<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Contract Owners
of PFL Variable Annuity Fund II,
PFL Life Insurance Company:
We have audited the accompanying balance sheet of PFL Variable Annuity Fund II
as of December 31, 1996, and the related statement of operations for the year
then ended and statements of changes in contract owners' equity for each of the
two years in the period then ended. These financial statements are the respon-
sibility of the Fund'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 stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. Our procedures
included confirmation of mutual fund shares owned as of December 31, 1996 by
correspondence with the mutual fund's transfer agent. An audit also includes
assessing the accounting principles used and significant estimates made by man-
agement, 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 PFL Variable Annuity Fund II
at December 31, 1996, and the results of its operations for the year then ended
and the changes in its 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
January 31, 1997
[LOGO OF PFL LIFE APPEARS HERE]
PFL LIFE
INSURANCE COMPANY
4333 EDGEWOOD ROAD NORTHEAST
CEDAR RAPIDS, IOWA 52499
PFL
VARIABLE
ANNUITY
FUND
[LOGO OF PFL VARIABLE ANNUITY FUND II APPEARS HERE]
Letter to
Contract Owners
and
Annual Report
for the Year Ended
December 31, 1996
[LOGO OF PFL LIFE APPEARS HERE]
<PAGE>
[LOGO OF PFL VARIABLE ANNUITY FUND II APPEARS HERE]
LETTER TO CONTRACT OWNERS
To Our Contract Owners:
The report of the PFL Variable Annuity for the year ended December 31, 1996 is
enclosed for your review.
If you have any questions concerning your contract, please call the Annuity
Service Center at 800-634-4672 or write to the following address:
PFL Life Insurance Company
Variable Annuity Dept.
4333 Edgewood Road Northeast
Cedar Rapids, Iowa 52499
We welcome your inquiries into other tax-deferred products offered by PFL Life.
It is a privilege to serve you and help you prepare for your retirement. Please
let us know if we can be of further assistance to you.
Sincerely,
/s/ William L. Busler
William L. Busler
President
PFL LIFE INSURANCE COMPANY
PFL VARIABLE ANNUITY FUND II
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Investment in Lexington Growth & Income
Fund, Inc., at current market value
(Note 2)............................................................ $505,968
========
LIABILITIES
Contract terminations payable........................................ $ 80
Accrued mortality and
expense risk charges
(Note 5)............................................................. $ 400
--------
Total Liabilities.................................................... $ 480
CONTRACT OWNERS' EQUITY
Deferred annuity contracts
terminable by owners
(Notes 3 and 6)..................................................... $505,488
--------
$505,968
========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
PFL VARIABLE ANNUITY FUND II
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996
--------
<S> <C>
NET INVESTMENT INCOME
Income:
Dividends........................................................ $ 33,432
Expenses:
Mortality
and expense risk
charges (Note 5)................................................. (4,213)
--------
Net investment
income.......................................................... 29,219
--------
NET REALIZED AND UNREALIZED
CAPITAL GAIN (LOSS) FROM INVESTMENTS
Net realized capital loss
from sales of investments:
Proceeds from sales.............................................. 36,436
Cost of investments
sold............................................................ 39,907
--------
Net realized loss from sales of investments...................... (3,471)
--------
Unrealized appreciation/depreciation
of investments:
Beginning of
period.......................................................... 4,071
End of period.................................................... 83,203
--------
Net change in
unrealized
appreciation/depreciation
of investments................................................... 79,132
--------
Net realized and
unrealized capital
gain (loss) from
investments...................................................... 75,661
--------
INCREASE FROM OPERATIONS........................................... $104,880
========
</TABLE>
See accompanying Notes to Financial Statements.
PFL VARIABLE ANNUITY FUND II
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
OPERATIONS
Net investment
income..................................................... $ 29,219 42,509
Net realized and
unrealized capital
gain (loss) from
investments................................................ 75,661 39,219
-------- -------
Increase (decrease)
from operations........................................... 104,880 81,728
-------- -------
CONTRACT TRANSACTIONS
Decrease from
contract terminations,
withdrawals and other
deductions................................................. (31,879) (51,615)
-------- -------
Net increase (decrease)
in contract
owners' equity.............................................. 73,001 30,113
CONTRACT OWNERS' EQUITY
Beginning of period......................................... 432,487 402,374
-------- -------
End of period............................................... $505,488 432,487
======== =======
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
PFL VARIABLE ANNUITY FUND II
NOTES TO FINANCIAL STATEMENTS
1.ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--PFL Variable Annuity Fund II ("FUND II") 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 N.V., a holding company
organized under the laws of The Netherlands. Fund II is registered with the
Securities and Exchange Commission as a Unit Investment Trust pursuant to
provisions of the Investment Company Act of 1940.
INVESTMENT--Fund II is invested solely in shares of Lexington Growth &
Income Fund, Inc., (the "mutual fund"), an open-end diversified management
investment company registered under the Investment Company Act of 1940.
Investments are stated at the closing net asset value per share on December
31, 1996.
Unrealized gains or losses from investment in the mutual fund are credited
or charged to contract owners' equity.
Realized capital gains or losses from sale of shares in the mutual fund are
determined on the first-in, first-out basis.
Dividend income--Dividends received from the mutual fund investment are
reinvested to purchase additional mutual fund shares.
2.INVESTMENT
A summary of the mutual fund investment at December 31, 1996 follows:
<TABLE>
<CAPTION>
NUMBER NET ASSET
OF SHARES VALUE MARKET
HELD PER SHARE VALUE COST
---------- --------- -------- --------
<S> <C> <C> <C>
27,261.185 $18.56 $505,968 $422,765
========== ====== ======== ========
</TABLE>
PFL VARIABLE ANNUITY FUND II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3.CONTRACT OWNERS' EQUITY
A summary at December 31 of deferred annuity contracts terminable by owners
follows:
<TABLE>
<CAPTION>
DEC. 31, 1996 Dec. 31, 1995
------------- -------------
<S> <C> <C>
Accumulation units owned by individuals........ 43,352.4226 46,482.8204
Unit value..................................... $11.659978 $9.304227
----------- -----------
Deferred annuity contracts terminable by
owners........................................ $505,488 $432,487
=========== ===========
</TABLE>
4.TAXES
Operations of Fund II 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 Fund II are accounted for
separately from other operations of PFL Life for purposes of federal income
taxation. Fund II 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 Fund II, to the extent applied to increase reserves under the
variable annuity contracts, is not taxable to PFL Life.
5.INSURANCE RISK CHARGES
PFL Life deducts a daily charge equal to an annual rate of 0.9% of the value
of the contract owner's individual account as a charge for mortality and
expense risk assumed by PFL Life.
6.NET ASSETS
At December 31, 1996 contract owners' equity was comprised of:
<TABLE>
<S> <C>
Unit transactions, accumulated net investment income and realized
capital gains................................................... $422,285
Adjustment for appreciation to market value...................... $ 83,203
--------
Total Contract Owners' Equity.................................... $505,488
========
</TABLE>
