabilities. The net interest
effect of such swap transactions is reported as an adjustment of interest income
from the hedged items as incurred.
The Company has entered into interest-rate cap agreements to hedge the exposure
of changing interest rates. The cash flows from the interest rate caps will help
offset losses that might occur from changes in interest rates. The cost of such
agreements is included in interest expense ratably during the life of the
agreement. Income received as a result of the cap agreement will be recognized
in investment income as earned. Unamortized cost of the agreements is included
in other assets.
AGGREGATE POLICY RESERVES
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables based on
statutorily specified interest rates and valuation methods that will provide, in
the aggregate, reserves that are greater than or equal to the minimum required
by law.
13
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The aggregate policy reserves for life insurance policies are based principally
upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality and
American Experience Mortality Tables. The reserves are calculated using interest
rates ranging from 2.00 to 6.00 percent and are computed principally on the Net
Level Premium Valuation and the Commissioners' Reserve Valuation Methods.
Reserves for universal life policies are based on account balances adjusted for
the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners' Annuity
Reserve Valuation Method including excess interest reserves to cover situations
where the future interest guarantees plus the decrease in surrender charges are
in excess of the maximum valuation rates of interest. Reserves for immediate
annuities and supplementary contracts with and without life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 2.50 to 11.25 percent and mortality rates, where appropriate, from a
variety of tables.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims reported to
the Company and claims incurred but not yet reported through the statement date.
These reserves are estimated using either individual case-basis valuations or
statistical analysis techniques. These estimates are subject to the effects of
trends in claim severity and frequency. The estimates are continually reviewed
and adjusted as necessary as experience develops or new information becomes
available.
SEPARATE ACCOUNTS
Assets held in trust for purchases of variable annuity contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. The assets in the separate accounts are valued at market.
Income and gains and losses with respect to the assets in the separate accounts
accrue to the benefit of the policyholders and, accordingly, the operations of
the separate accounts are not included in the accompanying financial statements.
The separate accounts do not have any minimum guarantees and the investment
risks associated with market value changes are borne entirely by the
policyholders. The Company received variable contract premiums of $281,095,
$227,864 and $133,386 in 1997, 1996 and 1995, respectively. All variable account
contracts are subject to discretionary withdrawal by the policyholder at the
market value of the underlying assets less the current surrender charge.
14
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. SFAS No. 119,
Disclosures about Derivative Financial Instruments and Fair Value of Financial
Instruments, requires additional disclosure about derivatives. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparisons to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. Statement of
Financial Accounting Standards No. 107 and No. 119 exclude certain financial
instruments and all nonfinancial instruments from their disclosure requirements
and allow companies to forego the disclosures when those estimates can only be
made at excessive cost. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the balance
sheet for these instruments approximate their fair values.
Investment securities: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values are
estimated using values obtained from independent pricing services or, in the
case of private placements, are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality, and
maturity of the investments. The fair values for equity securities are based on
quoted market prices.
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans is assumed to equal their carrying value.
15
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.
Interest rate cap and interest rate swaps: Estimated fair value of the
interest rate cap is based upon the latest quoted market price.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of Statement of
Financial Accounting Standards No. 107 and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------ ------------------------------
CARRYING Carrying
VALUE FAIR VALUE Value FAIR VALUE
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds $4,913,144 $5,046,527 $4,773,433 $4,867,770
Preferred stocks 2,750 8,029 3,097 7,133
Common stocks 42,345 42,345 32,038 32,038
Affiliated common stock 8,031 8,031 6,934 6,934
Mortgage loans on real estate 935,207 983,720 911,705 922,010
Policy loans 57,136 57,136 54,214 54,214
Cash and short-term
investments 23,939 23,939 50,737 50,737
Interest rate cap 5,618 1,513 6,797 6,975
Interest rate swaps - 2,546 - -
Separate account assets 2,517,365 2,517,365 1,844,515 1,844,515
LIABILITIES
Investment contract liabilities 4,345,181 4,283,461 4,532,568 4,398,630
Separate account liabilities 2,452,205 2,452,205 1,803,057 1,803,057
</TABLE>
16
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
United States Government and agencies $ 188,241 $ 2,562 $ (21) $ 190,782
State, municipal and other government 61,532 2,584 (1,774) 62,342
Public utilities 121,582 5,384 (2,952) 124,014
Industrial and miscellaneous 1,955,587 85,233 (7,752) 2,033,068
Mortgage-backed securities 2,586,202 55,382 (5,263) 2,636,321
-----------------------------------------------------------------
4,913,144 151,145 (17,762) 5,046,527
Preferred stocks 2,750 5,279 - 8,029
-----------------------------------------------------------------
$4,915,894 $156,424 $(17,762) $5,054,556
=================================================================
DECEMBER 31, 1996
Bonds:
United States Government and agencies $ 136,450 $ 3,301 $ 180 $ 139,571
State, municipal and other government 59,644 1,906 177 61,373
Public utilities 147,918 5,616 1,020 152,514
Industrial and miscellaneous 1,958,681 64,710 8,105 2,015,286
Mortgage-backed securities 2,470,740 43,896 15,610 2,499,026
-----------------------------------------------------------------
4,773,433 119,429 25,092 4,867,770
Preferred stocks 3,097 4,036 - 7,133
-----------------------------------------------------------------
$4,776,530 $123,465 $ 25,092 $4,874,903
=================================================================
</TABLE>
The carrying value and estimated fair value of bonds at December 31, 1997, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
----------------------------
<S> <C> <C>
Due in one year or less $ 132,834 $ 133,608
Due after one year through five years 1,036,862 1,066,474
Due after five years through ten years 886,542 915,229
Due after ten years 270,704 294,895
----------------------------
2,326,942 2,410,206
Mortgage and other asset-backed securities 2,586,202 2,636,321
----------------------------
$4,913,144 $5,046,527
============================
</TABLE>
17
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Interest on bonds and notes $373,496 $364,356 $342,182
Dividends on equity investments 1,460 1,436 1,822
Interest on mortgage loans 80,266 69,418 52,702
Rental income on real estate 7,501 9,526 10,443
Interest on policy loans 3,400 3,273 3,112
Other investment income 613 1,799 1,803
--------------------------------------
Gross investment income 466,736 449,808 412,064
Investment expenses 20,312 21,471 19,379
--------------------------------------
Net investment income $446,424 $428,337 $392,685
======================================
</TABLE>
Proceeds from sales and maturities of debt securities and related gross realized
gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Proceeds $3,284,095 $2,112,831 $1,757,229
==============================================
Gross realized gains $ 30,094 $ 19,876 $ 19,721
Gross realized losses (17,265) (19,634) (34,399)
----------------------------------------------
Net realized gains (losses) $ 12,829 $ 242 $ (14,678)
==============================================
</TABLE>
At December 31, 1997, investments with an aggregate carrying value of $5,944,376
were on deposit with regulatory authorities or were restrictively held in bank
custodial accounts for the benefit of such regulatory authorities as required by
statute.
18
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
---------------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Debt securities $ 12,829 $ 242 $(14,678)
Short-term investments (19) (197) 24
Equity securities 6,972 1,798 504
Mortgage loans on real estate 2,252 (5,530) (1,053)
Real estate 4,252 1,210 (1,908)
Other invested assets 1,632 12 (970)
---------------------------------------
27,918 (2,465) (18,081)
Tax effect (10,572) (1,235) 7,878
Transfer to interest maintenance reserve (10,187) 197 (7,891)
---------------------------------------
Net realized gains (losses) $ 7,159 $(3,503) $(18,096)
=======================================
<CAPTION>
CHANGE IN UNREALIZED
---------------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Debt securities $40,289 $(115,867) $355,560
Equity securities 5,653 2,929 (16,379)
----------------------------------------
Change in unrealized appreciation
(depreciation) $45,942 $(112,938) $339,181
=======================================
</TABLE>
Gross unrealized gains and gross unrealized losses on equity securities were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Unrealized gains $10,356 $ 9,590 $ 6,833
Unrealized losses (3,836) (8,723) (8,895)
---------------------------------------
Net unrealized gains (losses) $ 6,520 $ 867 $(2,062)
=======================================
19
</TABLE>
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
During 1997, the Company issued mortgage loans with interest rates ranging from
7.32% to 8.62%. The maximum percentage of any one mortgage loan to the value of
the underlying real estate at origination was 80%. Mortgage loans with a
carrying value of $237 were non-income producing for the previous twelve months.
Accrued interest of $79 related to these mortgage loans was excluded from
investment income. The Company requires all mortgaged properties to carry fire
insurance equal to the value of the underlying property.
During 1996 and 1995, mortgage loans of $13,163 and $1,644, respectively, were
foreclosed and transferred to real estate. No mortgage loans were foreclosed
during 1997. At December 31, 1997 and 1996, the Company held a mortgage loan
loss reserve in the asset valuation reserve of $11,985 and $5,432, respectively.
The mortgage loan portfolio is diversified by geographic region and specific
collateral property type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION PROPERTY TYPE DISTRIBUTION
- -------------------------------------- --------------------------------------
DECEMBER 31 DECEMBER 31
1997 1996 1997 1996
--------------- ---------------
<S> <C> <C> <C> <C> <C>
South Atlantic 29% 26% Retail 35% 37%
Pacific 15 13 Office 31 34
E. North Central 12 15 Apartment 14 14
Mountain 10 10 Other 14 12
W. South Central 9 12 Industrial 6 3
E. South Central 8 9
Middle Atlantic 7 6
W. North Central 6 6
New England 4 3
</TABLE>
At December 31, 1997, the Company had the following investments (excluding U. S.
Government guaranteed or insured issues) which individually represented more
than ten percent of capital and surplus and the asset valuation reserve:
<TABLE>
<CAPTION>
DESCRIPTION OF SECURITY OR ISSUER CARRYING VALUE
- -------------------------------------------------- ----------------------
<S> <C>
Bonds:
Structured Asset Securities Corporation $66,650
Countrywide Mortgage Backed Securities, Inc. 94,918
</TABLE>
20
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
The Company utilizes a variety of off-balance sheet financial instruments as
part of its efforts to hedge and manage fluctuations in the market value of its
investment portfolio attributable to changes in general interest rate levels and
to manage duration mismatch of assets and liabilities. Those instruments include
interest rate exchange agreements (swaps and caps), options, and commitments to
extend credit and all involve elements of credit and market risks in excess of
the amounts recognized in the accompanying financial statements at a given point
in time. The contract or notional amounts of those instruments reflect the
extent of involvement in the various types of financial instruments.
The Company's exposure to credit risk is the risk of loss from a counterparty
failing to perform according to the terms of the contract. That exposure
includes settlement risk (i.e., the risk that the counterparty defaults after
the Company has delivered funds or securities under terms of the contract) that
would result in an accounting loss and replacement cost risk (i.e., the cost to
replace the contract at current market rates should the counterparty default
prior to settlement date). Credit loss exposure resulting from nonperformance by
a counterparty for commitments to extend credit is represented by the
contractual amounts of the instruments.
At December 31, 1997 and 1996, the Company's outstanding financial instruments
with on and off-balance sheet risks, shown in notional amounts, are summarized
as follows:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
1997 1996
-----------------------
<S> <C> <C>
Derivative securities:
Interest rate swaps:
Receive fixed pay floating $100,000 $ -
Receive floating (uncapped) - pay floating (capped) 67,229 -
Interest rate cap agreements 500,000 500,000
</TABLE>
4. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to meet
its obligation under the reinsurance treaty.
21
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
4. REINSURANCE (CONTINUED)
Reinsurance assumption and cession treaties are transacted primarily with
affiliates. Premiums earned reflect the following reinsurance assumed and ceded
amounts:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Direct premiums $1,312,446 $1,457,450 $1,591,531
Reinsurance assumed 2,038 1,796 2,356
Reinsurance ceded (246,372) (300,546) (324,993)
--------------------------------------------------
Net premiums earned $1,068,112 $1,158,700 $1,268,894
==================================================
</TABLE>
The Company received reinsurance recoveries in the amount of $183,638, $168,155
and $167,287 during 1997, 1996 and 1995, respectively. At December 31, 1997 and
1996, estimated amounts recoverable from reinsurers that have been deducted from
policy and contract claim reserves totaled $60,437 and $63,226, respectively.
The aggregate reserves for policies and contracts were reduced for reserve
credits for reinsurance ceded at December 31, 1997 and 1996 of $2,434,130 and
$2,737,441, respectively.
At December 31, 1997, amounts recoverable from unauthorized reinsurers of
$73,080 (1996 $73,434) and reserve credits for reinsurance ceded of $78,838
(1996 $55,035) were associated with a single reinsurer and its affiliates. The
Company holds collateral under these reinsurance agreements in the form of trust
agreements totaling $117,686 at December 31, 1997 that can be drawn on for
amounts that remain unpaid for more than 120 days.
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax return
filing with certain affiliated companies. Under the terms of a tax-sharing
agreement between the Company and its affiliates, the Company computes federal
income tax expense as if it were filing a separate income tax return, except
that tax credits and net operating loss carryforwards are determined on the
basis of the consolidated group. Additionally, the alternative minimum tax is
computed for the consolidated group and the resulting tax, if any, is allocated
back to the separate companies on the basis of the separate companies'
alternative minimum taxable income.
22
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
5. INCOME TAXES (CONTINUED)
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before taxes and
realized capital losses for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Computed tax at federal statutory rate (35%) $42,775 $37,256 $27,835
Tax reserve adjustment 2,004 2,211 2,405
Excess tax depreciation (392) (384) (365)
Deferred acquisition costs tax basis 4,308 5,583 4,581
Prior year over accrual (1,016) (499) (306)
Dividend received deduction (941) (454) (56)
Charitable contribution (848) - -
Other items net (2,509) (2,536) (759)
-------------------------------------------
Federal income tax expense $43,381 $41,177 $33,335
===========================================
</TABLE>
Prior to 1984, as provided for under the Life Insurance Company Tax Act of 1959,
a portion of statutory income was not subject to current taxation but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($20,387 at December 31, 1997). To the extent dividends are paid from
the amount accumulated in the policyholders' surplus account, net earnings would
be reduced by the amount of tax required to be paid. Should the entire amount in
the policyholders' surplus account become taxable, the tax thereon computed at
current rates would amount to approximately $7,135.
The Company's federal income tax returns have been examined and closing
agreements have been executed with the Internal Revenue Service through 1987.
During 1996, there was a $5,025 prior period adjustment to the tax accrual. This
included a $2,100 writeoff of an intangible asset for tax purposes, and a
federal income tax refund of $1,829 for tax years 1984-1986 and related interest
of $1,686, net of a tax effect of $590. An examination is underway for years
1988 through 1995.
6. POLICY AND CONTRACT ATTRIBUTES
Participating life insurance policies are issued by the Company which entitle
policyholders to a share in the earnings of the participating policies, provided
that a dividend distribution, which is determined annually based on mortality
and persistency experience of the participating policies, is authorized by the
Company. Participating insurance constituted approximately .9% and 1.0% of
ordinary life insurance in force at December 31, 1997 and 1996, respectively.
23
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
A portion of the Company's policy reserves and other policyholders' funds
(including separate account liabilities) relate to liabilities established on a
variety of the Company's products that are not subject to significant mortality
or morbidity risk; however, there may be certain restrictions placed upon the
amount of funds that can be withdrawn without penalty. The amount of reserves on
these products, by withdrawal characteristics are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------- --------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment $ 8,912 0% $ 20,800 0%
Subject to discretionary withdrawal at
book value less surrender charge 755,300 8 794,881 9
Subject to discretionary withdrawal at
market value 2,454,845 27 1,803,057 20
Subject to discretionary withdrawal at
book value (minimal or no charges or
adjustments) 5,821,049 63 6,284,876 69
Not subject to discretionary withdrawal
provision 203,522 2 174,416 2
------------------------------- --------------------------------
9,243,628 100% 9,078,030 100%
Less reinsurance ceded 2,372,495 2,677,432
------------------ ------------------
Total policy reserves on annuities and
deposit fund liabilities $6,871,134 $6,400,598
================== ==================
</TABLE>
A reconciliation of the amounts transferred to and from the separate accounts is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------
Transfers as reported in the summary of operations of the
separate accounts statement:
<S> <C> <C> <C>
Transfers to separate accounts $281,095 $227,864 $133,386
Transfers from separate accounts 9,819 75,172 104,219
---------------------------------------------------
Net transfers to separate accounts 271,276 152,692 29,167
Reconciling adjustments charges for investment
manage-ment, administration fees and contract guarantees 26,204 19,093 13,814
---------------------------------------------------
Transfers as reported in the summary of operations of the
life, accident and health annual statement $297,480 $171,785 $ 42,981
===================================================
</TABLE>
24
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next anniversary
date. At December 31, 1997 and 1996, these assets (which are reported as
premiums deferred and uncollected) and the amounts of the related gross premiums
and loadings, are as follows:
<TABLE>
<CAPTION>
GROSS LOADING NET
----------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1997
Life and annuity:
Ordinary direct first year business $ 2,316 $1,698 $ 618
Ordinary direct renewal business 22,724 6,834 15,890
Group life direct business 1,523 646 877
Reinsurance ceded (1,464) (81) (1,383)
----------------------------------------
25,099 9,097 16,002
Accident and health:
Direct 148 - 148
Reinsurance ceded (49) - (49)
----------------------------------------
Total accident and health 99 - 99
----------------------------------------
$25,198 $9,097 $16,101
========================================
DECEMBER 31, 1996
Life and annuity:
Ordinary direct first year business $ 2,657 $1,865 $ 792
Ordinary direct renewal business 23,307 7,180 16,127
Group life direct business 1,788 1,195 593
Reinsurance ceded (1,706) (438) (1,268)
----------------------------------------
26,046 9,802 16,244
Accident and health:
Direct 104 - 104
Reinsurance ceded (3) - (3)
-----------------------------------------
Total accident and health 101 - 101
----------------------------------------
$26,147 $9,802 $16,345
========================================
</TABLE>
At December 31, 1997 and 1996, the Company had insurance in force aggregating
$69,271 and $69,251, respectively, in which the gross premiums are less than the
net premiums required by the standard valuation standards established by the
Insurance Division, Department of Commerce, of the State of Iowa. The Company
established policy reserves of $1,128 and $1,252 to cover these deficiencies at
December 31, 1997 and 1996, respectively.
25
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. Companies were allowed to grade the effects of the change in reserving
methodologies over five years. A direct charge to surplus of $501 was made for
the year ended December 31, 1995, related to the change in reserve methodology.
7. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.
The Company paid dividends to its parent of $62,000 and $20,000 in 1997 and
1996, respectively. No dividends were paid in 1995.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the FASB
No. 87 expense as a percent of salaries. The benefits are based on years of
service and the employee's compensation during the highest five consecutive
years of employment. Pension expense aggregated $422, $1,056 and $942 for the
years ended December 31, 1997, 1996 and 1995, respectively. The plan is subject
to the reporting and disclosure requirements of the Employee Retirement and
Income Security Act of 1974.
The Company's employees also participate in a contributory defined contribution
plan sponsored by AEGON which is qualified under Section 401(k) of the Internal
Revenue Service Code. Employees of the Company who customarily work at least
1,000 hours during each calendar year and meet the other eligibility
requirements, are participants of the plan. Participants may elect to contribute
up to fifteen percent of their salary to the plan. The Company will match an
amount up to three percent of the participant's salary. Participants may direct
all of their contributions and plan balances to be invested in a variety of
investment options. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement and Income Security Act of 1974. Expense
related to this plan was $226, $297 and $465 for the years ended December 31,
1997, 1996 and 1995, respectively.
26
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
8. RETIREMENT AND COMPENSATION PLANS (CONTINUED)
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also sponsors
an employee stock option plan for individuals employed at least three years and
a stock purchase plan for its producers, with the participating affiliated
companies establishing their own eligibility criteria, producer contribution
limits and company matching formula. These plans have been accrued or funded as
deemed appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans sponsored by
AEGON that provide postretirement medical, dental and life insurance benefits to
employees meeting certain eligibility requirements. Portions of the medical and
dental plans are contributory. The expenses of the postretirement plans
calculated on the pay-as-you-go basis are charged to affiliates in accordance
with an intercompany cost sharing arrangement. The Company expensed $62, $184
and $164 for the years ended December 31, 1997, 1996 and 1995, respectively.
9. RELATED PARTY TRANSACTIONS
The Company shares certain offices, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1997, 1996
and 1995, the Company paid $18,705, $17,028 and $14,214, respectively, for these
services, which approximates their costs to the affiliates.
Payable to affiliates and intercompany borrowings bear interest at the thirty-
day commercial paper rate of 5.6% at December 31, 1997. During 1997, 1996 and
1995, the Company paid net interest of $1,188, $174 and $71, respectively, to
affiliates.
During 1997 and 1995, the Company received capital contributions of $153 and
$40,000, respectively, in cash from its parent.
At December 31, 1997, the Company has a $16,400 short-term note payable to an
affiliate. Interest on this note accrues at 5.6%.
27
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1995, the Company sold real estate with a book value of approximately
$13,270 to an affiliated entity in exchange for a short-term note receivable. No
gain was recognized on this sale. This note matured during 1996.
During the year ended December 31, 1995, the Company restructured demand notes
and accrued interest of $13,250 and $745, respectively, related to an affiliate.
The Company received 9,750 shares of preferred stock from the affiliate for
satisfaction of debt. The Company realized a loss of $8,695 related to this
transaction. At December 31, 1996 and 1995, the preferred stock related to this
affiliate was deemed to have no value and an unrealized loss of $4,555 was
recognized in 1995.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. Although
such litigation sometimes includes substantial demands for compensatory and
punitive damages, in addition to contract liability, it is management's opinion,
after consultation with counsel and a review of available facts, that damages
arising from such demands will not be material to the Company's financial
position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. Assessments are charged to operations when received
by the Company except where right of offset against other taxes paid is allowed
by law; amounts available for future offsets are recorded as an asset on the
Company's balance sheet. Potential future obligations for unknown insolvencies
are not determinable by the Company. The future obligation has been based on the
most recent information available from the National Organization of Life and
Health Insurance Guaranty Associations. The Company has established a reserve of
$17,700 and $21,774 and an offsetting premium tax benefit of $7,984 and $8,752
at December 31, 1997 and 1996, respectively, for its estimated share of future
guaranty fund assessments related to several major insurer insolvencies. The
guaranty fund expense (benefit) was $(975), $2,617 and $5,859 for December 31,
1997, 1996 and 1995, respectively.
28
<PAGE>
PFL Life Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
11. YEAR 2000 (UNAUDITED)
AEGON has adopted and has in place a Year 2000 Assessment and Planning Project
(the "Project") to review and analyze its information technology and systems to
determine if they are Year 2000 compatible. The Company has begun to convert or
modify, where necessary, critical data processing systems. It is contemplated
that the plan will be substantially completed by early 1999. The Company does
not expect this project to have a significant effect on operations. However, to
mitigate the effect of outside influences upon the success of the project, the
Company has undertaken communications with its significant customers, suppliers
and other third parties to determine their Year 2000 compatibility and
readiness. Management believes that the issues associated with the Year 2000
will be resolved with no material financial impact on the Company.
Since the Year 2000 computer problem, and its resolution is complex and
multifaceted, the success of a response plan cannot be conclusively known until
the Year 2000 is reached (or an earlier date to the extent that systems or
equipment addresses Year 2000 date data prior to the Year 2000). Even with
appropriate and diligent pursuit of a well-conceived Project, including testing
procedures, there is no certainty that any company will achieve complete
success. Notwithstanding the efforts or results of the Company, its ability to
function unaffected to and through the Year 2000 may be adversely affected by
actions (or failure to act) of third parties beyond its knowledge or control.
29
<PAGE>
PFL Life Insurance Company
Summary of Investments - Other Than
Investments in Related Parties
(Dollars in thousands)
December 31, 1997
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and
government agencies and authorities $1,325,817 $1,355,098 $1,325,817
States, municipalities and political
subdivisions 136,058 139,110 136,058
Foreign governments 51,407 51,154 51,407
Public utilities 124,013 124,013 121,582
All other corporate bonds 3,275,849 3,377,152 3,278,280
Redeemable preferred stock 2,750 8,029 2,750
----------------------------------------------------
Total fixed maturities 4,915,894 5,054,556 4,915,894
EQUITY SECURITIES
Common stocks:
Banks, trust and insurance 7,593 9,046 9,046
Industrial, miscellaneous and all other 36,263 41,330 41,330
----------------------------------------------------
Total equity securities 43,856 50,376 50,376
Mortgage loans on real estate 935,207 935,207
Real estate 44,699 44,699
Real estate acquired in satisfaction of
debt 11,814 11,814
Policy loans 57,136 57,136
Other long-term investments 29,864 29,864
Cash and short-term investments 23,939 23,939
-------------- ----------------
Total investments $6,062,409 $6,068,929
============== ================
</TABLE>
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
30
<PAGE>
PFL Life Insurance Company
Supplementary Insurance Information
(Dollars in thousands)
SCHEDULE III
<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
--------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Individual life $ 882,003 $ - $ 8,550
Individual health 62,033 9,207 12,821
Group life and health 88,211 11,892 44,977
Annuity 4,204,125 - -
--------------------------------------------------
$5,236,372 $21,099 $66,348
==================================================
YEAR ENDED DECEMBER 31, 1996
Individual life $ 734,350 $ - $ 7,240
Individual health 39,219 8,680 13,631
Group life and health 78,418 14,702 53,486
Annuity 4,408,419 - -
--------------------------------------------------
$5,260,406 $23,382 $74,357
==================================================
YEAR ENDED DECEMBER 31, 1995
Individual life $ 594,274 $ - $ 6,066
Individual health 24,225 7,768 11,863
Group life and health 67,994 16,662 58,813
Annuity 4,220,274 -
--------------------------------------------------
$4,906,767 $ 24,430 $76,742
==================================================
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
NET BENEFITS, CLAIMS OTHER
PREMIUM INVESTMENT LOSSES AND SETTLEMENT OPERATING PREMIUMS
REVENUE INCOME* EXPENSES EXPENSES* WRITTEN
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 200,175 $ 75,914 $ 211,921 $ 36,185 -
63,548 5,934 37,706 29,216 $ 63,383
146,694 11,888 103,581 91,568 143,580
657,695 352,688 571,434 364,216 -
- ----------------------------------------------------------------------
$ 1,068,112 $446,424 $ 924,642 $521,185
======================================================================
$ 202,082 $ 66,538 $ 197,526 $ 38,067 -
55,871 5,263 32,903 29,511 $ 55,678
174,781 12,877 105,459 122,953 171,320
725,966 343,659 800,121 230,417 -
- ----------------------------------------------------------------------
$ 1,158,700 $428,337 $1,136,009 $420,948
======================================================================
$ 111,918 $ 49,929 $ 97,065 $ 37,933 -
47,692 4,091 25,793 26,033 $ 47,690
187,832 11,665 106,065 139,640 184,545
921,452 327,000 1,116,768 114,164 -
- ----------------------------------------------------------------------
$ 1,268,894 $392,685 $1,345,691 $317,770
======================================================================
</TABLE>
* Allocations of net investment income and other operating expenses are based on
a number of assumptions and estimates, and the results would change if
different methods were applied.
32
<PAGE>
PFL Life Insurance Company
Reinsurance
(Dollars in thousands)
SCHEDULE IV
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER
31, 1997
Life insurance in force $5,025,027 $420,519 $ 35,486 $4,639,994 .8%
=========================================================================
Premiums:
Individual life $ 201,691 $ 3,554 $ 2,038 $ 200,175 1.0%
Individual health 73,593 10,045 - 63,548 -
Group life and health 339,269 192,575 - 146,694 -
Annuity 697,893 40,198 - 657,695 -
-------------------------------------------------------------------------
$1,312,446 $ 246,372 $ 2,038 $1,068,112 .2%
=========================================================================
YEAR ENDED DECEMBER
31, 1996
Life insurance in force $4,863,416 $477,112 $30,685 $4,416,989 .7%
=========================================================================
Premiums:
Individual life $ 204,144 $ 3,858 $ 1,796 $ 202,082 .9%
Individual health 68,699 12,828 - 55,871 -
Group life and health 390,296 215,515 - 174,781 -
Annuity 794,311 68,345 - 725,966 -
-------------------------------------------------------------------------
$1,457,450 $300,546 $ 1,796 $1,158,700 .2%
=========================================================================
YEAR ENDED DECEMBER
31, 1995
Life insurance in force $4,594,434 $468,811 $22,936 $4,148,559 .6%
=========================================================================
Premiums:
Individual life $ 113,934 $ 3,841 $ 1,825 $ 111,918 1.6%
Individual health 60,309 12,617 - 47,692 -
Group life and health 408,097 220,265 - 187,832 -
Annuity 1,009,191 88,270 531 921,452 .05%
-------------------------------------------------------------------------
$1,591,531 $324,993 $ 2,356 $1,268,894 .2%
=========================================================================
</TABLE>
33
<PAGE>
PFL ENDEAVOR VA SEPARATE ACCOUNT
THE ENDEAVOR ML VARIABLE ANNUITY
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND CONTRACT OWNERS
OF THE ENDEAVOR ML VARIABLE ANNUITY,
PFL LIFE INSURANCE COMPANY
We have audited the accompanying balance sheet of certain subaccounts of
PFL Endeavor VA Separate Account which comprise The Endeavor ML Variable
Annuity as of December 31, 1997, and the related statements of operations
and changes in contract owners' equity for the period July 2, 1997
(commencement of operations) through December 31, 1997. These financial
statements are the responsibility of the Variable Account's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit 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 mutual fund shares
owned as of December 31, 1997 by correspondence with the mutual funds'
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 audit
provides 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 certain subaccounts of
the PFL Endeavor VA Separate Account which comprise The Endeavor ML
Variable Annuity at December 31, 1997 and the results of their operations
and changes in their contract owners' equity for the period July 2, 1997
(commencement of operations) to December 31, 1997 in conformity with
generally accepted accounting principles.
Des Moines, Iowa
March 27, 1998
<PAGE>
PFL ENDEAVOR VA SEPARATE ACCOUNT
THE ENDEAVOR ML VARIABLE ANNUITY
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
T. ROWE DREYFUS
ENDEAVOR ENDEAVOR PRICE ENDEAVOR SMALL
MONEY ASSET INT'L. VALUE CAP
MARKET ALLOCATION STOCK EQUITY VALUE
TOTAL SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash $ 2 2 - - - -
Investments in mutual funds,
at current market value (Note 2):
Endeavor Series Trust:
Endeavor Money Market Portfolio 506,969 506,969 - - - -
Endeavor Asset Allocation Portfolio 1,534,788 - 1,534,788 - - -
T. Rowe Price Int'l Stock Portfolio 2,443,605 - - 2,443,605 - -
Endeavor Value Equity Portfolio 1,838,074 - - - 1,838,074 -
Dreyfus Small Cap Value Portfolio 3,203,601 - - - - 3,203,601
Dreyfus U.S. Gov't Securities Portfolio 477,970 - - - - -
T. Rowe Price Equity Income Portfolio 3,087,461 - - - - -
T. Rowe Price Growth Stock Portfolio 2,327,591 - - - - -
Endeavor Opportunity Value Portfolio 1,274,303 - - - - -
Endeavor Enhanced Index Portfolio 1,655,437 - - - - -
WRL Series Fund, Inc.
WRL Growth Portfolio 3,096,326 - - - - -
Merrill Lynch Variable Series Funds, Inc.
High Current Income Fund 1,878,900 - - - - -
Developing Capital Markets Focus Fund 715,637 - - - - -
Basic Value Focus Fund 1,504,003 - - - - -
------------ --------- ----------- ----------- ----------- -----------
Total investments in mutual funds 25,544,665 506,969 1,534,788 2,443,605 1,838,074 3,203,601
------------ --------- ----------- ----------- ----------- -----------
------------ --------- ----------- ----------- ----------- -----------
Total Assets $25,544,667 506,971 1,534,788 2,443,605 1,838,074 3,203,601
============ ========= =========== =========== =========== ===========
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Contract terminations payable $ - - 32 66 51 98
------------ --------- ----------- ----------- ----------- -----------
Total Liabilities 657 - 32 66 51 98
Contract Owners' Equity:
Deferred annuity contracts terminable
by owners (Note 3 ) 25,544,010 506,971 1,534,756 2,443,539 1,838,023 3,203,503
------------ --------- ----------- ----------- ----------- -----------
25,544,667 506,971 1,534,788 2,443,605 1,838,074 3,203,601
============ ========= =========== =========== =========== ===========
<CAPTION>
DREYFUS T. ROWE T. ROWE
U.S. PRICE PRICE ENDEAVOR ENDEAVOR
GOV'T. EQUITY GROWTH OPPORTUNITY ENHANCED WRL
SECURITIES INCOME STOCK VALUE INDEX GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash - - - - - -
Investments in mutual funds,
at current market value (Note 2):
Endeavor Series Trust:
Endeavor Money Market Portfolio - - - - - -
Endeavor Asset Allocation Portfolio - - - - - -
T. Rowe Price Int'l Stock Portfolio - - - - - -
Endeavor Value Equity Portfolio - - - - - -
Dreyfus Small Cap Value Portfolio - - - - - -
Dreyfus U.S. Gov't Securities Portfolio 477,970 - - - - -
T. Rowe Price Equity Income Portfolio - 3,087,461 - - - -
T. Rowe Price Growth Stock Portfolio - - 2,327,591 - - -
Endeavor Opportunity Value Portfolio - - - 1,274,303 - -
Endeavor Enhanced Index Portfolio - - - - 1,655,437 -
WRL Series Fund, Inc.
WRL Growth Portfolio - - - - - 3,096,326
Merrill Lynch Variable Series Funds, Inc.
High Current Income Fund - - - - - -
Developing Capital Markets Focus Fund - - - - - -
Basic Value Focus Fund - - - - - -
------------ ------------- ------------ ----------- ------------ ------------
Total investments in mutual funds 477,970 3,087,461 2,327,591 1,274,303 1,655,437 3,096,326
------------ ------------- ------------ ----------- ------------ ------------
------------ ------------- ------------ ----------- ------------ ------------
Total Assets 477,970 3,087,461 2,327,591 1,274,303 1,655,437 3,096,326
============ ============= ============ =========== ============ ============
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Contract terminations payable - 71 70 24 49 110
------------ ------------- ------------ ----------- ------------ ------------
Total Liabilities - 71 70 24 49 110
Contract Owners' Equity:
Deferred annuity contracts terminable
by owners (Note 3 ) 477,970 3,087,390 2,327,521 1,274,279 1,655,388 3,096,216
------------ ------------- ------------ ----------- ------------ ------------
477,970 3,087,461 2,327,591 1,274,303 1,655,437 3,096,326
============= ============= ============ =========== ============ ============
<CAPTION>
High Developing Basic
Current Capital Value
Income Markets Focus Focus
Subaccount Subaccount Subaccount
---------- ------------- ----------
<S> <C> <C> <C>
ASSETS
Cash - - -
Investments in mutual funds,
at current market value (Note 2):
Endeavor Series Trust:
Endeavor Money Market Portfolio - - -
Endeavor Asset Allocation Portfolio - - -
T. Rowe Price Int'l Stock Portfolio - - -
Endeavor Value Equity Portfolio - - -
Dreyfus Small Cap Value Portfolio - - -
Dreyfus U.S. Gov't Securities Portfolio - - -
T. Rowe Price Equity Income Portfolio - - -
T. Rowe Price Growth Stock Portfolio - - -
Endeavor Opportunity Value Portfolio - - -
Endeavor Enhanced Index Portfolio - - -
WRL Series Fund, Inc.
WRL Growth Portfolio - - -
Merrill Lynch Variable Series Funds, Inc.
High Current Income Fund 1,878,900 - -
Developing Capital Markets Focus Fund - 715,637 -
Basic Value Focus Fund - - 1,504,003
------------ ----------- -----------
Total investments in mutual funds 1,878,900 715,637 1,504,003
------------ ----------- -----------
------------ ----------- -----------
Total Assets 1,878,900 715,637 1,504,003
============ =========== ===========
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Contract terminations payable 8 32 46
------------ ----------- -----------
Total Liabilities 8 32 46
Contract Owners' Equity:
Deferred annuity contracts terminable
by owners (Note 3 ) 1,878,892 715,605 1,503,957
------------ ----------- -----------
1,878,900 715,637 1,504,003
============ =========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
Page 1
<PAGE>
PFL ENDEAVOR SEPARATE ACCOUNT
THE ENDEAVOR ML VARIABLE ANNUITY
STATEMENT OF OPERATIONS
Period from July 2, 1997 (commencement of operations) through December 31, 1997
<TABLE>
<CAPTION>
T. Rowe
Endeavor Endeavor Price
Money Asset Int'l.
Market Allocation Stock
Total Subaccount Subaccount Subaccount
----- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends $303,354 9,244 - -
Expenses (Note 4):
Mortality and expense risk charge 80,736 2,669 3,956 8,872
------------- ---------- ---------- -----------
Net investment income (loss) $222,618 6,575 (3,956) (8,872)
============= ========== ========== ===========
NET REALIZED & UNREALIZED CAPITAL GAIN (LOSS)
FROM INVESTMENTS
Net realized capital gain (loss) from sales of investments:
Proceeds from sales 909,976 580,315 31,995 81,215
Cost of investments sold 920,148 580,315 31,704 90,232
------------- ---------- ---------- -----------
Net realized capital gain (loss) from sales of investments (10,172) - 291 (9,017)
Net change in unrealized appreciation (depreciation)
of investments:
Beginning of the period - - - -
End of the period (229,122) - 10,233 (84,863)
-------------- ---------- ---------- -----------
Net change in unrealized appreciation(depreciation)
of investments (229,122) - 10,233 (84,863)
-------------- ---------- ---------- -----------
Net realized and unrealized capital gain (loss)
from investments (239,294) - 10,524 (93,880)
-------------- ---------- ---------- -----------
INCREASE (DECREASE) FROM OPERATIONS $ (16,676) 6,575 6,568 (102,752)
============= ========== ========== ===========
<CAPTION>
Dreyfus Dreyfus T. Rowe
Endeavor Small U.S. Price
Value Cap Gov't. Equity
Equity Value Securities Income
Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends - - - -
Expenses (Note 4):
Mortality and expense risk charge 5,999 9,681 1,736 9,495
------------- ---------- ---------- -----------
Net investment income (loss) (5,999) (9,681) (1,736) (9,495)
============= ========== ========== ===========
NET REALIZED & UNREALIZED CAPITAL GAIN (LOSS)
FROM INVESTMENTS
Net realized capital gain (loss) from sales of investments:
Proceeds from sales 23,014 23,460 8,973 29,857
Cost of investments sold 21,687 22,034 8,799 27,953
-------------- ---------- ----------- ----------
Net realized capital gain (loss) from sales of investments 1,327 1,426 174 1,904
Net change in unrealized appreciation (depreciation)
of investments:
Beginning of the period - - - -
End of the period 49,138 (56,942) 12,568 138,559
-------------- ---------- ----------- ----------
Net change in unrealized appreciation(depreciation)
of investments 49,138 (56,942) 12,568 138,559
-------------- ---------- ----------- ----------
Net realized and unrealized capital gain (loss)
from investments 50,465 (55,516) 12,742 140,463
-------------- ---------- ---------- -----------
INCREASE (DECREASE) FROM OPERATIONS $ 44,466 (65,197) 11,006 130,968
============= ========== ========== ===========
<CAPTION>
T. Rowe
Price Endeavor Endeavor
Growth Opportunity Enhanced WRL
Stock Value Index Growth
Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends - - - -
Expenses (Note 4):
Mortality and expense risk charge 6,539 3,163 5,696 10,527
------------- ---------- ---------- -----------
Net investment income (loss) (6,539) (3,163) (5,696) 255,676
============= ========== ========== ===========
NET REALIZED & UNREALIZED CAPITAL GAIN (LOSS)
FROM INVESTMENTS
Net realized capital gain (loss) from sales of investments:
Proceeds from sales 15,883 10,276 6,087 21,895
Cost of investments sold 15,481 9,924 5,964 22,069
------------- ---------- ---------- -----------
Net realized capital gain (loss) from sales of investments 402 352 123 (174)
Net change in unrealized appreciation (depreciation)
of investments:
Beginning of the period - - - -
End of the period 79,647 14,982 42,978 (304,808)
----------- ---------- ---------- -----------
Net change in unrealized appreciation(depreciation)
of investments 79,647 14,982 42,978 (304,808)
----------- ---------- ---------- -----------
Net realized and unrealized capital gain (loss)
from investments 80,049 15,334 43,101 (304,982)
----------- ---------- ---------- -----------
INCREASE (DECREASE) FROM OPERATIONS 73,510 12,171 37,405 (49,306)
=========== ========== ========== ===========
<CAPTION>
High Developing Basic
Current Capital Value
Income Markets Focus Focus
Subaccount Subaccount Subaccount
---------- ------------- ----------
<S> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends 27,907 - -
Expenses (Note 4):
Mortality and expense risk charge 5,128 2,988 4,287
------------- ----------- -----------
Net investment income (loss) 22,779 (2,988) (4,287)
============= =========== ===========
NET REALIZED & UNREALIZED CAPITAL GAIN (LOSS)
FROM INVESTMENTS
Net realized capital gain (loss) from sales of investments:
Proceeds from sales 6,651 42,445 27,910
Cost of investments sold 6,627 51,458 25,901
------------- ----------- -----------
Net realized capital gain (loss) from sales of investments 24 (9,013) 2,009
Net change in unrealized appreciation (depreciation)
of investments:
Beginning of the period - - -
End of the period (5,935) (94,832) (29,847)
------------- ----------- -----------
Net change in unrealized appreciation(depreciation)
of investments (5,935) (94,832) (29,847)
------------- ----------- -----------
Net realized and unrealized capital gain (loss)
from investments (5,911) (103,845) (27,838)
------------- ----------- -----------
INCREASE (DECREASE) FROM OPERATIONS 16,868 (106,833) (32,125)
============= =========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
Page 2
<PAGE>
PFL Endeavor VA Separate Account
The Endeavor ML Variable Annuity
Statements of Changes in Contract Owners' Equity
Period from July 2, 1997 (commencement of operations) through December 31, 1997
<TABLE>
<CAPTION>
T. ROWE
ENDEAVOR ENDEAVOR PRICE ENDEAVOR
MONEY ASSET INTERNATIONAL VALUE
MARKET ALLOCATION STOCK EQUITY
TOTAL SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ------------ ------------ ------------- ------------
1997 1997 1997 1997 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operations
Net Investment Income (loss) $ 222,618 6,575 (3,956) (8,872) (5,999)
Net realized capital gain (loss) (10,172) - 291 (9,071) 1,327
Net change in unrealized appreciation/
depreciation of investments (229,122) - 10,233 (84,863) 49,138
------------ ------------ ------------ ------------- ------------
Increase (decrease) from operations (16,676) 6,575 6,568 (102,752) 44,466
------------ ------------ ------------ ------------- ------------
Contract Transactions:
Net contract purchase payments 17,481,257 1,013,022 794,387 1,695,062 1,347,831
Transfer payments from (to) other subaccounts
or general account 8,187,911 (510,554) 738,373 862,237 449,017
Contract terminations, withdrawals,
and other deductions (108,482) (2,072) (4,572) (11,008) (3,291)
------------ ------------ ------------ ------------- ------------
Increase from contract transaction 25,560,686 500,396 1,528,188 2,546,291 1,793,557
------------ ------------ ------------ ------------- ------------
------------ ------------ ------------ ------------- ------------
Net Increase in contract owner's equity 25,544,010 506,971 1,534,756 2,443,539 1,838,023
------------ ------------ ------------ ------------- ------------
Contract Owner's Equity:
Beginning of the period - - - - -
------------ ------------ ------------ ------------- ------------
End of the period $ 25,544,010 506,971 1,534,756 2,443,539 1,838,023
============ ============ ============ ============= ============
<CAPTION>
DREYFUS DREYFUS T. ROWE
SMALL U.S. PRICE
CAP GOVERNMENT EQUITY
VALUE SECURITIES INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ------------ ------------
1997 1997 1997
---- ---- ----
<S> <C> <C> <C>
Operations
Net Investment Income (loss) (9,681) (1,736) (9,495)
Net realized capital gain (loss) 1,426 174 1,904
Net change in unrealized appreciation/
depreciation of investments (56,942) 12,568 138,559
------------ ------------ ------------
Increase (decrease) from operations (65,197) 11,006 130,968
------------ ------------ ------------
Contract Transactions:
Net contract purchase payments 2,307,625 287,490 1,859,574
Transfer payments from (to) other subaccounts
or general account 976,339 181,904 1,102,565
Contract terminations, withdrawals,
and other deductions (15,264) (2,430) (23,717)
------------ ------------ ------------
Increase from contract transaction 3,268,700 466,964 2,956,422
------------ ------------ ------------
------------ ------------ ------------
Net Increase in contract owner's equity 3,203,503 477,970 3,087,390
------------ ------------ ------------
Contract Owner's Equity:
Beginning of the period - - -
------------ ------------ ------------
End of the period 3,203,503 477,970 3,087,390
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
T. ROWE
PRICE ENDEAVOR ENDEAVOR HIGH
GROWTH OPPORTUNITY ENHANCED WRL CURRENT
STOCK VALUE INDEX GROWTH INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ------------ ------------ ------------ ------------
1997 1997 1997 1997 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operations
Net Investment Income (loss) $ (5,539) (3,163) (5,696) 255,676 22,779
Net realized capital gain (loss) 402 352 123 (174) 24
Net change in unrealized appreciation/
depreciation of investments 79,647 14,982 42,978 (304,808) (5,935)
------------ ------------ ------------ ------------ ------------
Increase (decrease) from operations 73,510 12,171 37,405 (49,306) 16,868
------------ ------------ ------------ ------------ ------------
Contract Transactions:
Net contract purchase payments 1,728,051 781,291 1,129,258 2,390,827 868,938
Transfer payments from (to) other subaccounts
or general account 535,354 485,950 493,744 761,341 997,009
Contract terminations, withdrawals,
and other deductions (9,394) (5,133) (5,019) (6,646) (3,923)
------------ ------------ ------------ ------------ ------------
Increase from contract transaction 2,254,011 1,262,108 1,617,983 3,145,522 1,862,024
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net Increase in contract owner's equity 2,327,521 1,274,279 1,655,388 3,096,216 1,878,892
------------ ------------ ------------ ------------ ------------
Contract Owner's Equity:
Beginning of the period - - - - -
------------ ------------ ------------ ------------ ------------
End of the period $ 2,327,521 1,274,279 1,655,388 3,096,216 1,878,892
============ ============ ============ ============ ============
<CAPTION>
DEVELOPING BASIC
CAPITAL VALUE
MARKETS FOCUS FOCUS
SUBACCOUNT SUBACCOUNT
------------ ------------
1997 1997
---- ----
<S> <C> <C>
Operations
Net Investment Income (loss) (2,988) (4,287)
Net realized capital gain (loss) (9,013) 2,009
Net change in unrealized appreciation/
depreciation of investments (94,832) (29,847)
------------ ------------
Increase (decrease) from operations (106,833) (32,125)
------------ ------------
Contract Transactions:
Net contract purchase payments 510,032 767,869
Transfer payments from (to) other subaccounts
or general account 321,334 775,298
Contract terminations, withdrawals,
and other deductions (8,928) (7,085)
------------ ------------
Increase from contract transaction 822,438 1,536,082
------------ ------------
------------ ------------
Net Increase in contract owner's equity 715,605 1,503,957
------------ ------------
Contract Owner's Equity:
Beginning of the period - -
------------ ------------
End of the period 715,605 1,503,957
============ ============
</TABLE>
See accompanying Notes to Financial Statements.
Page 3
<PAGE>
PFL ENDEAVOR VA SEPARATE ACCOUNT
THE ENDEAVOR ML VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. Organization and Summary of Significant Accounting Policies
Organization - The Endeavor ML Variable Annuity Account ("Mutual Fund Account")
is a segregated investment account of PFL Life Insurance Company ("PFL Life"),
an indirect wholly-owned subsidiary of AEGON USA, Inc. ("AUSA"), a holding
company. AUSA is an indirect wholly-owned subsidiary of AEGON nv, a holding
company organized under the laws of the Netherlands.
The Mutual Fund Account is registered with the Securities and Exchange
Commission as a Unit Investment Trust pursuant to provisions of the Investment
Company Act of 1940. The Mutual Fund Account consists of fourteen investment
subaccounts, ten of which are invested in specified portfolios of the Endeavor
Series Trust, three of which are invested in the Merrill Lynch Variable Series
Fund, Inc. and one of which is invested in the Growth Portfolio of the WRL
Series Fund, Inc. Activity in these fourteen investment subaccounts is
available to contract owners of The Endeavor ML Variable Annuity. The Endeavor
Series Trust portfolios and the Growth Portfolio of the WRL Series Fund, Inc. of
the Mutual Fund Account are also available to the contract owners of The
Endeavor Variable Annuity and The Endeavor Platinum Variable Annuity issued by
PFL Life.
The subaccounts commenced operations on July 2, 1997. The investment advisor of
the Endeavor Series Trust is Endeavor Investment Advisors, a general partnership
between Endeavor Management Co. and AUSA Financial Markets, Inc., an affiliate
of PFL Life. The investment advisor for the WRL Series Fund, Inc., is WRL
Investment Management Inc., a subsidiary of Western Reserve Life Assurance Co.
of Ohio, an affiliate of PFL Life. The investment advisor of the Merrill Lynch
Variable Series Funds, Inc. is Merrill Lynch Asset Management L.P.
Investments - Net purchase payments received by the Mutual Fund Account are
invested in the portfolios of the Endeavor Series Trust, the Growth Portfolio of
the WRL Series Funds, and the funds of Merrill Lynch Series Funds, Inc.,
(collectively the "Series Funds") as selected by the contract owner. Investments
are stated at the closing net asset values per share on December 31, 1997.
Realized capital gains and losses from the sale of shares in the Series Funds
are determined on the first-in, first-out basis. Investment transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Unrealized gains or losses
from the investments in the Series Funds are credited or charged to contract
owners' equity.
Dividend income - Dividends received from the Series Funds investments are
reinvested to purchase additional mutual fund shares.
<PAGE>
PFL ENDEAVOR VA SEPARATE ACCOUNT
THE ENDEAVOR ML VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
2. Investments
A summary of the mutual fund investment at December 31, 1997 follows:
<TABLE>
<CAPTION>
Number of Net Asset Value
Shares Held Per Share Market Value Cost
------------ --------------- ------------------ --------------
<S> <C> <C> <C> <C>
Endeavor Series Trust:
Endeavor Money Market Portfolio 506,968.600 $ 1.00 $ 506,969 $ 506,969
Endeavor Asset Allocation Portfolio 68,701.329 22.34 1,534,788 1,524,555
T. Rowe Price Int'l Stock Portfolio 171,842.801 14.22 2,443,605 2,528,468
Endeavor Value Equity Portfolio 88,795.861 20.70 1,838,074 1,788,936
Dreyfus Small Cap Value Portfolio 195,222.492 16.41 3,203,601 3,260,543
Dreyfus U.S. Gov't Securities Portfolio 40,267.096 11.87 477,970 465,402
T. Rowe Price Equity Income Portfolio 159,641.204 19.34 3,087,461 2,948,902
T. Rowe Price Growth Stock Portfolio 112,011.099 20.78 2,327,591 2,247,944
Endeavor Opportunity Value Portfolio 108,451.295 11.75 1,274,303 1,259,321
Endeavor Enhanced Index Portfolio 134,697.848 12.29 1,655,437 1,612,459
WRL Series Fund, Inc.:
WRL Growth Portfolio 84,038.364 36.844201 3,096,326 3,401,134
Merrill Lynch Variable Series Funds, Inc.:
High Current Income Fund 163,098.987 11.52 1,878,900 1,884,835
Developing Capital Markets Focus Fund 77,617.891 9.22 715,637 810,469
Basic Value Focus Fund 94,949.713 15.84 1,504,003 1,533,850
---------------- --------------
$ 25,544,665 $ 25,773,787
===============- ==============
</TABLE>
The aggregate cost of purchases and proceeds from sales of investments were as
follows for the period ended December 31, 1997:
<TABLE>
<CAPTION>
Purchases Sales
---------------------------------------
<S> <C> <C>
Endeavor Series Trust:
Endeavor Money Market Portfolio $ 1,087,284 580,315
Endeavor Asset Allocation Portfolio 1,556,259 31,995
T. Rowe Price Int'l Stock Portfolio 2,618,700 81,215
Endeavor Value Equity Portfolio 1,810,623 23,014
Dreyfus Small Cap Value Portfolio 3,282,577 23,460
Dreyfus U.S. Gov't Securities Portfolio 474,201 8,973
T. Rowe Price Equity Income Portfolio 2,976,855 29,857
T. Rowe Price Growth Stock Portfolio 2,263,425 15,883
Endeavor Opportunity Value Portfolio 1,269,245 10,276
Endeavor Enhanced Index Portfolio 1,618,423 6,087
WRL Series Fund, Inc.:
WRL Growth Portfolio 3,423,203 21,895
Merrill Lynch Variable Series Funds, Inc.:
High Current Income Fund 1,891,462 6,651
Developing Capital Markets Focus Fund 861,927 42,445
Basic Value Focus Fund 1,559,751 27,910
------------- -------------
$ 26,693,935 909,976
============= =============
</TABLE>
<PAGE>
PFL ENDEAVOR VA SEPARATE ACCOUNT
THE ENDEAVOR ML VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
3 Contract Owners' Equity
A summary of deferred annuity contracts terminable by owners at December 31,
1997 follows:
<TABLE>
<CAPTION>
Return of Premium Death Benefit
Accumulation Accumulation Total
Subaccount Units Owned Unit Value Contract Value
---------- ------------ ------------ --------------
<S> <C> <C> <C>
Endeavor Money Market 186,769.997 1.196418 223,455
Endeavor Asset Allocation 146,972.115 2.171948 319,216
T. Rowe Price Int'l Stock 396,884.393 1.346560 534,429
Endeavor Value Equity 185,606.823 2.086130 387,200
Dreyfus Small Cap Value 427,723.238 1.851229 791,814
Dreyfus U.S. Gov't. Securities 142,705.078 1.215033 173,391
T. Rowe Price Equity Income 399,676.687 1.925022 769,386
T. Rowe Price Growth Stock 275,873.510 2.043487 563,744
Endeavor Opportunity Value 278,938.732 1.156993 322,730
Endeavor Enhanced Index 517,261.206 1.217647 629,842
WRL Growth 22,707.469 19.665157 446,546
High Current Income 296,791.692 1.037515 307,926
Developing Cap Markets Focus 190,773.375 0.776606 148,156
Basic Value Focus 279,869.269 1.045922 292,721
---------------
$ 5,910,556
===============
<CAPTION>
5% Annually Compounding Death Benefit and
Annual Step-Up Death Benefit
Accumulation Accumulation Total
Subaccount Units Owned Unit Value Contract Value
---------- ------------ ------------ --------------
<S> <C> <C> <C>
Endeavor Money Market 237,144.180 $ 1.195541 283,516
Endeavor Asset Allocation 560,066.492 2.170350 1,215,540
T. Rowe Price Int'l Stock 1,418,820.061 1.345562 1,909,110
Endeavor Value Equity 695,971.985 2.084599 1,450,823
Dreyfus Small Cap Value 1,303,710.955 1.849865 2,411,689
Dreyfus U.S. Gov't. Securities 250,859.166 1.214143 304,579
T. Rowe Price Equity Income 1,205,031.181 1.923605 2,318,004
T. Rowe Price Growth Stock 863,752.125 2.041994 1,763,777
Endeavor Opportunity Value 823,035.993 1.156145 951,549
Endeavor Enhanced Index 842,854.350 1.216754 1,025,546
WRL Growth 134,838.617 19.650673 2,649,670
High Current Income 1,515,274.846 1.036753 1,570,966
Developing Cap Markets Focus 731,215.174 0.776036 567,449
Basic Value Focus 1,158,912.186 1.045149 1,211,236
--------------
$ 19,633,454
==============
</TABLE>
December 31, 1997 contract owners' equity was comprised of:
<TABLE>
<CAPTION>
T. Rowe Dreyfus
Endeavor Endeavor Price Endeavor Small
Money Asset Int'l. Value Cap
Market Allocation Stock Equity Value
Total Subaccount Subaccount Subaccount Subaccount Subaccount
----- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Unit transactions, accumulated
net investment income and
realized capital gains $ 25,773,132 506,971 1,524,523 2,528,402 1,788,885 3,260,445
Adjustment for appreciation/
depreciation to market value (229,122) -- 10,233 (84,863) 49,138 (56,942)
-------------- -------- ---------- ---------- ---------- -----------
Total Contract Owners' Equity $ 25,544,010 506,971 1,534,756 2,443,539 1,838,023 3,203,503
============== ======== ========== ========== ========== ===========
<CAPTION>
Dreyfus T. Rowe T. Rowe
U.S. Price Price Endeavor Endeavor
Gov't Equity Growth Opportunity Enhanced WRL
Securities Income Stock Value Index Growth
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Unit transactions, accumulated
net investment income and
realized capital gains 465,402 2,948,831 2,247,874 1,259,297 1,612,410 3,401,024
Adjustment for appreciation/
depreciation to market value 12,568 138,559 79,647 14,982 42,978 (304,808)
----------- ------------ ----------- ----------- ----------- -----------
Total Contract Owners' Equity 477,970 3,087,390 2,327,521 1,274,279 1,655,388 3,096,216
=========== ============ =========== =========== =========== ===========
<CAPTION>
High Developing Basic
Current Capital Value
Income Markets Focus Focus
Subaccount Subaccount Subaccount
---------- ------------- ----------
<S> <C> <C> <C>
Unit transactions, accumulated
net investment income and
realized capital gains 1,884,827 810,437 1,533,804
Adjustment for appreciation/
depreciation to market value (5,935) (94,832) (29,847)
----------- ----------- ----------
Total Contract Owners' Equity 1,878,892 715,605 1,503,957
=========== =========== ==========
</TABLE>
A summary of changes in contract owners' account units follows:
<TABLE>
<CAPTION>
T. Rowe Dreyfus
Endeavor Endeavor Price Endeavor Small
Money Asset Int'l. Value Cap
Market Allocation Stock Equity Value
Subaccount Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Units outstanding at beginning of period - - - - -
Units purchased 856,545 367,347 1,191,744 661,561 1,217,677
Units redeemed and transferred (432,631) 339,692 623,960 220,018 513,757
---------- ---------- ----------- ---------- -----------
Units outstanding 12/31/97 423,914 707,039 1,815,704 881,579 1,731,434
========== ========== =========== ========== ===========
<CAPTION>
Dreyfus T. Rowe T. Rowe
U.S. Price Price Endeavor Endeavor
Gov't. Equity Growth Opportunity Enhanced
Securities Income Stock Value Index
Subaccount Subaccount Subaccount Subaccount Subaccount
----------- ---------- ---------- ---------- ----------
<C> <C> <C> <C> <C>
<S>
Units outstanding at beginning of period - - - - -
Units purchased 241,481 1,010,820 872,725 681,160 946,622
Units redeemed and transferred 152,083 593,888 266,901 420,815 413,494
---------- ---------- ----------- ---------- -----------
Units outstanding 12/31/97 393,564 1,604,708 1,139,626 1,101,975 1,360,116
========== ========== =========== ========== ===========
<CAPTION>
High Developing Basic
WRL Current Capital Value
Growth Income Markets Focus Focus
Subaccount Subaccount Subaccount Subaccount
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Units outstanding at beginning of period - - - -
Units purchased 119,298 845,593 544,241 710,989
Units redeemed and transferred 38,248 966,474 377,748 727,792
---------- ---------- ----------- ----------
Units outstanding 12/31/97 157,546 1,812,067 921,989 1,438,781
========== ========== =========== ==========
</TABLE>
<PAGE>
PFL ENDEAVOR VA SEPARATE ACCOUNT
THE ENDEAVOR ML VARIABLE ANNUITY
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
4. Administrative, Mortality and Expense Risk Charge
Administrative charges include an annual charge of the lesser of 2% of the
policy value or $35 per contract which will commence on the first policy
anniversary of each contract owner's account. This charge is waived if the
sum of the premium payments less the sum of the partial withdrawals equals or
exceeds $50,000 on the policy anniversary. Charges for administrative fees to
the variable annuity contracts are an expense of the Mutual Fund Account.
PFL Life deducts a daily charge for assuming certain mortality and expense
risks. For the 5% Annually Compounding Death Benefit, this charge is equal to
an effective annual rate of 1.25% of the value of the contract owners'
individual account. For the Return of Premium Death Benefit, the
corresponding charge is equal to an effective annual rate of 1.10% of the
contract owners' individual account. PFL Life also deducts a daily charge
equal to an annual rate of .15% of the contract owners' account for
administrative expenses. In addition, during the first seven policy years,
PFL deducts a daily distribution finance charge equal to an effective annual
rate of .15% of the contract owners' account.
5. Taxes
Operations of the Mutual Fund Account form a part of PFL Life, which is taxed
as a life insurance company under Subchapter L of the Internal Revenue Code
of 1986, as amended (the "Code"). The operations of the Mutual Fund Account
are accounted for separately from other operations of PFL Life for purposes
of federal income taxation. The Mutual Fund Account is not separately taxable
as a regulated investment company under Subchapter M of the Code and is not
otherwise taxable as an entity separate from PFL Life. Under existing federal
income tax laws, the income of the Mutual Fund Account, to the extent applied
to increase reserves under the variable annuity contracts, is not taxable to
PFL Life.
6. Year 2000 (Unaudited)
PFL Life and its parent have adopted and have in place a Year 2000
Assessment and Planning Project (the "Project") to review and analyze its
information technology and systems to determine if they are Year 2000
compatible. PFL Life has begun to convert, remediate or modify, where
necessary, critical data processing systems. It is contemplated that the
Project will be substantially completed by early 1999. PFL Life does not
expect this Project to have a significant effect on operations. However, to
mitigate the effect of outside influences upon the success of the Project,
PFL Life has undertaken communications with its significant customers,
suppliers and other third parties to determine their Year 2000 compatibility
and readiness. Management believes that the issues associated with the Year
2000 will be resolved with no material financial impact on PFL Life.
Since the Year 2000 computer problem, and its resolution, is complex and
multifaceted, the success of a response plan cannot be conclusively known
until the Year 2000 is reached (or an earlier date to the extent that systems
or equipment addresses Year 2000 date data prior to the Year 2000). Even with
appropriate and diligent pursuit of a well-conceived Project, including
testing procedures, there is no certainty that any company will achieve
complete success. Notwithstanding the efforts or results of PFL Life, its
ability to function unaffected to and through the Year 2000 may be adversely
affected by actions (or failure to act) of third parties beyond its knowledge
or control.
<PAGE>
PART C
OTHER INFORMATION
Item 28. Financial Statements and Exhibits
(a) Financial Statements:
All required financial statements are included in Part B of this
Registration Statement.
(b) Exhibits:
(1) Resolution of the Board of Directors of PFL Life Insurance
Company authorizing the establishment of the Target Account.
(Note 8)
(2) Form of Rules and Regulations of the Target Account.
(Note 10)
(3)(a) Form of Custodian Agreement between the Target Account and
Boston Safe Deposit and Trust Company. (Note 10)
(3)(b) Not Applicable.
(4)(a) Form of Management Agreement between the Target Account and
Endeavor Investment Advisers. (Note 10)
(4)(b)(1) Form of Investment Advisory Agreement between Endeavor
Investment Advisers and First Trust Advisers L.P. (DJIA
Target 5) (Note 10)
(4)(b)(2) Form of Investment Advisory Agreement between Endeavor
Investment Advisers and First Trust Advisers L.P. (DJIA
Target 10) (Note 10)
(5)(a) Principal Underwriting Agreement by and between PFL Life
Insurance Company on its own behalf and on behalf of the
Target Account, and AEG0N USA Securities, Inc. (Note 2)
(5)(a)(1) Principal Underwriting Agreement by and between PFL Life
Insurance Company on its own behalf and on behalf of the
Target Account, and AFSG Securities Corporation. (Note 9)
(5)(b) Form of Broker-Dealer Supervision and Sales Agreement by and
between AFSG Securities Corporation and the Broker-Dealer.
(Note 9)
(6)(a) Form of Policy for the Endeavor Variable Annuity. (Note 2)
(6)(b) Form of Policy Endorsement (Required Distributions) (Note 2)
(6)(c) Form of Policy Endorsement (Death Benefits) (Note 3)
(6)(d) Form of Policy Endorsement (Nursing Care) (Note 4)
(6)(e) Form of Policy Endorsement (Death Benefit) (Note 5)
(6)(f) Form of Policy for the Endeavor Variable Annuity. (Note 6)
(6)(g) Form of Policy Endorsement. (Nursing Care) (Note 6)
(6)(h) Form of Policy for the Endeavor FI Variable Annuity. (Note 7)
(6)(i) Form of Policy Endorsement for Endeavor FI. (Nursing Care)
(Note 7)
(6)(j) Form of Policy Endorsement. (Nursing Care) (Note 7)
<PAGE>
(6)(k) Form of Policy for the Endeavor Variable Annuity. (Note 9)
(6)(l) Form of Policy Endorsement (New Separate Accounts and Annuity
Commencement Date). (Note 9)
(7)(a) Form of Application for the PFL Endeavor Variable Annuity.
(Note 7)
(7)(b) Form of Application for the PFL Endeavor FI Variable Annuity.
(Note 7)
(7)(c) Form of Application for the Endeavor ML Variable Annuity.
(Note 7)
(7)(d) Form of Appliction for the Endeavor Variable Annuity. (Note 9)
(8)(a) Articles of Incorporation of PFL Life Insurance Company. (Note 9)
(8)(b) Bylaws of PFL Life Insurance Company. (Note 9)
(9) Not Applicable.
(10) Not Applicable.
(11)(a) Form of Distribution Plan (Note 10).
(11)(b) Form of Administrative Services Agreement with First Data
Investors Services Group (Note 10)
(11)(c) Form of Brokerage Enhancement Plan. (Note 10)
(11)(d) Form of Sublicense Agreement between Dow Jones, First Trust
Advisers L.P. and the Target Account. (Note 10)
(11)(e) Form of Distribution Agreement. (Note 10)
(12) Opinion and Consent of Counsel. (Note 9)
(13)(a) Opinion and Consent of Actuary. (Note 9)
(13)(b) Consent of Independent Auditors. (Note 10)
(14) Not Applicable.
(15) Not Applicable.
(16) Not Applicable.
(17) Financial Data Schedules. (Note 11)
- ----------------------
Note 1. Filed with the initial filing of Form N-4 Registration Statement
(File No. 33-33085) on January 23, 1990 and incorporated herein by
reference.
Note 2. Filed with Post-Effective Amendment No. 2 to Form N-4 Registration
Statement (File No. 33-33085) on April 1, 1991 and is filed
herewith.
Note 3. Filed with Post-Effective Amendment No. 3 to Form N-4 Registration
Statement (File No. 33-33085) on April 29, 1992 and is filed
herewith.
Note 4. Filed with Post-Effective Amendment No. 7 to Form N-4 Registration
Statement (File No. 33-33085) on March 29, 1994 and is filed
herewith.
Note 5. Filed with Post-Effective Amendment No. 10 to Form N-4 Registration
Statement (File No. 33-33085) on April 27, 1995 and incorporated
herein by reference.
<PAGE>
Note 6. Filed with Post-Effective Amendment No. 12 to Form N-4 Registration
Statement (File No. 33-33085) on February 28, 1997 and incorporated
herein by reference.
Note 7. Filed with Post-Effective Amendment No. 13 to Form N-4 Registration
Statement (File No. 33-33085) on April 29, 1997.
Note 8. Filed with the initial filing of Form N-3 Registration Statement (File
No. 333-36297) on September 24, 1997 and incorporated herein by
reference.
Note 9. Filed with the initial filing of Form N-3 Registration Statement (File
No. 333-47027) on February 27, 1998.
Note 10. Filed herewith.
Note 11. To be filed by a future amendment.
<PAGE>
Item 29. Directors and Officers of the Insurance Company
<TABLE>
<CAPTION>
Name and Principal Business Positions and Offices with Insurance Positions and Offices with
Address Company Registrant
- ------- ------- ----------
<C> <S> <C>
William L. Busler Director, Chairman of the Board and
4333 Edgewood Road N.E. President
Cedar Rapids, Iowa
52499-0001
Patrick S. Baird Director, Senior Vice President and
4333 Edgewood Road N.E. Chief Operating Officer
Cedar Rapids, Iowa
52499-0001
Craig D. Vermie Director, Vice President, Secretary
4333 Edgewood Road N.E. and General Counsel
Cedar Rapids, Iowa
52499-0001
Douglas C. Kolsrud Director, Vice President and
4333 Edgewood Road N.E. Corporate Actuary
Cedar Rapids, Iowa
52499-0001
Patrick E. Falconio Director, Senior Vice President and
4333 Edgewood Road N.E. Chief Investment Officer
Cedar Rapids, Iowa
52499-0001
Robert J. Kontz Vice President and
4333 Edgewood Road N.E. Corporate Controller
Cedar Rapids, Iowa
52499-0001
Brenda K. Clancy Vice President, Treasurer and Chief
4333 Edgewood Road N.E. Financial Officer
Cedar Rapids, Iowa
52499-0001
</TABLE>
Item 30. Persons Controlled by or Under Common Control with the Insurance
Company or Registrant
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name Incorporation Securities Owned Business
- ---- ------------- ---------------- --------
<S> <C> <C> <C>
AEGON N.V. Netherlands 53.63% of Vereniging Holding company
Corporation AEGON Netherlands
Membership Association
Groninger Financieringen B.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
AEGON Netherland N.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
AEGON Nevak Holding B.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
AEGON International N.V. Netherlands 100% of AEGON N.V. Holding company
Corporation Netherlands Corporation
Voting Trust Delaware Voting Trust
Trustees:
K.J. Storm
Donald J. Shepard
H.B. Van Wijk
Dennis Hersch
AEGON U.S. Holding Delaware 100% of Voting Trust Holding company
Corporation
Short Hills Management New Jersey 100% of AEGON U.S. Holding company
Company Holding Corporation
CORPA Reinsurance New York 100% of AEGON U.S. Holding company
Company Holding Corporation
AEGON Management Indiana 100% of AEGON U.S. Holding company
Company Holding Corporation
RCC North America Inc. Delaware 100% of AEGON U.S. Holding company
Holding Corporation
AEGON USA, Inc. Iowa 100% AEGON U.S. Holding company
Holding Corporation
AUSA Holding Company Maryland 100% AEGON USA, Inc. Holding company
Monumental General Insurance Maryland 100% AUSA Holding Co. Holding company
Group, Inc.
Trip Mate Insurance Agency, Inc. Kansas 100% Monumental General Sale/admin. of travel
Insurance Group, Inc. insurance
Monumental General Maryland 100% Monumental General Provides management srvcs.
Administrators, Inc. Insurance Group, Inc. to unaffiliated third party
administrator
Executive Management and Maryland 100% Monumental General Provides actuarial consulting
Consultant Services, Inc. Administrators, Inc. services
Monumental General Mass Maryland 100% Monumental General Marketing arm for sale of
Marketing, Inc. Insurance Group, Inc. mass marketed insurance
coverages
Diversified Investment Delaware 100% AUSA Holding Co. Registered investment advisor
Advisors, Inc.
Diversified Investors Securities Delaware 100% Diversified Investment Broker-Dealer
Corp. Advisors, Inc.
AEGON USA Securities, Inc. Iowa 100% AUSA Holding Co. Broker-Dealer
Supplemental Ins. Division, Inc. Tennessee 100% AUSA Holding Co. Insurance
Creditor Resources, Inc. Michigan 100% AUSA Holding Co. Credit insurance
CRC Creditor Resources Canada 100% Creditor Resources, Inc. Insurance agency
Canadian Dealer Network Inc.
AEGON USA Investment Iowa 100% AUSA Holding Co. Investment advisor
Management, Inc.
AEGON USA Realty Iowa 100% AUSA Holding Co. Provides real estate
Advisors, Inc. administrative and real
estate investment services
Quantra Corporation Delaware 100% AEGON USA Realty Real estate and financial
Advisors, Inc. software production and sales
Quantra Software Corporation Delaware 100% Quantra Corporation Manufacture and sell
mortgage loan and security
management software
Landauer Realty Advisors, Inc. Iowa 100% AEGON USA Realty Real estate counseling
Advisors, Inc.
Landauer Associates, Inc. Delaware 100% AEGON USA Realty Real estate counseling
Advisors, Inc.
Realty Information Systems, Inc. Iowa 100% AEGON USA Realty Information Systems for
Advisors, Inc. real estate investment
management
AEGON USA Realty Iowa 100% AEGON USA Real estate management
Management, Inc Realty Advisors, Inc.
USP Real Estate Investment Trust Iowa 21.89% First AUSA Life Ins. Co. Real estate investment trust
13.11% PFL Life Ins. Co.
4.86% Bankers United Life
Assurance Co.
Cedar Income Fund, Ltd. Iowa 16.73% PFL Life Ins. Co. Real estate investment trust
3.77% Bankers United Life
Assurance Company
3.38% Life Investors Co. of America
1.97% AEGON USA Realty Advisors, Inc.
.18% First AUSA Life Ins. Co.
RCC Properties Limited Iowa AEGON USA Realty Advisors, Limited Partnership
Partnership Inc. is General Partner and 5%
owner.
AUSA Financial Markets, Inc. Iowa 100% AUSA Holding Co. Marketing
Endeavor Investment Advisors California 49.9% AUSA Financial General Partnership
Markets, Inc.
Universal Benefits Corporation Iowa 100% AUSA Holding Co. Third party administrator
Investors Warranty of Iowa 100% AUSA Holding Co. Provider of automobile
America, Inc. extended maintenance
contracts
Massachusetts Fidelity Trust Co. Iowa 100% AUSA Holding Co. Trust company
Money Services, Inc. Delaware 100% AUSA Holding Co. Provides financial counseling
for employees and agents of
affiliated companies
Zahorik Company, Inc. California 100% AUSA Holding Co. Broker-Dealer
ZCI, Inc. Alabama 100% Zahorik Company, Inc. Insurance agency
AEGON Asset Management Delaware 100% AUSA Holding Co. Registered investment advisor
Services, Inc.
Intersecurities, Inc. Delaware 100% AUSA Holding Co. Broker-Dealer
ISI Insurance Agency, Inc. California 100% Intersecurities, Inc. Insurance agency
ISI Insurance Agency Ohio 100% ISI Insurance Agency, Inc. Insurance agency
of Ohio, Inc.
ISI Insurance Agency Texas 100% ISI Insurance Agency, Inc. Insurance agency
of Texas, Inc.
ISI Insurance Agency Massachusetts 100% ISI Insurance Agency Inc. Insurance Agency
of Massachusetts, Inc.
Associated Mariner Financial Michigan 100% Intersecurities, Inc. Holding co./management
Group, Inc. services
Mariner Financial Services, Inc. Michigan 100% Associated Mariner Broker/Dealer
Financial Group, Inc.
Mariner Planning Corporation Michigan 100% Mariner Financial Financial planning
Services, Inc.
Associated Mariner Agency, Inc. Michigan 100% Associated Mariner Insurance agency
Financial Group, Inc.
Associated Mariner Agency Hawaii 100% Associated Mariner Insurance agency
of Hawaii, Inc. Agency, Inc.
Associated Mariner Ins. Agency Massachusetts 100% Associated Mariner Insurance agency
of Massachusetts, Inc. Agency, Inc.
Associated Mariner Agency Ohio 100% Associated Mariner Insurance agency
Ohio, Inc. Agency, Inc.
Associated Mariner Agency Texas 100% Associated Mariner Insurance agency
Texas, Inc. Agency, Inc.
Associated Mariner Agency New Mexico 100% Associated Mariner Insurance agency
New Mexico, Inc. Agency, Inc.
Mariner Mortgage Corp. Michigan 100% Associated Mariner Mortgage origination
Financial Group, Inc.
Idex Investor Services, Inc. Florida 100% AUSA Holding Co. Shareholder services
Idex Management, Inc. Delaware 50% AUSA Holding Co. Investment advisor
50% Janus Capital Corp.
IDEX II Series Fund Massachusetts Various Mutual fund
IDEX Fund Massachusetts Various Mutual fund
IDEX Fund 3 Massachusetts Various Mutual fund
First AUSA Life Insurance Maryland 100% AEGON USA, Inc. Insurance holding company
Company
AUSA Life Insurance New York 100% First AUSA Life Insurance
Company, Inc. Insurance Company
Life Investors Insurance Iowa 100% First AUSA Life Ins. Co. Insurance
Company of America
Bankers United Life Iowa 100% Life Investors Ins. Insurance
Assurance Company Company of America
Life Investors Agency Iowa 100% Life Investors Ins. Marketing
Group, Inc. Company of America
PFL Life Insurance Company Iowa 100% First AUSA Life Ins. Co. Insurance
AEGON Financial Services Minnesota 100% PFL Life Insurance Co. Marketing
Group, Inc.
AEGON Assignment Corporation Kentucky 100% AEGON Financial Administrator of structured
Services Group, Inc. settlements
Southwest Equity Life Ins. Co. Arizona 100% of Common Voting Stock Insurance
First AUSA Life Ins. Co.
Iowa Fidelity Life Insurance Co. Arizona 100% of Common Voting Stock Insurance
First AUSA Life Ins. Co.
Western Reserve Life Assurance Ohio 100% First AUSA Life Ins. Co. Insurance
Co. of Ohio
WRL Series Fund, Inc. Maryland Various Mutual fund
WRL Investment Services, Inc. Florida 100% Western Reserve Life Provides administration for
Assurance Co. of Ohio affiliated mutual fund
WRL Investment Florida 100% Western Reserve Life Registered investment advisor
Management, Inc. Assurance Co. of Ohio
Monumental Life Insurance Co. Maryland 100% First AUSA Life Ins. Co. Insurance
AEGON Special Markets Maryland 100% Monumental Life Ins. Co. Marketing
Group, Inc.
Monumental General Casualty Co. Maryland 100% First AUSA Life Ins. Co. Insurance
United Financial Services, Inc. Maryland 100% First AUSA Life Ins. Co. General agency
Bankers Financial Life Ins. Co. Arizona 100% First AUSA Life Ins. Co. Insurance
The Whitestone Corporation Maryland 100% First AUSA Life Ins. Co. Insurance agency
Cadet Holding Corp. Iowa 100% First AUSA Life Holding company
Insurance Company
Commonwealth General Delaware 100% AEGON USA Holding company
Corporation ("CGC")
PB Series Trust Massachusetts N/A Mutual fund
Monumental Agency Group, Inc. Kentucky 100% CGC Provider of srvcs. to ins. cos.
Benefit Plans, Inc. Delaware 100% CGC TPA for Peoples Security Life
Insurance Company
Durco Agency, Inc. Virginia 100% Benefit Plans, Inc. General agent
Commonwealth General. Kentucky 100% CGC Administrator of structured
Assignment Corporation settlements
Providian Financial Services, Inc. Pennsylvania 100% CGC Financial services
AFSG Securities Corporation Pennsylvania 100% CGC Broker-Dealer
PB Investment Advisors, Inc. Delaware 100% CGC Registered investment advisor
Diversified Financial Products Inc. Delaware 100% CGC Provider of investment,
marketing and admin.
services to ins. cos.
AEGON USA Real Estate Delaware 100% Diversified Financial Real estate and mortgage
Services, Inc. Products Inc. holding company
Capital Real Estate Delaware 100% CGC Furniture and equiment lessor
Development Corporation
Capital General Development Delaware 100% CGC Holding company
Corporation
Commonwealth Life Kentucky 100% Capital General Insurance company
Insurance Company Development Corporation
Agency Holding I, Inc. Delaware 100% Commonwealth Life Investment subsidiary
Insurance Company
Agency Investments I, Inc. Delaware 100% Agency Holding I, Inc. Investment subsidiary
Peoples Security Life North Carolina 100% Capital General Insurance company
Insurance Company Development Corporation
Ammest Realty Corporation Texas 100% Peoples Security Life Special purpose subsidiary
Insurance Company
Agency Holding II, Inc. Delaware 100% Peoples Security Life Investment subsidiary
Insurance Company
Agency Investments II, Inc. Delaware 100% Agency Holding II, Inc. Investment subsidiary
Agency Holding III, Inc. Delaware 100% Peoples Security Life Investment subsidiary
Insurance Company
Agency Investments III, Inc. Delaware 100% Agency Holding III, Inc. Investment subsidiary
JMH Operating Company, Inc. Mississippi 100% Peoples Security Life Real estate holdings
Insurance Company
Capital Security Life Ins. Co. North Carolina 100% Capital General Insurance company
Development Corporation
Independence Automobile Florida 100% Capital Security Automobile Club
Association, Inc. Life Insurance Company
Independence Automobile Georgia 100% Capital Security Automobile Club
Club, Inc. Life Insurance Company
Capital 200 Block Corporation Delaware 100% CGC Real estate holdings
Capital Broadway Corporation Kentucky 100% CGC Real estate holdings
Southlife, Inc. Tennessee 100% CGC Investment subsidiary
Ampac Insurance Agency, Inc. Pennsylvania 100% CGC Provider of management
(EIN 23-1720755) support services
National Home Life Corporation Pennsylvania 100% Ampac Insurance Special-purpose subsidiary
Agency, Inc.
Compass Rose Development Pennsylvania 100% Ampac Insurance Special-purpose subsidiary
Corporation Agency, Inc.
Association Consultants, Inc. Illinois 100% Ampac Insurance TPA license-holder
Agency, Inc.
Valley Forge Associates, Inc. Pennsylvania 100% Ampac Insurance Furniture & equipment lessor
Agency, Inc.
Veterans Benefits Plans, Inc. Pennsylvania 100% Ampac Insurance Administator of group
Agency, Inc. insurance programs
Veterans Insurance Services, Inc. Delaware 100% Ampac Insurance Special-purpose subsidiary
Agency, Inc.
Financial Planning Services, Inc. Dist. Columbia 100% Ampac Insurance Special-purpose subsidiary
Agency, Inc.
Providian Auto and Home Missouri 100% CGC Insurance company
Insurance Company
Academy Insurance Group, Inc. Delaware 100% CGC Holding company
Academy Life Insurance Co. Missouri 100% Academy Insurance Insurance company
Group, Inc.
Pension Life Insurance New Jersey 100% Academy Insurance Insurance company
Company of America Group, Inc.
Academy Services, Inc. Delaware 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Ammest Development Corp. Inc. Kansas 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Ammest Insurance Agency, Inc. California 100% Academy Insurance General agent
Group, Inc.
Ammest Massachusetts Massachusetts 100% Academy Insurance Special-purpose subsidiary
Insurance Agency, Inc. Group, Inc.
Ammest Realty, Inc. Pennsylvania 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Ampac, Inc. Texas 100% Academy Insurance Managing general agent
Group, Inc.
Ampac Insurance Agency, Inc. Pennsylvania 100% Academy Insurance Special-purpose subsidiary
(EIN 23-2364438) Group, Inc.
Data/Mark Services, Inc. Delaware 100% Academy Insurance Provider of mgmt. services
Group, Inc.
Force Financial Group, Inc. Delaware 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Force Financial Services, Inc. Massachusetts 100% Force Fin. Group, Inc. Special-purpose subsidiary
Military Associates, Inc. Pennsylvania 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
NCOA Motor Club, Inc. Georgia 100% Academy Insurance Automobile club
Group, Inc.
NCOAA Management Company Texas 100% Academy Insurance Special-purpose subsidiary
Group, Inc.
Unicom Administrative Pennsylvania 100% Academy Insurance Provider of admin. services
Services, Inc. Group, Inc.
Unicom Administrative Germany 100%Unicom Administrative Provider of admin. servcies
Services, GmbH Services, Inc.
Providian Property and Casualty Kentucky 100% Providian Auto and Insurance company
Insurance Company Home Insurance Company
Providian Fire Insurance Co. Kentucky 100% Providian Property Insurance company
and Casualty Insurance Co.
Capital Liberty, L.P. Delaware 79.2% Commonwealth Life Holding Company
Insurance Company
19.8% Peoples Security Life
Insurance Company
1% CGC
Commonwealth General LLC Turks & 100% CGC Special-purpose subsidiary
Caicos Islands
Providian Life and Health Missouri 3.7% CGC Insurance company
Insurance Company 15.3% Peoples Security Life
Insurance Company
20% Capital Liberty, L.P.
61% Commonwealth Life
Insurance Company
Veterans Life Insurance Co. Illinois 100% Providian Life and Insurance company
Health Insurance Company
Peoples Benefit Services, Inc. Pennsylvania 100% Veterans Life Ins. Co. Special-purpose subsidiary
First Providian Life and New York 100% Veterans Life Ins. Co. Insurance Company
Health Insurance Company
</TABLE>
Item 31. Number of Contract Owners
As of December 31, 1997, there were 0 Owners of the Policies.
Item 32. Indemnification
The Iowa Code (Sections 490.850 et. seq.) provides for permissive
indemnification in certain situations, mandatory indemnification in other
situations, and prohibits indemnification in certain situations. The Code also
specifies procedures for determining when indemnification payments can be made.
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Depositor pursuant to the foregoing provisions, or otherwise, the Depositor has
been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Depositor of expenses incurred
or paid by a director, officer or controlling person in connection with the
securities being registered), the Depositor will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 33. Business and Other Connections of Investment Adviser
Manager - Endeavor Investment Advisers
The Manager is a registered investment adviser providing investment
management and administrative services to the Registrant.
The list required by this Item 33 of partners, officers and directors of
the Manager together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such officers and
directors during the past two years is incorporated by reference to Schedule B
and D of Form ADV filed by the Manager pursuant to the Investment Advisers Act
of 1940 (SEC No. 801-41827).
Advisers - First Trust Advisers L.P.
The list required by Item 33 of partners, officers and directors of the
Adviser together with information as to any other business, profession, vocation
or employment of a substantial nature engaged in by such officers and directors
during the past two years is incorporated by reference to Schedule B and D of
Form ADV filed by the Adviser pursuant to the Investment Advisers Act of 1940
(SEC No. 801-39950).
Item 34. Principal Underwriters
AFSG Securities Corporation
4333 Edgewood Road, N.E.
Cedar Rapids, IA 52499-0001
The directors and officers of AFSG Securities Corporation are as follows:
<TABLE>
<CAPTION>
Positions and Offices with Positions and Offices with
Name Underwriter Registrant
- ---- ----------- ----------
<S> <C>
Larry N. Norman Director and President
Harvey E. Willis Vice President and Secretary
Lisa Wachendorf Compliance Officer
Debra C. Cubero Vice President
Gregory J. Garvin Vice President
Michael F. Lane Vice President
Anne Spaes Vice President
Sarah J. Strange Director and Vice President
Brenda K. Clancy Vice President
</TABLE>
<PAGE>
Michael G. Ayers Treasurer / Controller
Colleen S. Lyons Assistant Secretary
John F. Reesor Assistant Secretary
The principal business address of each person listed is AFSG Securities
Corporation, 4333 Edgewood Road N.E., Cedar Rapids, IA 52499-0001.
AFSG Securities Corporation also serves as the principal underwriter for
the PFL Endeavor VA Separate Account, PFL Life Variable Annuity Account A, the
PFL Retirement Builder Variable Annuity Account, and the AUSA Endeavor Variable
Annuity Account. These accounts are separate accounts of PFL Life Insurance
Company or AUSA Life Insurance Company, Inc., life insurance company affiliates
of AFSG Securities Corporation.
Commissions and Other Compensation Received by Principal Underwriter.
AEGON USA Securities, Inc., the former broker dealer, and/or the broker-dealers
received $0 from the Registrant during the last fiscal year for its services in
distributing the Policies. No other commission or compensation was received by
the principal underwriter, directly or indirectly, from the Registrant for
distributing the Policies during the fiscal year.
Item 35. Location of Accounts and Records
The records required to be maintained by Section 31(a) of the Investment
Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder, are
maintained by PFL Life Insurance Company at 4333 Edgewood Road, N.E., Cedar
Rapids, Iowa 52499-0001.
Item 36. Management Services
All management Contracts are discussed in Part A or Part B.
Item 37. Undertakings
(a) Registrant undertakes to file a post-effective amendment, using
financial statements of the Registrant which need not be certified, within four
to six months from the effective date of the Registrant's 1933 Act registration
statement.
(b) Registrant undertakes that it will file a post-effective amendment
to this registration statement as frequently as necessary to ensure that the
audited financial statements in the registration statement are never more than
16 months old for so long as Premiums under the Policy may be accepted.
(c) Registrant undertakes that it will include either (i) a postcard
or similar written communication affixed to or included in the Prospectus that
the applicant can remove to send for a Statement of Additional Information or
(ii) a space in the Policy application that an applicant can check to request a
Statement of Additional Information.
(d) Registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form promptly upon written or oral request to PFL at the address or phone
number listed in the Prospectus.
(e) PFL Life Insurance Company hereby represents that the fees and
charges deducted under the policies, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by PFL Life Insurance Company.
<PAGE>
Section 403 (b) Representations
- -------------------------------
PFL represents that it is relying on a no-action letter dated November 28,
1988, to the American Council of Life Insurance (Ref. No. IP-6-88), regarding
Sections 22(e), 27(c)(1), and 27(d) of the Investment Company Act of 1940, in
connection with redeemability restrictions on Section 403(b) Policies, and that
paragraphs numbered (1) through (4) of that letter will be complied with.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the PFL Endeavor Target Account has caused this Registration Statement to
be signed on its behalf in the City of Corona del Mar and State of California on
this 20th day of February 1998.
PFL ENDEAVOR TARGET ACCOUNT
By: *
-------------------------------
Vincent J. McGuinness, Jr.
President
PFL LIFE INSURANCE COMPANY
By: *
----------------------
William L. Busler
President
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the duties indicated.
Signature Title Date
- --------- ----- ----
* Manager April __, 1998
- -------------------------------
Vincent J. McGuinness
* Manager April __, 1998
- -------------------------------
Timothy A. Devine
* Manager April __, 1998
- -------------------------------
Thomas J. Hawekotte
* Manager April __, 1998
- -------------------------------
Steven L. Klosterman
* Manager April __, 1998
- -------------------------------
Halbert D. Linquist
* Manager April __, 1998
- -------------------------------
R. Daniel Olmstead, Jr.
* Chief Financial Officer April __, 1998
- ------------------------------- and Treasurer
Michael J. Roland
* Manager April __, 1998
- -------------------------------
Vincent J. McGuinness, Jr.
* Manager April __, 1998
- -------------------------------
Keith H. Wood
* Manager April __, 1998
- -------------------------------
William L. Busler
/s/ Robert Hickey Power of Attorney April 20, 1998
- -------------------------------
Robert Hickey
* By Robert Hickey, Attorney-In-Fact.
<PAGE>
Registration No.
333-47027
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
EXHIBITS
TO
FORM N-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FOR
PFL ENDEAVOR TARGET ACCOUNT
---------------
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Page No. *
- ----------- ---------------------- ----------
<S> <C> <C>
(2) Form of Rules and Regulations of the Target Account.
(3)(a) Form of Custodian Agreement between the Target
Account and Boston Safe Deposit and Trust Company.
(4)(a) Form of Management Agreement between the Target
Account and Endeavor Investment Advisers.
(4)(b)(l) Form of Investment Advisory Agreement between
Endeavor Investment Advisers and First Trust
Advisers L.P. (DJIA Target 5).
(4)(b)(2) Form of Investment Advisory Agreement between
Endeavor Investment Advisers and First Trust
Advisers L.P. (DJIA Target 10).
(11)(a) Form of Distribution Plan.
(11)(b) Form of Administrative Services Agreement with
First Data Investors Services Group.
(11)(c) Form Brokerage Enhancement Plan.
(11)(d) Form of Sublicense Agreement between Dow Jones,
First Trust Advisors L.P. and the Target Account.
(11)(e) Form of Distribution Agreement.
(13)(b) Consent of Independent Auditors.
</TABLE>
* Page numbers included only in manually executed original, in compliance
with Rule 403(d).
<PAGE>
Exhibit 2
Form of Rules and Regulations
of the Target Account
<PAGE>
RULES AND REGULATIONS
---------------------
OF
PFL ENDEAVOR TARGET ACCOUNT
---------------------------
February ___, 1998
These are the RULES AND REGULATIONS of PFL Endeavor Target Account, a
managed separate account established under the insurance laws of the State of
Iowa (the "Account"), pursuant to a Resolution by written consent of the Board
of Directors of the PFL Life Insurance Company (the "Resolution") made the 16th
day of September, 1997. These Rules and Regulations have been adopted by the
Board of Managers of the Account (the "Managers" or "Board") pursuant to the
authority granted by the Resolution.
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I POLICY OWNERS AND POLICY OWNERS' MEETINGS............ 1
Section 1.1. Meetings............................................... 1
Section 1.2. Presiding Officer, Secretary........................... 1
Section 1.3. Authority of Chairman of Meeting....................... 1
Section 1.4. Voting; Quorum......................................... 2
Section 1.5. Inspectors............................................. 2
Section 1.6. Policy Owners' Action in Writing....................... 3
ARTICLE II MANAGERS AND MANAGERS' MEETINGS...................... 3
Section 2.1. Number of Managers..................................... 3
Section 2.2. Resignation, Retirement and Removal.................... 3
Section 2.3. Regular Meetings of the Managers....................... 4
Section 2.4. Special Meetings of Managers........................... 4
Section 2.5. Notice of Meetings..................................... 4
Section 2.6. Quorum; Presiding Officer.............................. 5
Section 2.7. Participation by Telephone............................. 5
Section 2.8. Location of Meetings................................... 5
Section 2.9. Votes.................................................. 5
Section 2.10. Rulings of Chairman................................... 6
Section 2.11. Managers' Action in Writing........................... 6
Section 2.12. Resignations.......................................... 6
ARTICLE III OFFICERS............................................. 6
Section 3.1. Officers of the Account................................ 6
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Section 3.2. Time and Terms of Election............................. 6
Section 3.3. Resignation and Removal................................ 7
Section 3.4. Fidelity Bond.......................................... 7
Section 3.5. Chairman of the Board.................................. 7
Section 3.6. President.............................................. 8
Section 3.7. Vice-Presidents........................................ 8
Section 3.8. Chief Financial Officer (Treasurer)
and Assistant Treasurers.............................. 9
Section 3.9. Controller and Assistant Controllers................... 9
Section 3.10. Secretary and Assistant Secretaries................... 10
Section 3.11. Substitutions......................................... 10
Section 3.12. Execution of Deeds, etc............................... 10
Section 3.13. Power to Vote Securities.............................. 10
Section 3.14. Limitation of Powers.................................. 11
ARTICLE IV COMMITTEES........................................... 11
Section 4.1. Power of Managers to Designate Committees.............. 11
Section 4.2. Rules for Conduct of Committee Affairs................. 12
Section 4.3. Managers May Alter, Abolish, etc., Committees.......... 12
Section 4.4. Minutes; Review by Managers............................ 12
ARTICLE V UNIT VALUE........................................... 12
ARTICLE VI INDEMNIFICATION...................................... 13
Section 6.01. Persons Indemnified................................... 13
Section 6.02. Disabling Conduct..................................... 13
Section 6.03. Determination......................................... 13
Section 6.04. Expenses Prior to Determination....................... 14
Section 6.05. Provisions Not Exclusive.............................. 15
Section 6.06. General............................................... 15
ARTICLE VII AMENDMENTS........................................... 15
Section 7.1. Rules and Regulations Subject to Amendment............. 15
Section 7.2. Notice of Proposal to Amend Rules
and Regulations Required.............................. 16
</TABLE>
<PAGE>
ARTICLE I
POLICY OWNERS AND POLICY OWNERS' MEETINGS
-----------------------------------------
Section 1.1. Meetings. Meetings of the policy owners of the Account (the
----------------------
"Policy Owners") or any class or subaccounts thereof shall be held whenever
called by the Managers and whenever a vote of Policy Owners or any class or
subaccounts thereof is required by the provisions of the Investment Company Act
of 1940, as amended (the "1940 Act"). Written notice of any meeting of Policy
Owners or any class or subaccounts thereof shall be given or caused to be given
by the Managers by mailing such notice at least seven days before such meeting,
postage prepaid, stating the time, place and purpose of the meeting, to each
Policy Owner entitled to vote at such meeting at the Policy Owner's address as
it appears on the records of the Account.
Section 1.2. Presiding Officer, Secretary. The Chairman of the Board, or
------------------------------------------
in his absence or if there is no Chairman of the Board, the President shall
preside at each Policy Owners' meeting as chairman of the meeting, or in the
absence of the Chairman of the Board and President, the Managers present at the
meeting shall elect one of their number as chairman of the meeting. Unless
otherwise provided for by the Managers, the Secretary of the Account shall be
the secretary of all meetings of Policy Owners and shall record the minutes
thereof.
Section 1.3. Authority of Chairman of Meeting. At any Policy Owners'
----------------------------------------------
meeting the chairman of the meeting shall be empowered to determine the
construction or interpretation of the Resolution or these Rules and Regulations,
or any part thereof or hereof, and his ruling shall be final.
1
<PAGE>
Section 1.4. Voting; Quorum. At each meeting of Policy Owners or any
----------------------------
class or subaccounts thereof, every Policy Owner entitled to vote shall be
entitled to a number of votes calculated separately for each subaccount of the
Account ("Subaccount"). Prior to the commencement of variable annuity payments,
the number of votes with respect to a Policy will equal the number of
accumulation units credited to the Policy. After variable annuity payments have
commenced, the number of votes with respect to a Policy will equal the amount of
the assets in the Account established to meet the variable obligations related
to the Policy, divided by the value of an accumulation unit. Policy Owners may
vote by proxy and the form of any such proxy may be prescribed from time to time
by the Managers. A quorum shall exist if the holders of [A MAJORITY] of the
outstanding votes without regard to Subaccounts are present in person or by
proxy, but any lesser number shall be sufficient for adjournments. Matters upon
which Policy Owners may vote include (i) the approval or termination of any
contract as to which Policy Owner action is required by the 1940 Act; (ii) any
change in the fundamental investment policies of a Subaccount; and (iii) any
additional matters as may be required by the 1940 Act, these Rules and
Regulations, any registration with the Securities and Exchange Commission (or
any successor agency) or any state, or as the Managers may consider necessary or
desirable. At all meetings of the Policy Owners, votes of Policy Owners need
not be taken by ballot unless otherwise provided for by vote of the Managers, or
as required by the 1940 Act, but the chairman of the meeting may in his
discretion authorize any matter to be voted upon by ballot.
Section 1.5. Inspectors. At any meeting of Policy Owners, the chairman
------------------------
of the meeting may appoint one or more inspectors of election or balloting to
supervise the voting at such meeting or any adjournment thereof. If inspectors
are not so appointed, the chairman of the meeting may, and on the request of any
Policy Owner present or represented and entitled to vote shall, appoint one or
more inspectors for such purpose. Each inspector, before entering upon the
discharge of his duties, shall take
2
<PAGE>
and sign an oath faithfully to execute the duties of inspector of election or
balloting, as the case may be, at such meeting with strict impartiality and
according to the best of his ability. If appointed, inspectors shall take
charge of the polls and, when the vote is competed, shall make a certificate of
the result of the vote taken and of such other facts as may be required by law.
Section 1.6. Policy Owners' Action in Writing. Nothing in this Article I
----------------------------------------------
shall limit the power of the Policy Owners to take any action without a meeting
by means of written instruments. Any action taken by Policy Owners may be taken
without a meeting if a majority of Policy Owners entitled to vote on the matter
(or such larger proportion thereof as shall be required by law or any express
provision of these Rules and Regulations) consent to the action in writing and
such written consents are filed with the records of the meetings of Policy
Owners. Such consent shall be treated for all purposes as a vote taken at a
meeting of Policy Owners.
ARTICLE II
MANAGERS AND MANAGERS' MEETINGS
-------------------------------
Section 2.1. Number of Managers. There shall initially be one or more
--------------------------------
Manager(s) appointed by PFL Life Insurance Company, and the number of Managers
shall thereafter be such number as from time to time shall be fixed by a vote
adopted by a majority of the Managers. A majority of the Managers may increase
or decrease the number of Managers to a number other than the number theretofore
determined. No decease in the number of Managers shall have the effect of
removing any Manager from office prior to the expiration of his term, but the
number of Managers may be decreased in conjunction with the removal of a Manager
pursuant to Section 2.2 of this Article II.
Section 2.2. Resignation, Retirement and Removal. Any Manager may resign
-------------------------------------------------
his position or retire as a Manager, by a written instrument signed by him and
delivered to the other Managers or to any
3
<PAGE>
officer of the Account, and such resignation or retirement shall take effect
upon such delivery or upon such later date as is specified in such instrument.
Any Manager may be removed with or without cause at any time by written
instrument signed by at least two-thirds of the Managers in office immediately
prior to such removal, specifying the date upon which such removal shall become
effective.
Section 2.3. Regular Meetings of the Managers. Regular meetings of the
----------------------------------------------
Managers may be held without call or notice at such places and at such times as
the Managers may from time to time determine; provided, that notice of such
determination, and of the time, place and purposes of the first regular meeting
thereafter, shall be given to each absent Manager in accordance with Section 2.5
hereof.
Section 2.4. Special Meetings of Managers. Special meetings of the
------------------------------------------
Managers may be held at any time and at any place when called by the Chairman of
the Board, if any is elected, the President or the Chief Financial Officer or by
two or more Managers, or if there shall be fewer than three Managers, by any
Manager; provided, that notice of the time, place and purposes thereof is given
to each Manager in accordance with Section 2.5 hereof by the Secretary or an
Assistant Secretary or by the officer or the Manager(s) calling the meeting.
Section 2.5. Notice of Meetings. Notice of any regular or special
--------------------------------
meeting of the Managers shall be sufficient if given in writing to each Manager,
and if sent by mail at least five days, or by telegram or facsimile or e-mail at
least twenty-four hours, before the meeting, addressed to his usual or last
known business or residence address, or if delivered to him in person at least
twenty-four hours before the meeting. Notice of a special meeting need not be
given to any Manager who was present at an earlier meeting, not more than
thirty-one days prior to the subsequent meeting, at which the subsequent meeting
was called. Notice of a meeting may be waived by any Manager by written waiver
of notice, executed by
4
<PAGE>
him before or after the meeting, and such waiver shall be filed with the
records of the meeting. Attendance by a Manager at a meeting shall constitute a
waiver of notice, except where a Manager attends a meeting for the purpose of
protesting prior thereto or at its commencement the lack of notice.
Section 2.6. Quorum; Presiding Officer. At any meeting of the Managers,
---------------------------------------
a Majority of the Managers shall constitute a quorum. Any meeting may be
adjourned from time to time by a majority of the votes cast upon the question,
whether or not a quorum is present, and the meeting may be held as adjourned
without further notice. Unless the Managers shall otherwise elect, generally or
in a particular case, the Chairman of the Board shall preside at each meeting of
the Managers as chairman of the meeting. In the absence of the Chairman of the
Board, or if there is no Chairman of the Board, the Managers present at the
meeting shall elect one of their number as chairman of the meeting.
Section 2.7. Participation by Telephone. One or more of the Managers may
----------------------------------------
participate in a meeting thereof or of any committee of the Managers by means of
a telephone conference call or other communications facility by means of which
all individuals participating in the meeting can hear each other at the same
time and participation by such means shall (except to the extent required
otherwise by the 1940 Act) constitute presence in person at such meeting.
Section 2.8. Location of Meetings. Managers' Meetings may be held at any
----------------------------------
place, within or without Iowa.
Section 2.9. Votes. Voting at Managers' meetings may be conducted
-------------------
orally, by show of hands, or, if requested by any Manager, by written ballot.
The results of all voting shall be recorded by the Secretary in the minute book.
5
<PAGE>
Section 2.10. Rulings of Chairman. All other rules of conduct adopted
----------------------------------
and used at any Managers' meeting shall be determined by the chairman of such
meeting, whose ruling on all procedural matters shall be final.
Section 2.11. Managers' Action in Writing. Nothing in this Article II
------------------------------------------
shall limit the power of the Managers to take action by means of a written
instrument without a meeting.
Section 2.12. Resignations. Any Manager may resign at any time by
---------------------------
written instrument signed by him and delivered to the Chairman of the Board or
the Secretary or to a meeting of the Managers. Such resignation shall be
effective upon receipt unless specified to be effective at some other time.
ARTICLE III
OFFICERS
--------
Section 3.1. Officers of the Account. The officers of the Account shall
-------------------------------------
consist of a President, a Chief Financial Officer (Treasurer) and a Secretary,
and may include one or more Vice Presidents, Assistant Treasurers and Assistant
Secretaries, and such other officers as the Managers may designate. If the
Managers shall elect a Chairman of the Board pursuant to Section 3.5, then the
Chairman of the Board shall also be an officer of the Account. The Chairman of
the Board, if there is one, shall be elected from among the Managers, but no
other officer need be a Manager. Any two or more officers, except those of
President and Vice-President, may be held by the same person.
Section 3.2. Time and Terms of Election. The President, the Chief
----------------------------------------
Financial Officer (Treasurer), and the Secretary shall be elected by the
Managers at their first meeting and thereafter at the annual meeting of the
Managers. Such officers shall hold office until the next annual meeting of the
Managers
6
<PAGE>
and until their successors shall have been duly elected and qualified,
and may be removed at any meeting by the affirmative vote of a Majority of the
Managers. All other officers of the Account may be elected or appointed at any
meeting of the Managers. Such other officers shall hold office for any term, or
indefinitely, as determined by the Managers, and shall be subject to removal,
with or without cause, at any time by the Managers.
Section 3.3. Resignation and Removal. Any officer may resign at any time
-------------------------------------
by giving written notice to the Managers. Such resignation shall take effect at
the time specified therein, and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective. If
the office of any officer or agent becomes vacant by reason of death,
resignation, retirement, disqualification, removal from office or otherwise, the
Managers may choose a successor, who shall hold office for the unexpired term in
respect of which such vacancy occurred. Except to the extent expressly provided
in a written agreement with the Account, no officer resigning or removed shall
have any right to any compensation for any period following such resignation or
removal, or any right to damages on account of such removal.
Section 3.4. Fidelity Bond. The Managers may, in their discretion,
---------------------------
direct any officer appointed by them to furnish at the expense of the Account a
fidelity bond approved by the Managers, in such amount as the Managers may
prescribe.
Section 3.5. Chairman of the Board. When and if the Managers shall deem
-----------------------------------
such action to be necessary or appropriate, they may elect a Chairman of the
Board from among the Managers. The Chairman of the Board ("Chairman") shall, if
present, preside at all meetings of the Managers and of the
7
<PAGE>
Policy Owners, and he shall have such other powers and duties as may be
prescribed by the Managers. He may use any one or more of the following titles:
Chairman of the Board or Chairman.
Section 3.6. President. The President of the Account shall have general
-----------------------
and active management of the business of the Account, shall see to it that all
orders, policies and resolutions of the Managers are carried into effect, and,
in connection therewith, shall be authorized to delegate to any Vice-President
of the Account such of his powers and duties as President and at such times and
in such manner as he shall deem advisable. In the absence or disability of the
Chairman, or if there is no Chairman, the President shall preside at all
meetings of the Policy Owners and, if he is a Manager, of the Managers; and he
shall have such other powers and perform such other duties as are incident to
the office of a chief executive officer and as the Managers may from time to
time prescribe.
Section 3.7. Vice-Presidents. The Vice-President, if any, or, if there
-----------------------------
is more than one, then the Vice-Presidents of the Account, shall assist the
President in the management of the business of the Account and the
implementation of orders, policies and resolutions of the Managers at such times
and in such manner as the President may deem to be advisable. If there is more
than one Vice-President, the Managers may designate one as the Executive Vice-
President, in which case he shall be first in order of seniority, and the
Managers may also grant to other Vice-Presidents such titles as shall be
descriptive of their respective functions or indicative of their relative
seniority. In the absence or disability of both the President and the Chairman,
or in the absence or disability of the President if there is no Chairman, the
Vice-President, or, if there is more than one, the Vice-Presidents in the order
of their relative seniority, shall exercise the powers and perform the duties of
those officers; and the Vice-President or Vice-Presidents shall have such other
powers and perform such other duties is as from time to time may be prescribed
by the President or by the Managers.
8
<PAGE>
Section 3.8. Chief Financial Officer (Treasurer) and Assistant
---------------------------------------------------------------
Treasurers. The Chief Financial Officer (Treasurer) shall keep full and
accurate accounts of receipts and disbursements in books of the Account, and
shall have such other duties and powers as may be prescribed from time to time
by the Managers, and shall render to the Managers, whenever they may require it,
an account of all his transactions as Chief Financial Officer (Treasurer) and of
the financial condition of the Account. If no Controller is elected, the Chief
Financial Officer (Treasurer) shall also have the duties and powers of the
Controller, as provided in these Rules and Regulations. Any Assistant Treasurer
shall have such duties and powers as shall be prescribed from time to time by
the Managers or the Chief Financial Officer (Treasurer), and shall be
responsible to and shall report to the Chief Financial Officer (Treasurer). In
the absence or disability of the Chief Financial Officer (Treasurer), the
Assistant Treasurer or, if there shall be more than one, the Assistant
Treasurers in the order of their seniority or as otherwise designated by the
Managers, shall have the powers and duties of the Chief Financial Officer
(Treasurer).
Section 3.9. Controller and Assistant Controllers. If a Controller is
--------------------------------------------------
elected, he shall be the chief accounting officer of the Account, and shall be
in charge of its books of account and accounting records and of its accounting
procedures, and shall have such duties and powers as are commonly incident to
the office of a controller and such other duties and powers as may be prescribed
from time to time by the Managers. The Controller shall be responsible to and
shall report to the Managers, but in the ordinary conduct of the Account's
business, shall be under the supervision of the Chief Financial Officer
(Treasurer). Any Assistant Controller shall have such duties and powers as
shall be prescribed from time to time by the Managers or the Controller, and
shall be responsible and shall report to the Controller. In the absence or
disability of the Controller, the Assistant Controller or, if there shall be
more than one, the Assistant Controllers in the order of their seniority or as
otherwise designated by the Managers, shall have the powers and duties of the
Controller.
9
<PAGE>
Section 3.10. Secretary and Assistant Secretaries. The Secretary shall,
--------------------------------------------------
if and to the extent requested by the Managers, attend all meetings of the
Managers, any committee of the Managers and/or the Policy Owners and record all
votes and the minutes of proceedings in a book to be kept for that purpose, and
shall give or cause to be given notice of all meetings of the Managers, any
committee of the Managers and/or the Policy Owners, and shall perform such other
duties as may be prescribed by the Managers. The Secretary shall be the
custodian of the books, records and papers of the Account (other than financial)
and shall see that all books, reports, statements, certificates and other
documents and records required by law are properly kept and filed. In the
absence or disability of the Secretary, the Assistant Secretary or, if there
shall be more than one, the Assistant Secretaries in the order of their
seniority or as otherwise designated by the Managers, shall have the powers and
duties of the Secretary.
Section 3.11. Substitutions. In case of the absence or disability of any
----------------------------
officer of the Account, or for any other reason that the Managers may deem
sufficient, the Managers may delegate, for the time being, the powers or duties,
or any of them, of such officer to any other officer, or to any Manager.
Section 3.12. Execution of Deeds, etc. Except as the Managers may
--------------------------------------
generally or in particular cases otherwise authorize or direct, all deeds,
leases, transfers, contracts, proposals, bonds, notes, checks, drafts and other
obligations made, accepted or endorsed by the Account shall be signed or
endorsed on behalf of the Account by the President, a Vice-President or the
Chief Financial Officer (Treasurer).
Section 3.13. Power to Vote Securities. Unless otherwise ordered by the
---------------------------------------
Managers, the Chief Financial Officer (Treasurer) shall have full power and
authority on behalf of the Account to give proxies for, and/or to attend and to
act and to vote at, any meeting of stockholders of any corporation in which the
Account may hold stock, and at any such meeting the Chief Financial Officer
(Treasurer) or his proxy
10
<PAGE>
shall possess and may exercise any and all rights and powers incident to
the ownership of such stock which, as the owner thereof, the Account might have
possessed and exercised if present. The Managers, by resolution from time to
time, or, in the absence thereof, the Treasurer, may confer like powers upon any
other person or persons as attorneys and proxies of the Account.
Section 3.14. Limitation of Powers. The Managers and Officers shall
----------------------------------
exercise their powers and authorities (a) in cooperation with the officers of
PFL Life Insurance Company and subject to the rights, powers, and obligations of
PFL Life Insurance Company, and (b) without limiting the generality of the
foregoing, recognizing that the assets of the Account are the property of PFL
Life Insurance Company and that the Policy Owners are owners of policies issued
by PFL Life Insurance Company.
ARTICLE IV
COMMITTEES
----------
Section 4.1. Power of Managers to Designate Committees. The Managers, by
-------------------------------------------------------
vote of a Majority of the Managers, may elect from their number an executive
committee and any other committees and may delegate thereto some or all of their
powers except those which by law or by these Rules and Regulations may not be
delegated; provided, that no committee shall be empowered to elect the Chairman
of the Board, the President, the Chief Financial Officer (Treasurer) or the
Secretary, to amend the Rules and Regulations, to exercise the powers of the
Managers under this Section 4.1 or under Section 4.3 hereof, or to perform any
act for which the action of a Majority of the Managers is required by law or by
these Rules and Regulations. The members of any such committee shall serve at
the pleasure of the Managers.
11
<PAGE>
Section 4.2. Rules for Conduct of Committee Affairs. Except as otherwise
----------------------------------------------------
provided by the Managers, each committee elected or appointed pursuant to this
Article IV may adopt such standing rules and regulations for the conduct of its
affairs as it may deem desirable, subject to review and approval of such rules
and regulations by the Managers at the next succeeding meeting of the Managers,
but in the absence of any such action or any contrary provisions by the
Managers, the business of each committee shall be conducted, so far as
practicable, in the same manner as provided herein for the Managers.
Section 4.3. Managers May Alter, Abolish, etc., Committees. The Managers
-----------------------------------------------------------
may at any time alter or abolish any committee, change the membership of any
committee, or revoke, rescind or modify any action of any committee or the
authority of any committee with respect to any matter or class of matters;
provided, that no such action shall impair the rights of any third parties.
Section 4.4. Minutes; Review by Managers. Any committee to which the
-----------------------------------------
Managers delegate any of their powers or duties shall keep records of its
meetings and shall report its actions to the Managers.
ARTICLE V
UNIT VALUE
----------
Unit value of each Subaccount shall mean the quotient obtained by dividing
the value of all the assets belonging to such Subaccount, less all liabilities
of such Subaccount, by the number of units of that Subaccount outstanding, in
each case at the time of each determination. Expenses and liabilities may
include such reserves for taxes, estimated accrued expenses and contingencies as
the Managers or their designates may in their sole discretion deem fair and
reasonable under the circumstances.
12
<PAGE>
ARTICLE VI
INDEMNIFICATION
---------------
Section 6.01. Persons Indemnified. The Account shall indemnify each
----------------------------------
of the members of its Board of Managers and officers against all liabilities and
expenses, including but not limited to counsel fees, amounts paid in
satisfaction of judgments, as fines or penalties, or in compromise or
settlement, reasonably incurred in connection with the defense or disposition of
any threatened, pending, or completed claim, action, suit, or other proceeding,
whether civil, criminal, administrative, or investigative, whether before any
court or administrative or legislative body, to which such person may be or may
have been subject, while in office or thereafter, by reason of being or having
been such a member or officer; provided that such person acted, or failed to
act, in good faith and in the reasonable belief that such action was in the best
interests of the Account, and, with respect to any criminal action or
proceeding, such person had no reasonable cause to believe the conduct was
unlawful; and except that no such person shall be indemnified for any
liabilities or expenses arising by reason of disabling conduct, whether or not
there is an adjudication of liability.
Section 6.02. Disabling Conduct. "Disabling conduct" means willful
--------------------------------
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of office.
Section 6.03. Determination. Whether any such liability or expense
----------------------------
arose out of disabling conduct shall be determined: (a) by a final decision on
the merits (including, but not limited to, a dismissal for insufficient evidence
of any disabling conduct) by a court or other body, before whom the proceeding
was brought that the person to be indemnified was not liable by reason of
disabling conduct; or (b) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that such person was not liable
by reason of disabling conduct, (i) by the vote of a majority of a quorum of
13
<PAGE>
Managers who are neither interested persons of the Account nor parties to the
action, suit, or proceeding in question or another action, suit, or proceeding
on the same or similar grounds ("dis interested, non-party managers"); or (ii)
by independent legal counsel in a written opinion if such quorum is not
obtainable, or, even if obtainable, if a quorum of disinterested managers of the
Account so directs; or (iii) by majority vote of the Policy Owners; or (iv) by
any other reasonable and fair means not inconsistent with any of the above.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
----------------
shall not, of itself, create a presumption that any liability or expense arose
by reason of disabling conduct, or that such person did not act in good faith
and in the reasonable belief that such action was in the best interests of the
Account, or, with respect to any criminal action or proceeding, that such person
had reasonable cause to believe that the conduct was unlawful.
Section 6.04. Expenses Prior to Determination. Any liabilities or
----------------------------------------------
expenses of the type described in Section 6.01 may be paid by the Account in
advance of the final disposition of the claim, action, suit or proceeding, as
authorized by the Board of Managers in the specific case, (a) upon receipt of an
undertaking by or on behalf of the member or officer to repay the advance unless
it shall be ultimately determined that such person is entitled to
indemnification, and (b), provided that (i) the indemnitee shall provide
security for that undertaking, or (ii) the account shall be insured against
losses arising by reason of any lawful advances, or (iii) a majority of a quorum
of disinterested, non-party managers of the Account, or an independent legal
counsel in a written opinion, shall determine, based on a review of readily
available facts (as opposed to a full trial type inquiry), that there is reason
to believe that the indemnitee ultimately will be found entitled to
indemnification.
14
<PAGE>
A determination pursuant to subparagraph (b)(iii) of this section
shall not prevent the recovery from any member of the Board or officer of any
amount advanced to such person as indemnification if such member of the Board or
officer is subsequently determined not to be entitled to indemnification; nor
shall a determination pursuant to said subparagraph prevent the payment of
indemnification if such member of the Board or officer is subsequently found to
be entitled to indemnification.
Section 6.05. Provisions Not Exclusive. The indemnification provided
---------------------------------------
by this Article shall not be deemed exclusive of any rights to which those
seeking indemnification may be entitled under any law, agreement, vote of Policy
Owners or otherwise.
Section 6.06. General. No indemnification provided by this Article
----------------------
shall be inconsistent with the Investment Company Act of 1940 or the Securities
Act of 1933.
Any indemnification provided by this Article shall continue as to a
person who has ceased to be a member of the Board of Managers or an officer of
the Account and shall inure to the benefit of the heirs, executors and
administrators of such person.
ARTICLE VII
AMENDMENTS
----------
Section 7.1. Rules and Regulations Subject to Amendment. These Rules
--------------------------------------------------------
and Regulations may be altered, amended or repealed, in whole or in part, at any
time by vote of the Majority of the Managers, except with respect to any
provision hereof which by law or these Rules and Regulations requires action by
the Policy Owners.
15
<PAGE>
Section 7.2. Notice of Proposal to Amend Rules and Regulations
---------------------------------------------------------------
Required. No proposal to amend or repeal these Rules and Regulations or to
- --------
adopt new Rules and Regulations shall be acted upon at a meeting unless either
(i) such proposal is stated in the notice or in the waiver of notice, as the
case may be, of the meeting of the Managers at which such action is taken, or
(ii) all of the Managers, as the case may be, are present at such meeting and
all agree to consider such proposal without protesting the lack of notice.
The foregoing Rules and Regulations were adopted by the Managers on
___________, 1998.
----------------------------
Secretary
16
<PAGE>
EXHIBIT 3(A)
CUSTODY AGREEMENT
by and between
PFL ENDEAVOR TARGET ACCOUNT
---------------------------
AND
BOSTON SAFE DEPOSIT AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
SECTION PAGE
- ------- ----
1. Establishment of/Additions to Account..................... 1
2. Distributions............................................. 1
3. Authorized Parties........................................ 1
4. Authorized Instructions................................... 2
5. Directed Powers of Custodian.............................. 2
6. Discretionary Powers of Custodian......................... 3
7. Duties of Custodian....................................... 4
8. Contractual Income and Settlement......................... 5
9. Tax Law................................................... 5
10. Non-Account Assets........................................ 5
11. Reporting and Recordkeeping............................... 6
12. Standard of Care.......................................... 6
13. Force Majeure............................................. 6
14. Compensation and Expenses................................. 7
15. Indemnification........................................... 7
16. Amendment or Termination.................................. 7
17. Governing Law and Legal Proceedings....................... 7
18. Representations........................................... 8
19. Necessary Parties......................................... 8
20. Execution in Counterparts................................. 8
Taxpayer Identification Number Certification...................10
<PAGE>
CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT made as of _____________________, 1998 ("Agreement")
by and between PFL Endeavor Target Account, a managed separate account created
under the laws of the State of Iowa ("Client") and Boston Safe Deposit and Trust
Company, a Massachusetts trust company ("Custodian").
WITNESSETH:
WHEREAS, the Client and the Custodian desire to establish a custody account
to provide for the safekeeping and recordkeeping of certain property of the
Client;
NOW, THEREFORE, the Client and the Custodian, each intending to be legally
bound, agree as follows:
1. ESTABLISHMENT OF/ADDITIONS TO ACCOUNT
-------------------------------------
The Client hereby appoints Boston Safe Deposit and Trust Company as
Custodian for any property acceptable to the Custodian which the Client may
deposit to the Custodian's care ("Account"). The Custodian shall have no
responsibility for any property until it in fact is received by the Custodian or
its agents or subcustodians. "Property" as used herein shall not include any
direct interest in real property, leaseholds or mineral interests.
2. Distributions
-------------
The Custodian shall make distributions or transfers out of the Account
pursuant to Authorized Instructions, as defined below. In making payments to
service providers pursuant to Authorized Instructions, the Client acknowledges
that the Custodian is acting as a paying agent, and not as the payor, for tax
information reporting and withholding purposes.
3. AUTHORIZED PARTIES
------------------
The Client shall furnish the Custodian with a written list of the names and
signatures of all persons authorized to direct the Custodian on behalf of the
Client under the terms of this Agreement. In addition, the Client may appoint
and remove one or more investment managers ("Investment Manager") for such
portion of the Account as the Client shall designate to the Custodian in
writing. The Investment Manager shall furnish the Custodian with a written list
of the names and signatures of the person or persons who
<PAGE>
are authorized to represent the Investment Manager in dealings with the
Custodian. The Custodian shall be entitled to deal with any person or entity so
identified by the Client or Investment Manager ("Authorized Party or Authorized
Parties") until notified otherwise in writing. The Custodian shall be under no
duty to question any direction of an Authorized Party with respect to the
portion of the Account over which such Authorized Party has authority, to review
any Property held in the Account, to make any suggestions with respect to the
investment and reinvestment of the assets in the Account, or to evaluate or
question the performance of any Authorized Party. The Custodian shall not be
responsible or liable for any diminution of value of any securities or other
property held by the Custodian (or its subcustodians).
4. AUTHORIZED INSTRUCTIONS
-----------------------
All directions and instructions to the Custodian from an Authorized Party
shall be in writing, by facsimile transmission, electronic transmission, or any
other method specifically agreed to in writing by the Client and the Custodian,
provided the Custodian may, in its discretion, accept oral directions and
instructions and may require confirmation in writing. The Custodian shall be
fully protected in acting in accordance with all such directions and
instructions ("Authorized Instructions") which it reasonably believes to have
been given by an Authorized Party or in failing to act in the absence thereof.
5. Directed Powers of Custodian
----------------------------
The Custodian shall have and exercise the following powers and authority in
the administration of the Account upon the direction of an Authorized Party:
a. Settle purchases and sales and engage in other transactions, including
free receipts and deliveries, exchanges and other voluntary corporate actions,
with respect to securities or other property received by the Custodian;
b. Execute proxies for any stocks, bonds or other securities held in the
Account;
c. Lend the assets of the Account in accordance with the terms and
conditions of a separate securities lending agreement; and
d. Take any and all actions necessary to settle transactions in futures
and/or options contracts, short-selling programs, foreign exchange or foreign
exchange contracts, swaps and other derivative investments.
Settlements of transactions may be effected in trading and processing
practices customary in the jurisdiction or market where the transaction occurs.
The Client acknowledges that this may, in certain circumstances, require the
delivery of cash or
2
<PAGE>
securities (or other property) without the concurrent receipt of securities (or
other property) or cash and, in such circumstances, the Client shall have
responsibility for nondelivery of securities or other property (or late
delivery) or nonreceipt of payment (or late payment) by the counterparty.
6. DISCRETIONARY POWERS OF CUSTODIAN
---------------------------------
The Custodian shall have and exercise the following powers and authority in
the administration of the Account:
a. Appoint sub-custodians (including a corporate affiliate of the
Custodian), domestic or foreign, as to part or all of the Account;
b. Hold property in nominee name, in bearer form or in book entry form, in
a clearinghouse corporation or in a depository, so long as the Custodian's
records clearly indicate that the assets held are a part of the Account;
c. Commence or defend suits or legal proceedings and represent the Account
in all suits or legal proceedings in any court or before any other body or
tribunal as the Custodian shall deem necessary to protect the Account;
d. Employ suitable agents and legal counsel, who may be counsel for the
Client, and, as a part of its reimbursable expenses under this Agreement, pay
their reasonable compensation and expenses. The Custodian shall be entitled to
rely on and may act upon advice of counsel on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to such advice;
e. Take all action necessary to pay for authorized transactions, including
exercising the power to borrow or raise monies from the Custodian in its
corporate capacity or an affiliate of the Custodian and shall hold any property
in the Account as security for advances made to the Account for any such
authorized transactions, including disbursements or expenses, or the purchase or
sale of foreign exchange, or of contracts for foreign exchange. The Custodian
shall be entitled to collect from the Account sufficient cash for reimbursement,
and if such cash is insufficient, dispose of the assets of the Account to the
extent necessary to obtain reimbursement;
f. Make, execute and deliver any and all documents, agreements or other
instruments in writing as is necessary or desirable for the accomplishment of
any of the powers in this Agreement; and
g. Generally take all action, whether or not expressly authorized, which
the Custodian may deem necessary or desirable for the fulfillment of its duties
hereunder.
3
<PAGE>
The powers described in this Section 6 may be exercised by the Custodian
with or without Authorized Instructions, but where the Custodian acts on
Authorized Instructions, the Custodian shall be fully protected as described in
Section 4. Without limiting the generality of the foregoing, the Custodian
shall not be liable for the acts or omissions of any subcustodian appointed
under paragraph (a) of this Section 6 pursuant to Authorized Instructions
including, but not limited to, any broker-dealer or other entity designated by
the Client or Investment Manager to hold any property of the Account as
collateral or otherwise pursuant to investment strategy.
7. DUTIES OF CUSTODIAN
-------------------
The Custodian shall perform or cause its agents or subcustodians to perform
the following duties with respect to the Account:
a. Hold the property in safekeeping facilities of the Custodian or of
other custodian banks or clearing corporations, in the United States or
elsewhere; provided that the Custodian shall not be responsible for any losses
resulting from the deposit or maintenance of securities or other property (in
accordance with market practice, custom, or regulation) with any recognized
foreign or domestic clearing facility, book-entry system, centralized custodial
depository, or similar organization;
b. Collect all income payable to and all distributions due to the Account
and sign on the Account's behalf all declarations, affidavits, and certificates
of ownership required to collect income and principal payments; provided that
the Custodian shall not be responsible for the failure to receive payment of (or
late payment of) distributions with respect to securities or other property held
in the Account;
c. Subject to the timely receipt of notice from an issuer or Authorized
Party, collect all proceeds from securities, certificates of deposit or other
investments which may mature or be called;
d. Submit or cause to be submitted to the Client or the Investment
Manager, as designated by the Client, information actually received by the
Custodian regarding ownership rights pertaining to property held in the Account;
e. Attend to involuntary corporate actions;
f. Determine the fair market value of the Account as of such dates as the
Client and the Custodian may agree upon, in accordance with methods consistently
followed and uniformly applied. In determining fair market value of the
Account, the Custodian shall be protected in relying on values recommended by an
Authorized Party; and
g. Render periodic statements for property held hereunder.
4
<PAGE>
8. CONTRACTUAL INCOME AND SETTLEMENT
---------------------------------
a. Contractual Income. The Custodian shall credit the Account with income
------------------
and maturity proceeds on securities on contractual payment date net of any taxes
or upon actual receipt as agreed between the Custodian and the Client. To the
extent the Client and the Custodian have agreed to credit income on contractual
payment date, the Custodian may reverse such accounting entries with back value
to the contractual payment date if the Custodian reasonably believes that it
will not receive such amount.
b. Contractual Settlement. The Custodian will attend to the settlement of
----------------------
securities transactions on the basis of either contractual settlement date
accounting or actual settlement date accounting as agreed between the Client and
the Custodian. To the extent the Client and the Custodian have agreed to settle
certain securities transactions on the basis of contractual settlement date
accounting, the Custodian may reverse with back value to the contractual
settlement date any entry relating to such contractual settlement where the
related transaction remains unsettled in accordance with established procedures.
9. Tax Law.
-------
a. The Custodian shall use reasonable efforts to assist the Authorized
Party, to the extent the Authorized Party has provided necessary information,
with respect to any tax obligations, including responsibility for taxes,
withholding, certification and reporting requirements, claims for exemptions or
refund, interest, penalties and other expenses ("Tax Obligations"). The Client
shall cause the Authorized Party to notify the Custodian in writing of any such
Tax Obligations. The Custodian shall have no responsibility or liability for
any Tax Obligations now or hereafter imposed on the Client or the Account by any
taxing authorities, domestic or foreign.
b. To the extent the Custodian is responsible under any applicable law for
any Tax Obligation, the Client shall cause the Authorized Party to inform the
Custodian of all Tax Obligations, shall direct the Custodian with respect to the
performance of such Tax Obligations and shall provide the Custodian with the
necessary funds and all information required by the Custodian to meet such Tax
Obligations.
10. Non-Account Assets
------------------
The Client may request the Custodian to perform a recordkeeping function
with respect to property held by others and not otherwise subject to the terms
of this Agreement. To the extent the Custodian shall agree to perform this
service, its sole
5
<PAGE>
responsibility shall be to accurately reflect information on its books which it
has received from an Authorized Party.
11. REPORTING AND RECORDKEEPING
---------------------------
If, within ninety (90) days after the Custodian mails to the Client a
statement with respect to the Account, the Client has not given the Custodian
written notice of any exception or objection thereto, the statement shall be
deemed to have been approved, and in such case, the Custodian shall not be
liable for any matters in such statements. The Client shall have the right, at
its own expense and with prior written notice to the Custodian, to inspect the
Custodian's books and records directly relating to the Account during normal
business hours or to designate an accountant to make such inspection.
12. Standard of Care
----------------
In performing its duties under this Agreement, the Custodian shall exercise
the same care and diligence that it would devote to its own property in like
circumstances. The duties of the Custodian shall only be those specifically
undertaken pursuant to this Agreement. The Custodian shall not be responsible
or liable for any losses or damages suffered by the Client arising as a result
of the insolvency of any subcustodian, except to the extent the Custodian was
negligent in its selection or continued retention of such subcustodian.
The Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Agreement and shall be held harmless in acting
upon any notice, request, direction, instruction, consent, certification or
other instrument believed by it to be genuine and delivered by an Authorized
Party. The Custodian shall not be liable for any act or omission of any other
person in carrying out any responsibility imposed upon such person and under no
circumstances shall the Custodian be liable for any indirect, consequential or
special damages with respect to the role as Custodian.
13. FORCE MAJEURE
-------------
Notwithstanding anything in this Agreement to the contrary contained
herein, the Custodian shall not be responsible or liable for its failure to
perform under this Agreement or for any losses to the Account resulting from any
event beyond the reasonable control of the Custodian, its agents or
subcustodians, including but not limited to nationalization, strikes,
expropriation, devaluation, seizure, or similar action by any governmental
authority, de facto or de jure; or enactment, promulgation, imposition or
enforcement by any such governmental authority of currency restrictions,
exchange controls, levies or other charges affecting the Account's property; or
the breakdown, failure or malfunction of any utilities or telecommunications
systems; or any order or
6
<PAGE>
regulation of any banking or securities industry including changes in market
rules and market conditions affecting the execution or settlement of
transactions; or acts of war, terrorism, insurrection or revolution; or acts of
God; or any other similar or third-party event. This Section shall survive the
termination of this Agreement.
14. COMPENSATION AND EXPENSES
-------------------------
The Custodian shall be entitled to compensation for services under this
Agreement as mutually agreed. The Client acknowledges that, as part of the
Custodian's compensation, the Custodian may earn interest on balances, including
disbursement balances and balances arising from purchase and sale transactions.
The Custodian shall also be entitled to reimbursement for reasonable expenses
incurred by it in the discharge of its duties under this Agreement. The
Custodian is authorized to charge and collect from the Account any and all fees
and expenses earned unless such fees and expenses are paid directly by the
Client. To the extent the Custodian advances funds to the Account for
disbursements or to effect the settlement of purchase transactions, the
Custodian shall be entitled to collect from the Account either (i) with respect
to domestic assets, an amount equal to what would have been earned on the sums
advanced (an amount approximating the "federal funds" interest rate) or (ii)
with respect to non-domestic assets, the rate applicable to the appropriate
foreign market.
15. Indemnification
---------------
The Client shall indemnify and hold harmless the Custodian from all
liability and expense, including reasonable counsel fees and expenses, arising
out of the performance of its obligations under this Agreement, except as a
result of the Custodian's own negligence or willful misconduct. This
indemnification shall survive the termination of this Agreement.
16. AMENDMENT OR TERMINATION
------------------------
This Agreement may be amended by written agreement of the Client and the
Custodian and may be terminated by either party upon ninety (90) days' notice in
writing to the other party.
17. GOVERNING LAW AND LEGAL PROCEEDINGS
-----------------------------------
This Agreement shall be construed in accordance with and governed by the
laws of the Commonwealth of Massachusetts. The parties hereby expressly waive,
to the full extent permitted by applicable law, any right to trial by jury with
respect to any judicial proceeding arising from or related to this Agreement.
7
<PAGE>
18. REPRESENTATIONS
---------------
The Client and the Custodian hereby each represent and warrant to the other
that it has full authority to enter into this Agreement upon the terms and
conditions hereof and that the individual executing this Agreement on its behalf
has the requisite authority to bind the Client or the Custodian to this
Agreement.
19. Necessary Parties
-----------------
All of the understandings, agreements, representations and warranties
contained herein are solely for the benefit of the Client and the Custodian and
there are no other parties who are intended to be benefited, in any way
whatsoever, by this Agreement.
20. EXECUTION IN COUNTERPARTS
-------------------------
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original, and said counterparts shall constitute but one and
the same instrument and may be sufficiently evidenced by one counterpart.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
AUTHORIZED SIGNER OF: AUTHORIZED OFFICER OF:
PFL ENDEAVOR TARGET ACCOUNT BOSTON SAFE DEPOSIT
AND TRUST COMPANY
By: By:
-------------------- --------------------
Name: Name:
Title: Title:
Date: Date:
------------------- -------------------
ADDRESS FOR NOTICE: ADDRESS FOR NOTICE:
- ----------------------- One Cabot Road
- ----------------------- Medford, MA 02155
- ----------------------- Attention:
-------------
Taxable:
----------------
or
Tax Exempt:
------------
(Under IRC Section: )
------
- -----------------------
Fiscal Year
9
<PAGE>
TAXPAYER IDENTIFICATION NUMBER CERTIFICATION
--------------------------------------------
By signing below the Client hereby certifies under penalties of perjury that the
taxpayer identification number provided below is correct and that the Client is
not subject to back-up withholding on reportable payments credited to the
Client's Account by the Custodian. The Client may not be subject to back-up
withholding either because (a) the Client is exempt from back-up withholding
because it is an "exempt recipient", (b) the Client has not been notified by the
Internal Revenue Service that it is subject to back-up withholding for failure
to report all interest or dividends, or (c) the IRS has notified the Client that
it is no longer subject to back-up withholding. (If (a), (b), or (c) do not
apply, please cross out.) FAILURE TO SIGN BELOW AND PROVIDE A VALID TAXPAYER
IDENTIFICATION NUMBER MAY REQUIRE THAT THE CUSTODIAN APPLY FEDERAL INCOME TAX
WITHHOLDING AT THE RATE OF 31% (OR THE RATE AS REQUIRED BY LAW) ON ALL
REPORTABLE PAYMENTS MADE TO THE ACCOUNT ESTABLISHED UNDER THIS AGREEMENT.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION
OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO AVOID BACKUP
WITHHOLDING.
PFL ENDEAVOR TARGET ACCOUNT
BY: ________________________
NAME:
TITLE:
_____________________________
TAXPAYER IDENTIFICATION NUMBER
10
<PAGE>
Exhibit 4(A)
Form of Management Agreement between
the Target Account and Boston Safe Deposit and Trust
<PAGE>
MANAGEMENT AGREEMENT
___________, 1998
Endeavor Management Co., Managing Partner
Endeavor Investment Advisers
Suite 300
2101 East Coast Highway
Corona del Mar, CA 92660
Dear Sirs:
PFL Endeavor Target Account (the "Account"), a managed separate account
created under the laws of the State of Iowa, herewith confirms its agreement
with Endeavor Investment Advisers, a California general partnership, (the
"Manager") as follows:
1. Investment Description; Appointment
-----------------------------------
The Account desires to employ its capital by investing and reinvesting in
investments of the kind and in accordance with the limitations specified in its
Rules and Regulations as amended from time to time, and in its registration
statement filed with the Securities and Exchange Commission ("SEC") on Form N-3,
as amended from time to time (the "Registration Statement"), and in such manner
and to such extent as may from time to time be approved by the Board of Managers
of the Account. The Account is currently divided into two subaccounts: Dow
Jones Industrial Average Target 10 Subaccount and Dow Jones Industrial Average
Target 5 Subaccount. The Account may in the future be divided into additional
subaccounts. Such existing and future subaccounts are hereinafter referred to
as the "Subaccounts." Copies of the Registration Statement and the Accounts's
Rules and Regulations have been or will be submitted to the Manager. The
Account desires to employ the Manager to act as its investment manager. The
Account acknowledges and agrees that the Manager intends to appoint a person to
act as investment adviser ("Adviser") to render investment advice to each of the
Subaccounts. Such Adviser shall make all determinations with respect to the
Subaccount's assets for which it has responsibility. The Manager accepts this
appointment and agrees to furnish the services for the compensation set forth
below.
<PAGE>
2. Services as Investment Manager
------------------------------
(a) Subject to the supervision and direction of the Board of Managers of the
Account, the Manager will have (i) overall supervisory responsibility for the
general management and investment of the Subaccounts' assets, and (ii) full
investment discretion to make all determinations with respect to the investment
of a Subaccount's assets not then managed by an Adviser. In connection with
its responsibilities set forth under (i) above, the Account acknowledges and
agrees that the Manager will select an Adviser to render investment advice to
each of the Subaccounts. Each such Adviser shall make all determinations with
respect to the Subaccount's assets for which it has responsibility. In
addition, the Manager will conduct a program of evaluations of the Advisers'
performance, review the activities of the Advisers for compliance with the
Subaccounts' investment objectives and policies and will keep the Account
informed of developments materially affecting the Subaccounts and shall, on its
own initiative, furnish, or cause the Adviser to furnish, to the Account from
time to time whatever information the Manager believes appropriate for this
purpose.
(b) The Manager will also furnish to the Account, at its own expense and
without renumeration from or other cost to the Account, the following:
(i) Office Space. The Manager will provide office space in the offices
------------
of the Manager or in such other place as may be agreed upon by the parties
hereto from time to time, and all necessary office facilities and equipment;
(ii) Personnel. The Manager will provide necessary executive and other
---------
personnel, including personnel for the performance of clerical and other office
functions, exclusive of those functions: (A) related to and to be performed
under the Account's contract or contracts for administration, custodial,
accounting, bookkeeping, transfer or similar services by the entity selected to
perform such services; and (B) related to the investment advisory services to be
provided by the Adviser pursuant to an investment advisory agreement; and
(iii) Preparation of Prospectus and Other Documents. The Manager will
provide other information and services, other than services of outside counsel
or independent accountants or investment advisory services to be provided by the
Adviser under an investment advisory agreement, required in connection with the
preparation of all registration statements and prospectuses, prospectus
supplements, statements of additional information, all annual, semiannual, and
periodic reports to policy owners of the Account, regulatory authorities, or
others, and all notices and proxy solicitation materials, furnished to policy
owners of the Account or regulatory authorities, and all tax returns.
(c) The records relating to the services provided under the Agreement shall
be the property of the Account and shall be under its control; however, the
Account shall furnish to the Manager such records and permit it to retain such
records (either in original or in duplicate form) as it shall reasonably require
an order to carry out its duties or to satisfy applicable regulatory
requirements. In the event of the termination of this Agreement, such records
shall promptly be returned to the Account by the Manager free from any claim or
retention of rights therein.
<PAGE>
(d) The services of the Manager to the Account hereunder are not to be
deemed exclusive, and the Manager shall be free to render similar services to
others and to engage in other activities, so long as the services rendered to
the Account are not impaired.
3. Compensation
------------
In consideration of services rendered pursuant to this Agreement, the
Account will pay the Manager a fee at the respective annual rates of the value
of each Subaccount's average daily net asset set forth in Schedule A hereto as
such schedule may be amended from time to time. Such fees shall be accrued
daily and paid monthly as soon as practicable after the end of each month. If
the Manager shall serve for less than the whole of any month, the foregoing
compensation shall be prorated. For the purpose of determining fees payable to
the Manager, the value of the Subaccounts' net assets shall be computed at the
times and in the manner specified in the Registration Statement.
4. Expenses
--------
The Account shall pay all expenses other than those expressly assumed by the
Manager herein, which expenses payable by the Account shall include, but are not
limited to:
a. Fees to the Manager;
b. Legal and audit expenses;
c. Fees and expenses related to the registration and qualification of the
Account and its shares for distribution under federal and state securities laws;
d. Expenses of the Account's transfer agent, custodian and administrator;
e. Salaries, fees and expenses of members of the Board of Managers and
executive officers of the Account who are not "affiliated persons" of the
Manager or the Advisers within the meaning of the 1940 Act;
f. Taxes (including the expenses related to preparation of tax returns) and
corporate or other fees levied against the Account;
g. Brokerage commissions and other expenses associated with the purchase
and sale of portfolio securities for the Account;
h. Expenses, including interest, of borrowing money;
i. Expenses incidental to meetings of the Account's policy owners, Board of
Managers and the maintenance of the Account's organizational existence;
j. Expenses of preparing, printing and mailing notices, proxy material,
reports to regulatory bodies and reports to policy owners of the Account;
<PAGE>
k. Expenses of preparing and typesetting of prospectuses of the Account;
l. Expenses of printing and distributing prospectuses to policy owners of
the Account;
m. Association membership dues;
n. Premiums for fidelity insurance, directors and officers liability
insurance and other coverage;
o. Charges of an independent pricing service to value the Subaccount's
assets;
p. Expenses related to the purchase or redemption of the Account's units;
and
q. Such nonrecurring expenses as may arise, including those associated with
actions, suits, or proceedings to which the Account is a party and arising from
any legal obligation which the Account may have to indemnify its officers and
members of the Board of Managers with respect thereto.
5. Standard of Care
----------------
The Manager shall exercise its best judgment in rendering the services
hereunder. The Manager shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Account in connection with the matters to
which this Agreement relates, provided that nothing herein shall be deemed to
protect or purport to protect the Manager against liability to the Account or to
the policy owners of the Account to which the Manager would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or by reason of the Manager's reckless disregard
of its obligations and duties under this Agreement. Any person, even though an
officer, director, employee or agent of the Manager, who may be or become an
officer, member of the Board of Managers, employee or agent of the Account,
shall be deemed, when rendering services to the Account to be rendering such
services to or to be acting solely for the Account and not as an officer,
director, employee or agent, or one under the control or direction of the
Manager, even though paid by it.
6. Term
----
This Agreement shall continue in effect, unless sooner terminated as
hereinafter provided, for a period of two years from the date hereof and
indefinitely thereafter provided that its continuance after such two year
period as to each Subaccount shall be specifically approved at least annually by
vote of a majority of the outstanding voting securities of such Subaccount or by
vote of a majority of the Account's Board of Managers; and further provided that
such continuance is also approved annually by the vote of a majority of the
Board of Managers who are not parties to this Agreement or interested persons of
the Account or the Manager, cast in person at a meeting called for the purpose
of voting on such approval. This Agreement may be terminated as to any
Subaccount at any time, without payment of any penalty, by the Account's Board
of Managers or by a vote of a majority of the outstanding voting securities of
such Subaccount upon 60 days' prior written notice to the Manager, or by the
Manager upon 90 days' prior written notice to the Account, or upon such shorter
notice as may be mutually agreed upon. This Agreement may be amended at any
time by the Manager and the Account, subject to
<PAGE>
approval by the Account's Board of Managers and, if required by applicable SEC
rules and regulations, a vote of a majority of the Account's outstanding voting
securities. This Agreement shall terminate automatically and immediately in the
event of its assignment. The terms "assignment" and "vote of a majority of the
outstanding voting securities" shall have the meaning set forth for such terms
in the 1940 Act.
7. Limitation of Account's Liability
----------------------------------
The Manager agrees that the Account's obligations hereunder in any case
shall be limited to the Account and to its assets and that the Manager shall not
seek satisfaction of any such obligation from the policy owners of the Account
nor from any member of its Board of Managers, officer, employee or agent of the
Account.
8. Force Majeure
-------------
The Manager shall not be liable for delays or errors occurring by reason of
circumstances beyond its control, including but not limited to acts of civil or
military authority, national emergencies, work stoppages, fire, flood,
catastrophe, acts of God, insurrection, war, riot, or failure of communication
or power supply. In the event of equipment breakdowns beyond its control, the
Manager shall take reasonable steps to minimize service interruptions but shall
have no liability with respect thereto.
9. Severability
------------
If any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby.
10. Miscellaneous
-------------
This Agreement constitutes the full and complete agreement of the parties
hereto with respect to the subject matter hereof. Each party agrees to perform
such further actions and execute such further documents as are necessary to
effectuate the purposes hereof. This Agreement shall be construed and enforced
in accordance with and governed by the laws of the State of California. The
captions in this Agreement are included for convenience only and in no way
define or delimit any of the provisions hereof or otherwise affect their
construction or effect. This Agreement may be executed in several counterparts,
all of which together shall for all purposes constitute one Agreement, binding
on all the parties.
<PAGE>
If the foregoing is in accordance with your understanding, kindly indicate
your acceptance hereof by signing and returning to us the enclosed copy hereof.
Very truly yours,
PFL ENDEAVOR TARGET ACCOUNT
By _______________________________
Authorized Officer
Accepted:
ENDEAVOR INVESTMENT ADVISERS
By: Endeavor Management Co.,
Managing Partner
By ________________________________
Authorized Officer
<PAGE>
SCHEDULE A
Dow Jones Industrial Average Target 10
Subaccount 0.75% of average daily net assets
Dow Jones Industrial Average Target 5
Subaccount 0.75% of average daily net assets
<PAGE>
Exhibit 4(B)(1)
Form of Investment Advisory Agreement between
Endeavor Investment Advisers
<PAGE>
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this _____ day of _________,1998, by and between First Trust
Advisers L.P., an Illinois limited partnership (the "Adviser"), and Endeavor
Investment Advisers, a California general partnership (the "Manager").
WHEREAS, the Manager serves as investment manager of the PFL Endeavor
Target Account (the "Account"), which is a managed separate account established
by PFL Life Insurance Company, and has filed a registration statement under the
Investment Company Act of 1940, as amended (the "1940 Act") and the Securities
Act of 1933 (the "Registration Statement"); and
WHEREAS, the Account is divided into two subaccounts, one of which is the
Dow Jones Industrial Average Target 5 Subaccount (the "Subaccount"); and
WHEREAS, the Manager desires to avail itself of the services, information,
advice, assistance and facilities of an investment adviser to assist the Manager
in performing services for the Subaccount; and
WHEREAS, the Adviser is registered under the Investment Advisers Act of
1940, as amended, and is engaged in the business of rendering investment
advisory services to investment companies and other institutional clients and
desires to provide such services to the Manager;
NOW, THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. Employment of the Adviser. The Manager hereby employs the Adviser to
-------------------------
manage the investment and reinvestment of the assets of the Subaccount, subject
to the control and direction of the Account's Board of Managers, for the period
and on the terms hereinafter set forth. The Adviser hereby accepts such
employment and agrees during such period to render the services and to assume
the obligations herein set forth for the compensation herein provided. The
Adviser shall for all purposes herein be deemed to be an independent contractor
and shall, except as expressly provided or authorized (whether herein or
otherwise), have no authority to act for or represent the Manager, the
Subaccount or the Account in any way.
2. Obligations of and Services to be Provided by the Adviser. The Adviser
---------------------------------------------------------
undertakes to provide the following services and to assume the following
obligations:
a. The Adviser shall manage the investment and reinvestment of the
portfolio assets of the Subaccount, all without prior consultation with the
Manager,
<PAGE>
subject to and in accordance with the investment objective and policies of the
Subaccount set forth in the Account's Registration Statement, as such
Registration Statement may be amended from time to time, and any written
instructions which the Manager or the Account's Board of Managers may issue from
time-to-time in accordance therewith. In pursuance of the foregoing, the Adviser
shall make all determinations with respect to the purchase and sale of portfolio
securities and shall take such action necessary to implement the same. The
Adviser shall render regular reports to the Account's Board of Managers and the
Manager concerning the investment activities of the Subaccount.
b. To the extent provided in the Account's Registration Statement, as such
Registration Statement may be amended from time to time, the Adviser shall, in
the name of the Subaccount, place orders for the execution of portfolio
transactions with or through such brokers, dealers or banks as it may select
including affiliates of the Adviser and, complying with Section 28(e) of the
Securities Exchange Act of 1934, may pay a commission on transactions in excess
of the amount of commission another broker-dealer would have charged.
c. In connection with the placement of orders for the execution of the
portfolio transactions of the Subaccount, the Adviser shall create and maintain
all necessary records pertaining to the purchase and sale of securities by the
Adviser on behalf of the Subaccount in accordance with all applicable laws,
rules and regulations, including but not limited to records required by Section
31(a) of the 1940 Act. All records shall be the property of the Account and
shall be available for inspection and use by the Securities and Exchange
Commission ("SEC"), the Account, the Manager or any person retained by the
Account. Where applicable, such records shall be maintained by the Adviser for
the periods and in the places required by Rule 31a-2 under the 1940 Act.
d. The Adviser shall bear its expenses of providing services pursuant to
this Agreement.
3. Compensation of the Adviser. In consideration of services rendered
---------------------------
pursuant to this Agreement, the Manager will pay the Adviser a fee at the annual
rate of the value of the Subaccount's average daily net assets set forth in
Schedule A hereto. Such fee shall be accrued daily and paid monthly as soon as
practicable after the end of each month. If the Adviser shall serve for less
than the whole of any month, the foregoing compensation shall be prorated. For
the purpose of determining fees payable to the Adviser, the value of the
Subaccount's net assets shall be computed at the times and in the manner
specified in the Account's Registration Statement.
4. Activities of the Adviser. The services of the Adviser hereunder are
-------------------------
not to be deemed exclusive, and the Adviser shall be free to render similar
services to others and to engage in other activities, so long as the services
rendered hereunder are not impaired.
<PAGE>
5. Use of Names. The Adviser hereby consents to the Subaccount being
------------
named the "Dow Jones Industrial Average Target 5 Subaccount." The Manager shall
not use the name of the Adviser or any of its affiliates in any prospectus,
sales literature or other material relating to the Account in any manner not
approved prior thereto by the Adviser; provided, however, that the Adviser shall
approve all uses of its name and that of its affiliates which merely refer in
accurate terms to its appointment hereunder or which are required by the SEC or
a state securities commission; and, provided, further, that in no event shall
such approval be unreasonably withheld. The Adviser shall not use the name of
the Account or the Manager in any material relating to the Adviser in any manner
not approved prior thereto by the Manager; provided, however, that the Manager
shall approve all uses of its or the Account's name which merely refer in
accurate terms to the appointment of the Adviser hereunder or which are required
by the SEC or a state securities commission; and, provided further, that in no
event shall such approval be unreasonably withheld.
The Manager recognizes that from time to time directors, officers and
employees of the Adviser may serve as directors, trustees, partners, officers
and employees of other corporations, business trusts, partnerships or other
entities (including other investment companies) and that such other entities may
include the name "Target," "First Trust" or Special Situations" as part of their
name, and that the Adviser or its affiliates may enter into investment advisory,
administration or other agreements with such other entities. If the Adviser
ceases to act as the Subaccount's investment adviser pursuant to this Agreement,
the Manager agrees, at the Adviser's request that it will cause the Account to
take all necessary action to change the name of the Subaccount to a name not
including "Target" in any form or confirmation of words.
The Manager and the Adviser recognize that the Subaccount is not sponsored,
endorsed, sold or promoted by Dow Jones & Company, Inc. ("Dow Jones"). Dow
Jones makes no representation or warranty, express or implied, to the policy
owners of the Account or any member of the public regarding the advisability of
purchasing interest in the Subaccount. Dow Jones' only relationship to the
Adviser is the licensing of certain copyrights, trademarks, servicemarks and
service names of Dow Jones. Dow Jones has no obligation to take the needs of
the Adviser or the policy owners of the Account into consideration in
determining, composing or calculating the Dow Jones Industrial Average/SM/. Dow
Jones is not responsible for and has not participated in the determination of
the terms and conditions of the Account, including the pricing or the amount
payable under contracts issued to policy owners. Dow Jones has no obligation or
liability in connection with the administration or marketing of the Subaccount.
DOW JONES DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE
DOW JONES INDUSTRIAL AVERAGE/SM/ OR ANY DATA INCLUDED THEREIN AND DOW JONES
SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.
DOW JONES MAKES NO
<PAGE>
WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ADVISER,
POLICY OWNERS OF THE ACCOUNT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
DOW JONES INDUSTRIAL AVERAGE/SM/ OR ANY DATA INCLUDED THEREIN. DOW JONES MAKES
NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
DOW JONES INDUSTRIAL AVERAGE/SM/ OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING
ANY OF THE FOREGOING, IN NO EVENT SHALL DOW JONES HAVE ANY LIABILITY FOR ANY
LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING
LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. THERE ARE
NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN DOW JONES
AND THE ADVISER.
6. Liability of the Adviser. Absent willful misfeasance, bad faith, gross
------------------------
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Adviser, the Adviser shall not be liable for any act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security. Nothing
herein shall constitute a waiver of any rights or remedies which the Account may
have under any federal or state securities laws.
7. Limitation of Account's Liability. The Adviser agrees that any of the
---------------------------------
Account's obligations shall be limited to the assets of the Subaccount and that
the Adviser shall not seek satisfaction of any such obligation from the policy
owners of the Account or from any Account officer, employee or agent of the
Account.
8. Renewal, Termination and Amendment. This Agreement shall continue in
----------------------------------
effect, unless sooner terminated as hereinafter provided, for a period of two
years from the date hereof and shall continue in full force and effect for
successive periods of one year thereafter, but only so long as each such
continuance as to the Subaccount is specifically approved at least annually by
vote of the holders of a majority of the outstanding voting securities of the
Subaccount or by vote of a majority of the Account's Board of Managers; and
further provided that such continuance is also approved annually by the vote of
a majority of the Board of Managers who are not parties to this Agreement or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval. This Agreement may be terminated as to the
Subaccount at any time, without payment of any penalty, by the Account's Board
of Managers, by the Manager, or by a vote of the majority of the outstanding
voting securities of the Account upon 60 days' prior written notice to the
Adviser, or by the Adviser upon 90 days' prior written notice to the Manager, or
upon such shorter notice as may be mutually agreed upon. This Agreement shall
terminate automatically and immediately upon termination of the Management
Agreement dated ________ __, 1998 between the Manager and the Account. This
Agreement shall terminate automatically and immediately in the event of its
assignment. The terms "assignment" and "vote of a majority of the outstanding
voting securities" shall
<PAGE>
have the meanings set forth for such terms in the 1940 Act. This Agreement may
be amended at any time by the Adviser and the Manager, subject to approval by
the Account's Board of Managers and, if required by applicable SEC rules and
regulations, a vote of a majority of the Subaccount's outstanding voting
securities.
9. Confidential Relationship. Any information and advice furnished by
-------------------------
either party to this Agreement to the other shall be treated as confidential and
shall not be disclosed to third parties except as required by law.
10. Severability. If any provision of this Agreement shall be held or
------------
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
11. Miscellaneous. This Agreement constitutes the full and complete
-------------
agreement of the parties hereto with respect to the subject matter hereof. Each
party agrees to perform such further actions and execute such further documents
as are necessary to effectuate the purposes hereof. This Agreement shall be
construed and enforced in accordance with and governed by the laws of the State
of California. The captions in this Agreement are included for convenience only
and in no way define or delimit any of the provisions hereof or otherwise affect
their construction or effect. This Agreement may be executed in several
counterparts, all of which together shall for all purposes constitute one
Agreement, binding on all the parties.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first written above.
ENDEAVOR INVESTMENT ADVISERS
BY: Endeavor Management Co.,
Managing Partner
BY:
-------------------------------
Authorized Officer
FIRST TRUST ADVISERS L.P.
BY:
-------------------------------
Authorized Officer
<PAGE>
SCHEDULE A
Dow Jones Industrial Average
Target 5 Subaccount 0.35% of average daily net assets
<PAGE>
Exhibit 4(B)(2)
Form of Investment Advisory Agreement
Endeavor Investment Advisers and First
Trust Advisers L.P. (DJIA Target)
<PAGE>
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this _____ day of _________,1998, by and between First Trust
Advisers L.P., an Illinois limited partnership (the "Adviser"), and Endeavor
Investment Advisers, a California general partnership (the "Manager").
WHEREAS, the Manager serves as investment manager of the PFL Endeavor
Target Account (the "Account"), which is a managed separate account established
by PFL Life Insurance Company, and has filed a registration statement under the
Investment Company Act of 1940, as amended (the "1940 Act") and the Securities
Act of 1933 (the "Registration Statement"); and
WHEREAS, the Account is divided into two subaccounts, one of which is the
Dow Jones Industrial Average Target 10 Subaccount (the "Subaccount"); and
WHEREAS, the Manager desires to avail itself of the services, information,
advice, assistance and facilities of an investment adviser to assist the Manager
in performing services for the Subaccount; and
WHEREAS, the Adviser is registered under the Investment Advisers Act of
1940, as amended, and is engaged in the business of rendering investment
advisory services to investment companies and other institutional clients and
desires to provide such services to the Manager;
NOW, THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. Employment of the Adviser. The Manager hereby employs the Adviser to
-------------------------
manage the investment and reinvestment of the assets of the Subaccount, subject
to the control and direction of the Account's Board of Managers, for the period
and on the terms hereinafter set forth. The Adviser hereby accepts such
employment and agrees during such period to render the services and to assume
the obligations herein set forth for the compensation herein provided. The
Adviser shall for all purposes herein be deemed to be an independent contractor
and shall, except as expressly provided or authorized (whether herein or
otherwise), have no authority to act for or represent the Manager, the
Subaccount or the Account in any way.
2. Obligations of and Services to be Provided by the Adviser. The Adviser
---------------------------------------------------------
undertakes to provide the following services and to assume the following
obligations:
a. The Adviser shall manage the investment and reinvestment of the
portfolio assets of the Subaccount, all without prior consultation with the
Manager,
<PAGE>
subject to and in accordance with the investment objective and policies of the
Subaccount set forth in the Account's Registration Statement, as such
Registration Statement may be amended from time to time, and any written
instructions which the Manager or the Account's Board of Managers may issue from
time-to-time in accordance therewith. In pursuance of the foregoing, the Adviser
shall make all determinations with respect to the purchase and sale of portfolio
securities and shall take such action necessary to implement the same. The
Adviser shall render regular reports to the Account's Board of Managers and the
Manager concerning the investment activities of the Subaccount.
b. To the extent provided in the Account's Registration Statement, as such
Registration Statement may be amended from time to time, the Adviser shall, in
the name of the Subaccount, place orders for the execution of portfolio
transactions with or through such brokers, dealers or banks as it may select
including affiliates of the Adviser and, complying with Section 28(e) of the
Securities Exchange Act of 1934, may pay a commission on transactions in excess
of the amount of commission another broker-dealer would have charged.
c. In connection with the placement of orders for the execution of the
portfolio transactions of the Subaccount, the Adviser shall create and maintain
all necessary records pertaining to the purchase and sale of securities by the
Adviser on behalf of the Subaccount in accordance with all applicable laws,
rules and regulations, including but not limited to records required by Section
31(a) of the 1940 Act. All records shall be the property of the Account and
shall be available for inspection and use by the Securities and Exchange
Commission ("SEC"), the Account, the Manager or any person retained by the
Account. Where applicable, such records shall be maintained by the Adviser for
the periods and in the places required by Rule 31a-2 under the 1940 Act.
d. The Adviser shall bear its expenses of providing services pursuant to
this Agreement.
3. Compensation of the Adviser. In consideration of services rendered
---------------------------
pursuant to this Agreement, the Manager will pay the Adviser a fee at the annual
rate of the value of the Subaccount's average daily net assets set forth in
Schedule A hereto. Such fee shall be accrued daily and paid monthly as soon as
practicable after the end of each month. If the Adviser shall serve for less
than the whole of any month, the foregoing compensation shall be prorated. For
the purpose of determining fees payable to the Adviser, the value of the
Subaccount's net assets shall be computed at the times and in the manner
specified in the Account's Registration Statement.
4. Activities of the Adviser. The services of the Adviser hereunder are
-------------------------
not to be deemed exclusive, and the Adviser shall be free to render similar
services to others and to engage in other activities, so long as the services
rendered hereunder are not impaired.
<PAGE>
5. Use of Names. The Adviser hereby consents to the Subaccount being
------------
named the "Dow Jones Industrial Average Target 10 Subaccount." The Manager shall
not use the name of the Adviser or any of its affiliates in any prospectus,
sales literature or other material relating to the Account in any manner not
approved prior thereto by the Adviser; provided, however, that the Adviser shall
approve all uses of its name and that of its affiliates which merely refer in
accurate terms to its appointment hereunder or which are required by the SEC or
a state securities commission; and, provided, further, that in no event shall
such approval be unreasonably withheld. The Adviser shall not use the name of
the Account or the Manager in any material relating to the Adviser in any manner
not approved prior thereto by the Manager; provided, however, that the Manager
shall approve all uses of its or the Account's name which merely refer in
accurate terms to the appointment of the Adviser hereunder or which are required
by the SEC or a state securities commission; and, provided further, that in no
event shall such approval be unreasonably withheld.
The Manager recognizes that from time to time directors, officers and
employees of the Adviser may serve as directors, trustees, partners, officers
and employees of other corporations, business trusts, partnerships or other
entities (including other investment companies) and that such other entities may
include the name "Target," "First Trust" or Special Situations" as part of their
name, and that the Adviser or its affiliates may enter into investment advisory,
administration or other agreements with such other entities. If the Adviser
ceases to act as the Subaccount's investment adviser pursuant to this Agreement,
the Manager agrees, at the Adviser's request that it will cause the Account to
take all necessary action to change the name of the Subaccount to a name not
including "Target" in any form or confirmation of words.
The Manager and the Adviser recognize that the Subaccount is not sponsored,
endorsed, sold or promoted by Dow Jones & Company, Inc. ("Dow Jones"). Dow
Jones makes no representation or warranty, express or implied, to the policy
owners of the Account or any member of the public regarding the advisability of
purchasing interest in the Subaccount. Dow Jones' only relationship to the
Adviser is the licensing of certain copyrights, trademarks, servicemarks and
service names of Dow Jones. Dow Jones has no obligation to take the needs of
the Adviser or the policy owners of the Account into consideration in
determining, composing or calculating the Dow Jones Industrial Average/SM/. Dow
Jones is not responsible for and has not participated in the determination of
the terms and conditions of the Account, including the pricing or the amount
payable under contracts issued to policy owners. Dow Jones has no obligation or
liability in connection with the administration or marketing of the Subaccount.
DOW JONES DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE
DOW JONES INDUSTRIAL AVERAGE/SM/ OR ANY DATA INCLUDED THEREIN AND DOW JONES
SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.
DOW JONES MAKES NO
<PAGE>
WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ADVISER,
POLICY OWNERS OF THE ACCOUNT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
DOW JONES INDUSTRIAL AVERAGE/SM/ OR ANY DATA INCLUDED THEREIN. DOW JONES MAKES
NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
DOW JONES INDUSTRIAL AVERAGE/SM/ OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING
ANY OF THE FOREGOING, IN NO EVENT SHALL DOW JONES HAVE ANY LIABILITY FOR ANY
LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING
LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. THERE ARE NO
THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN DOW JONES
AND THE ADVISER.
6. Liability of the Adviser. Absent willful misfeasance, bad faith, gross
------------------------
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Adviser, the Adviser shall not be liable for any act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security. Nothing
herein shall constitute a waiver of any rights or remedies which the Account may
have under any federal or state securities laws.
7. Limitation of Account's Liability. The Adviser agrees that any of the
---------------------------------
Account's obligations shall be limited to the assets of the Subaccount and that
the Adviser shall not seek satisfaction of any such obligation from the policy
owners of the Account or from any Account officer, employee or agent of the
Account.
8. Renewal, Termination and Amendment. This Agreement shall continue in
----------------------------------
effect, unless sooner terminated as hereinafter provided, for a period of two
years from the date hereof and shall continue in full force and effect for
successive periods of one year thereafter, but only so long as each such
continuance as to the Subaccount is specifically approved at least annually by
vote of the holders of a majority of the outstanding voting securities of the
Subaccount or by vote of a majority of the Account's Board of Managers; and
further provided that such continuance is also approved annually by the vote of
a majority of the Board of Managers who are not parties to this Agreement or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval. This Agreement may be terminated as to the
Subaccount at any time, without payment of any penalty, by the Account's Board
of Managers, by the Manager, or by a vote of the majority of the outstanding
voting securities of the Account upon 60 days' prior written notice to the
Adviser, or by the Adviser upon 90 days' prior written notice to the Manager, or
upon such shorter notice as may be mutually agreed upon. This Agreement shall
terminate automatically and immediately upon termination of the Management
Agreement dated ________ __, 1998 between the Manager and the Account. This
Agreement shall terminate automatically and immediately in the event of its
assignment. The terms "assignment" and "vote of a majority of the outstanding
voting securities" shall
<PAGE>
have the meanings set forth for such terms in the 1940 Act. This Agreement may
be amended at any time by the Adviser and the Manager, subject to approval by
the Account's Board of Managers and, if required by applicable SEC rules and
regulations, a vote of a majority of the Subaccount's outstanding voting
securities.
9. Confidential Relationship. Any information and advice furnished by
-------------------------
either party to this Agreement to the other shall be treated as confidential and
shall not be disclosed to third parties except as required by law.
10. Severability. If any provision of this Agreement shall be held or
------------
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
11. Miscellaneous. This Agreement constitutes the full and complete
-------------
agreement of the parties hereto with respect to the subject matter hereof. Each
party agrees to perform such further actions and execute such further documents
as are necessary to effectuate the purposes hereof. This Agreement shall be
construed and enforced in accordance with and governed by the laws of the State
of California. The captions in this Agreement are included for convenience only
and in no way define or delimit any of the provisions hereof or otherwise affect
their construction or effect. This Agreement may be executed in several
counterparts, all of which together shall for all purposes constitute one
Agreement, binding on all the parties.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first written above.
ENDEAVOR INVESTMENT ADVISERS
BY: Endeavor Management Co.,
Managing Partner
BY:
-------------------------------
Authorized Officer
FIRST TRUST ADVISERS L.P.
BY:
-------------------------------
Authorized Officer
<PAGE>
SCHEDULE A
Dow Jones Industrial Average
Target 10 Subaccount 0.35% of average daily net assets
<PAGE>
Exhibit 11(A)
Form of Distribution Plan
<PAGE>
PFL ENDEAVOR TARGET ACCOUNT
PLAN OF DISTRIBUTION PURSUANT TO
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT OF 1940
____________________, 1998
WHEREAS, PFL Endeavor Target Account (the "Target Account") is registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), as an
open-end management investment company and meets the definition of a separate
account under federal securities laws, the subaccounts of which are offered as
investment options under certain variable annuities (the "Policies") offered by
the PFL Life Insurance Company ("PFL"); and
WHEREAS, the Target Account desires to adopt a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act (the "12b-1 Plan") applicable to the
subaccounts of the Target Account as now in existence or hereinafter created
from time to time (the "Subaccounts"); and
WHEREAS, PFL has entered into a Principal Underwriting Agreement, on its
own behalf and on behalf of the Target Account, with AFSG Securities, Inc.
("AFSG"), pursuant to which AFSG has agreed to serve as principal underwriter of
the Policies; and
WHEREAS, AFSG has entered into agreements with broker-dealers for the
distribution of the Policies;
NOW, THEREFORE, the Target Account hereby adopts this 12b-1 Plan with
respect to the Subaccounts of the Target Account in accordance with Rule 12b-1
under the 1940 Act.
I. COMPENSATION
The Target Account is authorized to pay to PFL, as partial compensation for
the costs of distribution of the Policies, a distribution fee at a rate on an
annualized basis as a percentage of each Subaccount's average daily net assets
as specified on Schedule A attached hereto. Such fee shall be calculated and
accrued daily and paid monthly or at such other intervals as the Target Account
and PFL agree.
The amount of the fees payable by each Subaccount to PFL under this 12b-1
Plan is not related directly to expenses incurred by PFL on behalf of each
Subaccount for distribution of the Policies. This 12b-1 Plan does not obligate
the Target Account to reimburse PFL for such expenses. If PFL's expenses with
respect to each Subaccount exceed the fee set forth in this 12b-1 Plan, the
Target Account will not pay PFL any additional fee. Conversely, if such
expenses of PFL are less than the fee set forth above, PFL shall be entitled to
keep the excess fee.
<PAGE>
The fee set forth in this 12b-1 Plan will be paid by the Target Account to
PFL for each Subaccount unless and until either the 12b-1 Plan is terminated or
not renewed with respect to a Subaccount. If the 12b-1 Plan is terminated or
not renewed with respect to a Subaccount, any distribution expenses incurred by
PFL on behalf of that Subaccount in excess of the payments of the fees specified
herein which PFL has received or accrued through the termination date are the
sole responsibility and liability of PFL, and are not obligations of the Target
Account.
II. EXPENDITURES OF PFL
In distributing the Policies, PFL may spend such amounts as it deems
appropriate on any activities or expenses primarily intended to result in the
sale of the Policies including, but not limited to: (a) compensation to
employees of PFL and/or the underwriter; (b) commissions paid on sales of the
Policies; (c) the costs of training sales personnel regarding the sale of the
Policies; (d) compensation to and expenses, including overhead and telephone
expenses, of broker-dealers who engage in or support the distribution of the
Policies; (e) the costs of printing and distributing prospectuses, statements of
additional information and annual and interim reports of the Target Account for
other than existing shareholders; (f) the costs of preparing, printing and
distributing sales literature and advertising materials; (g) expenses relating
to the formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising; (h) the costs of obtaining such
information, analyses and reports with respect to marketing and promotional
activities and investor accounts as PFL may, from time to time, deem advisable;
and (i) the costs of any other activity that the Board of Managers of the Target
Account (the "Board") determines is primarily intended to result in the sale of
Policies.
III. REPORTS
PFL shall provide to the Board and the Board shall review, at least
quarterly, a written report of the amounts expended by PFL with respect to each
Subaccount under this 12b-1 Plan and the purposes for which such expenditures
were made.
IV. TERM
This 12b-1 Plan shall not become effective with respect to a Subaccount
unless it first has been approved by votes of a majority of both: (a) the Board;
and (b) those Managers of the Target Account who are not "interested persons" of
the Target Account and have no direct or indirect financial interest in the
operation of this 12b-1 Plan or any agreements related thereto (the "Independent
Managers"), cast in person at a meeting called for the purpose of voting on such
approval; and until the Managers who approve the 12b-1 Plan's taking effect with
respect to each Subaccount have concluded that there is a reasonable likelihood
that this 12b-1 Plan will benefit the variable annuity policy owners and the
Target Account.
2
<PAGE>
If approved as set forth above, this Plan shall continue thereafter in full
force and effect with respect to each Subaccount for so long as such continuance
is specifically approved at least annually in the manner provided for approval
herein.
V. RELATED AGREEMENTS
Any agreement related to this Plan shall be in writing and shall provide in
substance that: (a) such agreement, with respect to any Subaccount, may be
terminated at any time, without the payment of any penalty, by vote of a
majority of the Independent Managers or by vote of a majority of the outstanding
voting securities of that Subaccount, on not more than 60 days written notice to
any other party to the agreement; and (b) such agreement shall terminate
automatically in the event of its assignment.
VI. TERMINATION
This 12b-1 Plan may be terminated at any time without penalty by vote of a
majority of the Independent Managers or, by vote of a majority of the
outstanding voting securities of the applicable Subaccount.
VII. AMENDMENTS
This 12b-1 Plan may not be amended to increase materially the amount of
fees provided for herein unless such amendment is approved by a vote of a
majority of the outstanding voting securities of each Subaccount, and may not be
amended in any other material respect unless approved in the manner provided for
approval and annual renewal in Section IV hereof.
VIII. INDEPENDENT MANAGERS
While this 12b-1 Plan is in effect, the selection and nomination of the
Independent Managers shall be committed to the discretion of the Independent
Managers.
IX. DEFINITIONS
As used in this 12b-1 Plan, the terms "majority of the outstanding voting
securities" and "interested person" shall have the same meaning as those terms
have in the 1940 Act.
X. RECORDS
The Target Account shall preserve copies of this 12b-1 Plan (including any
amendments thereto) and any related agreements and all reports made pursuant to
Section III hereof for a period of not less than six (6) years, the first two
years in an easily accessible place.
3
<PAGE>
XI. SEVERABILITY
If any provision of this 12b-1 Plan shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this 12b-1 Plan
shall not be affected thereby.
IN WITNESS WHEREOF, the Target Account has executed this 12b-1 Plan on the
day and year set forth below.
Date: ________________
PFL ENDEAVOR TARGET ACCOUNT
By: -----------------------------
Title: -----------------------------
4
<PAGE>
SCHEDULE A
Rate (as a percentage
Policy of daily net assets)
------ -----------------------
Older Endeavor None
Endeavor Variable Annuity 0.15% first 7 policy years
Endeavor Platinum Variable Annuity 0.25% first 10 policy years
PFL ENDEAVOR TARGET ACCOUNT
Date: _________________________ By: ----------------------
Title: -------------------
A-1
<PAGE>
EXHIBIT (11)(B)
---------------
FORM OF ADMINISTRATIVE SERVICES AGREEMENT
-1-
<PAGE>
FORM OF
ADMINISTRATION AGREEMENT
The ADMINISTRATION AGREEMENT by and between FIRST DATA INVESTOR SERVICES
GROUP, INC., a Massachusetts corporation ("Investor Services Group"), and PFL
ENDEAVOR TARGET ACCOUNT, a managed separate account created under the laws of
the State of Iowa (the "Account") dated as of _________, 1998 (the "Agreement").
WHEREAS, the Account desires to retain Investor Services Group to render
certain administrative services with respect to each subaccount of the Account
listed in Schedule A hereto, as the same may be amended from time to time by the
parties hereto (collectively, the "Subaccounts"), and Investor Services Group is
willing to render such services;
WITNESSETH:
NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained, it is agreed between the parties hereto as follows:
1. Appointment. The Account hereby appoints Investor Services Group to
-----------
provide certain administrative services required by the Account on the terms set
forth in this Agreement. Investor Services Group accepts such appointment and
agrees to render the services herein set forth for the compensation herein
provided. In the event that the Account decides to retain Investor Services
Group to provide the administrative services hereunder with respect to one or
more subaccounts other than the Subaccounts, the Account shall notify Investor
Services Group in writing. If Investor Services Group is willing to render such
services, it shall notify the Account in writing whereupon such subaccount shall
become a Subaccount hereunder.
2. Delivery of Documents. The Account has furnished Investor Services
---------------------
Group with copies properly certified or authenticated of each of the following:
(a) Resolutions of the Account's Board of Managers authorizing the
appointment of Investor Services Group to provide certain administrative
services required by the Account for each Subaccount and approving this
Agreement;
(b) Each investment advisory agreement or management agreement between
the Account and an investment adviser or investment manager (the "Advisers")
with respect to the Subaccounts (the "Advisory Agreements");
(c) The Custody Agreement between _______________ (the "Custodian") and
the Account dated as of _______________ and all amendments thereto (the "Custody
Agreement");
(d) The Account's Registration Statement on Form N-3 (the "Registration
Statement") under the Securities Act of 1933 and under the 1940 Act (File Nos.
________ and ________), as declared effective by the Securities and Exchange
Commission ("SEC") on
-2-
<PAGE>
____________, relating to shares of beneficial interest of the Account no par
value (the "Shares"), and all amendments thereto; and
(e) Each Subaccount's most recent prospectus and Statement of Additional
Information and all amendments and supplements thereto (collectively, the
"Prospectuses").
The Account will furnish Investor Services Group from time to time with
copies, properly certified or authenticated, of all amendments of or supplements
to the foregoing. Furthermore, the Account will provide Investor Services Group
with any other documents that Investor Services Group may reasonably request and
will notify Investor Services Group as soon as possible of any matter materially
affecting the performance of Investor Services Group of its services under this
Agreement.
3. Duties as Administrator. Subject to the supervision and direction of
-----------------------
the Board of Managers of the Account, Investor Services Group will assist in
supervising various aspects of the Account's administrative operations and
undertakes to perform the following specific services:
(a) Maintaining office facilities (which may be in the offices of
Investor Services Group or a corporate affiliate) and furnishing corporate
officers for the Account;
(b) Performing the functions ordinarily performed by a mutual fund
group's internal legal department as described in Schedule D to this Agreement,
furnishing data processing services, clerical services, and executive and
administrative services and standard stationery and office supplies in
connection with the foregoing;
(c) Accounting and bookkeeping services (including the maintenance of
such accounts, books and records of the Account as may be required by Section
31(a) of the 1940 Act and the rules thereunder);
(d) Internal auditing;
(e) Performing all functions ordinarily performed by the office of a
corporate treasurer, and furnishing the services and facilities ordinarily
incident thereto, including calculating the net asset value of the shares in
conformity with the Subaccount's prospectus;
(f) Assisting in the preparation of reports to the Account's
shareholders of record and the SEC including, but not necessarily limited to,
Annual Reports and Semi-Annual Reports on Form N-SAR;
(g) Preparing various reports or other documents required by federal,
state and other applicable laws and regulations, other than those filed or
required to be filed by the Custodian or Adviser;
(h) Preparing the Account's tax returns;
-3-
<PAGE>
(i) Assisting each Adviser, at the Adviser's request, in monitoring and
developing compliance procedures for the Account which will include, among other
matters, procedures to assist the Advisers in monitoring compliance with each
Subaccount's investment objective, policies, restrictions, tax matters and
applicable laws and regulations;
(j) Performing all functions ordinarily performed by the office of a
corporate secretary, and furnishing the services and facilities incident
thereto, including preparation for, conduct of, and recording Managers' meetings
and shareholder meetings;
(k) Furnishing all other services identified on Schedule B annexed hereto
and incorporated herein which are not otherwise specifically set forth above.
In performing its duties under this Agreement, Investor Services Group: (a)
will act in accordance with the Prospectuses and with the instructions and
directions of the Account and will conform to and comply with the requirements
of the 1940 Act and all other applicable federal or state laws and regulations;
and (b) will consult with legal counsel to the Account, as necessary and
appropriate. Furthermore, Investor Services Group shall not have or be required
to have any authority to supervise the investment or reinvestment of the
securities or other properties which comprise the assets of the Account or any
of its Subaccounts and shall not provide any investment advisory services to the
Account or any of its Subaccounts.
4. Compensation and Allocation of Expenses. Investor Services Group shall
---------------------------------------
bear all expenses in connection with the performance of its services under this
Agreement, except as indicated below.
(a) Investor Services Group will from time to time employ or associate
with itself such person or persons as Investor Services Group may believe to be
particularly suited to assist it in performing services under this Agreement.
Such person or persons may be officers and employees who are employed by both
Investor Services Group and the Account. The compensation of such person or
persons shall be paid by Investor Services Group and no obligation shall be
incurred on behalf of the Account in such respect.
(b) Investor Services Group shall not be required to pay any of the
following expenses incurred by the Account: membership dues in the Investment
Company Institute or any similar organization; investment advisory expenses;
costs of printing and mailing stock certificates, prospectuses, reports and
notices; interest on borrowed money; brokerage commissions; stock exchange
listing fees; taxes and fees payable to Federal, state and other governmental
agencies; fees of Managers of the Account who are not affiliated with Investor
Services Group; outside auditing expenses; outside legal expenses; or other
expenses not specified in this Section 4 which may be properly payable by the
Account or a Subaccount.
(c) The Account will compensate Investor Services Group for the
performance of its obligations hereunder in accordance with the fees set forth
in the written Fee Schedule annexed hereto as Schedule B and incorporated
herein. Schedule B may be amended to add fee
-4-
<PAGE>
schedules for any additional Subaccounts for which Investor Services Group has
been retained as Administrator.
(d) The Account will compensate Investor Services Group for its services
rendered pursuant to this Agreement in accordance with the fees set forth above.
Such fees do not include out-of-pocket disbursements of Investor Services Group
for which Investor Services Group shall be entitled to bill separately. Out-of-
pocket disbursements shall include, but shall not be limited to, the items
specified in Schedule B, annexed hereto and incorporated herein, which schedule
may be modified by Investor Services Group upon not less than thirty days' prior
written notice to the Account and the Special Projects outlined in Schedule D
hereto.
(e) Investor Services Group will bill the Account as soon as practicable
after the end of each calendar month, and said billings will be detailed in
accordance with the out-of-pocket schedule. The Account will pay to Investor
Services Group the amount of such billing by Federal Subaccounts Wire within
fifteen (15) business days after the Account's receipt of said bill. In
addition, Investor Services Group may charge a service fee equal to the lesser
of (i) one and one half percent (1-1/2%) per month or (ii) the highest interest
rate legally permitted on any past due billed amount.
(f) The Account acknowledges that the fees that Investor Services Group
charges the Account under this Agreement reflect the allocation of risk between
the parties, including the disclaimer of warranties in Section 7 and the
limitations on liability in Section 5. Modifying the allocation of risk from
what is stated here would affect the fees that Investor Services Group charges,
and in consideration of those fees, the Account agrees to the stated allocation
of risk.
5. Limitation of Liability.
-----------------------
(a) Investor Services Group shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Account or the Subaccounts in
connection with the performance of its obligations and duties under this
Agreement, except a loss resulting from Investor Services Group's willful
misfeasance, bad faith or negligence in the performance of such obligations and
duties, or by reason of its reckless disregard thereof.
(b) Neither party may assert any cause of action against the other party
under this Agreement that accrued more than two (2) years prior to the filing of
the suit (or commencement of arbitration proceedings) alleging such cause of
action.
(c) Each party shall have the duty to mitigate damages for which the other
party may become responsible.
(d) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT
SHALL INVESTOR SERVICES GROUP, ITS AFFILIATES OR ANY OF ITS OR THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE UNDER ANY THEORY OF
TORT, CONTRACT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR LOST
PROFITS,
-5-
<PAGE>
EXEMPLARY, PUNITIVE, SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES,
EACH OF WHICH IS HEREBY EXCLUDED BY AGREEMENT OF THE PARTIES REGARDLESS OF
WHETHER SUCH DAMAGES WERE FORESEEABLE OR WHETHER EITHER PARTY OR ANY ENTITY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
6. Indemnification.
(a) The Account shall indemnify and hold Investor Services Group
harmless from and against any and all claims, costs, expenses (including
reasonable attorneys' fees), losses, damages, charges, payments and liabilities
of any sort or kind which may be asserted against Investor Services Group or for
which Investor Services Group may be held to be liable in connection with this
Agreement or Investor Services Group's performance hereunder (a "Claim"), unless
such Claim resulted from a negligent act or omission to act or bad faith by
Investor Services Group in the performance of its duties hereunder.
(b) Investor Services Group shall indemnify and hold the Account
harmless from and against any and all claims, costs, expenses (including
reasonable attorneys' fees), losses, damages, charges, payments and liabilities
of any sort or kind which may be asserted against the Account or for which the
Account may be held to be liable in connection with this Agreement (a "Claim"),
provided that such Claim resulted from a negligent act or omission to act, bad
faith, willful misfeasance or reckless disregard by Investor Services Group in
the performance of its duties hereunder.
(c) In any case in which one party (the "Indemnifying Party") may be
asked to indemnify or hold the other party (the "Indemnified Party") harmless,
the Indemnified Party will notify the Indemnifying Party promptly after
identifying any situation which it believes presents or appears likely to
present a claim for indemnification against the Indemnifying Party although the
failure to do so shall not prevent recovery by the Indemnified Party and shall
keep the Indemnifying Party advised with respect to all developments concerning
such situation. The Indemnifying Party shall have the option to defend the
Indemnified Party against any Claim which may be the subject of this
indemnification, and, in the event that the Indemnifying Party so elects, such
defense shall be conducted by counsel chosen by the Indemnifying Party and
satisfactory to the Indemnified Party, and thereupon the Indemnifying Party
shall take over complete defense of the Claim and the Indemnified Party shall
sustain no further legal or other expenses in respect of such Claim. The
Indemnified Party will not confess any Claim or make any compromise in any case
in which the Indemnifying Party will be asked to provide indemnification, except
with the Indemnifying Party's prior written consent. The obligations of the
parties hereto under this Section 6 shall survive the termination of this
Agreement.
7. EXCLUSION OF WARRANTIES. THIS IS A SERVICE AGREEMENT. EXCEPT AS
EXPRESSLY PROVIDED IN THIS AGREEMENT, INVESTOR SERVICES GROUP DISCLAIMS ALL
OTHER REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, MADE TO THE ACCOUNT OR
ANY OTHER PERSON, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES REGARDING
QUALITY, SUITABILITY,
-6-
<PAGE>
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE (IRRESPECTIVE OF
ANY COURSE OF DEALING, CUSTOM OR USAGE OF TRADE) OF ANY SERVICES OR ANY GOODS
PROVIDED INCIDENTAL TO SERVICES PROVIDED UNDER THIS AGREEMENT. INVESTOR SERVICES
GROUP DISCLAIMS ANY WARRANTY OF TITLE OR NON-INFRINGEMENT EXCEPT AS OTHERWISE
SET FORTH IN THIS AGREEMENT.
8. Termination of Agreement.
(a) This Agreement shall be effective on the date first written
above and shall continue for a period of two (2) years (the "Initial Term"),
unless earlier terminated pursuant to the terms of this Agreement. Thereafter,
this Agreement shall automatically be renewed for successive terms of two (2)
years ("Renewal Terms") each.
(b) Either party may terminate this Agreement at the end of the
Initial Term or at the end of any subsequent Renewal Term upon not than less
than ninety (90) days or more than one hundred-eighty (180) days prior written
notice to the other party.
(c) In the event a termination notice is given by the Account, all
expenses associated with movement of records and materials and conversion
thereof will be borne by the Account.
(d) If a party hereto is guilty of a material failure to perform its
duties and obligations hereunder (a "Defaulting Party") resulting in a material
loss to the other party, such other party (the "Non-Defaulting Party") may give
written notice thereof to the Defaulting Party, and if such material breach
shall not have been remedied within thirty (30) days after such written notice
is given, then the Non-Defaulting Party may terminate this Agreement by giving
thirty (30) days written notice of such termination to the Defaulting Party. If
Investor Services Group is the Non-Defaulting Party, its termination of this
Agreement shall not constitute a waiver of any other rights or remedies of
Investor Services Group with respect to services performed prior to such
termination or rights of Investor Services Group to be reimbursed for
out-of-pocket expenses. In all cases, termination by the Non-Defaulting Party
shall not constitute a waiver by the Non-Defaulting Party of any other rights it
might have under this Agreement or otherwise against the Defaulting Party.
9. Modifications and Waivers. No change, termination, modification, or
waiver of any term or condition of the Agreement shall be valid unless in
writing signed by each party. No such writing shall be effective as against
Investor Services Group unless said writing is executed by a Senior Vice
President, Executive Vice President or President of Investor Services Group. A
party's waiver of a breach of any term or condition in the Agreement shall not
be deemed a waiver of any subsequent breach of the same or another term or
condition.
10. No Presumption Against Drafter. Investor Services Group and the
Account have jointly participated in the negotiation and drafting of this
Agreement. The Agreement shall be
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<PAGE>
construed as if drafted jointly by the Account and Investor Services Group, and
no presumptions arise favoring any party by virtue of the authorship of any
provision of this Agreement.
11. Publicity. Neither Investor Services Group nor the Account shall
release or publish news releases, public announcements, advertising or other
publicity relating to this Agreement or to the transactions contemplated by it
without prior review and written approval of the other party; provided, however,
that either party may make such disclosures as are required by legal, accounting
or regulatory requirements after making reasonable efforts in the circumstances
to consult in advance with the other party.
12. Severability. The parties intend every provision of this Agreement to
be severable. If a court of competent jurisdiction determines that any term or
provision is illegal or invalid for any reason, the illegality or invalidity
shall not affect the validity of the remainder of this Agreement. In such case,
the parties shall in good faith modify or substitute such provision consistent
with the original intent of the parties. Without limiting the generality of this
paragraph, if a court determines that any remedy stated in this Agreement has
failed of its essential purpose, then all other provisions of this Agreement,
including the limitations on liability and exclusion of damages, shall remain
fully effective.
13. Miscellaneous.
(a) Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Account, the Account or Investor
Services Group shall be sufficiently given if addressed to the party and
received by it at its office set forth below or at such other place as it may
from time to time designate in writing.
To the Account:
PFL Endeavor Target Account
c/o Endeavor Investment Advisers
2101 East Coast Highway, Suite 300
Corona del Mar, California 92625
Attn:
To Investor Services Group:
First Data Investor Services Group, Inc.
4400 Computer Drive
Westborough, Massachusetts 01581
Attention: President
with a copy to Investor Services Group's General Counsel
(b) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and permitted assigns and is
not intended to confer upon
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<PAGE>
any other person any rights or remedies hereunder. This Agreement may not be
assigned or otherwise transferred by either party hereto, without the prior
written consent of the other party, which consent shall not be unreasonably
withheld; provided, however, that Investor Services Group may, in its sole
discretion, assign all its right, title and interest in this Agreement to an
affiliate, parent or subsidiary. Investor Services Group may, in its sole
discretion, engage subcontractors to perform any of the obligations contained in
this Agreement to be performed by Investor Services Group.
(c) The laws of the Commonwealth of Massachusetts, excluding the
laws on conflicts of laws, shall govern the interpretation, validity, and
enforcement of this Agreement. All actions arising from or related to this
Agreement shall be brought in the state and federal courts sitting in the City
of Boston, and Investor Services Group and the Account hereby submit themselves
to the exclusive jurisdiction of those courts.
(d) This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original and which collectively shall be
deemed to constitute only one instrument.
(e) The captions of this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
14. Confidentiality.
(a) The parties agree that the Proprietary Information (defined
below) and the contents of this Agreement (collectively "Confidential
Information") are confidential information of the parties and their respective
licensers. The Account and Investor Services Group shall exercise reasonable
care to safeguard the confidentiality of the Confidential Information of the
other. The Account and Investor Services Group may each use the Confidential
Information only to exercise its rights or perform its duties under this
Agreement. The Account and Investor Services Group shall not duplicate, sell or
disclose to others the Confidential Information of the other, in whole or in
part, without the prior written permission of the other party. The Account and
Investor Services Group may, however, disclose Confidential Information to its
employees who have a need to know the Confidential Information to perform work
for the other, provided that each shall use reasonable efforts to ensure that
the Confidential Information is not duplicated or disclosed by its employees in
breach of this Agreement. The Account and Investor Services Group may also
disclose the Confidential Information to independent contractors, auditors and
professional advisors, provided they first agree in writing to be bound by the
confidentiality obligations substantially similar to this Section 14.
Notwithstanding the previous sentence, in no event shall either the Account or
Investor Services Group disclose the Confidential Information to any competitor
of the other without specific, prior written consent.
(b) Proprietary Information means:
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<PAGE>
(i) any data or information that is completely sensitive
material, and not generally known to the public, including, but not limited to,
information about product plans, marketing strategies, finance, operations,
customer relationships, customer profiles, sales estimates, business plans, and
internal performance results relating to the past, present or future business
activities of the Account or Investor Services Group, their respective
subsidiaries and affiliated companies and the customers, clients and suppliers
of any of them;
(ii) any scientific or technical information, design, process,
procedure, formula, or improvement that is commercially valuable and secret in
the sense that its confidentiality affords the Account or Investor Services
Group a competitive advantage over its competitors; and
(iii) all confidential or proprietary concepts, documentation,
reports, data, specifications, computer software, source code, object code, flow
charts, databases, inventions, know-how, show-how and trade secrets, whether or
not patentable or copyrightable.
(c) Confidential Information includes, without limitation, all
documents, inventions, substances, engineering and laboratory notebooks,
drawings, diagrams, specifications, bills of material, equipment, prototypes and
models, and any other tangible manifestation of the foregoing of either party
which now exist or come into the control or possession of the other.
(d) The Account acknowledges that breach of the restrictions on use,
dissemination or disclosure of any Confidential Information would result in
immediate and irreparable harm, and money damages would be inadequate to
compensate Investor Services Group for that harm. Investor Services Group shall
be entitled to equitable relief, in addition to all other available remedies, to
redress any such breach.
15. Force Majeure. No party shall be liable for any default or delay in
the performance of its obligations under this Agreement if and to the extent
such default or delay is caused, directly or indirectly, by (i) fire, flood,
elements of nature or other acts of God; (ii) any outbreak or escalation of
hostilities, war, riots or civil disorders in any country, (iii) any act or
omission of the other party or any governmental authority; (iv) any labor
disputes (whether or not the employees' demands are reasonable or within the
party's power to satisfy); or (v) nonperformance by a third party or any similar
cause beyond the reasonable control of such party, including without limitation,
failures or fluctuations in telecommunications or other equipment. In any such
event, the non-performing party shall be excused from any further performance
and observance of the obligations so affected only for so long as such
circumstances prevail and such party continues to use commercially reasonable
efforts to recommence performance or observance as soon as practicable.
16. Entire Agreement. This Agreement, including all Schedules hereto,
constitutes the entire Agreement between the parties with respect to the subject
matter hereof and supersedes all prior and contemporaneous proposals,
agreements, contracts, representations, and
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<PAGE>
understandings, whether written or oral, between the parties with respect to the
subject matter hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed and delivered by their duly authorized officers as of the date
first written above.
FIRST DATA INVESTOR SERVICES GROUP, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
PFL ENDEAVOR TARGET ACCOUNT
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
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<PAGE>
SCHEDULE A
Target 5 Subaccount
Target 10 Subaccount
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<PAGE>
SCHEDULE B
FEE SCHEDULE
The Account shall pay Investor Services Group the following fees:
. a flat fee of $10,000 per annum per Subaccount.
. Investor Services Group shall be entitled to collect all
out-of-pocket fees described in Schedule C.
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<PAGE>
SCHEDULE C
OUT-OF-POCKET EXPENSES
Out-of-pocket expenses include, but are not limited to, the following:
- Courier services
- Pricing services used by the Account
- Customized programming requests at $100 per hour
- Telephone, telecommunications and fax
- Travel and lodging for Board, Shareholder and Operations meetings
- Independent Auditor's Report (SAS 70)
- Forms and supplies for the preparation of Board meetings and
other materials for the Account
- Duplicating charges with respect to filings with Federal and
state authorities and Board meeting materials
- Postage of Board meetings materials and other materials to the
Account's Board members and service providers (including
overnight or other courier services)
- Such other expenses as are agreed to by Investor Services Group
and the Account
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<PAGE>
SCHEDULE D
ACCOUNTING AND ADMINISTRATIVE SERVICES
ROUTINE PROJECTS
. Daily, Weekly, and Monthly Reporting
. Portfolio and General Ledger Accounting
. Daily Pricing of all Securities
. Daily Valuation and NAV Calculation
. Comparison of NAV to market movement
. Review of price tolerance/fluctuation report
. Research items appearing on the price exception report
. Preparation of monthly ex-dividend monitor
. Daily cash reconciliation with the custodian bank
. Daily support and report delivery to Portfolio Management
. Daily calculation of advisor fees and waivers
. Daily calculation of distribution rates
. Daily maintenance of each Subaccount's general ledger including expense
accruals
. Daily price notification to other vendors as required
. Calculation of 30-day adjusted SEC yields
. Income Reconciliation
. Internal reconciliation
. Sending all trades and trade instructions to the Custodian for
settlement
. Monitor corporate actions
. Provide cash availability to Adviser
. Preparation of month-end reconciliation package
. Monthly reconciliation of Subaccount expense records
. Preparation of monthly pay down gain/loss summaries
. Preparation of all annual and semi-annual audit work papers
. Preparation and Printing of Financial Statements
. Providing Shareholder Tax Information to Adviser
. Producing Drafts of IRS and State Tax Returns
. Treasury Services including:
Provide Officer for the Account
Expense Accrual Monitoring
Determination of Dividends
Prepare materials for review by the Board, e.g., 2a-7,10f-3, 17a-7,
17e-1, Rule 144a
. Tax and Financial Counsel
. Monthly Compliance Testing including Section 817H
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<PAGE>
LEGAL, REGULATORY AND BOARD OF TRUSTEES SUPPORT
ROUTINE LEGAL SERVICES
CORPORATE SECRETARIAL
o Provide Secretary/Assistant Secretary for Account
o Develop and maintain calendar of annual and quarterly board approvals and
regulatory filings
o Prepare notice, agenda, memoranda, resolutions and background materials
for legal approval (including additional Subaccounts of the Account) at
quarterly board meetings; attend meetings; make presentations where
appropriate; prepare minutes; follow up on issues
o Provide support for one special board meeting per year and written consent
votes where needed Provide support for one shareholder meeting per year
including preparation of proxy materials
REGULATORY/FILINGS
o Review Post-Effective Amendments
o Prepare Rule 24f-2 Notice
o Review Form N-SAR
o Review Annual and Semi-Annual Financial Reports
o Prepare prospectus supplements as needed
o Review proxy materials for special shareholder meetings
MISCELLANEOUS ROUTINE LEGAL SERVICES
o Communicate significant regulatory or legislative developments to Account
management and Managers and provide related planning assistance where needed
o Consult with Account management regarding portfolio compliance and corporate
and regulatory issues as needed
o Maintain effective communication with outside counsel and review legal bills
of outside counsel
o Coordinate the printing and mailing process with outside printers for all
shareholder publications
o Arrange D&O/E&O insurance and fidelity bond coverage for Account
o Assist in monitoring Code of Ethics reporting and provide such reports to
Adviser
SPECIAL LEGAL SERVICES (BILLED SEPARATELY)*
o Assist in managing SEC audits of Subaccounts
o Review sales material and advertising for Subaccounts, SEC and NASD
compliance
o Assist in conversion
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<PAGE>
Coordinate time and responsibility schedules
Draft notice, agenda, memoranda, resolutions and background materials
for board approval
o Assist in new investment Subaccount start-up (to the extent requested)
Coordinate time and responsibility schedules Draft/file registration
statement (including investment objectives/policies and prospectuses)
Respond to and negotiate SEC comments Draft notice, agenda and
resolutions for organizational meeting; attend board meeting; make
presentations where appropriate; prepare minutes and follow up on issues
o Develop compliance manual for Subaccounts
o Prepare notice, agenda, memoranda and background materials for special board
meetings, make presentations where appropriate, prepare minutes and follow
up on issues (in excess of one per year)
o Prepare proxy material for special shareholder meetings (in excess of one
per year )
o Prepare PEA for special purposes (e.g., new Subaccounts or classes, changes
in advisory relationships, mergers, restructurings)
o Assist in extraordinary non-recurring projects, including consultative
legal services as needed, e.g.:
Arrange CDSC financial programs
Prospectus simplification
Profile prospectuses Exemptive order applications
* SPECIAL LEGAL SERVICES SHALL BE BILLED AT A RATE OF $185 PER HOUR SUBJECT TO
CERTAIN PROJECT CAPS AS MAY BE AGREED TO BY INVESTOR SERVICES GROUP AND THE
ACCOUNT. NO SPECIAL LEGAL SERVICES SHALL BE UNDERTAKEN BY INVESTOR SERVICES
GROUP WITHOUT THE PRIOR WRITTEN CONSENT OF THE ACCOUNT.
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<PAGE>
EXHIBIT (11)(c)
---------------
Brokerage Enhancement Plan
<PAGE>
BROKERAGE ENHANCEMENT PLAN
OF
PFL ENDEAVOR TARGET ACCOUNT
SECTION 1. PFL Endeavor Target Account (the "Account") is a managed separate
account created by PFL Life Insurance Company (the "Life Company") under the
laws of the State of Iowa, the accumulation or annuity units ("Units") of the
sub-accounts of which may from time to time be offered for the purpose of
funding variable annuity contracts and variable life policies (collectively
referred to herein as "Variable Contracts").
SECTION 2. The Account currently offers Units in two sub-accounts, the DJIA
Target 10 Subaccount and the DJIA Target 5 Subaccount (the "Existing
Subaccounts" - such Subaccounts, together with all other Subaccounts
subsequently established by the Account, being referred to herein collectively
as the "Subaccounts").
SECTION 3. In order to provide for the implementation of the payments provided
for pursuant to this Brokerage Enhancement Plan (the "Plan"), the Account may
enter into a Distribution Agreement (the "Agreement") with Endeavor Group
pursuant to which Endeavor Group will serve as the distributor of the Account's
Units, and pursuant to which each Subaccount participating in this Plan will
authorize payments to Endeavor Group, as provided in Section 4 hereof, for
various costs incurred or paid by Endeavor Group in connection with the
distribution of Units of that Subaccount. Such Agreement, or any modification
thereof, shall become effective with respect to the Units of any Subaccount in
compliance with Section 12(b) of the Investment Company Act of 1940, as amended
(the "1940 Act"), and Rule 12b-1 thereunder as the same may be amended from time
to time.
SECTION 4. The Account may expend amounts consisting solely of that portion of
brokerage commissions paid by the Subaccounts in connection with their portfolio
transactions and made available to Endeavor Group or other introducing brokers
by broker-dealers executing such portfolio transactions for the benefit of the
Subaccounts to finance activities principally intended to result in the sale of
Units of the Subaccounts. Expenses permitted to be paid pursuant to this Plan
shall include, but not necessarily be limited to, the following costs:
<PAGE>
A. printing and mailing of Account prospectuses, statements of additional
information, any supplements thereto and Unitholder reports for existing and
prospective Variable Contract owners;
B. development, preparation, printing and mailing of Account
advertisements, sale literature and other promotional materials describing
and/or relating to the Subaccounts and including materials intended for use
within the Life Company, or for broker-dealer only use or retail use;
C. holding or participating in seminars and sales meetings designed to
promote the distribution of Account Units;
D. marketing fees requested by broker-dealers who sell Variable Contracts;
E. obtaining information and providing explanations to Variable Contract
owners regarding Account investment objectives and policies and other
information about the Account and the Subaccounts, including the performance of
the Subaccounts;
F. training sales personnel regarding sales of Variable Contracts and
underlying Units of the Account;
G. compensating broker-dealers and/or their registered representatives in
connection with the allocation of cash values and premiums of the Variable
Contracts to the Account;
H. personal service and/or maintenance of Variable Contract owner accounts
with respect to Account Units attributable to such accounts; and
I. financing any other activity that the Account's Board of Managers
determines is primarily intended to result in the sale of Units.
SECTION 5. This Plan shall not take effect with respect to any Existing
Subaccount until it has been approved by votes of a majority of (a) the
outstanding Units of such Subaccount, (b) the Managers of the Account, and (c)
those Managers of the Account who are not "interested persons" of the Account
(as defined in the 1940 Act) and who have no direct or indirect financial
interest in the operation of this Plan or any agreements of the Account related
hereto or any other person related to this Plan ("Disinterested Managers") cast
in person at a meeting called for the purpose of voting on this Plan. As
additional Subaccounts of the Account are established, this Plan shall become
effective with respect to each such Subaccount upon the initial public offering
of such new Subaccount's Units, provided that this Plan with respect to such
Subaccount has been approved by votes of a majority of both (a) the Managers of
the Account and (b) the Disinterested Managers cast in person at a meeting
called for the purpose of voting on such approval and by the initial Unitholder
of the Subaccount so long as such initial Unitholder's approval is required
under the 1940 Act and the rules
<PAGE>
thereunder. In addition, any agreement related to this Plan and entered into by
any Subaccount in connection therewith shall not take effect until it has been
approved by votes of a majority of (a) the Board of Managers of the Account, and
(b) the Disinterested Managers of the Account.
SECTION 6. Unless sooner terminated pursuant to Section 8, this Plan shall
continue in effect for a period of one year from the date it takes effect and
thereafter shall continue in effect so long as such continuance is specifically
approved annually by votes of a majority of both (a) the Board of Managers of
the Account and (b) the Disinterested Managers of the Account, cast in person at
a meeting called for the purpose of voting on this Plan.
SECTION 7. Any person authorized to direct the disposition of monies paid or
payable pursuant to this Plan or any related agreement shall provide to the
Account's Board of Managers and the Board shall review at least quarterly a
written report of the amounts so expended and the purposes for which such
expenditures were made.
SECTION 8. This Plan may be terminated at any time with respect to any
Subaccount by vote of a majority of the Disinterested Managers, or by vote of a
majority of the Units of the Subaccount.
SECTION 9. Any agreement of the Account, with respect to any Subaccount,
related to this Plan shall be in writing and shall provide:
A. That such agreement may be terminated with respect to a Subaccount at
any time without payment of any penalty, by vote of a majority of the
Disinterested Managers or by a vote of a majority of the outstanding Units of
such Subaccount on not more than sixty days' written notice to any other party
to the agreement; and
B. That such agreement shall terminate automatically in the event of its
assignment.
SECTION 10. This Plan may not be amended in any material respect, including,
but not limited to, changing the sources of monies from which distribution
expenses are paid provided for in Section 3 with respect to a Subaccount unless
such amendment is approved by a vote of at least a majority (as defined in the
1940 Act) of the outstanding Units of such Subaccount, and no material amendment
to this Plan shall be made unless approved by votes of a majority of (a) the
Board of Managers of the Account, and (b) the Disinterested Managers, cast in
person at a meeting called for the purpose of voting on such amendment.
SECTION 11. While this Plan is in effect with respect to any Subaccount, the
selection and nomination of the Disinterested Managers of the Account shall be
committed to the discretion of the existing Disinterested Managers of the
Account.
<PAGE>
EXHIBIT (11)(d)
---------------
FORM OF SUBLICENSE AGREEMENT BETWEEN
THE TARGET ACCOUNT,
FIRST TRUST ADVISERS L.P.,
AND DOW JONES & COMPANY, INC.
<PAGE>
Form Of Sublicense Agreement
This Sublicense Agreement (the "Sublicense Agreement"), dated as of
____________, 1998, is made by and among _________________ (the "Sublicensee"),
First Trust Advisors, L.P. ("Licensee") and Dow Jones & Company, Inc.
("Licensor").
WITNESSETH:
Whereas, pursuant to that certain License Agreement, dated as of November
11, 1997, by and between Licensor and Licensee (the "License Agreement"),
Licensor has granted Licensee a license to use certain copyright, trademark and
proprietary rights and trade secrets of Licensor (the "Dow Jones Marks") in
connection with the issuance, distribution, marketing and/or promotion of the
specific products described in Appendix A attached hereto and incorporated
herein (the "Products");
Whereas, Sublicensee and Licensee desire to enhance the marketability,
sales and performance of the products and services offered in connection with
that certain Sub-Advisory Agreement dated _____________ 199__ (the "Sub-Advisory
Agreement") by and between _________________ and Licensee by adding the Products
to such portfolio;
Whereas, Sublicensee wishes to issue and/or sell the Products and to use
and refer to the Dow Jones Marks in connection with the marketing and promotion
of the Products; and
Whereas, all capitalized terms used herein shall have the meanings assigned
to them in the License Agreement unless otherwise defined herein.
Now Therefore, in consideration of the premises and the mutual covenants
and agreements contained herein, the parties hereto agree as follows:
1. License. Pursuant to Section l(d) of the License Agreement, Licensor
hereby grants to Sublicensee a non-exclusive and non-transferable sublicense to
use the Dow Jones Marks in connection with the issuance,
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<PAGE>
distribution, marketing and/or promotion of the specific Products described in
Appendix A hereto.
2. Term. The term of the Sublicense Agreement (the "Sublicense Term")
shall commence as of the date hereof and shall remain in full force and effect
until November 18, 2002, unless (i) terminated earlier as provided herein or in
the License Agreement, (ii) terminated earlier automatically upon termination of
the Sub-Advisory Agreement, or (iii) extended upon the mutual consent of all
three (3) parties hereto.
3. Consideration. Each of the parties hereto anticipate that the
undertakings contemplated hereunder will increase the marketability and sales of
Products under each of the License Agreement and the Sub-Advisory Agreement.
4. Sublicensee Obligations. The Sublicensee acknowledges that it has
received and read a copy of the License Agreement (excluding Schedule B) and
agrees to be bound to Licensor and Licensee under this Agreement as if
Sublicensee were the Licensee under the License Agreement by all of the
provisions therein imposing any obligations on the Licensee (including without
limitation the indemnification obligations in Section 9) insofar as such
obligations arise out of or relate to the Products to be issued, marketed and/or
sold by the Sublicensee as described in Appendix A hereto, other than the
obligation to pay the License Fees imposed by Section 3 of the License
Agreement.
5. Sublicensee as Principal. Sublicensee agrees that its obligations
under the License Agreement pursuant to Section 4 hereof are as a principal and
shall be unaffected by any defense or claim that Licensee may have against
Licensor.
6. Licensee Liability. Licensee makes no representation or warranty,
express or implied, to the owners of the Products or any member of the public
regarding the advisability of purchasing the Products. Licensee has no
obligation to take the needs of Sublicensee or the owners of the Products into
consideration in determining, composing or calculating the Products. Licensee
is not responsible for and has not participated in the determination of the
terms and conditions of the Dow Jones Marks,
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<PAGE>
including the calculation of the Dow Jones Industrial Average/sm/. Licensee has
no obligation or liability in connection with the administration or calculation
of the Dow Jones Industrial Average/sm/.
Licensee does not guarantee the accuracy and/or the completeness of the Dow
Jones Industrial Average/sm/ or any data included therein and Licensee shall
have no liability for any errors, omissions, or interruptions therein. Licensee
makes no warranty, express or implied, as to results to be obtained by
Sublicensee, Owners of the Products, or any other person or entity from the use
of the Dow Jones Industrial Average/sm/ or any data included therein. Licensee
makes no express or implied warranties, and expressly disclaims all warranties
of merchantability or fitness for a particular purpose or use with respect to
the Dow Jones Industrial Average/sm/ or any data included therein. Without
limiting any of the foregoing, in no event shall Licensee have any liability for
any lost profits or indirect, punitive, special or consequential damages
(including lost profits), even if notified of the possibility of such damages.
There are no third party beneficiaries of any agreements or arrangements between
Licensee and Sublicensee.
7. Governing Law. This Sublicense Agreement shall be construed in
accordance with the laws of the State of Illinois without reference to or
inclusion of the principles of choice of law or conflicts of law of that
jurisdiction.
In Witness Whereof, the parties hereto have executed this Sublicense
Agreement as of the date first set forth above.
Sublicensee
-------------------------------------
By:
----------------------------------
Title:
-------------------------------
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<PAGE>
First Trust Advisors, L.P.
-------------------------------------
By:
----------------------------------
Title:
-------------------------------
Dow Jones & Company, Inc.
-------------------------------------
By:
----------------------------------
Title:
-------------------------------
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<PAGE>
APPENDIX A
PRODUCTS DESCRIPTION
A. Variable Annuities that meet the following criteria: (i) the issuer
is a company which is organized as an insurance company, whose primary business
activity is the writing of insurance and which is subject to supervision by the
insurance commissioner, or any official or agency performing like functions, of
any state; (ii) Sublicensee is the investment advisor or subadvisor for the
managed separate account underlying the contract; (iii) the benefits payable
under the terms of the contract are calculated with reference to the Strategy
(as defined below); and (iv) which has been registered with the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
B. Variable Life Insurance Products that meet the following criteria:
(i) the issuer is a company which is organized as an insurance company, whose
primary business activity is the writing of insurance and which is subject to
supervision by the insurance commissioner, or any official or agency performing
like functions, of any state; (ii) Sublicensee is the investment advisor or
subadvisor for the managed separate account underlying the policy; (iii) the
benefits payable under the terms of the policy are calculated with reference to
the Strategy; and (iv) which has been registered with the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
For purposes of this Agreement, the term "Strategy" shall mean either of
the following investment strategies:
(i) The strategy pursuant to which funds are invested in the ten
(10) stocks included in the Index that have the highest dividend yield as a
percentage of their year-end stock price (the "High-Yield Stocks"). These
investments are held for one calendar
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<PAGE>
year, after which they are replaced by investments in the next set of High-
Yield Stocks. This strategy is commonly referred to as the "Dogs of the
Dow" investment strategy.
(ii) The strategy pursuant to which funds are invested in the five
High-Yield Stocks which have the lowest stock price (the "Flying Five
Stocks"). These investments are held for one calendar year, after which
they are replaced by investments in the next set of Flying Five Stocks.
This strategy is commonly referred to as the "Flying Five" investment
strategy.
(iii) The strategy pursuant to which funds are invested in each of
the Flying Five Stocks except for the stock which has the lowest stock
price. These investments are held for one calendar year, after which they
are replaced by investments in the next set of Flying Five Stocks, except
for the stock which has the lowest stock price.
(iv) The strategy pursuant to which funds are invested in the five
High-Yield Stocks which have the second through the sixth lowest stock
prices. These investments are held for one calendar year, after which they
are replaced by investments in the next set of five High-Yield Stocks which
have the second through the sixth lowest stock prices.
-7-
<PAGE>
EXHIBIT (11)(e)
---------------
Distribution Agreement
<PAGE>
DISTRIBUTION AGREEMENT
----------------------
AGREEMENT made this ____ day of _____________________, 1998, between PFL
Endeavor Target Account (the "Account") and Endeavor Group, a California
corporation (the "Distributor") each with offices at 2101 East Coast Highway,
Suite 300, Corona del Mar, California 92625.
WHEREAS, the Account is a registered managed separate account, which
currently offers accumulation or annuity units ("Units") in two sub-accounts,
each as set forth on Schedule A hereto (the "Existing Sub-Accounts"), and the
Account may offer Units of one or more additional Sub-Accounts in the future;
WHEREAS, the Account was organized to act as the funding vehicle for
certain individual variable life insurance policies and individual and group
variable annuity contracts (collectively referred to herein as "Variable
Contracts") offered by PFL Life Insurance Company ("PFL") and life insurance
companies affiliated with PFL (collectively, the "Life Companies"), and/or to
qualified pension and retirement plans (the "Qualified Plans"); and
WHEREAS, it is contemplated that, in addition to entering into sales
agreements with Life Companies and/or Qualified Plans, the Distributor shall
engage in certain promotional and sales efforts on behalf of the Account, as
described in the Brokerage Enhancement Plan pursuant to Rule 12b-1 adopted by
the Account.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties agree as follows:
1. (a) The Account proposes to issue and sell Units to Life Companies and
to the Qualified Plans as may be permitted by applicable law and subject to the
Account's obtaining any necessary regulatory approvals. The Account hereby
appoints the Distributor as agent to sell the Units and the Distributor hereby
accepts such appointment. The Units will be distributed under such terms as are
set by the Account and will be sold to the Life Companies and the Qualified
Plans permitted to buy the Units as specified by the Account's Board of
Managers.
(b) In the event that the Account from time to time designates one or more
Sub-Accounts in addition to the Existing Sub-Accounts ("Additional Sub-
Accounts"), it shall notify the Distributor. If the Distributor is willing to
perform services hereunder for the Additional Sub-Accounts, it shall so notify
the Account. Thereafter, the Account and the Distributor shall mutually agree
to amend Schedule A to this Agreement in writing to add the Additional Sub-
Accounts and the Additional Funds shall be subject to this Agreement, subject to
the approval of the Board of Managers as set forth in Section 7.(a) below. The
Existing Sub-Accounts and all Additional Sub-Accounts subject to this Agreement
are referred to collectively as "Sub-Accounts."
<PAGE>
2. The Distributor agrees that (i) all Units sold by the Distributor shall
be sold at the net asset value as described in the Account's prospectus, and
(ii) the Account shall receive 100% of such net asset value.
3. (a) All sales literature and advertisements used by the Distributor in
connection with sales of Units shall be subject to approval by the Account. The
Account authorizes the Distributor, in connection with the sales or arranging
for the sale of Shares, to provide only such information and to make only such
statements or representations as are contained in the Account's then-current
Prospectus or in sales literature or advertisements approved by the Account or
in such financial and other statements which are furnished in writing to the
Distributor pursuant to the next paragraph. The Account shall not be
responsible in any way for any information provided or statements or
representations made by the Distributor or its representatives or agents other
than the information, statements and representations described in the preceding
sentence. The Distributor shall review all materials submitted to it by Life
Companies and Qualified Plans that describe the Account, the Units or the
Account's investment manager and investment advisers. The Distributor shall not
be responsible for any information provided or statements or representations
made by Life Companies or Qualified Plans, representatives or agents of Life
Companies or Qualified Plans, or any other persons or entities other than the
Distributor's representatives or agents.
(b) The Account shall keep the Distributor fully informed with regard to
its affairs, shall furnish the Distributor with a certified copy of all
financial statements and a signed copy of each report prepared by its
independent certified public accountants, and shall cooperate fully in the
efforts of the Distributor to sell the Units and in the performance by the
Distributor of all its duties under this Agreement.
4. (a) The Account will pay or cause to be paid:
(i) registration fees for registering its shares under
the Securities Act of 1933 (the "1933 Act") as required;
(ii) the expenses, including counsel fees, of preparing
registration statements and such other documents as the Account
believes are necessary for registering the Units with the
Securities and Exchange Commission (the "SEC") and such states as
are deemed necessary or appropriate;
(iii) expenses incident to preparing amendments to
registration statements of the Account under the 1933 Act and the
Investment Company Act of 1940, as amended (the "1940 Act");
(iv) expenses for preparing and setting in type all
prospectuses and the expense of supplying them to the then
existing Unitholders or beneficial owners of Units (including
owners
<PAGE>
of Variable Contracts whose Contracts use one or more Sub-
Accounts as their funding vehicle); and
(v) expenses incident to the issuance of its Units such
as the cost of certificates, if any, taxes and fees of the
transfer agent for establishing Unitholder record accounts and
confirmations.
(b) The Distributor shall pay all of its own costs and expenses
connected with the offer and sale of Units ("Distribution
Expenses"), except that certain Distribution Expenses may be
reimbursed to the Distributor as provided in Section 5 hereof.
5. (a) Pursuant to a Brokerage Enhancement Plan (the "Plan") adopted by
the Board of Managers of the Account in accordance with Section 12(b) of the
1940 Act, Rule 12b-1 and other rules and regulations promulgated thereunder, as
the same may be, from time to time, issued or amended, the Account, on behalf of
a Sub-Account that has approved the Plan pursuant to Section 5 thereof, may
reimburse the Distributor, for Distribution Expenses as described in Section
5(b) hereof. Reimbursements shall be payable only from brokerage commissions
paid by the Sub-Account in connection with its portfolio transactions which have
been made available for use by the Sub-Account as described in the Plan.
Reimbursements to the Distributor shall be payable on a monthly basis. Such
reimbursement may be made only for the one year period commencing on the date
hereof and for each twelve month period (or portion thereof) thereafter, in
which the Plan is in effect for that Sub-Account.
(b) Distribution Expenses reimbursable hereunder shall include, but not
necessarily be limited to, the following costs:
(i) printing and mailing of Account prospectuses,
statements of additional information, any supplements thereto and
shareholder reports for existing and prospective Variable
Contract owners;
(ii) development, preparation, printing and mailing of
Account advertisements, sale literature and other promotional
materials describing and/or relating to the Sub-Accounts and
including materials intended for use within the Life Company, or
for broker-dealer only use or retail use;
(iii) holding or participating in seminars and sales
meetings designed to promote the distribution of Account Units;
(iv) marketing fees requested by broker-dealers who
sell Variable Contracts;
<PAGE>
(v) obtaining information and providing explanations
to Variable Contract owners regarding Account investment
objectives and policies and other information about the Account
and the Sub-Accounts, including the performance of the Sub-
Accounts;
(vi) training sales personnel regarding sales of
Variable Contracts and underlying Units of the Account;
(vii) compensating broker-dealers and/or their
registered representatives in connection with the allocation of
cash values and premiums of the Variable Contracts to the
Account;
(viii) personal service and/or maintenance of Variable
Contract owner accounts with respect to Account Units
attributable to such accounts; and
(ix) financing any other activity that the Account's
Board of Managers determines is primarily intended to result in
the sale of Units.
(c) The Distributor shall submit annual reimbursable Distribution
Expense budgets to the Board of Managers of the Account. As soon as practicable
after the end of each calendar quarter, the Distributor shall submit to the
Board of Managers for ratification reports of Distribution Expenses reimbursed
as to each Sub-Account for that quarter. The Board of Managers will consider
each report at its next regular meeting after such report is submitted, and the
Distributor shall only retain those reimbursements that are approved by the
Board of Managers, including a majority of the "Disinterested Managers" (as that
term is defined in Section 7 hereof).
6. (a) The Account shall maintain a currently effective Registration
Statement on Form N-3 and shall file with the SEC such reports and other
documents as may be required under the 1933 Act and the 1940 Act or by the rule
and regulations of the SEC thereunder.
(b) The Account represents and warrants that its Registration
Statement, post-effective amendments, Prospectus and Statement of Additional
Information (excluding statements based upon written information furnished by
the Distributor expressly for inclusion therein) shall not contain any untrue
statement of material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that all statements or information furnished to the Distributor, pursuant to
Section 3(b) hereof shall be true and correct in all material respects.
7. (a) This Agreement shall take effect on the date set forth above,
provided it has been approved by a vote of the majority of the Managers of the
Account and those
<PAGE>
Managers of the Account who are not "interested persons" of the Account and who
have no direct or indirect financial interest in the operation of the Plan or
this Agreement (the "Disinterested Managers"), cast in person at a meeting
called for the purpose of voting on this Agreement. This Agreement shall remain
in full force and effect until May 1, 1999, and may be continued for twelve
month periods (or portions thereof) thereafter; provided that such continuance
shall be specifically approved annually by a majority of the Board of Managers
of the Account and by a majority of the Disinterested Managers. This Agreement
may be amended, with respect to any Sub-Account, with the approval of a majority
of the Board of Managers and by a majority of the Disinterested Managers.
(b) This Agreement, with respect to any Sub-Account, may be terminated, at
any time without payment of any penalty, by vote of a majority of the
Disinterested Managers or by vote of a majority of the outstanding voting
securities of that Sub-Account, or may be terminated by the Distributor, in
either case on not more than 60 days' written notice delivered personally by
registered mail, postage prepaid, to the other party.
(c) This Agreement shall automatically terminate in the event of its
assignment.
(d) The terms "interested persons," "assignment" and "vote of a majority of
the outstanding voting securities" as used herein shall have the meanings given
to them in the 1940 Act.
8. In the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of obligations or duties ("disabling conduct") hereunder on
the part of the Distributor (and its officers, directors, agents, employees,
controlling persons, shareholders and any other person or entity affiliated with
the Distributor or retained by it to perform or assist in the performance of its
obligations under this Agreement) the Distributor shall not be subject to
liability to the Account or to any Unitholder of the Sub-Accounts of the Account
for any act or omission in the course of, or connected with, rendering services
hereunder, or for any loss suffered by any of them in connection with the
matters to which this Agreement relates.
9. (a) The Account shall indemnify and hold harmless the Distributor and
each person, if any, who controls the Distributor within the meaning of Section
15 of the 1933 Act against any loss, liability, claim, damage or expense
(including the reasonable cost of investigating or defending any alleged loss,
liability, claim, damage or expense and reasonable counsel fees incurred in
connection therewith), which the Distributor or such controlling person may
incur under the 1933 Act or under common law or otherwise, arising out of or
based upon any untrue statement, or alleged untrue statement, of a material fact
contained in the Registration Statement, as from time to time amended or
supplemented, any prospectus or annual or interim report to Unitholders of the
Account, or arising out of or based upon any omission, or alleged omission, to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under
<PAGE>
which they were made, not misleading, unless such statement or omission was made
in reliance upon, and in conformity with, information furnished to the Account
in connection therewith by or on behalf of the Distributor; provided, however,
that in no case (i) is the indemnity of the Account in favor of the Distributor
and any such controlling persons to be deemed to protect such Distributor or any
such controlling persons thereof against any liability to the Account or its
security holders to which the Distributor or any such controlling persons would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of their duties or by reason of the reckless
disregard of their obligations and duties under this Agreement; or (ii) is the
Account to be liable under its indemnity agreement contained in this paragraph
with respect to any claim made against the Distributor or any such controlling
persons, unless the Distributor or such controlling persons, as the case may be,
shall have notified the Account in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon the Distributor or such controlling persons
(or after the Distributor or such controlling persons shall have received notice
of such service on any designated agent), but failure to notify the Account of
any such claim shall not relieve it from any liability which it may have to the
person against whom such action is brought otherwise than on account of its
indemnity agreement contained in this paragraph. The Account will be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but if the
Account elects to assume the defense, such defense shall be conducted by counsel
chosen by it and satisfactory to the Distributor or such controlling person or
persons, defendant or defendants in the suit. In the event the Account elects to
assume the defense of any such suit and retain such counsel, the Distributor or
such controlling person or persons, defendant or defendants in the suit, shall
bear the fees and expenses of any additional counsel retained by them, but, in
case the Account does not elect to assume the defense of any such suit, it will
reimburse the Distributor or such controlling person or persons, defendant or
defendants in the suit, for the reasonable fees and expenses of any counsel
retained by them. The Account shall promptly notify the Distributor of the
commencement of any litigation or proceeding against it or any of its officers
or directors in connection with the issuance or sale of any of the Units.
(b) The Distributor shall indemnify and hold harmless the Account and each
of its Managers and officers and each person, if any, who controls the Account
against any loss, liability, claim, damage or expense described in the foregoing
indemnity contained in paragraph 4.1, but only with respect to statements or
omissions made in reliance upon, and in conformity with, information furnished
to the Account in writing by or on behalf of the Distributor for use in
connection with the Registration Statement, as from time to time amended, or the
annual or interim reports to Unitholders. In case any action shall be brought
against the Account or any persons so indemnified, in respect of which indemnity
may be sought against the Distributor, the Distributor shall have the rights and
duties given to the Account, and the Account and each person so indemnified
shall have the rights and duties given to the Distributor by the provisions of
paragraph 4.1.
<PAGE>
10. This Agreement is made by the Account, on behalf of each Sub-Account,
pursuant to authority granted by the Board of Managers, and the obligations
created hereby are not binding on any of the Managers or Unitholders of the
Account individually, but bind only the property of the Account.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed by their duly authorized officers and under their respective seals
on the day and year first above written.
PFL ENDEAVOR TARGET ACCOUNT
Attest:
By:
Secretary Vincent J. McGuinness, Jr., President
ENDEAVOR GROUP
Attest:
By:
Secretary Vincent J. McGuinness,
Chief Executive Officer
<PAGE>
SCHEDULE A
The Distributor shall act as distributor for shares of the following Sub-
Accounts of PFL Endeavor Target Account:
The Dow Target 5 Sub-Account
The Dow Target 10 Sub-Account
<PAGE>
Exhibit (13)(b)
---------------
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Statements" in the Prospectuses and "Independent Auditors" in the Statements of
Additional Information and to the use of our report dated February 27, 1998 with
respect to the statutory-basis financial statements and schedules of PFL Life
Insurance Company, included in Pre-Effective Amendment No. 1 to the Registration
Statement (Form N-3 No. 333-47027) and related Prospectuses of The Endeavor
Variable Annuity and The Endeavor ML Variable Annuity.
/s/ Ernst & Young LLP
Des Moines, Iowa
April 27, 1998
