As filed with the Securities and Exchange Commission on May 1,
1997
Securities Act File No. 33-27352
Investment Company Act File No. 811-5780
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 17 X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 X
Amendment No. 20
ENDEAVOR SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
2101 East Coast Highway, Suite 300
Corona del Mar, California 92625
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Are Code: (800) 854-8393
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James R. McInnis
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President
Endeavor Series Trust
2101 East Coast Highway, Suite 300, Corona del Mar, California 92625
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(Name and Address of Agent for Service)
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Copies to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W. Washington, D.C. 20036
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It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragraph (b) on ____________
pursuant to paragraph (b) 60 days after filing pursuant to paragraph
(a)(1) on ____________ pursuant to paragraph (a)(1) 75 days after
filing pursuant to paragraph (a)(2) on pursuant to paragraph (a)(2) of
Rule 485
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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The Registrant has previously filed a declaration of indefinite registration of
shares of beneficial interest of its TCW Money Market Portfolio (formerly, Money
Market
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Portfolio), TCW Managed Asset Allocation Portfolio (formerly, Managed Asset
Allocation Portfolio), T. Rowe Price International Stock Portfolio (formerly,
Global Growth Portfolio), Value Equity Portfolio (formerly, Quest for Value
Equity Portfolio), Value Small Cap Portfolio (formerly, Quest for Value Small
Cap Portfolio), Dreyfus U.S. Government Securities Portfolio (formerly, U.S.
Government Securities Portfolio), T. Rowe Price Equity Income Portfolio, T. Rowe
Price Growth Stock Portfolio, Opportunity Value Portfolio and Enhanced Index
Portfolio pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended, (the "1940 Act"). Registrant's Rule 24f-2 Notice, on behalf of its TCW
Money Market Portfolio, TCW Managed Asset Allocation Portfolio, T. Rowe Price
International Stock Portfolio, Value Equity Portfolio, Value Small Cap
Portfolio, Dreyfus U.S. Government Securities Portfolio, T. Rowe Price Equity
Income Portfolio, T. Rowe Price Growth Stock Portfolio, Opportunity Value
Portfolio and Enhanced Index Portfolio for the fiscal year ended December 31,
1996 was filed on February 27, 1997. The Registrant did not sell shares of
beneficial interest for its Enhanced Index Portfolio during the fiscal year
ended December 31, 1996 pursuant to such declaration and, therefore, did not
file a Rule 24f-2 Notice for the fiscal year ended December 31, 1996 pursuant to
Rule 24f-2(b) of the 1940 Act.
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ENDEAVOR SERIES TRUST
Cross Reference Sheet
Pursuant to Rule 495(a)
Part A
Item Registration Statement
No. Caption Caption in Prospectus
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial
Information Financial Highlights
4. General Description
of Registrant Cover Page; The Fund;
Investment Objectives and
Policies
5. Management of the Fund The Fund; Management of
the Fund; Additional
Information
5A. Management's Discussion
of Fund Performance Not Applicable
6. Capital Stock and Other
Securities The Fund; Dividends,
Distributions and Taxes;
Organization and
Capitalization of the
Fund; Additional
Information
7. Purchase of Securities
Being Offered Sale and Redemption of Shares
8. Redemption or Repurchase Sale and Redemption of Shares
9. Pending Legal Proceedings Not Applicable
PART B
Item Registration Statement Caption in Statement
No. Caption of Additional Information
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10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and
History Organization and
Capitalization of the Fund
13. Investment Objectives and
Policies Investment Objectives and
Policies
14. Management of the Fund Management of the Fund
15. Control Persons and
Principal Holders of
Securities Management of the Fund
16. Investment Advisory and
Other Services Management of the Fund
17. Brokerage Allocation and
Other Practices Portfolio Transactions
18. Capital Stock and Other
Securities Organization and
Capitalization of the Fund
19. Purchase, Redemption and
Pricing of Securities
Being Offered Net Asset Value;
Redemption of Shares
20. Tax Status Taxes
21. Underwriters Management of the Fund
22. Calculation of
Performance Data Performance Information
23. Financial Statements Financial Statements
PART C
The information required to be included in Part C is set forth
under the appropriate Item, so numbered, in Part C to this Post-Effective
Amendment.
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Prospectus
ENDEAVOR SERIES TRUST
Endeavor Series Trust (the "Fund") is a diversified, open-end
management investment company, that offers a selection of managed investment
portfolios, each with its own investment objective designed to meet different
investment goals. There can be no assurance that these investment objectives
will be achieved.
This Prospectus describes the following ten portfolios currently
offered by the Fund (the "Portfolios").
* TCW Money Market Portfolio
* TCW Managed Asset Allocation Portfolio
* T. Rowe Price International Stock Portfolio
* Value Equity Portfolio
* Dreyfus Small Cap Value Portfolio
* Dreyfus U.S. Government Securities Portfolio
* T. Rowe Price Equity Income Portfolio
* T. Rowe Price Growth Stock Portfolio
* Opportunity Value Portfolio
* Enhanced Index Portfolio
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus sets forth concisely the information about the Fund and
the Portfolios that a prospective investor should know before investing. Please
read the Prospectus and retain it for future reference. Additional information
contained in a Statement of Additional Information also dated May 1, 1997 has
been filed with the Securities and Exchange Commission and is available upon
request without charge by writing or calling the Fund at the address or
telephone number set forth on the back cover of this Prospectus. The Statement
of Additional Information is incorporated by reference into this Prospectus.
The date of this Prospectus is May 1, 1997.
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THE FUND
Endeavor Series Trust is a diversified, open-end management investment
company that offers a selection of managed investment portfolios. Each portfolio
constitutes a separate mutual fund with its own investment objective and
policies. The Fund currently issues shares of ten portfolios. The Trustees of
the Fund may establish additional portfolios at any time.
Shares of the Portfolios are issued and redeemed at their net asset
value without a sales load and currently are offered only to various separate
accounts of PFL Life Insurance Company and certain of its affiliates ("PFL") to
fund various insurance contracts, including variable life insurance policies
(whether scheduled premium, flexible premium or single premium policies) or
variable annuity contracts. These insurance contracts are hereinafter referred
to as the "Contracts." The rights of PFL as the record holder for a separate
account of shares of the Portfolios are different from the rights of the owner
of a Contract. The terms "shareholder" or "shareholders" in this Prospectus
refer to PFL and not to any Contract owner.
The structure of the Fund permits Contract owners, within the
limitations described in the appropriate Contract, to allocate the amounts held
by PFL under the Contracts for investment in the various portfolios of the Fund.
See the prospectus and other material accompanying this Prospectus for a
description of the Contracts, which portfolios of the Fund are available to
Contract owners, and the relationship between increases or decreases in the net
asset value of shares of the portfolios (and any dividends and distributions on
such shares) and the benefits provided under the Contracts.
It is conceivable that in the future it may be disadvantageous for
scheduled premium variable life insurance separate accounts, flexible and single
premium variable life insurance separate accounts, and variable annuity separate
accounts to invest simultaneously in the Fund due to tax or other
considerations. The Trustees of the Fund intend to monitor events for the
existence of any irreconcilable material conflict between or among such
accounts, and PFL will take whatever remedial action may be necessary.
Investment Objectives
The Investment objectives of the Portfolios are as follows:
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TCW Money Market Portfolio (formerly, Money Market Portfolio) - seeks
current income, preservation of capital and maintenance of liquidity through
investment in short-term money market securities. The Portfolio's shares are
neither insured by nor guaranteed by the U.S. government. 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.
TCW Managed Asset Allocation Portfolio (formerly, 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.
Value Equity Portfolio (formerly, Quest for Value Equity Portfolio) -
seeks long term capital appreciation through investment in a diversified
portfolio of equity securities selected on the basis of a value oriented
approach to investing.
Dreyfus Small Cap Value Portfolio (formerly known as the Value Small
Cap Portfolio and prior to that the Quest for Value Small Cap Portfolio) - seeks
capital appreciation through investment in a diversified portfolio of equity
securities of companies with a median market 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 (formerly, 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 U.S. government 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 common 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.
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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.
Enhanced Index Portfolio - seeks to earn a total return modestly in
excess of the total return performance of the S&P 500 Composite Stock Price
Index (the "S&P 500 Index") while maintaining a volatility of return similar to
the S&P 500
Index.
FINANCIAL HIGHLIGHTS
The following tables are based on a Portfolio share outstanding
throughout each period and should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report dated
December 31, 1996 which is incorporated by reference into the Statement of
Additional Information. The financial statements contained in the Fund's Annual
Report have been audited by Ernst & Young LLP, independent auditors, whose
report appears in the Annual Report. Additional information concerning the
performance of the Fund is included in the Annual Report which may be obtained
without charge by writing the Fund at the address on the back cover of this
Prospectus.
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TCW MONEY MARKET PORTFOLIO*
Year Year Year
Ended Ended Ended
12/31/96 12/31/95 12/31/94
Operating
Performance:
Net asset
value,
beginning of
period $1.00 $1.00 $1.00
Net investment
income# 0.0479 0.0540 0.0337
Distributions:
Dividends from
net investment
income (0.0479) (0.0540) (0.0336)
Distributions
from net
realized
capital gains --- ----- (0.0001)
Total
distributions (0.0479) (0.0540) (0.0337)
Net asset
value, end of
period $1.00 $1.00 $1.00
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Total return++ 4.91% 5.54% 3.41%
Ratios to average net
assets/supplemental data:
Net assets,
end of period
(in 000's) $41,545 $27,551 $20,766
Ratio of net
investment
income to
average net
assets 4.81% 5.37% 3.58%
Ratio of
operating
expenses to
average net
assets** 0.60% 0.60% 0.85%
======================
Year Year Period
Ended Ended Ended
12/31/93 12/31/92 12/31/91*
Operating
Performance:
Net asset
value,
beginning of
period $1.00 $1.00 $1.00
Net investment
income# 0.0218 0.0287 0.0377
Distributions:
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Dividends from
net investment
income (0.0218) (0.0287) (0.0377)
Distributions
from net
realized
capital gains ----- ----- -----
Total
distributions (0.0218) (0.0287) (0.0377)
Net asset
value, end of
period $1.00 $1.00 $1.00
Total return++ 2.19% 2.90% 3.84%
Ratios to average
net assets/supple-
mental data:
Net assets,
end of period
(in 000's) $12,836 $4,527 $1,907
Ratio of net
investment
income to
average net
assets 2.19% 2.84% 5.02%+
Ratio of
operating
expenses to
average net
assets** 0.99% 0.91% 0.00%+
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* Effective May 1, 1996, the name of the Money Market Portfolio was
changed to TCW Money Market Portfolio. The Portfolio commenced
operations on April 8, 1991.
** Annualized operating expense ratios before waiver of fees and/or
reimbursement of expenses by investment manager for the years ended
December 31, 1993, December 31, 1992 and the period ended December 31,
1991 were 1.23%, 2.37% and 8.48%, respectively.
+ Annualized.
++ Total return represents the aggregate total return for the periods
indicated. The total return of the Portfolio does not reflect the
charges against the separate accounts of PFL or the Contracts.
# Net investment income/(loss) before fees waived and/or reimbursement of
expenses by investment manager for the years ended December 31, 1993,
December 31, 1992 and the period ended December 31, 1991 were $0.0195,
$0.0140 and $(0.0259), respectively.
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TCW MANAGED ASSET ALLOCATION PORTFOLIO*
Year Year Year
Ended Ended Ended
12/31/96 12/31/95 12/31/94+++
Operating
Performance:
Net asset
value,
beginning of
period $16.28 $13.48 $14.30
Net investment
income# 0.27 0.33 0.28
Net realized
and unrealized
gain/(loss) on
investments 2.61 2.72 (1.03)
Net increase/
(decrease) in
net assets
resulting from
investment
operations 2.88 3.05 (0.75)
Distributions:
Dividends from
net investment
income (0.32) (0.25) (0.07)
Net asset
value, end of
period $18.84 $16.28 $13.48
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Total Return++ 17.82% 22.91% (5.28)%
Ratios to
average net
assets/
supplemental
data:
Net assets,
end of period
(in 000's) $240,210 $198,876 $172,449
Ratio of net
investment
income to
average net
assets 1.59% 2.12% 2.03%
Ratio of
operating
expenses to
average net
assets** 0.85%% 0.84% 0.90%
Portfolio
turnover rate 58% 93% 67%
Average
commission
rate (per
share of
security) (a) $0.0041 --- ---
====================================
Year Year Period
Ended Ended Ended
12/31/93+++ 12/31/92+++ 12/31/91*
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Operating
Performance:
Net asset
value,
beginning of
period $12.31 $11.37 $10.00
Net investment
income# 0.23 0.24 0.10
Net realized
and unrealized
gain/(loss) on
investments 1.84 0.77 1.27
Net increase/
(decrease) in
net assets
resulting from
investment
operations 2.07 1.01 1.37
Dividends from
net investment
income (0.08) (0.07) ---
Net asset
value, end of
period $14.30 $12.31 $11.37
Total Return++ 16.79% 9.01% 13.70%
Ratios to
average net
assets/
supplemental
data:
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<PAGE>
Net assets,
end of period
(in 000's) $96,657 $14,055 $4,247
Ratio of net
investment
income to
average net
assets 1.71% 2.11% 4.54%+
Ratio of
operating
expenses to
average net
assets** 1.12% 1.18% 0.00%+
Portfolio
turnover rate 67% 50% 61%
Average
commission
rate (per
share of
security) (a) --- --- ---
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* Effective May 1, 1996, the name of the Managed Asset Allocation
Portfolio was changed to TCW Managed Asset Allocation Portfolio. The
Portfolio commenced operations on April 8, 1991.
** Annualized operating expense ratios before waiver of fees and/or
reimbursement of expenses by investment manager for the year ended
December 31, 1992 and the period ended December 31, 1991 were 1.73% and
5.18%, respectively.
+ Annualized.
++ Total return represents aggregate total return for the periods
indicated. The total return of the Portfolio does not reflect the
charges against the separate accounts of PFL or the Contracts.
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+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for this
period since use of the undistributed method does not accord with
results of operations.
# Net investment income/(loss) before fees waived and/or reimbursement of
expenses by investment manager for the year ended December 31, 1992 and
the period ended December 31, 1991 were $0.18 and $(0.01),
respectively.
(a) Average commission rate paid per share of securities purchased and
sold by the Portfolio.
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T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO*
Year Year Year
Ended Ended Ended
12/31/96+++ 12/31/95## 12/31/94
Operating
Performance:
Net asset value,
beginning of
period $12.19 $11.31 $11.99
Net investment
income/(loss)# 0.09 0.09 (0.02)
Net realized and
unrealized
gain/(loss) on
investments 1.76 1.06 (0.66)
Net increase/
(decrease) in
net assets
resulting from
investment
operations 1.85 1.15 (0.68)
Distributions:
Dividends from
net investment
income (0.09) --- ---
Distributions
from net
realized gains (0.00)*** (0.27) ---
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Total
Distributions (0.09) (0.27) ---
Net asset value,
end of period $13.95 $12.19 $11.31
Total return++ 15.23% 10.37% (5.67)%
Ratios to
average net
assets/
supplemental
data:
Net assets, end
of period (in
000's) $134,435 $92,352 $84,102
Ratio of net
investment
income/(loss) to
average net
assets 0.73% 0.81% (0.16 )
%
Ratio of
operating
expenses to
average net
assets** 1.18% 1.15% 1.16%
Portfolio
turnover rate 11% 111% 88%
Average
commission rate
(per share of
security) (a) $0.0024 --- ---
===============================
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Year Year Period
Ended Ended Ended
12/31/93+++ 12/31/92+++ 12/31/91*
Operating
Performance:
Net asset value,
beginning of
period $10.12 $10.52 $10.00
Net investment
income/(loss)# (0.04) 0.00*** 0.06
Net realized and
unrealized
gain/(loss) on
investments 1.91 (0.38) 0.46
Net increase/
(decrease) in
net assets
resulting from
investment
operations 1.87 (0.38) 0.52
Distributions:
Dividends from
net investment
income --- (0.02) ---
Distributions
from net
realized gains --- --- ---
Total
Distributions --- (0.02) ---
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Net asset value,
end of period $11.99 $10.12 $10.52
Total return++ 18.48% (3.61)% 5.20%
Ratios to
average net
assets/
supplemental
data:
Net assets, end
of period (in
000's) $52,777 $6,305 $3,200
Ratio of net
investment
income/(loss) to
average net
assets (0.31 )% 0.01% 3.18%+
Ratio of
operating
expenses to
average net
assets** 1.52% 1.43% 0.00%+
Portfolio
turnover rate 37% 34% 0%
Average
commission rate
(per share of
security) (a) --- --- ---
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* Effective March 24, 1995, the name of the Global Growth Portfolio was
changed to T. Rowe Price International Stock Portfolio and the
investment objective was changed from investment on a global basis to
investment on an international basis (i.e., in non-U.S. companies). The
Portfolio commenced operations on April 8, 1991.
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** Annualized operating expense ratios before waiver of fees and/or
reimbursement of expenses by investment manager for the year ended
December 31, 1992 and the period ended December 31, 1991 were 2.10% and
6.83%, respectively.
*** Amount represents less than $0.01 per share.
+ Annualized.
++ Total return represents aggregate total return for the periods
indicated. The total return of the Portfolio does not reflect the
charges against the separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for this
period since use of the undistributed method does not accord with
results of operations.
# Net investment loss before fees waived and/or reimbursement of expenses
by investment manager for the year ended December 31, 1992 and the
period ended December 31, 1991 were $(0.07) and $(0.07), respectively.
## Rowe Price-Fleming International, Inc. became the Portfolio's Adviser
effective January 3, 1995.
(a) Average commission rate paid per share of securities purchased and
sold by the Portfolio.
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VALUE EQUITY PORTFOLIO*
Year Year Year Period
Ended Ended Ended Ended
12/31/96+++ 12/31/95 12/31/94 12/31/93*+++
Operating
Performance:
Net asset value,
beginning of
period $14.23 $10.69 $10.28 $10.00
Net investment
income# 0.20 0.15 0.09 0.05
Net realized and
unrealized gain
on investments 3.15 3.52 0.33 0.23
Net increase in
net assets
resulting from
investment
operations 3.35 3.67 0.42 0.28
Distributions:
Dividends from
net investment
income (0.13) (0.09) (0.01) ---
Distributions
from net
realized gains (0.24) (0.04) --- ---
Total
distributions (0.37) (0.13) (0.01) ---
<PAGE>
Net asset value,
end of period $17.21 $14.23 $10.69 $10.28
Total return++ 23.84% 34.59% 4.09% 2.80%
Ratios to
average net
assets/
supplemental
data:
Net assets, end
of period (in
000's) $127,927 $68,630 $32,776 $11,178
Ratio of net
investment
income to
average net
assets 1.29% 1.56% 1.31% 0.84%+
Ratio of
operating
expenses to
average net
assets** 0.91% 0.86% 1.02% 1.30%+
Portfolio
turnover rate 27% 28% 56% 1%
Average
commission rate
(per share of
security)(a) $0.0569 --- --- ---
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* Effective May 1, 1996, the name of the Quest for Value Equity Portfolio
was changed to Value Equity Portfolio. The Portfolio commenced
operations on May 27, 1993.
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<PAGE>
** Annualized expense ratio before waiver of fees by investment manager
for the period ended December 31, 1993 was 2.10%.
+ Annualized.
++ Total return represents aggregate total return for the periods
indicated. The total return of the Portfolio does not reflect the
charges against the separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for this
period since use of the undistributed method did not accord with
results of operations.
# Net investment income before fees waived by investment manager for the
period ended December 31, 1993 was $0.00.
(a) Average commission rate paid per share of securities purchased and
sold by the Portfolio.
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DREYFUS SMALL CAP VALUE PORTFOLIO*
Year Year Year Period
Ended Ended Ended Ended
12/31/96+++## 12/31/95 12/31/94+++ 12/31/93*+++
Operating
Performance:
Net asset
value,
beginning of
period $12.22 $10.98 $11.18 $10.00
Net investment
income# 0.12 0.15 0.10 0.22
Net realized
and unrealized
gain/(loss) on
investments 2.95 1.36 (0.30) 0.96
Net increase/
(decrease) in
net assets
resulting from
investment
operations 3.07 1.51 (0.20) 1.18
Distributions:
Dividends from
net investment
income (0.14) (0.10) --- ---
Distributions
from net
realized gains (0.46) (0.17) --- ---
<PAGE>
Total
distributions (0.60) (0.27) --- ---
Net asset
value, end of
period $14.69 $12.22 $10.98 $11.18
Total return++ 25.63% 14.05% (1.79)% 11.80%
Ratios to
average net
assets/
supplemental
data:
Net assets,
end of period
(in 000's) $85,803 $52,597 $35,966 $12,699
Ratio of net
investment
income to
average net
assets 0.95% 1.56% 0.89% 3.98%+
Ratio of
operating
expenses to
average net
assets** 0.92% 0.87% 1.03% 1.30%+
Portfolio
turnover rate 171% 75% 77% 41%
Average
commission
rate (per
share of
security) (a) $0.0539 --- --- ---
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<PAGE>
* Effective October 29, 1996, the name of the Value Small Cap Portfolio
was changed to Dreyfus Small Cap Value Portfolio. On May 1, 1996, the
name of the Quest for Value Small Cap Portfolio was changed to Value
Small Cap Portfolio. The Portfolio commenced operations on May 4, 1993.
** Annualized operating expense ratio before waiver of fees by investment
manager for the period ended December 31, 1993 was 2.10%.
+ Annualized.
++ Total return represents aggregate total return for the periods
indicated. The total return of the Portfolio does not reflect the
charges against the separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for this
period since use of the undistributed method did not accord with
results of operations.
# Net investment income before fees waived by investment manager for the
period ended December 31, 1993 was $0.18.
## The Dreyfus Corporation became the Portfolio's Adviser effective
September 16, 1996.
(a) Average commission rate paid per share of securities purchased and
sold by the Portfolio.
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DREYFUS U.S. GOVERNMENT SECURITIES PORTFOLIO*
Year Year Period
Ended Ended Ended
12/31/96+++ 12/31/95 12/31/94*+++
Operating performance:
Net asset value,
beginning of period $11.39 $9.96 $10.00
Net investment income# 0.62 0.30 0.24
Net realized and
unrealized gain/(loss)
on investments (0.44) 1.25 (0.28)
Net increase/(decrease)
in net assets resulting
from investment
operations 0.18 1.55 (0.04)
Distributions:
Dividends from net
investment income (0.22) (0.12) ---
Distributions from net
realized gains (0.12) --- ---
Total distributions (0.34) 0.12) ---
Net asset value, end of
period $11.23 $11.39 $9.96
Total return++ 1.81% 15.64% (0.40)%
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<PAGE>
Ratios to average net
assets/supplemental
data:
Net assets, end of
period (in 000's) $24,727 $12,718 $3,505
Ratio of net investment
income to average net
assets 5.68% 5.58% 4.14%+
Ratio of operating
expenses to average net
assets** 0.82% 0.84% 0.78%+
Portfolio turnover rate 222% 161% 100%
- ------------------------
* Effective May 1, 1996, the name of the U.S. Government Securities
Portfolio was changed to Dreyfus U.S. Government Securities Portfolio.
The Portfolio commenced operations on May 13, 1994.
** Annualized operating expense ratio before waiver of fees and
reimbursement of expenses by investment manager for the period ended
December 31, 1994 was 1.83%.
+ Annualized.
++ Total return represents aggregate total return for the periods
indicated. The total return of the Portfolio does not reflect the
charges against the separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for this
period since use of the undistributed method did not accord with
results of operations.
# Net investment income before fees waived and reimbursement of expenses
by investment manager for the period ended December 31, 1994 was $0.18.
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<PAGE>
T. ROWE PRICE EQUITY INCOME PORTFOLIO
Year Year
Ended Ended
12/31/96+++ 12/31/95*+++
Operating performance:
Net asset value,
beginning of year $13.05 $10.00
Net investment income 0.41 0.34
Net realized and
unrealized gain on
investments 2.17 2.71
Net increase in net
assets resulting from
investment operations 2.58 3.05
Distributions:
Dividends from net
investment income (0.10) ---
Distribution from net
realized gains (0.04) ---
Total distributions (0.14) ---
Net asset value, end
of year $15.49 $13.05
Total return++ 19.88% 30.50%
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<PAGE>
Ratios to average net
assets/supplemental
data:
Net assets, end of
year (in 000's) $78,251 $21,910
Ratio of net
investment income to
average net assets 2.89% 3.24%+
Ratio of operating
expenses to average
net assets 0.96% 1.15%+
Portfolio turnover
rate 19% 16%
Average commission
rate (per share of
security) (a) $0.0396 ---
- --------------------------
* The Portfolio commenced operations on January 3, 1995.
+ Annualized.
++ Total return represents aggregate total return for the periods
indicated. The total return of the Portfolio does not reflect the
charges against the separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method which more appropriately presents the per share data for the
period since use of the undistributed method did not accord with
results of operations.
(a) Average commission rate paid per share of securities purchased and
sold by the Portfolio.
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<PAGE>
T. ROWE PRICE GROWTH STOCK PORTFOLIO
Year Year
Ended Ended
12/31/96+++ 12/31/95*+++
Operating performance:
Net asset value,
beginning of year $13.72 $10.00
Net investment income 0.11 0.08
Net realized and
unrealized gain on
investments 2.71 3.64
Net increase in net
assets resulting from
investment operations 2.82 3.72
Distributions:
Dividends from net
investment income (0.01) ---
Distributions from net
realized gains (0.24) ---
Total distributions (0.25) ---
Net asset value, end
of year $16.29 $13.72
Total return++ 20.77% 37.20%
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Ratios to average net
assets/supplemental
data:
Net assets, end of
year (in 000's) $59,732 $21,651
Ratio of net
investment income to
average net assets 0.75% 0.69%+
Ratio of operating
expenses to average
net assets 1.01% 1.26%+
Portfolio turnover 44% 64%
rate
Average commission
rate (per share of
security) (a) $0.0385 ---
- --------------------
* The Portfolio commenced operations on January 3, 1995.
+ Annualized.
++ Total return represents aggregate total return for the periods
indicated. The total return of the Portfolio does not reflect the
charges against the separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method which more appropriately presents the per share data for the
period since use of the undistributed method did not accord with
results of operations.
(a) Average commission rate paid per share of securities purchased and
sold by the Portfolio.
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<PAGE>
OPPORTUNITY VALUE PORTFOLIO
Three Months Period
Ended 3/31/97 Ended
(Unaudited)+++ 12/31/96*
Operating performance:
Net asset value,
beginning of $10.06 $10.00
period
Net investment
income (loss)# 0.05 0.00##
Net realized and
unrealized gain (loss)
on investments (0.09) 0.06
Net increase
(decrease) in net
assets resulting from
investment operations (0.04) 0.06
Net asset value, end
of period $10.02 $10.06
Total return++ (0.04)% 0.60%
Ratios to average net
assets/supplemental
data:
Net assets, end of
period (in 000's) $5,167 $701
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<PAGE>
Ratio of net
investment income
(loss) to average
net assets
1.97%+ (1.09)%+
Ratio of operating
expenses to average 1.30%+ 1.30%+
net assets**
Portfolio turnover
rate 4% 0%
Average commission
rate (per share of
security) (a) $0.0564 $0.0600
- -----------------
* The Portfolio commenced operations on November 18,
1996.
** Annualized operating expense ratio before waiver/reimbursement by
investment manager for the period ended December 31, 1996 was 12.69%.
+ Annualized.
++ Total return represents aggregate total return for the periods
indicated. The total return of the Portfolio does not reflect the
charges against the separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method which more appropriately presents the per share data for the
period since use of the undistributed method did not accord with the
results of operations.
# Net investment loss before waiver/reimbursement of expenses by
investment manager for the period ended December 31, 1996 was ($0.04).
## Amount represents less than $(0.01) per share.
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<PAGE>
(a) Average commission rate paid per share of securities purchased and
sold by the Portfolio.
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<PAGE>
--------------------
Endeavor Investment Advisers (the "Manager") has agreed, until
terminated by the Manager, to assume expenses of the Portfolios that exceed the
rates stated below. This has the effect of lowering each Portfolio's expense
ratio and of increasing returns otherwise available to investors at the time
such amounts are assumed. While this arrangement is in effect, the Manager pays
all expenses of the Portfolios to the extent they exceed the following
percentages of a Portfolio's average net assets: TCW Money Market - .99%, TCW
Managed Asset Allocation - 1.25%, T. Rowe Price International Stock - 1.53%,
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%, Opportunity Value - 1.30% and Enhanced Index - 1.30%.
The offering of shares of the Enhanced Index Portfolio is expected to
commence on or about the date of this Prospectus. Accordingly, no financial
highlight data is available for shares of this Portfolio.
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following is a brief description of the investment objectives and
policies of the Portfolios. The investment objective and the policies of each
Portfolio other than those listed under the caption "Investment Restrictions" in
the Statement of Additional Information are not fundamental policies and may be
changed by the Trustees of the Fund without the approval of shareholders.
Certain portfolio investments and techniques discussed below are described in
greater detail in the Statement of Additional Information. Due to the
uncertainty inherent in all investments, there can be no assurance that the
Portfolios will be able to achieve their respective investment objectives.
TCW Money Market Portfolio
The investment objective of the TCW Money Market Portfolio is to
provide current income, preservation of capital and liquidity through investment
in short-term money market securities.
The Portfolio seeks to maintain a constant net asset value of $1.00 per
share. If the Trustees believe that the extent of any deviation from a $1.00
price per share may result in material dilution or other unfair results to
shareholders, they will take such steps as they consider appropriate to
eliminate or reduce these consequences to the extent reasonably practicable.
This may include selling portfolio securities prior to maturity, shortening the
average maturity of the Portfolio, withholding or reducing dividends, redeeming
shares in kind, reducing the number of the Portfolio's outstanding shares
without monetary consideration, or utilizing a net asset value per share
determined by using available market quotations.
The Portfolio expects to invest in the following types of money market
securities:
* securities issued or guaranteed as to principal and
interest by the U.S. government or by its agencies
or instrumentalities ("U.S. government securities");
* certificates of deposit, bankers' acceptances and
other obligations issued or guaranteed by bank
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<PAGE>
holding companies in the United States and their
subsidiaries;
* U.S. dollar denominated obligations ("Eurodollar
obligations") of bank holding companies in the
United States, their subsidiaries and their
foreign branches or of the International Bank for
Reconstruction and Development (also known as the
World Bank);
* commercial paper and other short-term obligations
of, and variable amount master demand notes and
variable rate notes issued by U.S. and foreign
corporations; and
* repurchase agreements (see "Investment Strategies").
Investment Criteria. With respect to investments in money
market securities, in accordance with applicable regulations
of the Securities and Exchange Commission, the Portfolio will:
~ invest only in high quality money market instruments that
present minimal credit risks;
~ invest only in money market instruments with remaining or
implied maturities of thirteen months or less; and
~ maintain an average dollar weighted maturity of the
Portfolio's investments of 90 days or less.
The Portfolio will invest only in high quality money market
instruments, i.e., securities which have been assigned the highest quality
ratings by nationally recognized statistical rating organizations ("NRSROs")
such as "A-1" by Standard & Poor's Ratings Service, a division of McGraw-Hill
Companies, Inc. ("Standard & Poor's") or "Prime-1" by Moody's Investors Service,
Inc. ("Moody's"), or if not rated, determined to be of comparable quality by the
Portfolio's Adviser (as hereinafter defined); provided, that up to 5% of the
Portfolio's total assets may be invested in instruments assigned the second
highest quality ratings such as "A-2" or "Prime-2", or if not rated, determined
to be of comparable quality by the Portfolio's Adviser. For a description of the
NRSROs and their ratings, see the Appendix attached to the Statement of
Additional Information.
The Portfolio may not invest in the securities of any one issuer if,
immediately after such investment, more than 5% of
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<PAGE>
the total assets of the Portfolio (taken at current value) would be invested in
the securities of such issuer; provided, that this limitation does not apply to
U.S. government securities or to repurchase agreements secured by such
securities and that with respect to 25% of the Portfolio's total assets more
than 5% may be invested in securities of any one issuer for three business days
after the purchase thereof if the securities have been assigned the highest
quality ratings by NRSROs, or if not rated, have been determined to be of
comparable quality by the Portfolio's Adviser. With respect to U.S. government
securities, the Portfolio will not invest more than 55% of its assets in
securities issued or guaranteed by the U.S. Treasury or any single U.S.
government agency or instrumentality. See "Investment Restrictions" in the
Statement of Additional Information for a further description of the Portfolio's
investment criteria.
U.S. Government Securities. Securities issued or guaranteed as to
principal and interest by the U.S. government or its agencies and
instrumentalities include U.S. Treasury obligations, consisting of bills, notes
and bonds, which principally differ in their interest rates, maturities and
times of issuance, and obligations issued or guaranteed by agencies and
instrumentalities which are supported by (i) the full faith and credit of the
U.S. Treasury (such as securities of the Small Business Administration), (ii)
the limited authority of the issuer to borrow from the U.S. Treasury (such as
securities of the Student Loan Marketing Association) or (iii) the authority of
the U.S. government to purchase certain obligations of the issuer (such as
securities of the Federal National Mortgage Association). No assurance can be
given that the U.S. government will provide financial support to U.S. government
agencies or instrumentalities as described in clauses (ii) or (iii) above in the
future, other than as set forth above, since it is not obligated to do so by
law.
Other Money Market Securities. Other money market securities in which
the Portfolio may invest include U.S. dollar denominated instruments (such as
bankers' acceptances, commercial paper, certificates of deposit and Eurodollar
obligations) issued or guaranteed by bank holding companies in the United
States, their subsidiaries and their foreign branches. These bank obligations
may be general obligations of the parent bank holding company or may be limited
to the issuing entity by the terms of the specific obligation or by government
regulation.
-39-
<PAGE>
Obligations of the International Bank for Reconstruction and
Development (also known as the World Bank) are supported by subscribed but
unpaid commitments of its member countries. There can be no assurance that these
commitments will be undertaken or complied with in the future.
The other money market securities in which the Portfolio may invest
also include certain variable and floating rate instruments and participations
in corporate loans to corporations in whose commercial paper or other short-term
obligations the Portfolio may invest. Because the bank issuing the
participations does not guarantee them in any way, they are subject to the
credit risks generally associated with the underlying corporate borrower. To the
extent that the Portfolio may be regarded as a creditor of the issuing bank
(rather than of the underlying corporate borrower under the terms of the loan
participation), the Portfolio may also be subject to credit risks associated
with the issuing bank. The secondary market, if any, for these loan
participations is extremely limited and any such participations purchased by the
Portfolio will be regarded as illiquid.
Other money market securities in which the Portfolio may invest also
include bonds and notes with remaining maturities of thirteen months or less,
variable rate notes and variable amount master demand notes. A variable amount
master demand note differs from ordinary commercial paper in that it is issued
pursuant to a written agreement between the issuer and the holder, its amount
may be increased from time to time by the holder (subject to an agreed maximum)
or decreased by the holder or the issuer, it is payable on demand, the rate of
interest payable on it varies with an agreed formula and it is typically not
rated by a rating agency. Transfer of such notes is usually restricted by the
issuer, and there is no secondary trading market for them. Any variable amount
master demand note purchased by the Portfolio will be regarded as an illiquid
security. See "Investment Restrictions" in the Statement of Additional
Information.
Foreign Securities. The Portfolio may invest up to 10% of its total assets
in the securities (payable in U.S. dollars) of foreign issuers in developed
countries and in the securities of foreign branches of U.S. banks such as
negotiable certificates of deposit (Eurodollars). Because the Portfolio may
invest in foreign securities, investment in the Portfolio involves investment
risks that are different in some respects from an investment in a fund which
invests only in debt obligations of U.S. domestic issuers. Such risks may
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<PAGE>
include adverse future political and economic developments, the possible
imposition of foreign withholding taxes on interest income payable on the
securities held in the Portfolio, possible seizure or nationalization of foreign
deposits, the possible establishment of exchange controls, or the adoption of
other foreign governmental restrictions which might adversely affect the payment
of principal and interest on securities in the Portfolio. There may also be less
publicly available information about a foreign issuer than about a domestic
issuer and foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic issuers.
The Portfolio may employ certain investment strategies which are
described under the caption "Investment Strategies" below and in the Statement
of Additional Information.
TCW Managed Asset Allocation Portfolio
The investment objective of the TCW Managed Asset Allocation Portfolio
is to provide high total return through a managed asset allocation portfolio of
equity, fixed income and money market securities. The Portfolio seeks to achieve
its objective by investing primarily in securities issued by United States
companies.
The composition of the Portfolio's investments will be based on the
determination by the Portfolio's Adviser of the appropriate weighting for each
asset class and will be adjusted periodically. In making adjustments to the
asset allocation, the Portfolio's Adviser will use its asset allocation model
and will integrate its view of the expected returns for each asset class,
conditions in the stock, bond and money markets, interest rate and corporate
earnings growth trends, and economic conditions.
The asset class weightings may theoretically range from 0% to 100%,
although the Portfolio's Adviser expects these extremes to be reached rarely, if
at all, for any class. The Portfolio will be "rebalanced" or checked for
possible reallocation monthly or more often if market conditions demand.
The equity portion of the Portfolio will be invested in a diversified
selection of equity securities of established companies in sound financial
condition. The equity securities in which the Portfolio will be invested may
include common
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<PAGE>
stocks, preferred stocks, securities convertible into or exchangeable for common
stocks and warrants. The Portfolio's Adviser will strive to achieve total
returns from dividends and capital gains in excess of those from broadly-based
stock market indices, but will not incur excessive risk of loss to do so.
The fixed income portion of the Portfolio will be invested in taxable
securities including securities issued or guaranteed by the U.S. government and
its agencies or instrumentalities, collateralized mortgage obligations that are
issued or guaranteed by the U.S. government or its agencies or instrumentalities
or that are collateralized by a portfolio of mortgages or mortgage-related
securities guaranteed by such an agency or instrumentality and high grade
corporate and mortgage-backed bonds with maturities typically ranging from 2 to
30 years. The weighted average maturity of such investments will generally range
from 3 to 10 years and securities will, at time of purchase, have ratings within
the four highest rating categories established by Moody's, Standard & Poor's, or
a similar NRSRO or if not rated, be of comparable quality as determined by the
Portfolio's Adviser. The NRSROs' descriptions of these bond ratings are set
forth in the Appendix to the Statement of Additional Information. Securities
rated in the fourth highest category may have speculative characteristics;
changes in economic or business conditions are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade bonds. Like the three highest grades, however, these securities are
considered investment grade.
Mortgage-backed bonds have yield and maturity characteristics
corresponding to the underlying mortgage loans. Thus, for example, unlike other
bonds, which pay a fixed rate of interest until maturity when the entire
principal amount comes due, payments on mortgage-backed bonds include both
interest and a partial repayment of principal. Fluctuating prepayments of
principal may result from the refinancing or foreclosure of the underlying
mortgage loans. Although maturities of the underlying mortgage loans range up to
30 years, such prepayments may shorten the effective maturities. Because of the
prepayment feature, mortgage-backed bonds may be less effective than other types
of securities as a means of "locking in" attractive long-term interest rates.
This is caused by the need to reinvest repayments of principal generally and the
possibility of significant unscheduled prepayments resulting from declines in
mortgage interest rates. As a result, mortgage-backed bonds may have less
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<PAGE>
potential for capital appreciation during periods of declining interest rates
than other investments of comparable maturities, while having a comparable risk
of decline during periods of rising interest rates.
Foreign Securities. The Portfolio may invest up to 10% of its total
assets in equity securities (payable in U.S. dollars) of foreign issuers in
developed countries. Because the Portfolio may invest in foreign securities,
investment in the Portfolio involves investment risks that are different in some
respects from an investment in a fund which invests only in securities of U.S.
domestic issuers. Such risks may include adverse future political and economic
developments, the possible imposition of foreign withholding taxes on interest
income payable on the securities held in the Portfolio, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on securities in the
Portfolio. There may also be less publicly available information about a foreign
issuer than about a domestic issuer and foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable to domestic issuers.
The cash portion of the Portfolio will be invested in the same
portfolio securities that are eligible for investment by the TCW Money Market
Portfolio described above. The Portfolio may employ certain investment
strategies which are discussed under the caption "Investment Strategies" below
and in the Statement of Additional Information.
T. Rowe Price International Stock Portfolio
The T. Rowe Price International Stock Portfolio was formerly known as
the Global Growth Portfolio. Effective March 24, 1995, the name of the Global
Growth Portfolio was changed to T. Rowe Price International Stock Portfolio and
the Portfolio's investment objective was changed from seeking long-term capital
appreciation through a policy of investing in small capitalization common stocks
and their convertible equivalents on a global basis to the investment objective
and policies set forth below.
The investment objective of the T. Rowe Price International Stock
Portfolio is to seek long-term growth of
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<PAGE>
capital through investments primarily in common stocks of
established non-U.S. companies.
Over the last 30 years, many foreign economies have grown faster than
the United States' economy, and the return from equity investments in these
countries has often exceeded the return on similar investments in the United
States. Moreover, there has normally been a wide and largely unrelated variation
in performance between international equity markets over this period. Although
there can be no assurance that these conditions will continue, the Portfolio's
Adviser, within the framework of diversification, seeks to identify and invest
in companies participating in the faster growing foreign economies and markets.
The Adviser believes that investment in foreign securities offers significant
potential for long-term capital appreciation and an opportunity to achieve
investment diversification.
The Adviser intends to invest substantially all of the Portfolio's
assets outside the United States and diversify investments broadly among
countries throughout the world developed, newly industrialized and emerging - by
having at least five different countries represented in the Portfolio. The
Portfolio may invest in countries of the Far East and Europe as well as South
Africa, Australia, Canada, and other areas (including developing countries).
Further, not more than 20% of the Portfolio's net asset value will be invested
in securities of issuers located in any one country with the exception of
issuers located in Australia, Canada, France, Japan, the United Kingdom or
Germany (where the investment limitation is 35%). In addition, the Adviser will
consider factors applicable to United States investors in making investment
decisions for the Portfolio.
In seeking its objective, the Portfolio invests primarily in common
stocks of established foreign companies which have, in the Adviser's opinion,
the potential for growth of capital. However, the Portfolio may also invest in a
variety of other equity related securities such as preferred stocks, warrants
and convertible securities, as well as corporate and governmental debt
securities, when considered consistent with the Portfolio's investment objective
and program. The Portfolio may also invest in investment funds which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The Portfolio's investment in these
funds is subject to the provisions of the Investment Company
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<PAGE>
Act of 1940 (the "1940 Act"). If the Portfolio invests in such investment funds,
the Portfolio's shareholders will bear not only their proportionate share of the
expenses of the Portfolio (including operating expenses and the fees of the
investment manager), but also will bear indirectly similar expenses of the
underlying investment funds. In addition, the securities of these investment
funds may trade at a premium of their net asset value. Under normal conditions,
the Portfolio's investments in securities other than common stocks is limited to
no more than 35% of its total assets.
In determining the appropriate distribution of investments among
various countries and geographic regions, the Portfolio's Adviser ordinarily
considers the following factors: prospects for relative economic growth between
foreign countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
In analyzing companies for investment, the Adviser ordinarily looks for
one or more of the following characteristics: an above-average earnings growth
per share; high return on invested capital; healthy balance sheet; sound
financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
successfully in their market place. While current dividend income is not a
prerequisite in the selection of portfolio companies, the companies in which the
Portfolio invests normally will have a record of paying dividends, and will
generally be expected to increase the amounts of such dividends in future years
as earnings increase. It is expected that the Portfolio's investments will
ordinarily be traded on exchanges located at least in the respective countries
in which the various issuers of such securities are principally based.
In the event that future economic or financial conditions abroad
adversely affect equity securities, or stocks are considered overvalued, or the
Portfolio's Adviser believes that investing for defensive purposes is
appropriate, or in order to meet anticipated redemption requests, the Portfolio
may invest part or all of its assets in U.S. government securities,
investment-grade debt obligations of U.S. companies and high quality (within the
two highest rating
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<PAGE>
categories assigned by a NRSRO) short-term debt securities (with remaining
maturities of one year or less) including certificates of deposit, bankers'
acceptances, commercial paper, short-term corporate securities and repurchase
agreements.
The international objectives of the Portfolio allow investors an
opportunity to achieve potentially higher returns, reflecting participation in
countries and economies with higher growth rates than those available
domestically. However, foreign investments involve certain risks that are not
present in domestic securities. Because the Portfolio intends to purchase
securities denominated in foreign currencies, a change in the value of any such
currency against the U.S. dollar will result in a change in the U.S. dollar
value of the Portfolio's assets and the Portfolio's income. In addition,
although a portion of the Portfolio's investment income may be received or
realized in such currencies, the Portfolio will be required to compute and
distribute its income in U.S. dollars. Therefore, if the exchange rate for any
such currency declines after the Portfolio's income has been earned and computed
in U.S. dollars but before conversion and payment, the Portfolio could be
required to liquidate portfolio securities to make such distributions.
The values of foreign investments and the investment income derived
from them may also be affected unfavorably by changes in currency exchange
control regulations. Although the Portfolio will invest only in securities
denominated in foreign currencies that are fully exchangeable into U.S. dollars
without legal restriction at the time of investment, there can be no assurance
that currency controls will not be imposed subsequently. In addition, the values
of foreign fixed income investments will fluctuate in response to changes in
U.S. and foreign interest rates.
There may be less information publicly available about a foreign issuer
than about a U.S. issuer, and foreign issuers are not generally subject to
accounting, auditing and financial reporting standards and practices comparable
to those in the United States. Foreign stock markets are generally not as
developed or efficient as, and may be more volatile than, those in the United
States. While growing in volume, they usually have substantially less volume
than U.S. markets and the Portfolio's investment securities may be less liquid
and subject to more rapid and erratic price movements than securities of
comparable U.S. companies. Equity securities may trade at price/earnings
multiples higher than
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<PAGE>
comparable United States securities and such levels may not be sustainable.
There is generally less government supervision and regulation of foreign stock
exchanges, brokers and listed companies than in the United States. Moreover,
settlement practices for transactions in foreign markets may differ from those
in United States markets. Such differences may include delays beyond periods
customary in the United States and practices, such as delivery of securities
prior to receipt of payment, which increase the likelihood of a "failed
settlement." Failed settlements can result in losses to the Portfolio. In less
liquid and well developed stock markets, such as those in some Asian and Latin
American countries, volatility may be heightened by actions of a few major
investors. For example, substantial increases or decreases in cash flows of
mutual funds investing in these markets could significantly affect stock prices
and, therefore, share prices.
Foreign brokerage commissions, custodial expenses and other fees are
also generally higher than for securities traded in the United States.
Consequently, the overall expense ratios of international funds are usually
somewhat higher than those of typical domestic stock funds.
In addition, the economies, markets and political structures of a
number of the countries in which the Portfolio can invest do not compare
favorably with the United States and other mature economies in terms of wealth
and stability. Therefore, investments in these countries may be riskier, and
will be subject to erratic and abrupt price movements. Some economies are less
well developed and less diverse (for example, Latin America, Eastern Europe and
certain Asian countries), and more vulnerable to the ebb and flow of
international trade, trade barriers and other protectionist or retaliatory
measures (for example, Japan, southeast Asia and Latin America). Some countries,
particularly in Latin America, are grappling with severe inflation and high
levels of national debt. Investments in countries that have recently begun
moving away from central planning and state-owned industries toward free
markets, such as the Eastern European or Chinese economies, should be regarded
as speculative.
Certain portfolio countries have histories of instability and upheaval
(Latin America) and internal politics that could cause their governments to act
in a detrimental or hostile manner toward private enterprise or foreign
investment. Any such actions, for example, nationalizing an industry or company,
could have a severe and adverse effect on security
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prices and impair the Portfolio's ability to repatriate capital or income. The
Portfolio's Adviser will not invest the Portfolio's assets in countries where it
believes such events are likely to occur.
Income received by the Portfolio from sources within foreign countries
may be reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. The Portfolio's Adviser will attempt to minimize such
taxes by timing of transactions and other strategies, but there can be no
assurance that such efforts will be successful. Any such taxes paid by the
Portfolio will reduce its net income available for distribution to shareholders.
The Portfolio may employ certain investment strategies which are
discussed under the caption "Investment Strategies" below and in the Statement
of Additional Information.
Value Equity Portfolio
The investment objective of the Value Equity Portfolio is 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.
It is the Portfolio Adviser's intention to invest in securities which
in its opinion possess one or more of the following characteristics: undervalued
assets, valuable consumer or commercial franchises, securities valuation below
peer companies, substantial and growing cash flow and/or a favorable price to
book value relationship.
Investment policies aimed at achieving the Portfolio's objective are
set in a flexible framework of securities selection which primarily includes
equity securities, such as common stocks, preferred stocks, convertible
securities, rights and warrants in proportions which vary from time to time.
Under normal circumstances at least 65% of the Portfolio's assets will be
invested in common stocks or securities convertible into common stocks. The
Portfolio will invest primarily in stocks listed on the New York Stock Exchange.
In addition, it may also purchase securities listed on other domestic securities
exchanges or traded in the domestic over-the-counter market and foreign
securities that
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are listed on a domestic or foreign securities exchange, traded in the domestic
or foreign over-the-counter markets or represented by American Depositary
Receipts.
In the event that future economic or financial conditions adversely
affect equity securities, or stocks are considered overvalued, or the
Portfolio's Adviser believes that investing for defensive purposes is
appropriate, or in order to meet anticipated redemption requests, the Portfolio
may invest part or all of its assets in U.S. government securities and high
quality short-term debt securities (with remaining maturities of one year or
less) including certificates of deposit, bankers' acceptances, commercial paper,
short-term corporate securities and repurchase agreements.
The Portfolio may invest in certain foreign securities which may
represent a greater degree of risk than investing in domestic securities. These
risks are discussed in the above section of this Prospectus describing the T.
Rowe Price International Stock Portfolio.
It is the present intention of the Portfolio's Adviser to invest no
more than 5% of the Portfolio's net assets in bonds rated below Baa3 by Moody's
or BBB by Standard & Poor's (commonly known as "junk bonds"). In the event that
the Portfolio's Adviser intends in the future to invest more than 5% of the
Portfolio's net assets in junk bonds, appropriate disclosures will be made to
existing and prospective shareholders. For information about the possible risks
of investing in junk bonds see "Investment Objective and Policies - Lower Rated
Bonds" in the Statement of Additional Information.
The Portfolio may employ certain investment strategies which are
discussed under the caption "Investment Strategies" below and in the Statement
of Additional Information.
Dreyfus Small Cap Value Portfolio
The investment objective of the Dreyfus Small Cap Value Portfolio is to
seek capital appreciation through investments in a diversified portfolio of
equity securities of companies with a median market 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.
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Small-capitalization companies are often under-priced for the following
reasons: (i) institutional investors, which currently represent a majority of
the trading volume in the shares of publicly-traded companies, are often less
interested in such companies because in order to acquire an equity position that
is large enough to be meaningful to an institutional investor, such an investor
may be required to buy a large percentage of the company's outstanding equity
securities and (ii) such companies may not be regularly researched by stock
analysts, thereby resulting in greater discrepancies in valuation.
The Portfolio will invest in equity securities of domestic and foreign
(up to 5% of its total assets) issuers which would be characterized as "value"
companies according to criteria established by the Portfolio's Adviser. To
manage the Portfolio, the Portfolio's Adviser classifies issuers as "growth" or
"value" companies. In general, the Portfolio's Adviser believes that companies
with relatively low price to book ratios, low price to earnings ratios or higher
than average dividend payments in relation to price should be classified as
value companies. Alternatively, companies which have above average earnings or
sales growth and retention of earnings and command higher price to earnings
ratios fit the more classic growth description.
While seeking desirable equity investments, the Portfolio may invest in
money market instruments consisting of U.S. government securities, certificates
of deposit, time deposits, bankers' acceptances, short-term investment grade
corporate bonds and other short-term debt instruments, and repurchase
agreements. Under normal market conditions, the Portfolio does not expect to
have a substantial portion of its assets invested in money market instruments.
However, when the Portfolio's Adviser determines that adverse market conditions
exist, the Portfolio may adopt a temporary defensive posture and invest all of
its assets in money market instruments.
Equity securities consist of common stocks, preferred stocks and
securities convertible into common stocks. Securities purchased by the Portfolio
will be traded on the New York Stock Exchange, the American Stock Exchange or in
the over-the-counter market, and will also include options, warrants, bonds,
notes and debentures which are convertible into or exchangeable for, or which
grant a right to purchase or sell, such securities. In addition, the Portfolio
may purchase securities issued by closed-end investment companies
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and foreign securities that are listed on a domestic or foreign securities
exchange, traded in domestic or foreign over-the-counter markets or represented
by American Depositary Receipts.
The Portfolio is expected to have greater risk exposure and reward
potential than a fund which invests primarily in larger-capitalization
companies. The trading volumes of securities of smaller-capitalization companies
are normally less than those of larger-capitalization companies. This often
translates into greater price swings, both upward and downward. Since trading
volumes are lower, new demand for the securities of such companies could result
in disproportionately large increases in the price of such securities. The
waiting period for the achievement of an investor's objectives might be longer
since these securities are not closely monitored by research analysts and, thus,
it takes more time for investors to become aware of fundamental changes or other
factors which have motivated the Portfolio's purchase. Small-capitalization
companies often achieve higher growth rates and experience higher failure rates
than do larger-capitalization companies.
The Portfolio may invest in certain foreign securities which may
represent a greater degree of risk than investing in domestic securities. These
risks are discussed in the above section of this Prospectus describing the T.
Rowe Price International Stock Portfolio.
The Portfolio may employ certain investment strategies which are
discussed under the caption "Investment Strategies" below and in the Statement
of Additional Information.
Dreyfus U.S. Government Securities Portfolio
The investment objective of the Dreyfus U.S. Government Securities
Portfolio is to seek 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 U.S. government debt obligations and mortgage-backed securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities
("U.S. Government Securities").
The Portfolio expects to invest in the following types of
U.S. Government Securities:
* U.S. Treasury obligations;
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* obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government which are
backed by their own credit and may not be backed by
the full faith and credit of the U.S. government;
* mortgage-backed securities guaranteed by the
Government National Mortgage Association that are
supported by the full faith and credit of the U.S.
government and which are the "modified pass-through"
type of mortgage-backed security ("GNMA
Certificates"). Such securities entitle the holder
to receive all interest and principal payments due
whether or not payments are actually made on the
underlying mortgages;
* mortgage-backed securities guaranteed by agencies or
instrumentalities of the U.S. government which are
supported by their own credit but not the full faith
and credit of the U.S. government, such as the
Federal Home Loan Mortgage Corporation and the
Federal National Mortgage Association; and
* collateralized mortgage obligations issued by
private issuers for which the underlying mortgage-
backed securities serving as collateral are backed
(i) by the credit alone of the U.S. government
agency or instrumentality which issues or guarantees
the mortgage-backed securities, or (ii) by the full
faith and credit of the U.S. government.
Mortgage-Backed Securities. The mortgage-backed securities in which the
Portfolio invests represent participation interests in pools of mortgage loans
which are guaranteed by agencies or instrumentalities of the U.S. government.
However, the guarantee of these types of securities runs only to the principal
and interest payments and not to the market value of such securities. In
addition, the guarantee only runs to the portfolio securities held by the
Portfolio and not the purchase of shares of the Portfolio.
Mortgage-backed securities are issued by lenders such as mortgage
bankers, commercial banks, and savings and loan associations. Such securities
differ from conventional debt securities which provide for periodic payment of
interest in fixed amounts (usually semiannually) with principal payments at
maturity or specified call dates. Mortgage-backed securities provide for monthly
payments which are, in effect, a "pass-through" of the monthly interest and
principal
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payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans. Principal prepayments result from the sale of the
underlying property or the refinancing or foreclosure of underlying mortgages.
The yield of mortgage-backed securities is based on the average life of
the underlying pool of mortgage loans, which is computed on the basis of the
maturities of the underlying instruments. The actual life of any particular pool
may be shortened by unscheduled or early payments of principal and interest. The
occurrence of prepayments is affected by a wide range of economic, demographic
and social factors and, accordingly, it is not possible to accurately predict
the average life of a particular pool. For pools of fixed rate 30-year
mortgages, it has been common practice to assume that prepayments will result in
a 12-year average life. The actual prepayment experience of a pool of mortgage
loans may cause the yield realized by the Portfolio to differ from the yield
calculated on the basis of the average life of the pool. In addition, if any of
these mortgage-backed securities are purchased at a premium, the premium may be
lost in the event of early prepayment which may result in a loss to the
Portfolio.
Prepayments tend to increase during periods of falling interest rates,
while during periods of rising interest rates prepayments will most likely
decline. Reinvestment by the Portfolio of scheduled principal payments and
unscheduled prepayments may occur at higher or lower rates than the original
investment, thus affecting the yield of the Portfolio. Monthly interest payments
received by the Portfolio have a compounding effect which will increase the
yield to shareholders as compared to debt obligations that pay interest
semiannually. Because of the reinvestment of prepayments of principal at current
rates, mortgage-backed securities may be less effective than Treasury bonds of
similar maturity at maintaining yields during periods of declining interest
rates. Also, although the value of debt securities may increase as interest
rates decline, the value of these pass-through type of securities may not
increase as much due to the prepayment feature.
Collateralized Mortgage Obligations. Collateralized mortgage
obligations ("CMOs"), which are debt obligations collateralized by mortgage
loans or mortgage pass-through securities, provide the holder with a specified
interest in the cash flow of a pool of underlying mortgages or other
mortgage-backed securities. Issuers of CMOs frequently elect
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to be taxed as a pass-through entity known as real estate mortgage investment
conduits. CMOs are issued in multiple classes, each with a specified fixed or
floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in many ways. In most cases,
however, payments of principal are applied to the CMO classes in the order of
their respective stated maturities, so that no principal payments will be made
on a CMO class until all other classes having an earlier stated maturity date
are paid in full. The classes may include accrual certificates (also known as
"Z-Bonds"), which only accrue interest at a specified rate until other specified
classes have been retired and are converted thereafter to interest-paying
securities. They may also include planned amortization classes which generally
require, within certain limits, that specified amounts of principal be applied
on each payment date, and generally exhibit less yield and market volatility
than other classes.
Stripped Mortgage-Backed Securities. The Portfolio may also invest a
portion of its assets in stripped mortgage-backed securities ("SMBS"), which are
derivative multi-class mortgage securities. SMBS are usually structured with two
classes that receive different proportions of the interest and principal
distributions from a pool of mortgage assets. The Portfolio will only invest in
SMBS whose mortgage assets are U.S. Government Securities.
A common type of SMBS will be structured so that one class receives
some of the interest and most of the principal from the mortgage assets, while
the other class receives most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the interest
(the interest-only or "IO" class) while the other class will receive all of the
principal (the principal-only or "PO" class). The yield to maturity on an IO
class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Portfolio's yield
to maturity from these securities. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the Portfolio may fail to
fully recoup its initial investment in these securities even if the security is
in one of the highest rating categories.
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The Portfolio may invest not more than 5% of its total assets in CMOs
deemed by its Adviser to be complex, such as floating rate and inverse floating
rate tranches and SMBS.
Non-Mortgage Asset Backed Securities. The Portfolio may invest in
non-mortgage backed securities including interests in pools of receivables, such
as motor vehicle installment purchase obligations and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets.
Non-mortgage backed securities are not issued or guaranteed by the U.S.
government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities. In addition, such securities generally will have
remaining estimated lives at the time of purchase of five years or less.
The purchase of non-mortgage backed securities raises considerations
peculiar to the financing of the instruments underlying such securities. For
example, most organizations that issue asset backed securities relating to motor
vehicle installment purchase obligations perfect their interests in their
respective obligations only by filing a financing statement and by having the
servicer of the obligations, which is usually the originator, take custody
thereof. In such circumstances, if the servicer were to sell the same
obligations to another party, in violation of its duty not to do so, there is a
risk that such party could acquire an interest in the obligations superior to
that of holders of the asset backed securities. Also, although most such
obligations grant a security interest in the motor vehicle being financed, in
most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the asset backed securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the asset backed securities. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on those securities. In addition, various state and federal laws give
the motor
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vehicle owner the right to assert against the holder of the owner's obligation
certain defenses such owner would have against the seller of the motor vehicle.
The assertion of such defenses could reduce payments on the related asset backed
securities. Insofar as credit card receivables are concerned, credit card
holders are entitled to the protection of a number of state and federal consumer
credit laws, many of which give such holders the right to set off certain
amounts against balances owed on the credit card, thereby reducing the amounts
paid on such receivables. In addition, unlike most other asset backed
securities, credit card receivables are unsecured obligations of the card
holder.
U.S. Treasury Obligations. U.S. Treasury obligations consist of bills,
notes and bonds which principally differ in their interest rates, maturities and
times of issuance. Obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government are supported by (i) the full faith and
credit of the U.S. Treasury (such as securities of the Small Business
Administration), (ii) the limited authority of the issuer to borrow from the
U.S. Treasury (such as securities of the Student Loan Marketing Association) or
(iii) the authority of the U.S. government to purchase certain obligations of
the issuer (such as securities of the Federal National Mortgage Association). No
assurance can be given that the U.S. government will provide financial support
to U.S. government agencies or instrumentalities as described in clauses (ii) or
(iii) above in the future, other than as set forth above, since it is not
obligated to do so by law. The Portfolio will not invest more than 55% of the
value of its assets in GNMA Certificates or in securities issued or guaranteed
by any other single U.S. government agency or instrumentality.
Corporate and Other Obligations. In seeking to obtain its investment
objective, the Portfolio may also invest in a broad range of debt securities,
other than U.S. Government Securities, with varying maturities such as corporate
convertible and non-convertible debt obligations such as fixed and variable rate
bonds. The weighted average maturity of such investments will generally range
from 2 to 10 years. Debt securities may also include money market securities,
including bank certificates of deposit and time deposits, bankers' acceptances,
prime commercial paper, high-grade, short-term corporate obligations, and
repurchase agreements with respect to these instruments.
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Investment-grade debt securities are securities rated Baa or higher by
Moody's or BBB or higher by Standard & Poor's, and unrated securities that are
of equivalent quality in the opinion of the Portfolio's Adviser. The
NRSROs'descriptions of these bond ratings are set forth in the Appendix to the
Statement of Additional Information. Securities rated in the fourth highest
category may have speculative characteristics; changes in economic conditions
are more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade bonds. Like the three highest grades,
however, these securities are considered investment grade.
Lower-Rated Securities. The Portfolio may also invest a portion of its
assets, not to exceed 25%, in securities rated below Baa by Moody's or BBB by
Standard & Poor's (commonly known as "junk bonds"), so long as they are
consistent with the Portfolio's objective of seeking as high a level of total
return as is consistent with prudent investment strategies. Such securities may
include bonds rated as low as C by Moody's and by Standard & Poor's. See the
Appendix to the Statement of Additional Information. The Portfolio's Adviser
anticipates that a substantial portion of the Portfolio's lower-rated securities
will be in the higher end of these ratings.
Lower-rated and comparable unrated securities (collectively referred to
in this discussion as "lower-rated securities") will likely have some quality
and protective characteristics that, in the judgment of the rating organization,
are out-weighed by large uncertainties or major risk exposures to adverse
conditions; and are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation.
While the market values of lower-rated securities tend to react less to
fluctuations in interest rate levels than the market values of higher-rated
securities, the market values of certain lower-rated securities also tend to be
more sensitive to individual corporate developments and changes in economic
conditions than higher-rated securities. In addition, lower- rated securities
generally present a higher degree of credit risk. Issuers of lower-rated
securities are often highly leveraged and may not have more traditional methods
of financing available to them so that their ability to service their debt
obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired.
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The risk of loss due to default by such issuers is significantly greater because
lower-rated securities generally are unsecured and frequently are subordinated
to the prior payment of senior indebtedness. The Portfolio may incur additional
expenses to the extent that it is required to seek recovery upon a default in
the payment of principal or interest on its portfolio holdings. The existence of
limited markets for lower-rated securities may diminish the Portfolio's ability
to obtain accurate market quotations for purposes of valuing such securities and
calculating its net asset value For additional information about the possible
risks of investing in junk bonds, see "Investment Objectives and Policies -
Lower-Rated Bonds" in the Statement of Additional Information.
Foreign Securities. The Portfolio may invest up to 15% of its total
assets in debt securities, including securities denominated in foreign
currencies of foreign issuers (including foreign governments) in developed
countries and emerging markets. Because the Portfolio may invest in foreign
securities, investment in the Portfolio involves investment risks that are
different in some respects from an investment in a fund which invests only in
securities of U.S. domestic issuers. Such risks may include adverse future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities held in the
Portfolio, possible seizure or nationalization of foreign deposits, the possible
establishment of exchange controls, or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on securities in the Portfolio. There may also be less publicly
available information about a foreign issuer than about a domestic issuer and
foreign issuers are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic issuers.
The considerations described above generally are more of a concern in
developing countries inasmuch as their economic systems are generally smaller
and less diverse and mature and their political systems less stable than those
in developed countries. The Portfolio seeks to mitigate the risks associated
with these considerations through diversification and active portfolio
management.
The Portfolio may invest up to 35% of its assets in U.S.
dollar-denominated obligations issued by foreign branches of
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domestic banks ("Eurodollar" obligations) and domestic branches of foreign banks
("Yankee dollar" obligations).
The Portfolio may employ certain investment strategies which are
discussed under the caption "Investment Strategies" below and in the Statement
of Additional Information.
T. Rowe Price Equity Income Portfolio
The investment objective of the T. Rowe Price Equity Income Portfolio
is to seek to provide substantial dividend income and also capital appreciation
by investing primarily in dividend-paying common stocks of established
companies. In pursuing its objective, the Portfolio emphasizes companies with
favorable prospects for increasing dividend income, and secondarily, capital
appreciation. Over time, the income component (dividends and interest earned) of
the Portfolio's investments is expected to be a significant contributor to the
Portfolio's total return. The Portfolio's yield is expected to be significantly
above that of the S&P 500 Index. Total return will consist primarily of dividend
income and secondarily of capital appreciation (or depreciation).
The investment program of the Portfolio is based on several premises.
First, the Portfolio's Adviser believes that, over time, dividend income can
account for a significant component of the total return from equity investments.
Second, dividends are normally a more stable and predictable source of return
than capital appreciation. While the price of a company's stock generally
increases or decreases in response to short-term earnings and market
fluctuations, its dividends are generally less volatile. Finally, the
Portfolio's Adviser believes that stocks which distribute a high level of
current income tend to have less price volatility than those which pay below
average dividends.
To achieve its objective, the Portfolio, under normal circumstances,
will invest at least 65% of its total assets in income-producing common stocks,
whose prospects for dividend growth and capital appreciation are considered
favorable by its Adviser. To enhance capital appreciation potential, the
Portfolio also uses a "value" approach and invests in stocks and other
securities its Adviser believes are temporarily undervalued by various measures,
such as price/earnings ratios. The Portfolio's investments will generally be
made in companies which share some of the following characteristics:
* established operating histories;
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* above-average current dividend yields relative to the S&P 500
Index;
* low price/earnings ratios relative to the S&P 500 Index;
* sound balance sheets and other financial characteristics; and
* low stock price relative to company's underlying value as
measured by assets, earnings, cash flow or business
franchises.
Although the Portfolio will invest primarily in U.S. common stocks, it
may also purchase other types of securities, for example, foreign securities,
preferred stocks, convertible securities and warrants, when considered
consistent with the Portfolio's investment objective and program.
In the event that future economic or financial conditions adversely
affect equity securities, or stocks are considered overvalued, or the
Portfolio's Adviser believes that investing for defensive purposes is
appropriate, or in order to meet anticipated redemption requests, the Portfolio
may invest part or all of its assets in U.S. government securities and high
quality (within the two highest rating categories assigned by a NRSRO) U.S. and
foreign dollar-denominated money market securities including certificates of
deposit, bankers' acceptances, commercial paper, short-term corporate securities
and repurchase agreements.
The Portfolio may invest up to 25% of its total assets in foreign
securities. These include non-dollar denominated securities traded outside the
U.S. and dollar denominated securities traded in the U.S. (such as American
Depositary Receipts). Such investments increase a portfolio's diversification
and may enhance return, but they may represent a greater degree of risk than
investing in domestic securities. These risks are discussed in the above section
of this Prospectus describing the T. Rowe Price International Stock Portfolio.
The Portfolio may invest in debt securities of any type including municipal
securities, without regard to quality or rating. Such securities would be
purchased in companies which meet the investment criteria for the Portfolio. The
price of a bond fluctuates with changes in interest rates, rising when interest
rates fall and falling when interest rates rise. The
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Portfolio, however, will not invest more than 10% of its total assets in
securities rated below Baa by Moody's or BBB by Standard & Poor's (commonly
known as "junk bonds"). Such securities may include bonds rated as low as C by
Moody's and by Standard & Poor's. See the Appendix to the Statement of
Additional Information. Investments in non-investment grade securities entail
certain risks which are discussed in the above section of this Prospectus
describing the Dreyfus U.S. Government Securities Portfolio under the heading
"Lower-Rated Securities."
The Portfolio may employ certain investment strategies which are
discussed under the caption "Investment Strategies" below and in the Statement
of Additional Information.
T. Rowe Price Growth Stock Portfolio
The investment objectives of the T. Rowe Price Growth Stock Portfolio
are to seek long-term growth of capital and to increase dividend income through
investment primarily in common stocks of well-established growth companies. A
growth company is defined by the Portfolio's Adviser as one which: (1) has
demonstrated historical growth of earnings faster than the growth of inflation
and the economy in general; and (2) has indications of being able to continue
this growth pattern in the future. Total return will consist primarily of
capital appreciation or depreciation and secondarily of dividend income.
More than fifty years ago, Thomas Rowe Price pioneered the Growth Stock
Theory of Investing. It is based on the premise that inflation represents a more
serious, long-term threat to an investor's portfolio than stock market
fluctuations or recessions. Mr. Price believed that when a company's earnings
grow faster than both inflation and the economy in general, the market will
eventually reward its long-term earnings growth with a higher stock price. In
addition, the company should be able to raise its dividend in line with its
growth in earnings.
Although corporate earnings can be expected to be lower during periods
of recession, it is the Portfolio Adviser's opinion that, over the long term,
the earnings of well-established growth companies will not be affected adversely
by unfavorable economic conditions to the same extent as the earnings of more
cyclical companies. However, investors should be aware that the Portfolio's
share value may not
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always reflect the long-term earnings trend of growth
companies.
The Portfolio will invest primarily in the common stocks of a
diversified group of well-established growth companies. While current dividend
income is not a prerequisite in the selection of a growth company, the companies
in which the Portfolio will invest normally have a record of paying dividends
and are generally expected to increase the amounts of such dividends in future
years as earnings increase.
Although the Portfolio will invest primarily in U.S. common stocks, it
may also purchase other types of securities, for example, foreign securities,
preferred stocks, convertible securities and warrants, when considered
consistent with the Portfolio's investment objectives and program.
In the event that future economic or financial conditions adversely
affect equity securities, or stocks are considered overvalued, or the
Portfolio's Adviser believes that investing for defensive purposes is
appropriate, or in order to meet anticipated redemption requests, the Portfolio
may invest part or all of its assets in U.S. government securities and high
quality (within the two highest rating categories assigned by a NRSRO) U.S. and
foreign dollar-denominated money market securities including certificates of
deposit, bankers' acceptances, commercial paper, short-term corporate securities
and repurchase agreements.
The Portfolio may invest up to 30% of its total assets in foreign
securities. These include non-dollar denominated securities traded outside the
U. S. and dollar denominated securities traded in the U. S. (such as American
Depositary Receipts). Such investments increase a portfolio's diversification
and may enhance return, but they may represent a greater degree of risk than
investing in domestic securities. These risks are discussed in the above section
of this Prospectus describing the T. Rowe Price International Stock Portfolio.
The Portfolio may employ certain investment strategies which are
discussed under the caption "Investment Strategies" below and in the Statement
of Additional Information.
Opportunity Value Portfolio
The investment objective of the Opportunity Value Portfolio is to
achieve growth of capital over time through
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investment in a portfolio consisting of common stocks, bonds and cash
equivalents, the percentages of which will vary based on the Portfolio Adviser's
assessments of the relative outlook for such investments. In seeking to achieve
its investment objective, the types of equity securities in which the Portfolio
may invest will be 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. It is the Adviser's intention to invest in
securities of companies which in its opinion possess one or more of the
following characteristics: undervalued assets, valuable consumer or commercial
franchises, securities valuation below peer companies, substantial and growing
cash flow and/or a favorable price to book value relationship. Investment
policies aimed at achieving the Portfolio's objective are set in a flexible
framework of securities selection which primarily includes equity securities,
such as common stocks, preferred stocks, convertible securities, rights and
warrants in proportions which vary from time to time. The Portfolio will invest
primarily in stocks listed on the New York Stock Exchange. In addition, it may
also purchase securities of companies, including companies with small market
capitalizations, listed on other domestic securities exchanges, securities
traded in the domestic over-the-counter market and foreign securities provided
that they are listed on a domestic or foreign securities exchange or represented
by American Depositary Receipts listed on a domestic securities exchange or
traded in domestic or foreign over-the-counter markets.
Investing in foreign securities may present a greater degree of risk
than investing in domestic securities. These risks are discussed in the above
section of this Prospectus describing the T. Rowe Price International Stock
Portfolio. Investing in the securities of small capitalization companies
involves greater risk exposure and reward potential than investments in larger
capitalization companies. These risks are discussed in the above section of this
Prospectus describing the Dreyfus Small Cap Value Portfolio.
Debt securities are expected to be predominantly investment grade
intermediate to long-term U.S. government and corporate debt, although the
Portfolio will also invest in high quality short-term money market and cash
equivalent securities and may invest almost all of its assets in such securities
when the Portfolio's Adviser deems it advisable in order to preserve capital.
The Portfolio's debt securities may also include mortgage-backed securities
issued by the U.S.
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government, its agencies or instrumentalities and collateralized mortgage
obligations that are issued or guaranteed by the U.S. government or its agencies
or instrumentalities or that are collateralized by a portfolio of mortgages or
mortgage-related securities guaranteed by such an agency or instrumentality.
The effective maturity of a mortgage-backed security may be shortened
by unscheduled or early payment of principal and interest on the underlying
mortgages, which may affect the effective yield of such securities. The
principal that is returned may be invested in instruments having a higher or
lower yield than the prepaid instruments depending on then-current market
conditions.
Investment grade securities will, at the time of purchase, have ratings
within the four highest rating categories established by Moody's, Standard &
Poor's, or a similar NRSRO or, if not rated, be of comparable quality as
determined by the Portfolio's Adviser. The NRSROs' descriptions of these bond
ratings are set forth in the Appendix to the Statement of Additional
Information. Securities rated in the fourth highest category may have
speculative characteristics; changes in economic or business conditions are more
likely to lead to a weakened capacity to make principal and interest payments
than in the case of higher grade bonds. Like the three highest grades, however,
these securities are considered investment grade.
It is the present intention of the Portfolio's Adviser to invest no
more than 5% of the Portfolio's net assets in bonds rated below Baa3 by Moody's
or BBB by Standard & Poor's (commonly known as "junk bonds"). In the event that
the Portfolio's Adviser intends in the future to invest more than 5% of the
Portfolio's net assets in junk bonds, appropriate disclosures will be made to
existing and prospective shareholders. For information about the possible risks
of investing in junk bonds see "Investment Objectives and Policies - Lower Rated
Bonds" in the Statement of Additional Information.
The allocation of the Portfolio's assets among the different types of
permitted investments will vary from time to time based upon the Portfolio
Adviser's evaluation of economic and market trends and its perception of the
relative values available from such types of securities at any given time. There
is neither a minimum nor a maximum percentage of the Portfolio's assets that
may, at any given time, be
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invested in any of the types of investments identified above. Consequently,
while the Portfolio will earn income to the extent it is invested in bonds or
cash equivalents, the Portfolio does not have any specific income objective.
Although there is neither a minimum nor maximum percentage of the Portfolio's
assets that may, at any given time, be invested in any of the types of
investments identified above, it is anticipated that most of the time the
substantial majority of the Portfolio's assets will be invested in common
stocks.
The Portfolio may employ certain investment strategies which are
discussed under the caption "Investment Strategies" below and in the Statement
of Additional Information.
Enhanced Index Portfolio
The investment objective of the Enhanced Index Portfolio is to earn a
total return modestly in excess of the total return performance of the S&P 500
Index (including the reinvestment of dividends) while maintaining a volatility
of return similar to the S&P 500 Index. The Portfolio is appropriate for
investors who seek a modestly enhanced total return relative to that of large
and medium sized U.S. companies typically represented in the S&P 500 Index. The
Portfolio intends to invest in securities of approximately 300 issuers, which
securities are rated by the Portfolio's Adviser to have above average expected
returns.
The Portfolio seeks to achieve its investment objective through
fundamental analysis, systematic stock valuation and disciplined portfolio
construction.
* Fundamental research: The Portfolio Adviser's
approximately 25 domestic equity analysts, each an
industry specialist with an average of approximately
12 years experience, follow over 900 predominantly
large and medium sized U.S. companies --
approximately 525 of which form the universe for the
Portfolio's investments. A substantial majority of
these companies are issuers of securities which are
included in the S&P 500 Index. The analysts'
research goal is to forecast normalized, longer term
earnings and dividends for the companies that they
cover.
* Systematic valuation: The analysts' forecasts are
converted into comparable expected returns by a
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dividend discount model, which calculates those expected
returns by solving for the rate of return that equates the
company's current stock price to the present value of its
estimated long-term earnings power. Within each sector,
companies are ranked by their expected return and grouped into
quintiles; those with the highest expected returns (Quintile
1) are deemed the most undervalued relative to their long-term
earnings power, while those with the lowest expected returns
(Quintile 5) are deemed the most overvalued.
* Disciplined portfolio construction: A diversified
portfolio is constructed using disciplined buy and
sell rules. Portfolio sector weightings will
generally approximate those of the S&P 500 Index.
The Portfolio will normally be principally
comprised, based on the dividend discount model, of
stocks in the first three Quintiles. Finally, the
Portfolio holds a large number of stocks to enhance
its diversification.
Under normal market circumstances, the Portfolio's Adviser will invest
at least 65% of its net assets in equity securities consisting of common stocks
and other securities with equity characteristics such as trust interests,
limited partnership interests, preferred stocks, warrants, rights and securities
convertible into common stock. The Portfolio's primary equity investments will
be the common stock of large and medium sized U.S. companies with market
capitalizations above $1 billion. Such securities will be listed on a national
securities exchange or traded in the over-the-counter market. The Portfolio may
invest in similar securities of foreign corporations, provided that the
securities of such corporations are included in the S&P 500 Index.
The Portfolio intends to manage its portfolio actively in pursuit of
its investment objective. Since the Portfolio has a long-term investment
perspective, it does not intend to respond to short-term market fluctuations or
to acquire securities for the purpose of short-term trading; however, it may
take advantage of short-term trading opportunities that are consistent with its
objective.
During ordinary market conditions, the Portfolio's Adviser will keep
the Portfolio as fully invested as practicable in the equity securities
described above. In the event that future economic or financial conditions
adversely
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affect equity securities, or stocks are considered overvalued, or the
Portfolio's Adviser believes that investing for defensive purposes is
appropriate, or in order to meet anticipated redemption requests, the Portfolio
may invest part or all of its assets in U.S. government securities and high
quality (within the two highest rating categories assigned by a NRSRO) U.S.
dollar-denominated money market securities including certificates of deposit,
bankers' acceptances, commercial paper, short-term debt securities and
repurchase agreements.
Convertible bonds and other fixed income securities (other than money
market instruments) in which the Portfolio may invest will, at the time of
investment, have ratings within the four highest rating categories established
by Moody's, Standard & Poor's, or a similar NRSRO or, if not rated, be of
comparable quality as determined by the Portfolio's Adviser. The NRSROs'
descriptions of these bond ratings are set forth in the Appendix to the
Statement of Additional Information. Securities rated in the fourth highest
category may have speculative characteristics; changes in economic or business
conditions are more likely to lead to a weakened capacity to make principal and
interest payments than in the case of higher grade bonds. Like the three highest
grades, however, these securities are considered investment grade.
The Portfolio may invest in certain foreign securities which may
represent a greater degree of risk than investing in domestic securities. These
risks are discussed in the above section of this Prospectus describing the T.
Rowe Price International Stock Portfolio.
The Portfolio may employ certain investment strategies which are
discussed under the caption "Investment Strategies" below and in the Statement
of Additional Information.
Investment Strategies
In addition to making investments directly in securities, the
Portfolios (other than the TCW Money Market Portfolio) may write covered call
and put options and hedge their investments by purchasing options and engaging
in transactions in futures contracts and related options. The Adviser to the TCW
Managed Asset Allocation Portfolio does not presently intend to utilize futures
contracts and related options but may do so in the future. The Advisers to the
Dreyfus Small Cap Value Portfolio and the Opportunity Growth Portfolio do not
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currently intend to write covered call and put options or engage in transactions
in futures contracts and related options, but may do so in the future. The T.
Rowe Price International Stock, Dreyfus U.S. Government Securities, T. Rowe
Price Equity Income, T. Rowe Price Growth Stock, Opportunity Value and Enhanced
Index Portfolios may engage in foreign currency exchange transactions to protect
against changes in future exchange rates. All Portfolios except the TCW Money
Market Portfolio may invest in American Depositary Receipts and European
Depositary Receipts. All Portfolios may enter into repurchase agreements, may
make forward commitments to purchase securities, lend their portfolio securities
and borrow funds under certain limited circumstances. The T. Rowe Price Equity
Income, T. Rowe Price Growth Stock, T. Rowe Price International Stock and
Dreyfus U.S. Government Securities Portfolios may invest in hybrid instruments.
The investment strategies referred to above and the risks related to them are
summarized below and certain of these strategies are described in more detail in
the Statement of Additional Information.
Options and Futures Transactions. A Portfolio (other than the TCW Money
Market Portfolio) may seek to increase the current return on its investments by
writing covered call or covered put options. The Advisers to the Dreyfus Small
Cap Value Portfolio and the Opportunity Value Portfolio have no present
intention to engage in this strategy, but may do so in the future.
In addition, a Portfolio (other than the TCW Money Market Portfolio)
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 its Adviser
plans to purchase through the writing and purchase of options on securities and
any index of securities in which the Portfolio may invest and the purchase and
sale of futures contracts and related options. The Advisers to the TCW Managed
Asset Allocation, Dreyfus Small Cap Value and Opportunity Value Portfolios have
no present intention to use this strategy, but may do so in the future.
The Adviser to the Dreyfus U.S. Government Securities Portfolio does
not presently intend to purchase or sell call or put options but may enter into
interest rate futures contracts and write and purchase put and call options on
such futures contracts. The Portfolio may purchase and sell interest rate
futures contracts as a hedge against changes in interest rates. A futures
contract is an agreement between two parties to buy and sell a security for a
set price on a
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future date. Futures contracts are traded on designated "contracts markets"
which, through their clearing corporations, guarantee performance of the
contracts. Currently, there are futures contracts based on securities such as
long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA Certificates and
three-month U.S. Treasury bills.
Generally, if market interest rates increase, the value of outstanding
debt securities declines (and vice versa). Entering into a futures contract for
the sale of securities has an effect similar to the actual sale of securities,
although the sale of the futures contracts might be accomplished more easily and
quickly. For example, if the Portfolio holds long-term U.S. Government
Securities and the Adviser anticipates a rise in long-term interest rates, it
could, in lieu of disposing of its portfolio securities, enter into futures
contracts for the sale of similar long-term securities. If interest rates
increased and the value of the Portfolio's securities declined, the value of the
Portfolio's futures contracts would increase, thereby protecting the Portfolio
by preventing the net asset value from declining as much as it otherwise would
have. Similarly, entering into futures contracts for the purchase of securities
has an effect similar to the actual purchase of the underlying securities, but
permits the continued holding of securities other than the underlying
securities. For example, if the Adviser expects long-term interest rates to
decline, the Portfolio might enter into futures contracts for the purchase of
long-term securities, so that it could gain rapid market exposure that may
offset anticipated increases in the cost of securities it intends to purchase,
while continuing to hold higher-yielding short-term securities or waiting for
the long-term market to stabilize.
A Portfolio (other than the TCW Money Market Portfolio) also may
purchase and sell listed put and call options on futures contracts. An option on
a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract (a long position if the option
is a call and a short position if the option is a put), at a specified exercise
price at any time during the option period. When an option on a futures contract
is exercised, delivery of the futures position is accompanied by cash
representing the difference between the current market price of the futures
contract and the exercise price of the option.
The Dreyfus U.S. Government Securities Portfolio may purchase put
options on interest rate futures contracts in
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lieu of, and for the same purpose as, sale of a futures contract. It also may
purchase such put options in order to hedge a long position in the underlying
futures contract in the same manner as it purchases "protective puts" on
securities. The purchase of call options on interest rate futures contracts is
intended to serve the same purpose as the actual purchase of the futures
contract, and the Portfolio will set aside cash or cash equivalents sufficient
to purchase the amount of portfolio securities represented by the underlying
futures contracts.
A Portfolio may not purchase futures contracts or related options if,
immediately thereafter, more than 33 1/3% (25% for the T. Rowe Price Equity
Income Portfolio, the T. Rowe Price Growth Stock Portfolio and the T. Rowe Price
International Stock Portfolio) of the Portfolio's total assets would be so
invested.
The Portfolios' Advisers generally expect that options and futures
transactions for the Portfolios will be conducted on securities and other
exchanges. In certain instances, however, a Portfolio 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 Portfolio'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 Portfolio. There can be no assurance
that a Portfolio will be able to effect closing transactions at any particular
time or at an acceptable price. The use of options and futures involves the risk
of imperfect correlation between movements in options and futures prices and
movements in the prices of the securities that are being hedged. Expenses and
losses incurred as a result of these hedging strategies will reduce the
Portfolio's current return. In many foreign countries, futures and options
markets do not exist or are not sufficiently developed to be effectively used by
a Portfolio.
Foreign Currency Transactions. The Dreyfus U.S. Government Securities, T.
Rowe Price Equity Income, T. Rowe Price Growth Stock, T. Rowe Price
International Stock, Opportunity Value and Enhanced Index Portfolios may
purchase foreign currency on a spot (or cash) basis, enter into contracts to
purchase or sell foreign currencies at a future date ("forward contracts"),
purchase and sell foreign currency futures contracts, and purchase exchange
traded and
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over-the-counter call and put options on foreign currency futures contracts and
on foreign currencies. The Adviser to a Portfolio may engage in these
transactions to protect against uncertainty in the level of future exchange
rates in connection with the purchase and sale of portfolio securities
("transaction hedging") and to protect the value of specific portfolio positions
("position hedging").
Hedging transactions involve costs and may result in losses. The
Dreyfus U.S. Government Securities, T. Rowe Price Equity Income, T. Rowe Price
Growth Stock, T. Rowe Price International Stock, Opportunity Value and Enhanced
Index Portfolios may write covered call options on foreign currencies to offset
some of the costs of hedging those currencies. A Portfolio will engage in
over-the-counter transactions only when appropriate exchange traded transactions
are unavailable and when, in the opinion of the Portfolio's Adviser, the pricing
mechanism and liquidity are satisfactory and the participants are responsible
parties likely to meet their contractual obligations. A Portfolio's ability to
engage in hedging and related option transactions may be limited by tax
considerations.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency.
Interest Rate Transactions. In order to attempt to protect the value of
its portfolio from interest rate fluctuations, the Dreyfus U.S. Government
Securities Portfolio may enter into various hedging transactions, such as
interest rate swaps and the purchase or sale of interest rate caps and floors.
Interest rate swaps involve the exchange by the Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest rate
cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined
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interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate floor. The Adviser to the Portfolio
expects to enter into these transactions on behalf of the Portfolio primarily to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the
Portfolio anticipates purchasing at a later date. The Portfolio intends to use
these transactions as a hedge and not as a speculative investment. The Portfolio
will not sell interest rate caps or floors that it does not own.
The Portfolio may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, only the net amount of the
two payments. Inasmuch as these hedging transactions are entered into for good
faith hedging purposes, the Adviser to the Portfolio and the Fund believe such
obligations do not constitute senior securities and accordingly, will not treat
them as being subject to the Portfolio's borrowing restrictions. The net amount
of the excess, if any, of the Portfolio's obligations over its entitlement with
respect to each interest rate swap will be accrued on a daily basis and an
amount of cash or liquid securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Portfolio's custodian. The Portfolio will not enter into any interest rate swap,
cap or floor transactions unless the unsecured senior debt or the claims-paying
ability of the other party thereto is rated in the highest category of at least
one NRSRO at the time of entering into such transaction. If there is a default
by the other party to such a securities transaction, the Portfolio will have
contractual remedies pursuant to the agreements related to the transactions. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps and floors are more recent innovations for which
standardized documentation has not yet been developed and, accordingly, they are
less liquid than swaps.
Dollar Roll Transactions. The Dreyfus U.S. Government Securities
Portfolio may enter into dollar roll transactions
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with selected banks and broker-dealers. Dollar roll transactions are comprised
of the sale by the Portfolio of mortgage-based securities, together with a
commitment to purchase similar, but not identical, securities at a future date.
In addition, the Portfolio is paid a fee as consideration for entering into the
commitment to purchase. Dollar rolls may be renewed after cash settlement and
initially may involve only a firm commitment agreement by the Portfolio to buy a
security. If the broker-dealer to whom the Portfolio sells the security becomes
insolvent, the Portfolio's right to purchase or repurchase the security may be
restricted; the value of the security may change adversely over the term of the
dollar roll; the security that the Portfolio is required to repurchase may be
worth less than the security that the Portfolio originally held, and the return
earned by the Portfolio with the proceeds of a dollar roll may not exceed
transaction costs. Dollar roll transactions are treated as borrowings for
purposes of the 1940 Act, and the aggregate of such transactions and all other
borrowings of the Portfolio (including reverse repurchase agreements) will be
subject to the requirement that the Portfolio maintain asset coverage of 300%
for all borrowings.
Reverse Repurchase Agreements. Each Portfolio is permitted to enter
into reverse repurchase agreements. In a reverse repurchase agreement, the
Portfolio sells a security and agrees to repurchase it at a mutually agreed upon
date and price, reflecting the interest rate effective for the term of the
agreement. For the purposes of the 1940 Act it is considered a form of borrowing
by the Portfolio and, therefore, is a form of leverage. Leverage may cause any
gains or losses of the Portfolio to be magnified.
Borrowings. A Portfolio other than the Dreyfus U.S. Government Securities,
T. Rowe Price Equity Income, T. Rowe Price Growth Stock, T. Rowe Price
International Stock, Opportunity Value and Enhanced Index Portfolios may borrow
money for temporary purposes in amounts up to 5% of its total assets. The
Dreyfus U.S. Government Securities Portfolio may borrow from banks and enter
into reverse repurchase agreements or dollar rolls transactions in an amount
equal to up to 33 1/3% of the value of its net assets (computed at the time the
loan is made) to take advantage of investment opportunities and for temporary,
extraordinary or emergency purposes. The Dreyfus U.S. Government Securities
Portfolio may pledge up to 33 1/3% of its total assets to secure these
borrowings. If the Portfolio's asset coverage for borrowings falls below
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300%, the Portfolio will take prompt action to reduce its borrowings.
The T. Rowe Price Equity Income, T. Rowe Price Growth Stock and T. Rowe
Price International Stock Portfolios may borrow money as a temporary measure for
emergency purposes, to facilitate redemption requests, or for other purposes
consistent with the Portfolio's investment objective and program in an amount up
to 33 1/3% of the Portfolio's net assets. Each Portfolio may pledge up to 33
1/3% of its total assets to secure these borrowings. These Portfolios may not
purchase additional securities when borrowings exceed 5% of total assets.
The Opportunity Value and Enhanced Index Portfolios may borrow money
from banks as a temporary measure for extraordinary or emergency purposes in
amounts up to 10% of their total assets. Neither Portfolio may purchase
additional securities when borrowings exceed 5% of total assets.
As a matter of operating policy, each of the Dreyfus U.S. Government
Securities, T. Rowe Price Equity Income, T. Rowe Price Growth Stock and T. Rowe
Price International Stock Portfolios will limit all borrowings to no more than
25% of such Portfolio's net assets.
American and European Depositary Receipts. All Portfolios except the
TCW Money Market Portfolio may purchase foreign securities in the form of
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") or
other securities convertible into securities of corporations in which the
Portfolios are permitted to invest pursuant to their respective investment
objectives and policies. These securities may not necessarily be denominated in
the same currency into which they may be converted. ADRs are receipts typically
issued by a United States bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs are receipts issued
in Europe by banks or depositories which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in United
States securities markets and EDRs, in bearer form, are designed for use in
European securities markets.
Repurchase Agreements. All Portfolios may enter into repurchase
agreements with a bank, broker-dealer or other financial institution as a means
of earning a fixed rate of return on its cash reserves for periods as short as
overnight.
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A repurchase agreement is a contract pursuant to which a Portfolio, against
receipt of securities of at least equal value including accrued interest, agrees
to advance a specified sum to the financial institution which agrees to
reacquire the securities at a mutually agreed upon time (usually one day) and
price. Each repurchase agreement entered into by a Portfolio will provide that
the value of the collateral underlying the repurchase agreement will always be
at least equal to the repurchase price, including any accrued interest. The
Portfolio's right to liquidate such securities in the event of a default by the
seller could involve certain costs, losses or delays and, to the extent that
proceeds from any sale upon a default of the obligation to repurchase are less
than the repurchase price, the Portfolio could suffer a loss.
Forward Commitments. Each Portfolio may make contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments") if it holds, and maintains until the settlement date in
a segregated account, cash or high-grade debt obligations in an amount
sufficient to meet the purchase price, or if it enters into offsetting contracts
for the forward sale of other securities it owns. Forward commitments may be
considered securities in themselves and involve a risk of loss if the value of
the security to be purchased declines prior to the settlement date, which risk
is in addition to the risk of decline in value of the Portfolio's other assets.
Where such purchases are made through dealers, the Portfolio relies on the
dealer to consummate the sale. The dealer's failure to do so may result in the
loss to the Portfolio of an advantageous yield or price.
Securities Loans. Each Portfolio may seek to obtain additional income
by making secured loans of its portfolio securities with a value up to 33 1/3%
of its total assets. All securities loans will be made pursuant to agreements
requiring the loans to be continuously secured by collateral in cash or
high-grade debt obligations at least equal at all times to the market value of
the loaned securities. The borrower pays to the Portfolio an amount equal to any
dividends or interest received on loaned securities. The Portfolio retains all
or a portion of the interest received on investment of cash collateral or
receives a fee from the borrower. Lending portfolio securities involves risks of
delay in recovery of the loaned securities or in some cases loss of rights in
the collateral should the borrower fail financially.
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Hybrid Instruments. The T. Rowe Price Equity Income, T. Rowe Price
Growth Stock and T. Rowe Price International Stock Portfolios may invest up to
10% of their total assets, and the Dreyfus U.S. Government Securities Portfolio
may invest up to 5% of its total assets, in hybrid instruments. Hybrid
instruments have recently been developed and combine the elements of futures
contacts or options with those of debt, preferred equity or a depository
instrument. Often these hybrid instruments are indexed to the price of a
commodity, particular currency, or a domestic or foreign debt or equity
securities index. Hybrid instruments may take a variety of forms, including, but
not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
or securities index at a future point in time, preferred stock with dividend
rates determined by reference to the value of a currency, or convertible
securities with the conversion terms related to a particular commodity. Hybrid
instruments may bear interest or pay dividends at below market (or even
relatively nominal) rates. Under certain conditions, the redemption value of
such an instrument could be zero. Hybrid instruments can have volatile prices
and limited liquidity and their use by a Portfolio may not be successful.
Fixed-Income Securities - Downgrades. If any security invested in by
any of the Portfolios loses its rating or has its rating reduced after the
Portfolio has purchased it, unless required by law, the Portfolio is not
required to sell or otherwise dispose of the security, but may consider doing
so.
Illiquid Securities. Each Portfolio may invest up to 10% (15% with
respect to T. Rowe Price International Stock Portfolio, T. Rowe Price Equity
Income Portfolio, T. Rowe Price Growth Stock Portfolio, Dreyfus Small Cap Value
Portfolio, Opportunity Value Portfolio , Enhanced Index Portfolio and, if
approved by shareholders at an upcoming shareholders meeting, the Value Equity
Portfolio) of its net assets in illiquid securities and other securities which
are not readily marketable, including non-negotiable time deposits, certain
restricted securities not deemed by the Fund's Trustees to be liquid and
repurchase agreements with maturities longer than seven days. Securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933,
which have been determined to be liquid, will not be considered by the
Portfolios' Advisers to be illiquid or not readily marketable and, therefore,
are not subject to the aforementioned 10% or 15% limits. The inability of a
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Portfolio to dispose of illiquid or not readily marketable investments readily
or at a reasonable price could impair the Portfolio's ability to raise cash for
redemptions or other purposes. The liquidity of securities purchased by a
Portfolio which are eligible for resale pursuant to Rule 144A will be monitored
by the Portfolios' Advisers on an ongoing basis, subject to the oversight of the
Trustees. In the event that such a security is deemed to be no longer liquid, a
Portfolio's holdings will be reviewed to determine what action, if any, is
required to ensure that the retention of such security does not result in a
Portfolio having more than 10% or 15%, as applicable, of its assets invested in
illiquid or not readily marketable securities.
MANAGEMENT OF THE FUND
The Trustees and officers of the Fund provide broad supervision over
the business and affairs of the Portfolios and the Fund.
The Manager
The Fund is managed by Endeavor Investment Advisers ("the Manager")
which, subject to the supervision and direction of the Trustees of the Fund, has
overall responsibility for the general management and administration of the
Fund. 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 Fund,
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 Trustee of the Fund, 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 and
administrative services to the Fund and in the exercise of such responsibility
selects the investment advisers for the Fund's Portfolios (the "Advisers") and
monitors the Advisers' investment programs and results, reviews brokerage
matters, oversees compliance by the Fund with various federal and state
statutes, and carries out the directives of the Trustees. The Manager is
responsible for providing the Fund with office space, office equipment, and
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personnel necessary to operate and administer the Fund's business, and also
supervises the provision of services by third parties such as the Fund's
custodian and transfer agent. Pursuant to an administration agreement, First
Data Investor Services Group, Inc. ("FDISG") assists the Manager in the
performance of its administrative responsibilities to the Fund.
As compensation for these services the Fund pays the Manager a monthly
fee at the following annual rates of each Portfolio's average daily net assets:
TCW Money Market Portfolio - .50%; TCW Managed Asset Allocation Portfolio -
.75%; T. Rowe Price International Stock Portfolio - .90%; Value Equity Portfolio
- -.80%; Dreyfus Small Cap Value Portfolio - .80%; Dreyfus U.S. Government
Securities Portfolio - .65%; T. Rowe Price Equity Income Portfolio - .80%; T.
Rowe Price Growth Stock Portfolio -.80%; Opportunity Value Portfolio - .80%;
Enhanced Index Portfolio - .75%. The management fees paid by the Portfolios
(other than the TCW Money Market Portfolio and Dreyfus U.S. Government
Securities Portfolio), although higher than the fees paid by most other
investment companies in general, are comparable to management fees paid for
similar services by many investment companies with similar investment objectives
and policies. From the management fees, the Manager pays the expenses of
providing investment advisory services to the Portfolios, including the fees of
the Adviser of each Portfolio and the fees and expenses of FDISG pursuant to the
administration agreement.
In addition to the management fees, the Fund 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 Trustees who are not interested persons of the
Fund, insurance, brokerage costs, litigation, and other extraordinary or
nonrecurring expenses. All general Fund expenses are allocated among and charged
to the assets of the Portfolios of the Fund on a basis that the Trustees deem
fair and equitable, which may be on the basis of relative net assets of each
Portfolio or the nature of the services performed and relative applicability to
each Portfolio.
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The Advisers
Pursuant to an investment advisory agreement with the Manager, the
Adviser to a Portfolio furnishes continuously an investment program for the
Portfolio, makes investment decisions on behalf of the Portfolio, places all
orders for the purchase and sale of investments for the Portfolio's account with
brokers or dealers selected by such Adviser and may perform certain limited
related administrative functions in connection therewith. For its services, the
Manager pays the Adviser a fee based on a percentage of the average daily net
assets of the Portfolio. An Adviser may place portfolio securities transactions
with broker-dealers who furnish it with certain services of value in advising
the Portfolio and other clients. In so doing, an Adviser may cause a Portfolio
to pay greater brokerage commissions than it might otherwise pay. In seeking the
most favorable price and execution available, an Adviser may, if permitted by
law, consider sales of the Contracts as a factor in the selection of
broker-dealers. OpCap Advisors may select, under certain circumstances,
Oppenheimer & Co., Inc., one of its affiliates, to execute transactions for the
Value Equity and Opportunity Value Portfolios. T. Rowe Price Associates, Inc.
and Rowe Price-Fleming International, Inc. may utilize certain brokers
indirectly related to them in the capacity as broker in connection with the
execution of transactions for the T. Rowe Price Equity Income, T. Rowe Price
Growth Stock and T. Rowe Price International Stock Portfolios. J.P. Morgan
Investment Management Inc. may utilize certain brokers affiliated with it in
connection with the execution of transactions for the Enhanced Index Portfolio.
See the Statement of Additional Information for a further discussion of
Portfolio trading.
The Board of Trustees of the Fund has authorized the Manager and the
Advisers to enter into arrangements with brokers who execute brokerage
transactions for the Portfolios whereby a portion of the commissions earned by
such brokers will be shared with a broker-dealer affiliate of the Manager. The
affiliated broker will act as an "introducing broker" in the transaction.
Subject to the requirements of applicable law including seeking best price and
execution of orders, commissions paid to executing brokers will not exceed
ordinary and customary brokerage commissions.
The Board of Trustees has determined that the Fund's brokerage
commissions should be utilized for the Fund's benefit to the extent possible.
After reviewing various alternatives, the Board concluded that commissions
received by
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the broker-dealer affiliate of the Manager can be used to promote the
distribution of the Fund's shares including payments to broker-dealers who sell
the Contracts, the costs of training and educating such broker-dealers with
respect to the Contracts and other bona-fide distribution costs payable to
unaffiliated persons. Other than incidental costs related to establishing the
broker-dealer affiliate as an "introducing broker", no portion of the
commissions received by the broker-dealer affiliate of the Manager will be
retained for its or any affiliate's benefit. On a quarterly basis, the Manager
will report to the Board of Trustees the aggregate commissions received by its
broker-dealer affiliate and the distribution expenses paid from such
commissions. The Board of Trustees will periodically review the extent to which
the foregoing arrangement reduces distribution expenses currently being incurred
by the Manager or its affiliates on behalf of the Fund. The Board of Trustees
may determine from time to time other appropriate uses for the Fund from the
commissions it pays to executing brokers.
The Manager will not implement this program until any required
exemptive or no-action relief is obtained from the Securities and Exchange
Commission.
TCW Funds Management, Inc. ("TCW") is the Adviser to the TCW Money
Market Portfolio and the TCW Managed Asset Allocation Portfolio. As compensation
for its services as investment adviser, the Manager pays TCW a monthly fee at
the annual rate of .25% of the average daily net assets of the TCW Money Market
Portfolio and .375% of the average daily net assets of the TCW Managed Asset
Allocation Portfolio. TCW is a wholly owned subsidiary of The TCW Group, Inc.,
whose subsidiaries, including Trust Company of the West and TCW Asset Management
Company, provide a variety of trust, investment management and investment
advisory services. TCW and its affiliates, which as of December 31, 1996 had
over $50 billion under management or committed for management, provide
investment advisory services to a number of open-end and closed-end investment
companies.
James M. Goldberg, a Managing Director and Chairman of the Fixed Income
Policy Committee of TCW, is the portfolio manager for the TCW Money Market
Portfolio. Mr. Goldberg has been with TCW since 1984. Investment decisions for
the equity portion of the TCW Managed Asset Allocation Portfolio are made by
Norman Ridley in consultation with Stefan D. Abrams. Mr. Ridley is a Senior Vice
President of TCW and has been with the firm since 1985. Since 1992 Mr. Abrams
has been a Managing
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Director of TCW and is Director of Equity Strategy and Asset Allocation.
Investment decisions for the fixed income portion of the TCW Managed Asset
Allocation Portfolio are made by Mr.
Goldberg.
OpCap Advisors ("OpCap") (formerly known as Quest for Value Advisors)
is the Adviser to the Value Equity Portfolio and the Opportunity Value
Portfolio. As compensation for its services as investment adviser, the Manager
pays OpCap a monthly fee at the annual rate of .40% of the average daily net
assets of each of the Value Equity and Opportunity Value Portfolios, subject to
reduction with respect to the Opportunity Value Portfolio in certain
circumstances.
OpCap is a majority-owned subsidiary of Oppenheimer Capital, a general
partnership which is registered as an investment adviser under the Investment
Advisers Act of 1940. The employees of Oppenheimer Capital render all investment
management services performed under the investment advisory agreements to the
Portfolios. Oppenheimer Financial Corp. holds a 33% interest in Oppenheimer
Capital. Oppenheimer Capital, L.P., a Delaware limited partnership of which
Oppenheimer Financial Corp. is the sole general partner, owns the remaining 67%
interest of Oppenheimer Capital. The units of Oppenheimer Capital, L.P. are
traded on the New York Stock Exchange. OpCap and its affiliates have operated as
investment advisers to both mutual funds and other clients since 1968, and had
approximately $48.2 billion under management as of December 31, 1996.
On February 13, 1997, PIMCO Advisors L.P. ("PIMCO Advisors"), a
registered investment adviser with approximately $110 billion in assets under
management through various subsidiaries, signed an Agreement and Plan of Merger
with Oppenheimer Group, Inc. ("OGI") and its subsidiary Oppenheimer Financial
Corp. ("Opfin") pursuant to which PIMCO Advisors and its affiliate, Thomson
Advisory Group, Inc. ("TAG"), will acquire the one-third managing general
partner interest in Oppenheimer Capital, its 1.0% general partnership interest
in OpCap, and its 1.0% general partner interest in Oppenheimer Capital L.P. (the
"Transaction") and OGI will be merged with and into TAG. The Transaction is
subject to certain conditions being satisfied prior to closing, including
consents from certain lenders, approvals from regulatory authorities, including
a favorable tax ruling from the Internal Revenue Service, and consents of
clients, which are expected to take up to six months to obtain. If the
Transaction is consummated, it will involve a change in
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control of Oppenheimer Capital and its subsidiary OpCap which will constitute an
assignment and termination of the investment advisory agreements between the
Manager and OpCap. At a meeting held on April 8, 1997, the Fund's Board of
Trustees, including all of the "disinterested Trustees" as defined in the 1940
Act, approved and determined to submit to shareholders for approval, new
investment advisory agreements with OpCap, substantially upon the same terms and
conditions as the existing investment advisory agreements. Proxy material will
be sent to shareholders of the Value Equity and Opportunity Value Portfolios
concerning approval of the new investment advisory agreements.
Eileen Rominger, Managing Director of Oppenheimer Capital, is the portfolio
manager for the Value Equity Portfolio. Ms. Rominger has been with Oppenheimer
Capital since 1981. Richard J. Glasebrook II, Managing Director of Oppenheimer
Capital, is the portfolio manager for the Opportunity Value Portfolio. Mr.
Glasebrook has been with Oppenheimer Capital since 1990. Mr. Glasebrook was
named by Morningstar, Inc. (an independent service that monitors the performance
of registered investment companies) as its 1995 Variable Fund Manager of the
Year.
The Dreyfus Corporation ("Dreyfus") is the Adviser to the Dreyfus U.S.
Government Securities Portfolio and the Dreyfus Small Cap Value Portfolio.
Dreyfus, which was formed in 1947, is a wholly-owned subsidiary of Mellon Bank,
N.A., which is a wholly-owned subsidiary of Mellon Bank Corporation ("Mellon").
As of December 31, 1996, Dreyfus managed or administered approximately $82
billion in assets for more than 1.7 million investor accounts nationwide. As
compensation for its services as investment adviser, the Manager pays Dreyfus a
monthly fee at the annual rate of .15% of the average daily net assets of the
Dreyfus U.S. Government Securities Portfolio and .375% of the average daily net
assets of the Dreyfus Small Cap Value Portfolio.
Prior to September 16, 1996, OpCap was the Adviser to the Dreyfus Small
Cap Value Portfolio (formerly known as the Value Small Cap Portfolio and prior
to that the Quest for Value Small Cap Portfolio). As compensation for its
services as investment adviser, the Manager paid OpCap a monthly fee at the
annual rate of .40% of the Portfolio's average daily net assets.
Mellon is a publicly-owned multibank holding company incorporated under
Pennsylvania law in 1971 and registered
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under the Federal Bank Holding Company Act of 1956, as amended. Mellon provides
a comprehensive range of financial products and services in domestic and
selected international markets. Mellon is among the twenty-five largest bank
holding companies in the United States based on total assets. Mellon's principal
wholly-owned subsidiaries are Mellon Bank, N.A., Mellon Bank (DE) National
Association, Mellon Bank (MD), The Boston Company, Inc., AFCO Credit Corporation
and a number of companies known as Mellon Financial Services Corporations.
Through its subsidiaries, including Dreyfus, Mellon managed more than $233
billion in assets as of December 31, 1996, including approximately $81 billion
in mutual fund assets. As of December 31, 1996, Mellon, through various
subsidiaries, provided non-investment services, such as custodial or
administration services, for more than $1,046 billion in assets, including
approximately $57 billion in mutual fund assets.
Prior to May 1, 1996, The Boston Company Asset Management, Inc. ("Boston
Company"), an affiliate of Dreyfus, was the Dreyfus U.S. Government Securities
Portfolio's Adviser. Boston Company is a wholly-owned subsidiary of The Boston
Company, Inc., which is an indirect wholly-owned subsidiary of Mellon.
Andrew S. Windmueller, who has been employed by Dreyfus since October, 1994
and by The Boston Company, Inc. since 1986, is the portfolio manager for the
Dreyfus U.S. Government Securities Portfolio. Mr. Windmueller is a member of the
Fixed Income Strategy Committee and the Head of Credit Research of Boston
Company and Vice President of Boston Company.
The portfolio managers for the Dreyfus Small Cap Value Portfolio are David
L. Diamond and Peter I. Higgins. Mr. Diamond has been employed by Boston Company
since June, 1991 and by Dreyfus since October, 1994. Mr. Higgins has been
employed by The Boston Company, Inc. since August, 1988, by Boston Company since
June, 1991 and by Dreyfus since February, 1996.
T. Rowe Price Associates, Inc. ("T. Rowe Price") is the Adviser to the T.
Rowe Price Equity Income Portfolio and the T. Rowe Price Growth Stock Portfolio.
As compensation for its services as investment adviser, the Manager pays T. Rowe
Price a monthly fee at the annual rate of .40% of the average daily net assets
of each of the T. Rowe Price Equity Income and T. Rowe Price Growth Stock
Portfolios. T. Rowe Price serves as
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investment manager to a variety of individual and institutional investor
accounts, including limited and real estate partnerships and other mutual funds.
Investment decisions with respect to the T. Rowe Price Equity Income
Portfolio are made by an Investment Advisory Committee composed of the following
members: Brian C. Rogers, Chairman, Thomas H. Broadus, Jr., Richard P. Howard,
and William J. Stromberg. The Committee Chairman has day-to-day responsibility
for managing the Portfolio and works with the Committee in developing and
executing the Portfolio's investment program. Mr. Rogers has been Chairman of
the Committee since 1993. He joined T. Rowe Price in 1982 and has been managing
investments since 1983.
Investment decisions with respect to the T. Rowe Price Growth Stock
Portfolio are made by an Investment Advisory Committee composed of the following
members: Robert W. Smith, Chairman, James A.C. Kennedy and Brian C. Rogers. The
Committee Chairman has day-to-day responsibility for managing the Portfolio and
works with the Committee in developing and executing the Portfolio's investment
program. Mr. Smith has served on the Committee since 1995 and has been Chairman
of the Committee since February, 1997. He joined T. Rowe Price in 1992. From
1987 to 1992, Mr. Smith was an Investment Analyst for Massachusetts Financial
Services.
Rowe Price-Fleming International, Inc. ("Price-Fleming") is the Adviser
to the T. Rowe Price International Stock Portfolio (formerly the Global Growth
Portfolio). As compensation for its services as investment adviser, the Manager
pays Price-Fleming a monthly fee at an annual rate based on the Portfolio's
average daily net assets as follows: .75% up to $20 million; .60% in excess of
$20 million up to $50 million; and .50% of assets in excess of $50 million. At
such time as the net assets of the Portfolio exceed $200 million, the fee shall
be .50% of total average daily net assets.
Prior to January 1, 1995, Ivory & Sime International, Inc. ("I&S") and
Ivory & Sime plc acted as adviser and sub- adviser, respectively, for the Global
Growth Portfolio. As compensation for its services as investment adviser, the
Manager paid ISI a monthly fee at the annual rate of .45% of the average daily
net assets of the Portfolio up to $400 million and .30% of average daily net
assets in excess of $400
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million. As compensation for its services, Ivory & Sime plc received from ISI
78% of the gross monthly fees paid by the Manager to ISI.
Price-Fleming was incorporated in Maryland in 1979 as a joint venture
between T. Rowe Price and Robert Fleming Holdings Limited ("Flemings"). Flemings
is a diversified investment organization which participates in a global network
of regional investment offices in New York, London, Zurich, Geneva, Tokyo, Hong
Kong, Manila, Kuala Lampur, South Korea and Taiwan.
T. Rowe Price was incorporated in Maryland in 1947 as successor to the
investment counseling business founded by the late Thomas Rowe Price, Jr., in
1937. Flemings was incorporated in 1974 in the United Kingdom as successor to
the business founded by Robert Fleming in 1873. As of December 31, 1996, T. Rowe
Price and its affiliates managed more than $95 billion of assets of which
Price-Fleming managed the U.S.
equivalent of approximately $25 billion.
The common stock of Price-Fleming is 50% owned by a wholly-owned
subsidiary of T. Rowe Price, 25% by a subsidiary of Fleming and 25% by Jardine
Fleming Group Limited ("Jardine Fleming"). (Half of Jardine Fleming is owned by
Flemings and half by Jardine Matheson Holdings Limited.) T. Rowe Price has the
right to elect a majority of the board of directors of Price-Fleming, and
Flemings has the right to elect the remaining directors, one of whom will be
nominated by Jardine Fleming.
Investment decisions with respect to the T. Rowe Price International Stock
Portfolio are made by an investment advisory group composed of the following
members: Martin G. Wade, Christopher D. Alderson, Peter B. Askew, Mark J. T.
Edwards, John R. Ford, James B. M. Seddon, Benedict R. F. Thomas and David J. L.
Warren.
Martin Wade joined Price-Fleming in 1979 and has 27 years of experience
with the Fleming Group in research, client service and investment management.
(Fleming Group includes Flemings and/or Jardine Fleming). Christopher Alderson
joined Price-Fleming in 1988 and has 10 years of experience with the Fleming
Group in research and portfolio management. Peter Askew joined Price-Fleming in
1988 and has 21 years of experience managing multi-currency fixed income
portfolios. Mark Edwards joined Price-Fleming in 1986 and has 15 years of
experience in financial analysis. John Ford joined Price- Fleming in 1982 and
has 16 years of experience with the Fleming Group in research and portfolio
management. James Seddon joined Price-Fleming in 1987 and has nine years of
experience in investment management. Benedict Thomas joined Price-Fleming in
1988 and has seven years of portfolio management experience. David Warren joined
Price-Fleming in 1984 and has 16 years of experience in equity research, fixed
income research and portfolio management.
J.P. Morgan Investment Management Inc. ("Morgan") is the Adviser to the
Enhanced Index Portfolio. As compensation for its services as investment adviser
the Manager pays Morgan a monthly fee at the annual rate of .35% of the average
daily net assets of the Enhanced Index Portfolio.
Morgan is a wholly-owned subsidiary of J.P. Morgan and Co.
Incorporated, ("J.P. Morgan"), a bank holding company. Through offices in New
York City and abroad, J.P. Morgan, through Morgan and other subsidiaries,
including Morgan Guaranty Trust Company of New York, offers a wide range of
services to governmental, institutional, corporate and individual customers and
acts as investment adviser to individual and institutional clients with combined
assets under management (as of December 31, 1996) of over $178 billion (of which
Morgan advises over $176 billion). J.P. Morgan has a long history of service as
adviser, underwriter and lender to an extensive roster of major companies and as
a financial adviser to national governments. The firm, through its predecessor
firms, has been in business for over a century and has been managing investments
since 1913.
Investment decisions with respect to the Enhanced Index Portfolio are made
by an investment advisory group composed of Frederic A. Nelson, III, James Wiess
,Leon Roisenberg and Timothy J. Devlin.
Mr. Nelson is a Managing Director of Morgan and is responsible for the U.S.
equity business, including active equity and structured strategies. Mr. Nelson
joined Morgan in 1994 after 14 years at Bankers Trust Company where he was part
of the Global Investment Management Group. Mr. Wiess, a Vice President of
Morgan, is a portfolio manager in the Equity and Balanced Accounts Group with
responsibility for portfolio rebalancing and product research and development in
structured equity strategies. Mr. Wiess joined Morgan in 1992 and from 1984 to
1991 was employed by Oppenheimer & Co. Mr. Roisenberg joined Morgan in 1996 as a
Vice President. From 1991 to 1996, Mr. Roisenberg was a quantative
analyst/portfolio manager at
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Bankers Trust Company. Mr. Devlin joined Morgan in 1996 and is a member of the
Structured Equity Group with the dual responsibilities of client servicing and
portfolio management. From 1988 to 1996, Mr. Devlin was at Mitchell Hutchins
where he managed quantitatively driven equity portfolios.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Portfolio intends to qualify each year as a "regulated investment
company" under the Internal Revenue Code. By so qualifying, a Portfolio will not
be subject to federal income taxes to the extent that its net investment income
and net realized capital gains are distributed to shareholders.
It is the intention of each Portfolio to distribute substantially all
its net investment income. Although the Trustees of the Fund may decide to
declare dividends at other intervals, dividends from investment income of each
Portfolio are expected to be declared annually (except with respect to the TCW
Money Market Portfolio where dividends will be declared daily and paid monthly)
and will be distributed to the various separate accounts of PFL and not to
Contract owners in the form of additional full and fractional shares of the
Portfolio and not in cash. The result is that the investment performance of the
Portfolios, including the effect of dividends, is reflected in the cash value of
the Contracts. See the prospectus for the Contracts accompanying this
Prospectus.
All net realized long- or short-term capital gains of each Portfolio,
if any, will be declared and distributed at least annually either during or
after the close of the Portfolio's fiscal year and will be reinvested in
additional full and fractional shares of the Portfolio. In certain foreign
countries, interest and dividends are subject to a tax which is withheld by the
issuer. U.S. income tax treaties with certain countries reduce the rates of
these withholding taxes. The Fund intends to provide the documentation necessary
to achieve the lower treaty rate of withholding whenever applicable or to seek
refund of amounts withheld in excess of the treaty rate.
For a discussion of the impact on Contract owners of income taxes PFL
may owe as a result of (i) its ownership of shares of the Portfolios, (ii) its
receipt of dividends and distributions thereon, and (iii) its gains from the
purchase
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and sale thereof, reference should be made to the prospectus for the Contracts
accompanying this Prospectus.
SALE AND REDEMPTION OF SHARES
The Fund continuously offers shares of each Portfolio only to separate
accounts of PFL, but may at any time offer shares to a separate account of any
other insurer approved by the Trustees.
AEGON USA Securities, Inc. ("AEGON Securities"), an affiliate of PFL,
is the principal underwriter and distributor of the Contracts. AEGON Securities
places orders for the purchase or redemption of shares of each Portfolio based
on, among other things, the amount of net Contract premiums or purchase payments
transferred to the separate accounts, transfers to or from a separate account
investment division, policy loans, loan repayments, and benefit payments to be
effected on a given date pursuant to the terms of the Contracts. Such orders are
effected, without sales charge, at the net asset value per share for each
Portfolio determined as of the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., New York City time), on that same date.
The net asset value of the shares of each Portfolio for the purpose of
pricing orders for the purchase and redemption of shares is determined as of the
close of the New York Stock Exchange, Monday through Friday, exclusive of
national business holidays. Net asset value per share is computed by dividing
the value of all assets of a Portfolio (including accrued interest and
dividends), less all liabilities of the Portfolio (including accrued expenses
and dividends payable), by the number of outstanding shares of the Portfolio.
The assets of the TCW Money Market Portfolio are valued at amortized cost and
the assets of the other Portfolios are valued on the basis of their market
values or, in the absence of a market value with respect to any portfolio
securities, at fair value as determined by or under the direction of the Fund's
Board of Trustees including the employment of an independent pricing service, as
described in the Statement of Additional Information.
Shares of the Portfolios may be redeemed on any day on which the Fund
is open for business.
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PERFORMANCE INFORMATION
From time to time, the Fund may advertise the "average annual or
cumulative total return" of the TCW Managed Asset Allocation, Value Equity,
Dreyfus Small Cap Value, Dreyfus U.S. Government Securities, T. Rowe Price
Equity Income, T. Rowe Price Growth Stock, T. Rowe Price International Stock,
Opportunity Value and Enhanced Index Portfolios or the "yield" and "effective
yield" of the TCW Money Market and Dreyfus U.S. Government Securities Portfolios
and may compare the performance of the Portfolios with that of other mutual
funds with similar investment objectives as listed in rankings prepared by
Lipper Analytical Services, Inc., or similar independent services monitoring
mutual fund performance, and with appropriate securities or other relevant
indices. The "average annual total return" of a Portfolio refers to the average
annual compounded rate of return over the stated period that would equate an
initial investment in that Portfolio at the beginning of the period to its
ending redeemable value, assuming reinvestment of all dividends and
distributions and deduction of all recurring charges other than charges and
deductions which are, or may be, imposed under the Contracts. Figures will be
given for the recent one, five and ten year periods and for the life of the
Portfolio if it has not been in existence for any such periods. When considering
"average annual total return" figures for periods longer than one year, it is
important to note that a Portfolio's annual total return for any given year
might have been greater or less than its average for the entire period.
"Cumulative total return" represents the total change in value of an investment
in a Portfolio for a specified period (again reflecting changes in Portfolio
share prices and assuming reinvestment of Portfolio distributions). The TCW
Money Market Portfolio's "yield" refers to the income generated by an investment
in the Portfolio over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of income
generated by the investment during that week is assumed to be generated each
week over a 52-week period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the Portfolio is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. The Dreyfus U.S. Government
Securities Portfolio may advertise its 30-day yield. Such yield refers to the
income that is generated over a stated 30-day (or one month) period (which
period will be stated in the advertisement),
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divided by the net asset value per share on the last day of the period. The
income is annualized by assuming that the income during the 30-day period
remains the same each month over one year and compounded semi-annually. The
methods used to calculate "average annual and cumulative total return" and
"yield" are described further in the Statement of Additional Information.
The performance of each Portfolio will vary from time to time in
response to fluctuations in market conditions, interest rates, the composition
of the Portfolio's investments and expenses. Consequently, a Portfolio's
performance figures are historical and should not be considered representative
of the performance of the Portfolio for any future period.
OpCap is the investment adviser of the Managed Portfolio of the
Accumulation Trust (formerly known as the Quest for Value Accumulation Trust)
(the "Accumulation Trust"), a registered open-end investment company whose
shares are sold to certain variable accounts of life insurance companies. The
Managed Portfolio of the Accumulation Trust is substantially similar to the
Opportunity Value Portfolio in that it has the same investment objective as the
Opportunity Value Portfolio and is managed using the same investment strategies
and techniques as contemplated for the Opportunity Value Portfolio.
The Opportunity Value Portfolio commenced operations in November, 1996
and, consequently, does not have a significant operating history. See "Financial
Highlights." Set forth below is certain performance information regarding the
Managed Portfolio of the Accumulation Trust which has been obtained from OpCap,
and is set forth in the current prospectus and statement of additional
information of the Accumulation Trust. Investors should not rely on the
following financial information as an indication of the future performance of
the Opportunity Value Portfolio.
Average Annual Total Return of Comparable Portfolio*(1)
For the Period
For the Year For the Five Years from Inception
Ended December Ended December to December 31,
31, 1996 31, 1996 1996(2)
Managed Portfolio
of Accumulation
<PAGE>
Trust 22.77% 19.13% 20.09%
* On September 16, 1994, an investment company called Quest for Value
Accumulation Trust (the "Old Trust") was effectively divided into two
investment funds, the Old Trust and the Accumulation Trust, at which time
the Accumulation Trust commenced operations. The total net assets for the
Managed Portfolio immediately after the transaction was $682,601,380 with
respect to the Old Trust and $51,345,102 with respect to the Accumulation
Trust. For the period prior to September 16, 1994, the performance figures
above for the Managed Portfolio reflect the performance of the
corresponding Portfolio of the Old Trust.
(1) Reflects waiver of all or a portion of the advisory fees and
reimbursements of other expenses. Without such waivers and
reimbursements, the average annual total return during the periods
would have been lower.
(2) The Portfolio commenced operations on August 1, 1988.
Morgan is the investment manager of certain Private Accounts. At
December 31, 1996 and as of the date of this Prospectus, the Enhanced Index
Portfolio had not commenced operations. However, these Private Accounts are
substantially similar to the Enhanced Index Portfolio in that they have the same
investment objectives as the Enhanced Index Portfolio and are managed using the
same investment strategies and techniques as contemplated for the Enhanced Index
Portfolio.
Investors should not rely on the following financial information as an
indication of the future performance of the Enhanced Index Portfolio. The
performance of the Enhanced Index Portfolio may vary from the Private Account
composite information because the Portfolio will be actively managed and its
investments will vary from time to time and will not be identical to the past
portfolio investments of the Private Accounts. Moreover, the Private Accounts
are not registered under the 1940 Act and therefore are not subject to certain
investment restrictions that are imposed by the 1940 Act, which, if imposed,
could have adversely affected the Private Accounts' performances. In addition,
the Private Accounts are not subject to the provisions of the Internal Revenue
Code with respect to "regulated investment companies," which provisions, if
imposed, could have adversely affected the Private Accounts' performances.
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<PAGE>
The chart below shows hypothetical performance information derived from
historical composite performance of the Private Accounts included in the
Structured Stock Selection Composite. The hypothetical performance figures
represent the actual performance results of the composite of comparable Private
Accounts, adjusted to reflect the deduction of the fees and expenses anticipated
to be paid by the Enhanced Index Portfolio. The actual Private Account composite
performance figures are time-weighted rates of return which include all income
and accrued income and realized and unrealized gains or losses, but do not
reflect the deduction of investment advisory fees actually charged to the
Private Accounts.
Hypothetical Average Annual Total Return Information Derived from Private
Account Composite
For the For the Five For the Period
Year Ended Years Ended From Inception
December 31, December 31, (November 1, 1989)
1996 1996 to December 31, 1996
Structured
Stock
Selection
Composite 22.21% 15.45% 14.61%
------------------
The calculations of total return assume the reinvestment of all
dividends and capital gains distributions on the reinvestment dates during the
period and the deduction of all recurring expenses that were charged to
shareholder accounts. The above tables do not reflect charges and deductions
which are, or may be, imposed under the Contracts. For a description of such
charges and deductions, see the prospectus accompanying this Prospectus which
describes the Contracts.
ORGANIZATION AND CAPITALIZATION OF THE FUND
The Fund was established in November 1988 as a business trust under
Massachusetts law. The Fund has authorized an unlimited number of shares of
beneficial interest which may,
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without shareholder approval, be divided into an unlimited number of series.
Shares of the Fund are presently divided into ten series of shares, one for each
of the Fund's ten Portfolios. Shares are freely transferable, are entitled to
dividends as declared by the Trustees, and in liquidation are entitled to
receive the net assets of their respective Portfolios, but not the net assets of
the other Portfolios.
Fund shares are entitled to vote at any meeting of shareholders. The
Fund does not generally hold annual meetings of shareholders and will do so only
when required by law. Matters submitted to a shareholder vote must be approved
by each portfolio of the Fund separately except (i) when required by the 1940
Act, shares will be voted together as a single class and (ii) when the Trustees
have determined that the matter does not affect all portfolios, then only
shareholders of the affected portfolio will be entitled to vote on the matter.
Owners of the Contracts have certain voting interests in respect of
shares of the Portfolios. See "Voting Rights" in the prospectus for the
Contracts accompanying this Prospectus for a description of the rights granted
Contract owners to instruct voting of shares.
ADDITIONAL INFORMATION
Transfer Agent and Custodian
All cash and securities of the Fund 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 Fund.
Independent Auditors
Ernst & Young LLP, located at 200 Clarendon Street, Boston,
Massachusetts, 02116, serves as the Fund's independent auditors.
Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the registration statement of which this Prospectus
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<PAGE>
forms a part, each such statement being qualified in all respects by such
reference.
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<PAGE>
TABLE OF CONTENTS
Page
The Fund 2 ENDEAVOR SERIES TRUST
Financial Highlights 4
Investment Objectives and Policies 34 2101 East Coast Highway,
TCW Money Market Portfolio 34 Suite 300
TCW Managed Asset Allocation Corona del Mar, California 92625
Portfolio 38 (800) 854-8393
T. Rowe Price International Stock
Portfolio 40 Manager
Value Equity Portfolio 44
Dreyfus Small Cap Value Portfolio 46 Endeavor Investment Advisers
Dreyfus U.S. Government Securities 2101 East Coast Highway
Portfolio 48 Suite 300
T. Rowe Price Equity Income Corona del Mar, California 92625
Portfolio 55
T. Rowe Price Growth Stock Investment Advisers
Portfolio 57
Opportunity Value Portfolio 58 TCW Funds Management, Inc.
Enhanced Index Portfolio 60 865 S. Figueroa Street
Investment Strategies 63 Los Angeles, California 90071
Management of the Fund 72
The Manager 72 OpCap Advisors
The Advisers 73 One World Financial Center
Dividends, Distributions and Taxes 81 New York, New York 10281
Sale and Redemption of Shares 82
Performance Information 83 The Dreyfus Corporation
Organization and Capitalization 200 Park Avenue
of the Fund 87 New York, New York 10166
Additional Information 87
Transfer Agent and Custodian 87 T. Rowe Price Associates, Inc.
Independent Auditors 87 100 East Pratt Street
Baltimore, Maryland 21202
--------------
Rowe Price-Fleming International,
No person has been authorized to give any Inc.
information or to make any representation not 100 East Pratt Street
contained in this Prospectus and, if given or Baltimore, Maryland 21202
made, such information or representation must
not be relied upon as having been authorized. J.P. Morgan Investment
This Prospectus does not constitute an Management Inc.
offering of any securities other than the 522 Fifth Avenue
registered securities to which it relates or New York, New York 10036
an offer to any person in any state or
jurisdiction of the United States or any Custodian
country where such offer would be unlawful.
Boston Safe Deposit and Trust
Company
One Boston Place
Boston, Massachusetts 02108
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
ENDEAVOR SERIES TRUST
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus for the TCW Money Market Portfolio
(formerly, the Money Market Portfolio), the TCW Managed Asset Allocation
Portfolio (formerly, the Managed Asset Allocation Portfolio), the T. Rowe Price
International Stock Portfolio (formerly, the Global Growth Portfolio), the Value
Equity Portfolio (formerly, the Quest for Value Equity Portfolio), the Dreyfus
Small Cap Value Portfolio (formerly, the Value Small Cap Portfolio and prior to
that the Quest for Value Small Cap Portfolio), the Dreyfus U.S. Government
Securities Portfolio (formerly, the U.S. Government Securities Portfolio), the
T. Rowe Price Equity Income Portfolio, the T. Rowe Price Growth Stock Portfolio,
the Opportunity Value Portfolio and the Enhanced Index Portfolio of Endeavor
Series Trust (the "Fund"), dated May 1, 1997, which may be obtained by writing
the Fund at 2101 East Coast Highway, Suite 300, Corona del Mar, California 92625
or by telephoning (800) 854- 8393. Unless otherwise defined herein, capitalized
terms have the meanings given to them in the Prospectus.
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TABLE OF CONTENTS
Page
Investment Objectives and Policies................ 3
Options and Futures Strategies............... 3
Foreign Currency Transactions................ 9
Repurchase Agreements........................ 13
Forward Commitments.......................... 14
Securities Loans............................. 14
Lower Rated Bonds ........................... 14
Interest Rate Transactions................... 16
Dollar Roll Transactions..................... 17
Portfolio Turnover........................... 18
Investment Restrictions........................... 19
Other Policies............................... 22
Performance Information........................... 23
Total Return................................. 24
Yield........................................ 26
Non-Standardized Performance................. 27
Portfolio Transactions............................ 27
Management of the Fund............................ 32
Trustees and Officers........................ 32
The Manager.................................. 38
The Advisers................................. 40
Redemption of Shares.............................. 44
Net Asset Value................................... 44
Taxes............................................. 47
Federal Income Taxes......................... 47
Organization and Capitalization of the Fund....... 48
Legal Matters..................................... 51
Custodian......................................... 51
Financial Statements.............................. 51
Appendix.......................................... A-1
----------------------
No person has been authorized to give any information or to make any
representation not contained in this Statement of Additional Information or in
the Prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized. This Statement of Additional
Information does not constitute an offering of any securities other than the
registered securities to which it relates or an offer to any person in any state
or other jurisdiction of the United States or any country where such offer would
be unlawful.
The date of this Statement of Additional Information is May 1, 1997.
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the investment
objectives and policies of the Portfolios in the Prospectus of the Fund. The
Fund is managed by Endeavor Investment Advisers. The Manager has selected TCW
Funds Management, Inc. as investment adviser for the TCW Money Market Portfolio
and the TCW Managed Asset Allocation Portfolio, Rowe Price-Fleming
International, Inc. as investment adviser for the T. Rowe Price International
Stock Portfolio, OpCap Advisors (formerly, Quest for Value Advisors) as
investment adviser for the Value Equity Portfolio and Opportunity Value
Portfolio, The Dreyfus Corporation as investment adviser for the Dreyfus U.S.
Government Securities Portfolio and Dreyfus Small Cap Value Portfolio, T. Rowe
Price Associates, Inc. as investment adviser for the T. Rowe Price Equity Income
Portfolio and T. Rowe Price Growth Stock Portfolio and J.P. Morgan Investment
Management Inc. as investment adviser for the Enhanced Index Portfolio.
Options and Futures Strategies (All Portfolios except TCW Money Market
Portfolio)
A Portfolio may seek to increase the current return on its investments
by writing covered call or covered put options. In addition, a Portfolio 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 its Adviser plans to
purchase through the writing and purchase of options including options on stock
indices and the purchase and sale of futures contracts and related options. A
Portfolio may utilize options or futures contracts and related options for other
than hedging purposes to the extent that the aggregate initial margins and
premiums do not exceed 5% of the Portfolio's net asset value. The Adviser to the
TCW Managed Asset Allocation Portfolio does not presently intend to utilize
options or futures contracts and related options but may do so in the future.
The Advisers to the Dreyfus Small Cap Value Portfolio and the Opportunity Value
Portfolio do not currently intend to write covered put and call options or
engage in transactions in futures contracts and related options, but may do so
in the future. Expenses and losses incurred as a result of such hedging
strategies will reduce a Portfolio's current return.
The ability of a Portfolio to engage in the options and futures
strategies described below will depend on the availability of liquid markets in
such instruments. Markets in options and futures with respect to stock indices
and U.S. government securities are relatively new and still developing. 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
Portfolio will be
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able to utilize these instruments effectively for the purposes
stated below.
Writing Covered Options on Securities. A Portfolio 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 its Adviser determines is
appropriate in seeking to attain the Portfolio's investment objective. Call
options written by a Portfolio give the holder the right to buy the underlying
security from the Portfolio at a stated exercise price; put options give the
holder the right to sell the underlying security to the Portfolio at a stated
price.
A Portfolio 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 Portfolio 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 Portfolio 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 Portfolio owns or has the right to acquire. In the
case of a call written for cross-hedging purposes or a put option, the Portfolio
will maintain in a segregated account at the Fund's custodian bank cash or
short-term U.S. government securities with a value equal to or greater than the
Portfolio's obligation under the option. A Portfolio may also write combinations
of covered puts and covered calls on the same underlying security.
A Portfolio will receive a premium from writing an option, which
increases the Portfolio'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 Portfolio
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 Portfolio 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 Portfolio may terminate an option which it has written prior to its
expiration by entering into a closing purchase
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transaction in which it purchases an option having the same terms as the option
written. The Portfolio 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 Portfolio.
Purchasing Put and Call Options on Securities. A Portfolio 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 Portfolio, 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 Portfolio might
otherwise have realized on the underlying security will be reduced by the
premium paid for the put option and by transaction costs.
A Portfolio 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 Portfolio, 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 manner, any profit which the Portfolio
might have realized had it bought 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 Portfolio intends to purchase put or call options if, as a result of
any such transaction, the aggregate cost of options held by the Portfolio at the
time of such transaction would exceed 5% of its total assets.
Purchase and Sale of Options and Futures on Stock Indices. A Portfolio
may purchase and sell options on stock indices and stock index futures contracts
either as a hedge against movements in the equity markets or for other
investment purposes.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price,
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an option on a stock index gives the holder the right to receive, upon exercise
of the option, an amount of cash if the closing level of that stock index is
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to such difference
between the closing price of the index and the exercise price of the option
expressed in dollars times a specified multiple. The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Unlike options on specific securities, all settlements of options on stock
indices are in cash and gain or loss depends on general movements in the stocks
included in the index rather than price movements in particular stocks.
Currently options traded include the Standard & Poor's 500 Composite Stock Price
Index, the NYSE Composite Index, the AMEX Market Value Index, the National
Over-The-Counter Index, the Nikkei 225 Stock Average Index, the Financial Times
Stock Exchange 100 Index and other standard broadly based stock market indices.
Options are also traded in certain industry or market segment indices such as
the Pharmaceutical Index.
A stock index futures contract is an agreement in which one party agrees
to deliver to the other an amount of cash equal to a specific dollar amount
times the difference between the value of a specific stock index at the close of
the last trading day of the contract and the price at which the agreement is
made. No physical delivery of securities is made.
If a Portfolio's Adviser expects general stock market prices to rise, it
might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
it wants ultimately to buy for the Portfolio. If in fact the stock index does
rise, the price of the particular equity securities intended to be purchased may
also increase, but that increase would be offset in part by the increase in the
value of the Portfolio's index option or futures contract resulting from the
increase in the index. If, on the other hand, the Portfolio's Adviser expects
general stock market prices to decline, it might purchase a put option or sell a
futures contract on the index. If that index does in fact decline, the value of
some or all of the equity securities held by the Portfolio may also be expected
to decline, but that decrease would be offset in part by the increase in the
value of the Portfolio's position in such put option or futures contract.
Purchase and Sale of Interest Rate Futures. A Portfolio may purchase and
sell interest rate futures contracts on U.S. Treasury bills, notes and bonds and
Government National Mortgage Association ("GNMA") certificates either for the
purpose of hedging its portfolio securities against the adverse effects of
anticipated movements in interest rates or for other investment purposes.
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A Portfolio may sell interest rate futures contracts in anticipation of
an increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the securities held by a Portfolio will fall, thus
reducing the net asset value of the Portfolio. This interest rate risk can be
reduced without employing futures as a hedge by selling such securities and
either reinvesting the proceeds in securities with shorter maturities or by
holding assets in cash. However, this strategy entails increased transaction
costs in the form of dealer spreads and brokerage commissions and would
typically reduce the Portfolio's average yield as a result of the shortening of
maturities.
The sale of interest rate futures contracts provides a means of hedging
against rising interest rates. As rates increase, the value of a Portfolio's
short position in the futures contracts will also tend to increase thus
offsetting all or a portion of the depreciation in the market value of the
Portfolio's investments that are being hedged. While the Portfolio will incur
commission expenses in selling and closing out futures positions (which is done
by taking an opposite position in the futures contract), commissions on futures
transactions are lower than transaction costs incurred in the purchase and sale
of portfolio securities.
A Portfolio may purchase interest rate futures contracts in anticipation
of a decline in interest rates when it is not fully invested. As such purchases
are made, it is expected that an equivalent amount of futures contracts will be
closed out.
A Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges, and are standardized as to maturity date
and the underlying financial instrument. Futures exchanges and trading in the
United States are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC"). Futures are traded in London at the London
International Financial Futures Exchange, in Paris, at the MATIF, and in Tokyo
at the Tokyo Stock Exchange.
Options on Futures Contracts. A Portfolio may purchase and write call
and put options on stock index and interest rate futures contracts. A Portfolio
may use such options on futures contracts in connection with its hedging
strategies in lieu of purchasing and writing options directly on the underlying
securities or stock indices or purchasing or selling the underlying futures. For
example, a Portfolio may purchase put options or write call options on stock
index futures or interest rate futures, rather than selling futures contracts,
in anticipation of a decline in general stock market prices or rise in interest
rates, respectively, or purchase call options or write put options on stock
index or interest rate futures, rather than purchasing such futures, to hedge
against possible increases in the price of equity
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securities or debt securities, respectively, which the
Portfolio intends to purchase.
In connection with transactions in stock index options, stock index
futures, interest rate futures and related options on such futures, a Portfolio
will be required to deposit as "initial margin" an amount of cash and short-term
U.S. government securities. The current initial margin requirement per contract
is approximately 2% of the contract amount. Thereafter, subsequent payments
(referred to as "variation margin") are made to and from the broker to reflect
changes in the value of the futures contract. Brokers may establish deposit
requirements higher than exchange minimums.
Limitations. A Portfolio will not purchase or sell futures contracts or
options on futures contracts or stock indices 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
or stock indices would exceed 5% of the net assets of the Portfolio 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 Portfolio's ability to
terminate options and futures positions at times when its Adviser deems it
desirable to do so. Although a Portfolio will not enter into an option or
futures position unless its Adviser believes that a liquid market exists for
such option or future, there can be no assurance that a Portfolio will be able
to effect closing transactions at any particular time or at an acceptable price.
The Advisers generally expect that options and futures transactions for the
Portfolios will be conducted on recognized exchanges. In certain instances,
however, a Portfolio 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 Portfolio'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 Portfolio.
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 a Portfolio's Adviser to
forecast correctly interest rate movements and general stock market price
movements. This risk increases as the composition of the securities held by the
Portfolio diverges from the composition of the relevant option or futures
contract.
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Foreign Currency Transactions (Dreyfus U.S. Government
Securities, T. Rowe Price Equity Income, T. Rowe Price Growth
Stock, T. Rowe Price International Stock, Opportunity Value
and Enhanced Index Portfolios)
Foreign Currency Exchange Transactions. The Dreyfus U.S. Government
Securities, T. Rowe Price Equity Income, T. Rowe Price Growth Stock, T. Rowe
Price International Stock, Opportunity Value and Enhanced Index Portfolios may
engage in foreign currency exchange transactions to protect against uncertainty
in the level of future exchange rates. The Adviser to a Portfolio may engage in
foreign currency exchange transactions in connection with the purchase and sale
of portfolio securities ("transaction hedging"), and to protect the value of
specific portfolio positions ("position hedging").
A Portfolio may engage in "transaction hedging" to protect against a
change in the foreign currency exchange rate between the date on which the
Portfolio contracts to purchase or sell the security and the settlement date, or
to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. For that purpose, a Portfolio may purchase or sell a foreign
currency on a spot (or cash) basis at the prevailing spot rate in connection
with the settlement of transactions in portfolio securities denominated in that
foreign currency.
If conditions warrant, a Portfolio may also enter into contracts to
purchase or sell foreign currencies at a future date ("forward contracts") and
purchase and sell foreign currency futures contracts as a hedge against changes
in foreign currency exchange rates between the trade and settlement dates on
particular transactions and not for speculation. A foreign currency forward
contract is a negotiated agreement to exchange currency at a future time at a
rate or rates that may be higher or lower than the spot rate. Foreign currency
futures contracts are standardized exchange-traded contracts and have margin
requirements.
For transaction hedging purposes, a Portfolio may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives a Portfolio the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives a Portfolio the
right to sell a currency at an exercise price until the expiration of the
option. A call option on a futures contract gives a Portfolio the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives a Portfolio the right to purchase a
currency at the exercise price until the expiration of the option.
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A Portfolio may engage in "position hedging" to protect against a
decline in the value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the value of
currency for securities which the Portfolio intends to buy, when it holds cash
reserves and short-term investments). For position hedging purposes, a Portfolio
may purchase or sell foreign currency futures contracts and foreign currency
forward contracts, and may purchase put or call options on foreign currency
futures contracts and on foreign currencies on exchanges or over-the-counter
markets. In connection with position hedging, a Portfolio may also purchase or
sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of
portfolio securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for a Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security or securities being hedged is less
than the amount of foreign currency the Portfolio is obligated to deliver and if
a decision is made to sell the security or securities and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security or
securities if the market value of such security or securities exceeds the amount
of foreign currency the Portfolio is obligated to deliver.
Hedging transactions involve costs and may result in losses. A Portfolio
may write covered call options on foreign currencies to offset some of the costs
of hedging those currencies. A Portfolio will engage in over-the-counter
transactions only when appropriate exchange-traded transactions are unavailable
and when, in the opinion of the Portfolio's Adviser, the pricing mechanism and
liquidity are satisfactory and the participants are responsible parties likely
to meet their contractual obligations. A Portfolio's ability to engage in
hedging and related option transactions may be limited by tax considerations.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the
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value of the hedged currency, they tend to limit any potential gain which might
result from the increase in the value of such currency.
Currency Forward and Futures Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract as agreed by the parties, at a price set at the time of the contract.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the CFTC, such as the New York Mercantile Exchange. A Portfolio
would enter into foreign currency futures contracts solely for hedging or other
appropriate investment purposes as defined in CFTC regulations.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in any given month.
Forward contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, a Portfolio may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market in such
contracts. Although a Portfolio intends to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there
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appears to be an active secondary market, there can be no assurance that a
secondary market on an exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures position and, in the event of adverse price movements, a
Portfolio would continue to be required to make daily cash payments of variation
margin.
Foreign Currency Options. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when a Portfolio's Adviser believes that a liquid secondary market exists for
such options. There can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence foreign exchange
rates and investments generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Portfolio at one rate, while offering a lesser rate of exchange should a
Portfolio desire to resell that currency to the dealer.
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Repurchase Agreements (All Portfolios)
Each of the Portfolios may enter into repurchase agreements with a bank,
broker-dealer, or other financial institution but no Portfolio may invest more
than 10% (15% with respect to each of the T. Rowe Price Equity Income, T. Rowe
Price Growth Stock, T. Rowe Price International Stock, Dreyfus Small Cap Value,
Opportunity Value and Enhanced Index Portfolios) of its net assets in repurchase
agreements having maturities of greater than seven days. A Portfolio may enter
into repurchase agreements, provided the Fund's custodian always has possession
of securities serving as collateral whose market value at least equals the
amount of the repurchase obligation. To minimize the risk of loss a Portfolio
will enter into repurchase agreements only with financial institutions which are
considered by its Adviser to be creditworthy under guidelines adopted by the
Trustees of the Fund. If an institution enters an insolvency proceeding, the
resulting delay in liquidation of the securities serving as collateral could
cause a Portfolio some loss, as well as legal expense, if the value of the
securities declines prior to liquidation.
Forward Commitments (All Portfolios)
Each of the Portfolios may enter into forward commitments to purchase
securities. An amount of cash or short-term U.S. government securities equal to
the Portfolio's commitment will be deposited in a segregated account at the
Fund's custodian bank to secure the Portfolio's obligation. Although a Portfolio
will generally enter into forward commitments to purchase securities with the
intention of actually acquiring the securities for its portfolio (or for
delivery pursuant to options contracts it has entered into), the Portfolio may
dispose of a security prior to settlement if its Adviser deems it advisable to
do so. The Portfolio may realize short-term gains or losses in connection with
such sales.
Securities Loans (All Portfolios)
Each of the Portfolios may pay reasonable finders', administrative and
custodial fees in connection with loans of its portfolio securities. Although
voting rights or the right to consent accompanying loaned securities pass to the
borrower, a Portfolio retains the right to call the loan at any time on
reasonable notice, and will do so in order that the securities may be voted by
the Portfolio with respect to matters materially affecting the investment. A
Portfolio may also call a loan in order to sell the securities involved. Loans
of portfolio securities will only be made to borrowers considered by a
Portfolio's Adviser to be creditworthy under guidelines adopted by the Trustees
of the Fund.
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Lower Rated Bonds (Value Equity, Dreyfus U.S. Government
Securities, Opportunity Value and T. Rowe Price Equity Income
Portfolios)
The Value Equity Portfolio and Opportunity Value Portfolio may invest up
to 5% of their assets, the T. Rowe Price Equity Income Portfolio may invest up
to 10% of its assets, and the Dreyfus U.S. Government Securities Portfolio may
invest up to 25% of its assets in bonds rated below Baa3 by Moody's Investors
Service Inc. ("Moody's") or BBB by Standard & Poor's Ratings Service, a division
of McGraw-Hill Companies, Inc. ("Standard & Poor's") (commonly known as "junk
bonds"). Securities rated less than Baa by Moody's or BBB by Standard & Poor's
are classified as non-investment grade securities and are considered speculative
by those rating agencies. It is each Portfolio Adviser's policy not to rely
exclusively on ratings issued by credit rating agencies but to supplement such
ratings with the Adviser's own independent and ongoing review of credit quality.
Junk bonds may be issued as a consequence of corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events or by smaller or highly leveraged companies. When economic conditions
appear to be deteriorating, junk bonds may decline in market value due to
investors' heightened concern over credit quality, regardless of prevailing
interest rates. Although the growth of the high yield securities market in the
1980s had paralleled a long economic expansion, in the past many issuers have
been affected by adverse economic and market conditions. It should be recognized
that an economic downturn or increase in interest rates is likely to have a
negative effect on (i) the high yield bond market, (ii) the value of high yield
securities and (iii) the ability of the securities' issuers to service their
principal and interest payment obligations, to meet their projected business
goals or to obtain additional financing. The market for junk bonds, especially
during periods of deteriorating economic conditions, may be less liquid than the
market for investment grade bonds. In periods of reduced market liquidity, junk
bond prices may become more volatile and may experience sudden and substantial
price declines. Also, there may be significant disparities in the prices quoted
for junk bonds by various dealers. Under such conditions, a Portfolio may find
it difficult to value its junk bonds accurately. Under such conditions, a
Portfolio may have to use subjective rather than objective criteria to value its
junk bond investments accurately and rely more heavily on the judgment of the
Fund's Board of Trustees. Prices for junk bonds also may be affected by
legislative and regulatory developments. For example, recent federal rules
require that savings and loans gradually reduce their holdings of high-yield
securities. Also, from time to time, Congress has considered legislation to
restrict or eliminate the corporate tax deduction for interest payments or to
regulate corporate restructurings such as takeovers, mergers or leveraged
buyouts. Such legislation, if enacted, could depress the prices of outstanding
junk bonds.
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Interest Rate Transactions (Dreyfus U.S. Government Securities
Portfolio)
Among the strategic transactions into which the Dreyfus U.S. Government
Securities Portfolio may enter are interest rate swaps and the purchase or sale
of related caps and floors. The Portfolio expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in the price of
securities the Portfolio anticipates purchasing at a later date. The Portfolio
intends to use these transactions as hedges and not as speculative investments
and will not sell interest rate caps or floors where it does not own securities
or other instruments providing the income stream the Portfolio may be obligated
to pay. Interest rate swaps involve the exchange by the Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser, to the extent that a specific index
exceeds a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such cap. The purchase of a
floor entitles the purchaser to receive payments on a notional principal amount
from the party selling such floor to the extent that a specified index falls
below a predetermined interest rate or amount.
The Portfolio will usually enter into swaps on a net basis, i.e., the
two payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps and floors are entered into for good faith hedging purposes, the
Adviser to the Portfolio and the Fund believe such obligations do not constitute
senior securities under the Investment Company Act of 1940 (the "1940 Act") and,
accordingly, will not treat them as being subject to its borrowing restrictions.
The Portfolio will not enter into any swap, cap and floor transaction unless, at
the time of entering into such transaction, the unsecured long-term debt of the
counterparty, combined with any credit enhancements, is rated at least "A" by
Standard & Poor's or Moody's or has an equivalent rating from a nationally
recognized statistical rating organization ("NRSRO") or is determined to be of
equivalent credit quality by the Adviser. For a description of the NRSROs and
their ratings, see the Appendix. If there is a default by the counterparty, the
Portfolio may have contractual remedies pursuant to the
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agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps and floors are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
With respect to swaps, the Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess. Caps and floors require
segregation of assets with a value equal to the Portfolio's net obligations, if
any.
Dollar Roll Transactions (Dreyfus U.S. Government Securities
Portfolio)
The Dreyfus U.S. Government Securities Portfolio may enter into "dollar
roll" transactions, which consist of the sale by the Portfolio to a bank or
broker-dealer (the "counterparty") of GNMA certificates or other mortgage-backed
securities together with a commitment to purchase from the counterparty similar,
but not identical, securities at a future date. The counterparty receives all
principal and interest payments, including prepayments, made on the security
while it is the holder. The Portfolio receives a fee from the counterparty as
consideration for entering into the commitment to purchase. Dollar rolls may be
renewed over a period of several months with a different repurchase price and a
cash settlement made at each renewal without physical delivery of securities.
Moreover, the transaction may be preceded by a firm commitment agreement
pursuant to which the Portfolio agrees to buy a security on a future date.
The Portfolio will not use such transactions for leveraging purposes
and, accordingly, will segregate cash, U.S. government securities or other high
grade debt obligations in an amount sufficient to meet its purchase obligations
under the transactions. The Portfolio will also maintain asset coverage of at
least 300% for all outstanding firm commitments, dollar rolls and other
borrowings.
Dollar rolls are treated for purposes of the 1940 Act as borrowings of
the Portfolio because they involve the sale of a security coupled with an
agreement to repurchase. Like all borrowings, a dollar roll involves costs to
the Portfolio. For example, while the Portfolio receives a fee as consideration
for agreeing to repurchase the security, the Portfolio forgoes the right to
receive all principal and interest payments while the counterparty holds the
security. These payments to the counterparty may exceed the fee received by the
Portfolio, thereby effectively charging the Portfolio
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interest on its borrowing. Further, although the Portfolio can estimate the
amount of expected principal prepayment over the term of the dollar roll, a
variation in the actual amount of prepayment could increase or decrease the cost
of the Portfolio's borrowing.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Portfolio's right to
purchase from the counterparty might be restricted. Additionally, the value of
such securities may change adversely before the Portfolio is able to purchase
them. Similarly, the Portfolio may be required to purchase securities in
connection with a dollar roll at a higher price than may otherwise be available
on the open market. Since, as noted above, the counterparty is required to
deliver a similar, but not identical, security to the Portfolio, the security
that the Portfolio is required to buy under the dollar roll may be worth less
than an identical security. Finally, there can be no assurance that the
Portfolio's use of the cash that it receives from a dollar roll will provide a
return that exceeds borrowing costs.
Portfolio Turnover
While it is impossible to predict portfolio turnover rates, the Advisers
to the Portfolios other than the Dreyfus U.S. Government Securities Portfolio,
Dreyfus Small Cap Value Portfolio and the TCW Money Market Portfolio anticipate
that portfolio turnover will generally not exceed 100% per year. The Adviser to
the Dreyfus U.S. Government Securities Portfolio anticipates that portfolio
turnover may exceed 200% per year, exclusive of dollar roll transactions. The
Adviser to the Dreyfus Small Cap Value Portfolio anticipates that the
Portfolio's portfolio turnover rate will generally not exceed 175%. With respect
to the TCW Money Market Portfolio, although the Portfolio intends normally to
hold its investments to maturity, the short maturities of these investments are
expected by the Portfolio's Adviser to result in a relatively high rate of
portfolio turnover. Higher portfolio turnover rates usually generate additional
brokerage commissions and expenses.
For the fiscal year ended December 31, 1996, the portfolio turnover rate
for the Dreyfus Small Cap Value Portfolio was 171% as compared with a turnover
rate of 75%% for the fiscal year ended December 31, 1995. The increase in
portfolio turnover rate was in connection with the change of the Portfolio's
investment adviser in September, 1996.
For the fiscal year ended December 31, 1996, the portfolio turnover rate
for the Dreyfus U.S. Government Securities Portfolio was 222% as compared with a
turnover rate of 161% for the period ended December 31, 1995. The increase
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in portfolio turnover rate was due to an increased number of
market-related investment opportunities for the Portfolio.
INVESTMENT RESTRICTIONS
Except for restriction numbers 2, 3, 4, 11 and 12 with respect to the T.
Rowe Price Equity Income, T. Rowe Price Growth Stock, Opportunity Value and
Enhanced Index Portfolios and restriction number 11 with respect to the T. Rowe
Price International Stock and Dreyfus Small Cap Value Portfolios (which
restrictions are not fundamental policies), the following investment
restrictions (numbers 1 through 12) are fundamental policies, which may not be
changed without the approval of a majority of the outstanding shares of the
Portfolio, and apply to each of the Portfolios except as otherwise indicated. As
provided in the 1940 Act, a vote of a majority of the outstanding shares
necessary to amend a fundamental policy means the affirmative vote of the lesser
of (1) 67% or more of the shares present at a meeting, if the holders of more
than 50% of the outstanding shares of the Portfolio are present or represented
by proxy, or (2) more than 50% of the outstanding shares of the Portfolio.
A Portfolio may not:
1. Borrow money or issue senior securities (as defined in the 1940 Act),
provided that a Portfolio may borrow amounts not exceeding 5% of the value of
its total assets (not including the amount borrowed) for temporary purposes,
except that the Dreyfus U.S. Government Securities Portfolio may borrow from
banks or through reverse repurchase agreements or dollar roll transactions in an
amount equal to up to 33 1/3% of the value of its total assets (calculated when
the loan is made) for temporary, extraordinary or emergency purposes and to take
advantage of investment opportunities and may pledge up to 33 1/3% of the value
of its total assets to secure those borrowings; except that the T. Rowe Price
Equity Income Portfolio, the T. Rowe Price Growth Stock Portfolio and T. Rowe
Price International Stock Portfolio may (i) borrow for non-leveraging, temporary
or emergency purposes and (ii) engage in reverse repurchase agreements and make
other investments or engage in other transactions, which may involve a
borrowing, in a manner consistent with each Portfolio's investment objective and
program, provided that the combination of (i) and (ii) shall not exceed 33 1/3%
of the value of each Portfolios's total assets (including the amount borrowed)
less liabilities (other than borrowings) and may pledge up to 33 1/3% of the
value of its total assets to secure those borrowings; except that the
Opportunity Value Portfolio may borrow money from banks or through reverse
repurchase agreements for temporary or emergency purposes in amounts up to 10%
of its total assets; and except that the Enhanced Index Portfolio may borrow
money from banks for temporary or emergency purposes or through reverse
repurchase agreements in amounts up to 10% of its total assets.
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2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure borrowings permitted by restriction 1 above. Collateral arrangements with
respect to margin for futures contracts and options are not deemed to be pledges
or other encumbrances for purposes of this restriction.
3. Purchase securities on margin, except a Portfolio may obtain such
short-term credits as may be necessary for the clearance of securities
transactions and may make margin deposits in connection with transactions in
options, futures contracts and options on such contracts.
4. Make short sales of securities or maintain a short position for the account
of the Portfolio, unless at all times when a short position is open the
Portfolio owns an equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible or exchangeable
for securities of the same issue as, and in equal amounts to, the securities
sold short.
5. Underwrite securities issued by other persons, except to the extent that
in connection with the disposition of its portfolio investments it may be deemed
to be an underwriter under federal securities laws.
6. Purchase or sell real estate, although a Portfolio may purchase securities
of issuers which deal in real estate, securities which are secured by interests
in real estate and securities representing interests in real estate.
7. Purchase or sell commodities or commodity contracts, except that all
Portfolios other than the TCW Money Market Portfolio may purchase or sell
financial futures contracts and related options. For purposes of this
restriction, currency contracts or hybrid investments shall not be considered
commodities.
8. Make loans, except by purchase of debt obligations in which the Portfolio
may invest consistently with its investment policies, by entering into
repurchase agreements or through the lending of its portfolio securities.
9. Invest in the securities of any issuer if, immediately after such
investment, more than 5% of the total assets of the Portfolio (taken at current
value) would be invested in the securities of such issuer or acquire more than
10% of the outstanding voting securities of any issuer, provided that this
limitation does not apply to obligations issued or guaranteed as to principal
and interest by the U.S. government or its agencies and instrumentalities or to
repurchase agreements secured by such obligations and that up to 25% of the
Portfolio's total assets (taken at current value) may be invested without regard
to this limitation.
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10. Invest more than 25% of the value of its total assets in any one industry,
provided that this limitation does not apply to obligations issued or guaranteed
as to interest and principal by the U.S. government, its agencies and
instrumentalities, and repurchase agreements secured by such obligations, and in
the case of the TCW Money Market Portfolio obligations of domestic branches of
United States banks.
11. Invest more than 10% (15% with respect to the T. Rowe Price Equity Income
Portfolio, the T. Rowe Price Growth Stock Portfolio, the T. Rowe Price
International Stock Portfolio, the Dreyfus Small Cap Value Portfolio, the
Opportunity Value Portfolio and the Enhanced Index Portfolio) of its net assets
(taken at current value at the time of each purchase) in illiquid securities
including repurchase agreements maturing in more than seven days.
12. Purchase securities of any issuer for the purpose of
exercising control or management.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
Other Policies
The TCW Money Market Portfolio may not invest in the securities of any
one issuer if, immediately after such investment, more than 5% of the total
assets of the Portfolio (taken at current value) would be invested in the
securities of such issuer, provided that this limitation does not apply to
obligations issued or guaranteed as to principal and interest by the U.S.
government or its agencies and instrumentalities or to repurchase agreements
secured by such obligations and that with respect to 25% of the Portfolio's
total assets more than 5% may be invested in securities of any one issuer for
three business days after the purchase thereof if the securities have been
assigned the highest quality rating by NRSROs, or if not rated, have been
determined to be of comparable quality. These limitations apply to time
deposits, including certificates of deposit, bankers' acceptances, letters of
credit and similar instruments; they do not apply to demand deposit accounts.
For a description of the NRSROs' ratings, see the Appendix.
In addition, the TCW Money Market Portfolio may not purchase any
security that matures more than thirteen months (397 days) from the date of
purchase or which has an implied maturity of more than thirteen months (397
days) except as provided in (1) below. For the purposes of satisfying this
requirement, the maturity of a portfolio instrument shall be deemed to be the
period remaining until the date noted on the face of the instrument as the date
on which the principal amount must be paid, or in the case of an instrument
called
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for redemption, the date on which the redemption payment must
be made, except that:
1. An instrument that is issued or guaranteed by the U.S. government or any
agency thereof which has a variable rate of interest readjusted no less
frequently than every 25 months (762 days) may be deemed to have a maturity
equal to the period remaining until the next readjustment of the interest rate.
2. A variable rate instrument, the principal amount of which is scheduled on
the face of the instrument to be paid in thirteen months (397 days) or less, may
be deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
3. A variable rate instrument that is subject to a demand feature may be
deemed to have a maturity equal to the longer of the period remaining until the
next readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
4. A floating rate instrument that is subject to a demand feature may be
deemed to have a maturity equal to the period remaining until the principal
amount can be recovered through demand.
5. A repurchase agreement may be deemed to have a maturity equal to the period
remaining until the date on which the repurchase of the underlying securities is
scheduled to occur, or where no date is specified, but the agreement is subject
to demand, the notice period applicable to a demand for the repurchase of the
securities.
6. A portfolio lending agreement may be treated as having a maturity equal to
the period remaining until the date on which the loaned securities are scheduled
to be returned, or where no date is specified, but the agreement is subject to
demand, the notice period applicable to a demand for the return of the loaned
securities.
Each of the Value Equity and Dreyfus Small Cap Value Portfolios may not
invest more than 5% of the value of its total assets in warrants not listed on
either the New York or American Stock Exchange. Each of the Opportunity Value
and Enhanced Index Portfolios will not invest in warrants if, as a result
thereof, more than 2% of the value of the total assets of the Portfolio would be
invested in warrants which are not listed on the New York Stock Exchange, the
American Stock Exchange, or a recognized foreign exchange, or more than 5% of
the value of the total assets of the Portfolio would be invested in warrants
whether or not so listed. However, the acquisition of warrants attached to other
securities is not subject to this restriction. Each of the T. Rowe Price Equity
Income, T. Rowe Price Growth Stock and T. Rowe Price
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International Stock Portfolios will not invest in warrants if, as a result
thereof, the Portfolio will have more than 5% of the value of its total assets
invested in warrants; provided that this restriction does not apply to warrants
acquired as a result of the purchase of another security.
PERFORMANCE INFORMATION
Total return and yield will be computed as described below.
Total Return
Each Portfolio's "average annual total return" figures described and
shown in the Prospectus are computed according to a formula prescribed by the
Securities and Exchange Commission. The formula can be expressed as follows:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1000 payment
made at the beginning of the 1, 5, or 10 years (or other) periods at the end of
the 1, 5, or 10 years (or other) periods (or fractional portion thereof)
The table below shows the average annual total return for
the TCW Managed Asset Allocation, Value Equity, Dreyfus Small
Cap Value, Dreyfus U.S. Government Securities, T. Rowe Price
Equity Income, T. Rowe Price Growth Stock and Opportunity
Value Portfolios for the specific periods.
With respect to the T. Rowe Price International Stock Portfolio which
commenced operation April 8, 1991, effective January 1, 1995, the Portfolio's
Adviser was changed to Rowe Price-Fleming International, Inc. ("Price-Fleming").
Prior to March 24, 1995, the Portfolio was known as the Global Growth Portfolio.
Subsequent to such time, the Portfolio's investment objective was changed from
investments in small capitalization companies on a global basis to investments
in a broad range of established companies on an international basis (i.e.,
non-U.S. companies). Because of the change of the Portfolio's Adviser,
performance information for the period from inception to December 31, 1995 is
not presented. Such information is not reflective of Price-Fleming's ability to
manage the Portfolio. Information with respect to the Portfolio's per share
income and capital changes from inception through December 31, 1996 is set forth
in the Prospectus. Average annual total return information for the
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period from inception to December 31, 1994 is available upon written request to
the Fund.
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For Period
For the One For the Five From Incep-
Year Period Year Period tion (1) to
Ended December Ended December December 31,
31, 1996 31, 1996 1996
TCW Managed Asset
Allocation(2)...... 17.82%/17.82%* 12.66%/12.39%* 12.72%/12.41%*
T. Rowe Price
International
Stock.............. 15.23%/15.23%* N/A 12.77%/12.77%*
Value Equity(3)....... 23.84%/23.84%* N/A 17.46%/17.29%*
Dreyfus Small
Cap Value(4)....... 25.63%/25.63%* N/A 13.19%/13.07%*
T. Rowe Price
Equity Income(5)... 19.88%/19.88%* N/A 25.19%/25.19%*
T. Rowe Price Growth
Stock(5)............ 20.77%/20.77%* N/A 28.85%/28.85%*
Dreyfus U.S.
Government
Securities(6)...... 1.81%/1.81%* N/A 6.23%/6.08%*
Opportunity Value(7).. N/A N/A .60%/.20%*
- ------------------------
* The figure shows what the Portfolio's performance would have been in
the absence of fee waivers and/or reimbursement of other expenses, if
any.
(1) With respect to T. Rowe Price International Stock Portfolio, period
commenced on January 1, 1995.
(2) The Portfolio commenced operations on April 8, 1991.
(3) The Portfolio commenced operations on May 27, 1993.
(4) The Portfolio commenced operations on May 4, 1993.
(5) The Portfolio commenced operations on January 3, 1995.
(6) The Portfolio commenced operations on May 13, 1994.
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(7) The Portfolio commenced operations on November 18,
1996.
The calculations of total return assume the reinvestment of all
dividends and capital gains distributions on the reinvestment dates during the
period and the deduction of all recurring expenses that were charged to
shareholders accounts. The above table does not reflect charges and deductions
which are, or may be, imposed under the Contracts.
The performance of each Portfolio will vary from time to time in
response to fluctuations in market conditions, interest rates, the composition
of the Portfolio's investments and expenses. Consequently, a Portfolio's
performance figures are historical and should not be considered representative
of the performance of the Portfolio for any future period.
Yield
From time to time, the Fund may quote the TCW Money Market Portfolio's
and the Dreyfus U.S. Government Securities Portfolio's yield and effective yield
in advertisements or in reports or other communications to shareholders. Yield
quotations are expressed in annualized terms and may be quoted on a compounded
basis.
The annualized current yield for the TCW Money Market Portfolio is
computed by: (a) determining the net change in the value of a hypothetical
pre-existing account in the Portfolio having a balance of one share at the
beginning of a seven calendar day period for which yield is to be quoted; (b)
dividing the net change by the value of the account at the beginning of the
period to obtain the base period return; and (c) annualizing the results (i.e.,
multiplying the base period return by 365/7). The net change in the value of the
account reflects the value of additional shares purchased with dividends
declared on the original share and any such additional shares, but does not
include realized gains and losses or unrealized appreciation and depreciation.
In addition, the TCW Money Market Portfolio may calculate a compound effective
annualized yield by adding 1 to the base period return (calculated as described
above), raising the sum to a power equal to 365/7 and subtracting 1.
The Dreyfus U.S. Government Securities Portfolio's 30-day yield will be
calculated according to a formula prescribed by the Securities and Exchange
Commission. The formula can be expressed as follows:
YIELD = 2[(a-b+1)6-1]
cd
Where: a = dividends and interest earned during the period
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b = expenses accrued for the period (net of
reimbursement)
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = the net asset value per share on the last day
of the period
For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by the Portfolio at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Yield information is useful in reviewing a Portfolio's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in a Portfolio's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in the Portfolios'
investment portfolios, portfolio maturity, operating expenses and market
conditions.
It should be recognized that in periods of declining interest rates the
yields will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yields will tend to be somewhat lower.
Also, when interest rates are falling, the inflow of net new money to a
Portfolio from the continuous sale of its shares will likely be invested in
instruments producing lower yields than the balance of the Portfolio's
investments, thereby reducing the current yield of the Portfolio. In periods of
rising interest rates, the opposite can be expected to occur.
Non-Standardized Performance
In addition to the performance information described above, the Fund
may provide total return information with respect to the Portfolios for
designated periods, such as for the most recent six months or most recent twelve
months. This total return information is computed as described under "Total
Return" above except that no annualization is made.
PORTFOLIO TRANSACTIONS
Subject to the supervision and control of the Manager and the Trustees
of the Fund, each Portfolio's Adviser is responsible for decisions to buy and
sell securities for its account and for the placement of its portfolio business
and the negotiation of commissions, if any, paid on such
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transactions. Brokerage commissions are paid on transactions in equity
securities traded on a securities exchange and on options, futures contracts and
options thereon. Fixed income securities and certain equity securities in which
the Portfolios invest are traded in the over-the-counter market. These
securities are generally traded on a net basis with dealers acting as principal
for their own account without a stated commission, although prices of such
securities usually include a profit to the dealer. In over-the-counter
transactions, orders are placed directly with a principal market maker unless a
better price and execution can be obtained by using a broker. In underwritten
offerings, securities are usually purchased at a fixed price which includes an
amount of compensation to the underwriter generally referred to as the
underwriter's concession or discount. Certain money market securities may be
purchased directly from an issuer, in which case no commissions or discounts are
paid. U.S. government securities are generally purchased from underwriters or
dealers, although certain newly-issued U.S. government securities may be
purchased directly from the U.S. Treasury or from the issuing agency or
instrumentality. Each Portfolio's Adviser is responsible for effecting its
portfolio transactions and will do so in a manner deemed fair and reasonable to
the Portfolio and not according to any formula. The primary consideration in all
portfolio transactions will be prompt execution of orders in an efficient manner
at a favorable price. In selecting broker-dealers and negotiating commissions,
an Adviser considers the firm's reliability, the quality of its execution
services on a continuing basis and its financial condition. When more than one
firm is believed to meet these criteria, preference may be given to brokers that
provide the Portfolios or their Advisers with brokerage and research services
within the meaning of Section 28(e) of the Securities Exchange Act of 1934. Each
Portfolio's Adviser is of the opinion that, because this material must be
analyzed and reviewed, its receipt and use does not tend to reduce expenses but
may benefit the Portfolio by supplementing the Adviser's research. In seeking
the most favorable price and execution available, an Adviser may, if permitted
by law, consider sales of the Contracts as described in the Prospectus a factor
in the selection of broker-dealers.
The Board of Trustees of the Fund has authorized the Manager and the
Advisers to enter into arrangements with brokers who execute brokerage
transactions for the Portfolios whereby a portion of the commissions earned by
such brokers will be shared with a broker-dealer affiliate of the Manager. The
affiliated broker will act as an "introducing broker" in the transaction.
Subject to the requirements of applicable law including seeking best price and
execution of orders, commissions paid to executing brokers will not exceed
ordinary and customary brokerage commissions.
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The Board of Trustees has determined that the Fund's brokerage
commissions should be utilized for the Fund's benefit to the extent possible.
After reviewing various alternatives, the Board concluded that commissions
received by the broker-dealer affiliate of the Manager can be used to promote
the distribution of the Fund's shares including payments to broker-dealers who
sell the Contracts, the costs of training and educating such broker-dealers with
respect to the Contracts and other bona-fide distribution costs payable to
unaffiliated persons. Other than incidental costs related to establishing the
broker-dealer affiliate as an "introducing broker", no portion of the
commissions received by the broker-dealer affiliate of the Manager will be
retained for its or any affiliate's benefit. On a quarterly basis, the Manager
will report to the Board of Trustees the aggregate commissions received by its
broker-dealer affiliate and the distribution expenses paid from such
commissions. The Board of Trustees will periodically review the extent to which
the foregoing arrangement reduces distribution expenses currently being incurred
by the Manager or its affiliates on behalf of the Fund. The Board of Trustees
may determine from time to time other appropriate uses for the Fund from the
commissions it pays to executing brokers.
The Manager will not implement this program until any required
exemptive or no-action relief is obtained from the Securities and Exchange
Commission.
An Adviser may effect portfolio transactions for other investment
companies and advisory accounts. Research services furnished by broker-dealers
through which a Portfolio effects its securities transactions may be used by the
Portfolio's Adviser in servicing all of its accounts; not all such services may
be used in connection with the Portfolio. In the opinion of each Adviser, it is
not possible to measure separately the benefits from research services to each
of its accounts, including a Portfolio. Whenever concurrent decisions are made
to purchase or sell securities by a Portfolio and another account, the
Portfolio's Adviser will attempt to allocate equitably portfolio transactions
among the Portfolio and other accounts. In making such allocations between the
Portfolio and other accounts, the main factors to be considered are the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and the opinions of the persons
responsible for recommending investments to the Portfolio and the other
accounts. In some cases this procedure could have an adverse effect on a
Portfolio. In the opinion of each Adviser, however, the results of such
procedures will, on the whole, be in the best interest of each of the accounts.
The Adviser to the Value Equity and Opportunity Value Portfolios may
execute brokerage transactions through Oppenheimer & Co. Inc. ("Opco"), an
affiliated broker-dealer
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of the Adviser, acting as agent in accordance with procedures established by the
Fund's Board of Trustees, but will not purchase any securities from or sell any
securities to Opco acting as principal for its own account.
The Adviser to the T. Rowe Price International Stock, T. Rowe Price
Equity Income and T. Rowe Price Growth Stock Portfolios may execute portfolio
transactions through certain affiliates of Robert Fleming Holdings Limited and
Jardine Fleming Group Limited, persons indirectly related to the Adviser, acting
as agent in accordance with procedures established by the Fund's Board of
Trustees, but will not purchase any securities from or sell any securities to
any such affiliate acting as principal for its own account.
The Adviser to the Enhanced Index Portfolio may execute portfolio
transactions through certain of its affiliated brokers, acting as agent in
accordance with the procedures established by the Fund's Board of Trustees, but
will not purchase any securities from or sell any securities to such affiliate
acting as principal for its own account.
For the year ended December 31, 1994, the TCW Money Market Portfolio
did not pay any brokerage commissions, while the TCW Managed Asset Allocation
Portfolio and T. Rowe Price International Stock Portfolio paid $175,548 and
$554,048, respectively, in brokerage commissions. For the year ended December
31, 1994, the Value Equity Portfolio and Dreyfus Small Cap Value Portfolio paid
$58,472 and $100,262, respectively, in brokerage commissions, of which $32,796
(78.29%) with respect to the Value Equity Portfolio and $58,028 (72.78%) with
respect to the Dreyfus Small Cap Value Portfolio was paid to Opco. For the
fiscal period ended December 31, 1994, the Dreyfus U.S. Government Securities
Portfolio paid no brokerage commissions. For the year ended December 31, 1995,
the TCW Money Market Portfolio and the Dreyfus U.S. Government Securities
Portfolio did not pay any brokerage commissions, while the TCW Managed Asset
Allocation Portfolio paid $187,103 in brokerage commissions. For the year ended
December 31, 1995, the T. Rowe Price International Stock Portfolio, the Value
Equity Portfolio and the Dreyfus Small Cap Value Portfolio paid $395,753,
$57,800, and $101,885, respectively, in brokerage commissions of which $33,338
(8.42%), $15,101 (3.82%) and $673 (.17%) with respect to the T. Rowe Price
International Stock Portfolio was paid to Robert Fleming Holdings Limited and
Jardine Fleming Group Limited, Ord Minnett and OpCo, respectively, $29,271
(50.64%) with respect to the Value Equity Portfolio and $36,216 (35.55%) with
respect to the Dreyfus Small Cap Value Portfolio was paid to OpCo. For the
fiscal period ended December 31, 1995, the T. Rowe Price Equity Income Portfolio
and the T. Rowe Price Growth Stock Portfolio paid $18,059 and $39,447,
respectively in brokerage commissions of which $10 (0.06%) with respect to the
T. Rowe Price Equity Income Portfolio was paid to OpCo and $536 (1.36%), $507
(1.29%) and $23 (0.06%)
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with respect to the T. Rowe Price Growth Stock Portfolio was paid to Boston Safe
Deposit and Trust Company, Jardine Fleming Group Limited and OpCo, respectively.
For the year ended December 31, 1996, the Dreyfus U.S. Government Securities
Portfolio did not pay any brokerage commissions, while the TCW Money Market
Portfolio and the TCW Managed Asset Allocation Portfolio paid $2,724 and $93,009
in brokerage commissions, respectively. For the year ended December 31, 1996,
the T. Rowe Price International Stock Portfolio, the Value Equity Portfolio and
the Dreyfus Small Cap Value Portfolio paid $136,536, $90,589, and $398,554,
respectively, in brokerage commissions of which $4,462 (3.27%), $2,908 (2.13%)
and $906 (.66%) with respect to the T. Rowe Price International Stock Portfolio
was paid to Robert Fleming Holdings Limited and Jardine Fleming Group Limited,
Ord Minnett and OpCo, respectively, $35,624 (39.32%) with respect to the Value
Equity Portfolio and $34,511 (8.66%) with respect to the Dreyfus Small Cap Value
Portfolio was paid to OpCo. For the fiscal year ended December 31, 1996, the T.
Rowe Price Equity Income Portfolio and the T. Rowe Price Growth Stock Portfolio
paid $55,261 and $69,409, respectively in brokerage commissions of which $120
(.22%) with respect to the T. Rowe Price Equity Income Portfolio was paid to
OpCo and $3,037 (4.38%) and $63 (.09%) with respect to the T. Rowe Price Growth
Stock Portfolio was paid to Robert Flemings Holdings Limited and OpCo,
respectively. For the fiscal period ended December 31, 1996, the Opportunity
Value Portfolio paid $291 in brokerage commissions.
MANAGEMENT OF THE FUND
Trustees and Officers
The Trustees and executive officers of the Trust, their ages and their
principal occupations during the past five years are set forth below. Unless
otherwise indicated, the business address of each is 2101 East Coast Highway,
Suite 300, Corona del Mar, California 92625.
Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
James R. McInnis (49) President President of Endeavor
Group (broker-dealer)
since June, 1991;
President of McGuinness &
Associates (insurance
marketing) from March,
1983 to June, 1991.
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Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
- ---------------------
*Vincent J. McGuinness (62)
Trustee Chairman, Chief Executive
Officer 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.
Timothy A. Devine (62) Trustee Prior to September, 1993,
1424 Dolphin Terrace President and Chief
Corona del Mar, California Executive Officer, Devine
92625 Properties, Inc. Since
September, 1993, Vice
President, Plant Control,
Inc. (landscape
contracting and
maintenance).
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<PAGE>
Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
Trustee President, Thomas J.
Thomas J. Hawekotte (62) Hawekotte, P.C. (law
1200 Lake Shore Drive practice).
Chicago, Illinois 60610
Steven L. Klosterman (45) Trustee Since July, 1995,
462 Stevens Avenue President of Klosterman
Suite 206 Capital Corporation
Solana Beach, California (investment adviser);
92075 Investment Counselor,
Robert J. Metcalf &
Associates, Inc.
(investment adviser) from
August, 1990 to June,
1995.
*Halbert D. Lindquist (51) Trustee President, Lindquist
1650 E. Fort Lowell Road Enterprises, Inc.
Tucson, Arizona 85719-2324 (financial services) and
since December, 1987
Tucson Asset Management,
Inc. (financial services),
and since November, 1987,
Presidio Government
Securities, Incorporated
(broker-dealer).
R. Daniel Olmstead, Jr. (66) Trustee Rancher until January, 1997.
2661 Point Del Mar Since January, 1997, real
Corona Del Mar, California estate consultant.
92625
Norman Ridley (51) Vice Since 1985, Senior Vice
865 S. Figueroa Street President President, TCW Asset
Suite 1800 Management Company and
Los Angeles, California Trust Company of the West.
90017
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Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
Vice Since November, 1987,
Ronald E. Robison (58) President Managing Director and
865 S. Figueroa Street Chief Operating Officer,
Suite 1800 TCW Funds Management Inc.;
Los Angeles, California since March, 1990,
90017 Managing Director, Trust
Company of the West and
TCW Asset Management
Company.
James M. Goldberg (51) Vice Since June, 1984, Managing
865 S. Figueroa Street President Director, TCW Asset
Suite 1800 Management Company and
Los Angeles, California Trust Company of the West
90017 and since January, 1987
Managing Director, TCW
Funds Management, Inc.
Eileen Rominger (42) Vice Since May, 1994, Managing
One World Financial Center President Director, Oppenheimer
New York, New York 10281 Capital, prior thereto
Senior Vice President,
Oppenheimer Capital;
Portfolio Manager,
Oppenheimer Quest Value Fund,
Inc., OCC Accumulation Trust,
Enterprise Accumulation Trust
and Penn Series Fund,
open-end investment
companies.
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<PAGE>
Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
**Vincent J. McGuinness, Jr. Chief Since September, 1996,
(32) Financial Chief Financial Officer
Officer and since May, 1996,
(Treasurer) Director of Endeavor
Management Co.; since August,
1996, Chief Financial officer
of VJM Corporation; since
May, 1996, Executive Vice
President and Director of
Sales, Western Division of
Endeavor Group; Chief
Financial Officer of
McGuinness & Associates;
since March, 1996, Director
of McGuinness Group. From
July, 1993 to August, 1995
Rocky Mountain Regional
Marketing Director for
Endeavor Group. MBA graduate
student from September,
1991 to May, 1993.
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Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
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; and from
November, 1986 to July,
1992, Executive Secretary
to Chairman of the Board
and Chief Executive
Officer of, and from
October, 1990 to July,
1992, Secretary of
McGuinness & Associates,
Endeavor Group, VJM
Corporation, McGuinness
Group, Endeavor Management
Co. and Swift Energy
Marketing Company.
* An "interested person" of the Fund as defined in the 1940
Act.
** Vincent J. McGuinness, Jr. is the son of Vincent J.
McGuinness.
No remuneration will be paid by the Fund to any Trustee or officer of
the Fund who is affiliated with the Manager or the Advisers. Each Trustee who is
not an affiliated person of the Fund will be reimbursed for out-of-pocket
expenses and receives an annual fee of $2,500 and $500 for attendance at each
regularly scheduled Trustees' meeting. Set forth below for each of the Trustees
of the Fund is the aggregate compensation paid to such Trustees for the fiscal
year ended December 31, 1996.
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COMPENSATION TABLE
Total
Compensation
From Fund
Aggregate and Fund
Name of Compensation Complex
Person From Fund Paid to Trustees
Vincent J. McGuinness $ - $ -
Timothy A. Devine 4,500 4,500
Thomas J. Hawekotte 4,500 4,500
Steven L. Klosterman 4,500 4,500
Halbert D. Lindquist 3,500 3,500
R. Daniel Olmstead 4,500 4,500
The Agreement and Declaration of Trust of the Fund provides that the
Fund will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Fund, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Fund or that such indemnification would relieve any officer or Trustee of any
liability to the Fund or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of his duties. The Fund, at its
expense, provides liability insurance for the benefit of its Trustees and
officers.
As of the date of this Statement of Additional Information, the
officers and Trustees of the Fund as a group owned less than 1% of the
outstanding shares of the Fund.
The Manager
The Management Agreement between the Fund and the Manager with respect
to the TCW Money Market, TCW Managed Asset Allocation and T. Rowe Price
International Stock Portfolios was approved by the Trustees of the Fund
(including all of the Trustees who are not "interested persons" [as defined in
the 1940 Act] of the Manager) on July 20, 1992, and by the shareholders of the
Fund on November 23, 1992. With respect to the Value Equity and Dreyfus Small
Cap Value Portfolios, the Management Agreement was approved by the Trustees of
the Fund (including all of the Trustees who are not "interested persons" of the
Manager) on April 19, 1993 and by PFL Life Insurance Company, the sole
shareholder of the Value Equity and Dreyfus Small Cap Value Portfolios, on April
19, 1993. With respect to the Dreyfus U.S. Government Securities Portfolio, the
Management Agreement was approved by the Trustees of the Fund (including all of
the Trustees who are
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not "interested persons" of the Manager) on January 24, 1994 and by PFL Life
Insurance Company, the sole shareholder of the Dreyfus U.S. Government
Securities Portfolio, on March 7, 1994. With respect to the T. Rowe Price Equity
Income and T. Rowe Price Growth Stock Portfolios, the Management Agreement was
approved by the Trustees of the Fund (including all of the Trustees who are not
"interested persons" of the Manager) on October 24, 1994 and by PFL Life
Insurance Company, the sole shareholder of the T. Rowe Price Equity Income and
T. Rowe Price Growth Stock Portfolios, on November 1, 1994. With respect to the
Opportunity Value and Enhanced Index Portfolios, the Management Agreement was
approved by the Trustees of the Fund (including all of the Trustees who are not
"interested persons" of the Manager) on August 13, 1996 and by PFL Life
Insurance Company, the sole shareholder of the Opportunity Value and Enhanced
Index Portfolios, on August 26, 1996. See "Organization and Capitalization of
the Fund." The Management Agreement will continue in force for two years from
its date, November 23, 1992 with respect to the TCW Money Market, TCW Managed
Asset Allocation and T. Rowe Price International Stock Portfolios, April 19,
1993 with respect to the Value Equity and Dreyfus Small Cap Value Portfolios,
March 25, 1994 with respect to the Dreyfus U.S. Government Securities Portfolio,
December 28, 1994 with respect to the T. Rowe Price Equity Income and T. Rowe
Price Growth Stock Portfolios, August 26, 1996 with respect to the Opportunity
Value and Enhanced Index Portfolios and from year to year thereafter, but only
so long as its continuation as to each Portfolio is specifically approved at
least annually (i) by the Trustees or by the vote of a majority of the
outstanding voting securities of the Portfolio, and (ii) by the vote of a
majority of the Trustees who are not parties to the Management Agreement or
"interested persons" of any such party, by votes cast in person at a meeting
called for the purpose of voting on such approval. The Management Agreement
provides that it shall terminate automatically if assigned, and that it may be
terminated as to any Portfolio without penalty by the Trustees of the Fund or by
vote of a majority of the outstanding voting securities of the Portfolio upon 60
days' prior written notice to the Manager, or by the Manager upon 90 days' prior
written notice to the Fund, or upon such shorter notice as may be mutually
agreed upon. In the event the Manager ceases to be the Manager of the Fund, the
right of the Fund to use the identifying name of "Endeavor" may be withdrawn.
The Advisers
The Investment Advisory Agreements between the Manager and TCW Funds
Management, Inc. were approved by the Trustees of the Fund (including all the
Trustees who are not "interested persons" of the Manager or of the Adviser) on
July 20, 1992, and by the shareholders of the Fund on November 23, 1992. The
Investment Advisory Agreements between the Manager
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and OpCap Advisors (formerly known as Quest for Value Advisors) were initially
approved by the Trustees of the Fund (including all of the Trustees who are not
"interested persons" of the Manager or of the Adviser) on April 19, 1993 with
respect to the Value Equity Portfolio and August 13, 1996 with respect to the
Opportunity Value Portfolio and by PFL Life Insurance Company as sole
shareholder of the Value Equity and Opportunity Value Portfolios on April 19,
1993 and August 26, 1996, respectively. As described in the Prospectus, a
transaction is pending whereby the ownership of OpCap Advisors is being
transferred which, under the 1940 Act, will result in the automatic termination
of the Investment Advisory Agreement between the Manager and OpCap Advisors. On
April 8, 1997 the Trustees of the Fund (including all of the Trustees who are
not "interested persons" of the Manager or the Adviser) approved new Investment
Advisory Agreements between the Manager and OpCap Advisors. Approval of the new
Investment Advisory Agreements will be submitted to the shareholders of the
Value Equity and Opportunity Value Portfolios for approval.
The Investment Advisory Agreement between the Manager and The Boston
Company Asset Management, Inc. was approved by the Trustees of the Fund
(including all of the Trustees who are not "interested persons" of the Manager
or of the Adviser) on January 24, 1994 and by PFL Life Insurance Company as sole
shareholder of the Dreyfus U.S. Government Securities Portfolio on March 7,
1994. The Investment Advisory Agreement was transferred to The Dreyfus
Corporation effective May 1, 1996. The Investment Advisory Agreements between
the Manager and T. Rowe Price Associates, Inc. were approved by the Trustees of
the Fund (including all of the Trustees who are not "interested persons" of the
Manager or of the Adviser) on October 24, 1994 and by PFL Life Insurance Company
as sole shareholder of the T. Rowe Price Equity Income and T. Rowe Price Growth
Stock Portfolios on November 1, 1994. The Investment Advisory Agreement between
the Manager and J.P. Morgan Investment Management Inc. was approved by the
Trustees of the Fund (including all of the Trustees who are not "interested
persons" of the Manager or of the Adviser) on August 13, 1996 and by PFL Life
Insurance Company as sole shareholder of the Enhanced Index Portfolio on August
26, 1996. Effective January 1, 1995, Price-Fleming became the Adviser of the T.
Rowe Price International Stock Portfolio. The Investment Advisory Agreement with
Price-Fleming for the T. Rowe Price International Stock Portfolio was approved
by the Trustees of the Fund (including all of the Trustees who are not
"interested persons" of the Manager or of the Adviser) on December 19, 1994 and
by shareholders of the Portfolio on March 24, 1995. Effective September 16,
1996, The Dreyfus Corporation became the Adviser of the Dreyfus Small Cap Value
Portfolio. The Investment Advisory Agreement with The Dreyfus Corporation was
approved by the Trustees of the Fund (including all of the Trustees who are not
"interested persons" of the Manager or of the Adviser) on August 13, 1996
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and by the shareholders of the Portfolio on October 29, 1996. See "Organization
and Capitalization of the Fund."
Each agreement will continue in force for two years from its date,
November 23, 1992 with respect to the TCW Money Market and TCW Managed Asset
Allocation Portfolios, April 19, 1993 with respect to the Value Equity
Portfolio, March 25, 1994 with respect to the Dreyfus U.S. Government Securities
Portfolio, December 28, 1994 with respect to the T. Rowe Price Equity Income and
T. Rowe Price Growth Stock Portfolios, January 1, 1995 with respect to the T.
Rowe Price International Stock Portfolio, September 16, 1996 with respect to the
Dreyfus Small Cap Value Portfolio, November 4, 1996 with respect to the
Opportunity Value Portfolio and April 30, 1997 with respect to the Enhanced
Index Portfolio, and from year to year thereafter, but only so long as its
continuation as to a Portfolio is specifically approved at least annually (i) by
the Trustees or by the vote of a majority of the outstanding voting securities
of the Portfolio, and (ii) by the vote of a majority of the Trustees who are not
parties to the agreement or "interested persons" of any such party, by votes
cast in person at a meeting called for the purpose of voting on such approval.
Each Investment Advisory Agreement provides that it shall terminate
automatically if assigned or if the Management Agreement with respect to the
related Portfolio terminates, and that it may be terminated as to a Portfolio
without penalty by the Manager, by the Trustees of the Fund or by vote of a
majority of the outstanding voting securities of the Portfolio on not less than
60 days' (90 days' with respect to the Enhanced Index Portfolio) prior written
notice to the Adviser or by the Adviser on not less than 150 days' prior written
notice to the Manager, or upon such shorter notice as may be mutually agreed
upon.
The following table shows the fees paid by each of the Portfolios and
any fee waivers or reimbursements during the fiscal years ended December 31,
1994, December 31, 1995 and December 31, 1996.
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1996
Investment Investment
Management Management Other
Fee Fee Expenses
Paid Waived
Reimbursed
TCW Money Market
Portfolio....... $ 165,212 $ -- --
TCW Managed Asset
Allocation
Portfolio....... 1,639,338 -- --
T. Rowe Price
International
Stock Portfolio. 1,015,179 -- --
Value Equity
Portfolio....... 768,579 -- --
Dreyfus Small
Cap Value
Portfolio....... 535,895 -- --
Dreyfus U.S.
Government
Securities
Portfolio....... 122,058 -- --
T. Rowe Price
Equity Income
Portfolio....... 369,356 -- --
T. Rowe Price
Growth Stock
Portfolio....... 313,356 -- --
Opportunity Value
Portfolio*...... 197 -- 2,802
1995**
Investment Investment
Management Management Other
Fee Fee Expenses
Paid Waived Reimbursed
TCW Money Market
Portfolio....... $ 117,465 $ --- ---
TCW Managed Asset
Allocation
Portfolio....... 1,388,652 --- ---
T. Rowe Price
International
Stock Portfolio. 759,830 --- ---
Value Equity
Portfolio....... 395,205 --- ---
Dreyfus Small Cap
Value Portfolio. 339,672 --- ---
Dreyfus U.S.
Government
Securities
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<PAGE>
Portfolio....... 42,531 --- ---
T. Rowe Price
Equity Income
Portfolio....... 70,664 --- ---
T. Rowe Price
Growth Stock
Portfolio....... 75,681 --- ---
1994
Investment
Management Investment Other
Fee Management Expenses
Paid Fee Waived Reimbursed
TCW Money Market
Portfolio........ $ 111,100 $--- $ ---
TCW Managed Asset
Allocation
Portfolio....... 1,151,688 --- ---
T. Rowe Price
International
Stock Portfolio. 696,732 --- ---
Value Equity
Portfolio....... 191,316 --- ---
Dreyfus Small
Cap Value
Portfolio....... 214,198 --- ---
Dreyfus U.S.
Government
Securities
Portfolio***.... 8,087 8,087 4,955
- ---------------
* The information presented with respect to the Opportunity Value
Portfolio is for the period from November 18, 1996 (commencement of
operations) to December 31, 1996.
** The information presented for the T. Rowe Price Equity Income and T.
Rowe Price Growth Stock Portfolios is for the period from January 3,
1995 (commencement of operations) to December 31, 1995.
*** The information presented with respect to the Dreyfus
U.S. Government Securities Portfolio is for the period
from May 13, 1994 (commencement of operations) to
December 31, 1994.
---------------------------
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<PAGE>
Each Investment Advisory Agreement provides that the Adviser shall not
be subject to any liability to the Fund or the Manager for any act or omission
in the course of or connected with rendering services thereunder in the absence
of willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties on the part of the Adviser.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of
payment on shares of the Portfolios for more than seven days during any period
(1) when the New York Stock Exchange is closed or trading on the Exchange is
restricted as determined by the Securities and Exchange Commission, (2) when an
emergency exists, as defined by the Securities and Exchange Commission, which
makes it not reasonably practicable for a Portfolio to dispose of securities
owned by it or fairly to determine the value of its assets, or (3) as the
Securities and Exchange Commission may otherwise permit.
The value of the shares on redemption may be more or less than the
shareholder's cost, depending upon the market value of the portfolio securities
at the time of redemption.
NET ASSET VALUE
The net asset value per share of each Portfolio is determined as of the
close of regular trading of the New York Stock Exchange (currently 4:00 p.m.,
New York City time), Monday through Friday, exclusive of national business
holidays. The Fund will be closed on the following national business holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Portfolio securities for which
the primary market is on a domestic or foreign exchange or which are traded
over-the-counter and quoted on the NASDAQ System will be valued at the last sale
price on the day of valuation or, if there was no sale that day, at the last
reported bid price, using prices as of the close of trading. Portfolio
securities not quoted on the NASDAQ System that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, will be valued at the most recently
quoted bid price provided by the principal market makers.
In the case of any securities which are not actively traded, reliable
market quotations may not be considered to be readily available. These
investments are stated at fair value as determined under the direction of the
Trustees. Such fair value is expected to be determined by utilizing information
furnished by a pricing service which determines valuations for normal,
institutional-size trading units of such securities using methods based on
market transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders.
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If any securities held by a Portfolio are restricted as to resale,
their fair value will be determined following procedures approved by the
Trustees. The fair value of such securities is generally determined as the
amount which the Portfolio could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by the Portfolio in connection with
such disposition). In addition, specific factors are also generally considered,
such as the cost of the investment, the market value of any unrestricted
securities of the same class (both at the time of purchase and at the time of
valuation), the size of the holding, the prices of any recent transactions or
offers with respect to such securities and any available analysts' reports
regarding the issuer.
Notwithstanding the foregoing, short-term debt securities with
maturities of 60 days or less will be valued at amortized cost.
The TCW Money Market Portfolio's investment policies and method of
securities valuation are intended to permit the Portfolio generally to maintain
a constant net asset value of $1.00 per share by computing the net asset value
per share to the nearest $.01 per share. The Portfolio is permitted to use the
amortized cost method of valuation for its portfolio securities pursuant to
regulations of the Securities and Exchange Commission. This method may result in
periods during which value, as determined by amortized cost, is higher or lower
than the price the Portfolio would receive if it sold the instrument. The net
asset value per share would be subject to fluctuation upon any significant
changes in the value of the Portfolio's securities. The value of debt
securities, such as those in the Portfolio, usually reflects yields generally
available on securities of similar yield, quality and duration. When such yields
decline, the value of a portfolio holding such securities can be expected to
decline. Although the Portfolio seeks to maintain the net asset value per share
of the Portfolio at $1.00, there can be no assurance that net asset value will
not vary.
The Trustees of the Fund have undertaken to establish procedures
reasonably designed, taking into account current market conditions and the
Portfolio's investment objective, to stabilize the net asset value per share for
purposes of sales and redemptions at $1.00. These procedures include the
determination, at such intervals as the Trustees deem appropriate, of the
extent, if any, to which the net asset value per share calculated by using
available market quotations deviates from $1.00 per share. In the event such
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<PAGE>
deviation exceeds one half of one percent, the Trustees are required to promptly
consider what action, if any, should be initiated.
With respect to the Portfolios other than the TCW Money Market
Portfolio, foreign securities traded outside the United States are generally
valued as of the time their trading is complete, which is usually different from
the close of the New York Stock Exchange. Occasionally, events affecting the
value of such securities may occur between such times and the close of the New
York Stock Exchange that will not be reflected in the computation of the
Portfolio's net asset value. If events materially affecting the value of such
securities occur during such period, these securities will be valued at their
fair value according to procedures decided upon in good faith by the Fund's
Board of Trustees. All securities and other assets of a Portfolio initially
expressed in foreign currencies will be converted to U.S. dollar values at the
mean of the bid and offer prices of such currencies against U.S. dollars last
quoted on a valuation date by any recognized dealer.
TAXES
Federal Income Taxes
Each Portfolio intends to qualify each year as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). By so
qualifying, a Portfolio will not be subject to federal income taxes to the
extent that its net investment income and net realized capital gains are
distributed.
In order to so qualify, a Portfolio must, among other things, (1)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stocks or securities or foreign currencies, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stocks or securities;
(2) derive less than 30% of its gross income in each taxable year from the sale
or other disposition of stocks or securities held less than three months (the
Portfolio's transactions in future transactions, straddles and options may be
restricted in order to comply with this requirement); and (3) diversify its
holdings so that, at the end of each quarter of the Portfolio's taxable year,
(a) at least 50% of the market value of the Portfolio's assets is represented by
cash, government securities and other securities limited in respect of any one
issuer to 5% of the value of the Portfolio's assets and to not more than 10% of
the voting securities of such issuer, and (b) not more than 25% of the value of
its assets is invested in securities of any one issuer (other than government
securities).
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<PAGE>
As a regulated investment company, a Portfolio will not be subject to
federal income tax on net investment income and capital gains (short- and
long-term), if any, that it distributes to its shareholders if at least 90% of
its net investment income and net short-term capital gains for the taxable year
are distributed, but will be subject to tax at regular corporate rates on any
income or gains that are not distributed. In general, dividends will be treated
as paid when actually distributed, except that dividends declared in October,
November or December and made payable to shareholders of record in such a month
will be treated as having been paid by the Portfolio (and received by
shareholders) on December 31, provided the dividend is paid in the following
January. Each Portfolio intends to satisfy the distribution requirement in each
taxable year.
The Portfolios will not be subject to the 4% federal excise tax imposed
on registered investment companies that do not distribute all of their income
and gains each calendar year because such tax does not apply to a registered
investment company whose only shareholders are segregated asset accounts of life
insurance companies held in connection with variable annuity and/or variable
life insurance policies.
The Fund intends to comply with section 817(h) of the Code and the
regulations issued thereunder. As required by regulations under that section,
the only shareholders of the Fund and its Portfolios will be life insurance
company segregated asset accounts (also referred to as separate accounts) that
fund variable life insurance or annuity contracts and the general account of PFL
Life Insurance Company which provided the initial capital for the Portfolios of
the Fund. See the prospectus or other material for the Contracts for additional
discussion of the taxation of segregated asset accounts and of the owner of the
particular Contract described therein.
Section 817(h) of the Code and Treasury Department regulations
thereunder impose certain diversification requirements on the segregated asset
accounts investing in the Portfolios of the Fund. These requirements, which are
in addition to the diversification requirements applicable to the Fund under the
1940 Act and under the regulated investment company provisions of the Code, may
limit the types and amounts of securities in which the Portfolios may invest.
Failure to meet the requirements of section 817(h) could result in current
taxation of the owner of the Contract on the income of the Contract.
The Fund may therefore find it necessary to take action to ensure that
a Contract continues to qualify as a Contract under federal tax laws. The Fund,
for example, may be required to alter the investment objectives of a Portfolio
or substitute the shares of one Portfolio for those of another. No such change
of investment objectives or substitution of
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<PAGE>
securities will take place without notice to the shareholders of the affected
Portfolio and the approval of a majority of such shareholders and without prior
approval of the Securities and Exchange Commission, to the extent legally
required.
ORGANIZATION AND CAPITALIZATION OF THE FUND
The Fund is a Massachusetts business trust organized on November 18,
1988. A copy of the Fund's Agreement and Declaration of Trust, as amended, which
is governed by Massachusetts law, is on file with the Secretary of State of The
Commonwealth of Massachusetts.
The Trustees of the Fund have authority to issue an unlimited number of
shares of beneficial interest without par value of one or more series.
Currently, the Trustees have established and designated ten series. Each series
of shares represents the beneficial interest in a separate Portfolio of assets
of the Fund, which is separately managed and has its own investment objective
and policies. The Trustees of the Fund have authority, without the necessity of
a shareholder vote, to establish additional portfolios and series of shares. The
shares outstanding are, and those offered hereby when issued will be, fully paid
and nonassessable by the Fund. The shares have no preemptive, conversion or
subscription rights and are fully transferable.
The assets received from the sale of shares of a Portfolio, and all
income, earnings, profits and proceeds thereof, subject only to the rights of
creditors, constitute the underlying assets of the Portfolio. The underlying
assets of a Portfolio are required to be segregated on the Fund's books of
account and are to be charged with the expenses with respect to that Portfolio.
Any general expenses of the Fund not readily attributable to a Portfolio will be
allocated by or under the direction of the Trustees in such manner as the
Trustees determine to be fair and equitable, taking into consideration, among
other things, the nature and type of expense and the relative sizes of the
Portfolio and the other Portfolios.
Each share has one vote, with fractional shares voting proportionately.
Shareholders of a Portfolio are not entitled to vote on any matter that requires
a separate vote of the shares of another Portfolio but which does not affect the
Portfolio. The Agreement and Declaration of Trust does not require the Fund to
hold annual meetings of shareholders. Thus, there will ordinarily be no annual
shareholder meetings, unless otherwise required by the 1940 Act. The Trustees of
the Fund may appoint their successors until fewer than a majority of the
Trustees have been elected by shareholders, at which time a meeting of
shareholders will be called to elect Trustees. Under the Agreement and
Declaration of Trust, any Trustee may be removed by vote of two-thirds of the
outstanding shares of the Fund, and holders of 10% or more of
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<PAGE>
the outstanding shares can require the Trustees to call a meeting of
shareholders for the purpose of voting on the removal of one or more Trustees.
If ten or more shareholders who have been such for at least six months and who
hold in the aggregate shares with a net asset value of at least $25,000 inform
the Trustees that they wish to communicate with other shareholders, the Trustees
either will give such shareholders access to the shareholder lists or will
inform them of the cost involved if the Fund forwards materials to the
shareholders on their behalf. If the Trustees object to mailing such materials,
they must inform the Securities and Exchange Commission and thereafter comply
with the requirements of the 1940 Act.
PFL will vote shares of the Fund as described under the caption "Voting
Rights" in the prospectus or other material for the Contracts which accompanies
the Prospectus.
As of March 31, 1997, the PFL Endeavor Variable Annuity Account owned
of record the following approximate percentages of the outstanding shares of
each Portfolio: 75% of the TCW Money Market Portfolio; 95% of the TCW Managed
Asset Allocation Portfolio; 89% of the T. Rowe Price International Stock
Portfolio; 85% of the Value Equity Portfolio; 88% of the Dreyfus Small Cap Value
Portfolio; 83% of the Dreyfus U.S. Government Securities Portfolio; 83% of the
T. Rowe Price Equity Income Portfolio; 81% of the T. Rowe Price Growth Stock
Portfolio; and 77% of the Opportunity Value Portfolio. As of March 31, 1997, the
PFL Endeavor Platinum Variable Annuity Account owned of record the following
approximate percentages of the outstanding shares of each Portfolio: 23% of the
TCW Money Market Portfolio; 4% of the TCW Managed Asset Allocation Portfolio; 8%
of the T. Rowe Price International Stock Portfolio; 12% of the Value Equity
Portfolio; 9% of the Dreyfus Small Cap Value Portfolio; 14% of the Dreyfus U.S.
Government Securities Portfolio; 14% of the T. Rowe Price Equity Income
Portfolio; 10% of the T. Rowe Price Growth Stock Portfolio; and 14% of the
Opportunity Value Portfolio. As of March 31, 1997, the AUSA Endeavor Variable
Annuity Account owned of record the following approximate percentages of the
outstanding shares of each Portfolio: 2% of the TCW Money Market Portfolio; 1%
of the TCW Managed Asset Allocation Portfolio; 3% of the T. Rowe Price
International Stock Portfolio; 2% of the Value Equity Portfolio; 2% of the
Dreyfus Small Cap Value Portfolio; 3% of the Dreyfus U.S. Government Securities
Portfolio; 3% of the T. Rowe Price Equity Income Portfolio; 3% of the T. Rowe
Price Growth Stock Portfolio; and 9% of the Opportunity Value Portfolio.
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts
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and obligations of the Fund and requires that notice of such disclaimer be given
in each agreement, obligation or instrument entered into or executed by the Fund
or the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of Fund property for all loss and expense of any
shareholders held personally liable for obligations of the Fund. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The likelihood of such circumstances is remote.
LEGAL MATTERS
Certain legal matters are passed on for the Fund by Sullivan &
Worcester LLP of Washington, D.C.
CUSTODIAN
Boston Safe Deposit and Trust Company, located at One Boston Place,
Boston, Massachusetts 02108, serves as the custodian of the Fund. Under the
Custody Agreement, Boston Safe holds the Portfolios' securities and keeps all
necessary records and documents.
FINANCIAL STATEMENTS
The financial statements of the TCW Money Market Portfolio, TCW Managed
Asset Allocation Portfolio, T. Rowe Price International Stock Portfolio, Value
Equity Portfolio, Dreyfus Small Cap Value Portfolio, Dreyfus U.S. Government
Securities Portfolio, T. Rowe Price Equity Income Portfolio, T. Rowe Price
Growth Stock Portfolio and Opportunity Value Portfolio for the fiscal year ended
December 31, 1996, including notes to the financial statements and supplementary
information and the Independent Auditors' Report are included in the Fund's
Annual Report to Shareholders. A copy of the Annual Report accompanies this
Statement of Additional Information. The financial statements (including the
Independent Auditors' Report) included in the Annual Report are incorporated
herein by reference. Interim financial statements (unaudited) for the
Opportunity Value Portfolio for the period January 1, 1997 through March 31,
1997 accompany this Statement of Additional Information.
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APPENDIX
SECURITIES RATINGS
Standard & Poor's Bond Ratings
A Standard & Poor's corporate debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree. Debt rated "A" has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt of a higher rated category. Debt rated "BBB" is regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
to repay principal for debt in this category than for higher rated categories.
Bonds rated "BB", "B", "CCC" and "CC" are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. The ratings from "AA" to "B" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
Moody's Bond Ratings
Bonds rated "Aaa" by Moody's are judged to be of the best quality and
to carry the smallest degree of investment risk. Bonds rated "Aa" are judged to
be of high quality by all standards. Bonds rated "A" possess many favorable
investment attributes and are to be considered as higher medium grade
obligations. Bonds rated "Baa" are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured and have speculative
characteristics as well. Bonds are rated "Ba", "B", "Caa", "Ca", "C" when
protection of interest and principal payments is questionable. A "Ba" rating
indicates some speculative elements while "Ca" represents a high degree of
speculation and "C" represents the lowest rated class of bonds. "Caa", "Ca" and
"C" bonds may be in default. Moody's applies numerical modifiers "1", "2" and
"3" in each generic rating classification from "Aa" to "B" in its corporate bond
rating system. The modifier "1" indicates that the security ranks in the higher
end of its generic rating
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category; the modifier "2" indicates a mid-range ranking; and the modifier "3"
indicates that the issue ranks at the lower end of its generic rating category.
Standard & Poor's Commercial Paper Ratings
"A" is the highest commercial paper rating category utilized by
Standard & Poor's, which uses the numbers "1+", "1", "2" and "3" to denote
relative strength within its "A" classification. Commercial paper issuers rated
"A" by Standard & Poor's have the following characteristics. Liquidity ratios
are better than industry average. Long-term debt rating is "A" or better. The
issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow are in an upward trend. Typically, the issuer is a strong
company in a well-established industry and has superior management. Issues rated
"B" are regarded as having only an adequate capacity for timely payment.
However, such capacity may be damaged by changing conditions or short-term
adversities. The rating "C" is assigned to short-term debt obligations with a
doubtful capacity for repayment. An issue rated "D" is either in default or is
expected to be in default upon maturity.
Moody's Commercial Paper Ratings
"Prime-1" is the highest commercial paper rating assigned by Moody's,
which uses the numbers "1", "2" and "3" to denote relative strength within its
highest classification of Prime. Commercial paper issuers rated Prime by Moody's
have the following characteristics. Their short-term debt obligations carry the
smallest degree of investment risk. Margins of support for current indebtedness
are large or stable with cash flow and asset protection well assured. Current
liquidity provides ample coverage of near-term liabilities and unused
alternative financing arrangements are generally available. While protective
elements may change over the intermediate or longer terms, such changes are most
unlikely to impair the fundamentally strong position of short-term obligations.
IBCA Limited/IBCA Inc. Commercial Paper Ratings. Short-term obligations,
including commercial paper, rated A-1+ by IBCA Limited or its affiliate IBCA
Inc., are obligations supported by the highest capacity for timely repayment.
Obligations rated A-1 have a very strong capacity for timely repayment.
Obligations rated A-2 have a strong capacity for timely repayment, although such
capacity may be susceptible to adverse changes in business, economic or
financial conditions.
Fitch Investors Service LLP. Commercial Paper Ratings. Fitch Investors Service
LLP employs the rating F-1+ to indicate issues regarded as having the strongest
degree of assurance for timely payment. The rating F-1 reflects an assurance of
timely payment only slightly less in degree than issues rated F-1+, while the
rating F-2 indicates a satisfactory degree of
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assurance for timely payment, although the margin of safety is not as great as
indicated by the F-1+ and F-1 categories.
Duff & Phelps Inc. Commercial Paper Ratings. Duff & Phelps Inc. employs the
designation of Duff 1 with respect to top grade commercial paper and bank money
instruments. Duff 1+ indicates the highest certainty of timely payment:
short-term liquidity is clearly outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations. Duff 1- indicates high certainty of timely
payment. Duff 2 indicates good certainty of timely payment: liquidity factors
and company fundamentals are sound.
Thomson BankWatch, Inc. ("BankWatch") Commercial Paper Ratings. BankWatch will
assign both short-term debt ratings and issuer ratings to the issuers it rates.
BankWatch will assign a short-term rating ("TBW-1", "TBW-2", "TBW-3", or
"TBW-4") to each class of debt (e.g., commercial paper or non-convertible debt),
having a maturity of one-year or less, issued by a holding company structure or
an entity within the holding company structure that is rated by BankWatch.
Additionally, BankWatch will assign an issuer rating ("A", "A/B", "B", "B/C",
"C", "C/D", "D", "D/E", and "E") to each issuer that it rates.
Various of the NRSROs utilize rankings within rating categories
indicated by a + or -. The Portfolios, in accordance with industry practice,
recognize such rankings within categories as graduations, viewing for example
Standard & Poor's rating of A-1+ and A-1 as being in Standard & Poor's highest
rating category.
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<PAGE>
Portfolio of Investments
Endeavor Series Trust
Opportunity Value Portfolio
March 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Value
Shares (Note 1)
------ ------
<S> <C>
COMMON STOCK - 58.5%
Banking - 10.1%
2,500 Bank of Boston Corporation.................... $167,500
1,700 Citicorp ..................................... 184,025
600 Wells Fargo & Company ........................ 170,475
------------
522,000
------------
Insurance - 4.9%
2,400 ACE, Ltd. .................................... 153,600
2,300 EXEL Ltd. Ord................................. 97,175
------------
250,775
------------
Restaurants - 4.6%
5,000 McDonald's Corporation ....................... 236,250
------------
Energy - 4.5%
4,000 Tenneco Inc .................................. 156,000
2,000 Triton Energy Corporation+.................... 77,500
------------
233,500
------------
Manufacturing and Engineering - 4.4%
2,800 Caterpillar, Inc ............................. 224,700
------------
Diversified Chemicals - 4.0%
1,600 duPont (E.I.) de Nemours & Company ........... 169,600
300 Hercules, Inc. ............................... 12,675
600 Monsanto Company ............................. 22,950
------------
205,225
------------
Financial Services - 3.5%
4,600 Federal Home Loan Mortgage Corporation ....... 125,350
1,600 Federal National Mortgage Association ........ 57,800
------------
183,150
------------
Paper and Paper Products - 3.5%
4,000 Champion International Corporation ........... 182,000
------------
Aerospace and Defense - 3.5%
1,400 Lockheed Martin Corporation................... 117,600
1,000 McDonnell Douglas Corporation ................ 61,000
------------
178,600
------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
Portfolio of Investments (Continued)
Endeavor Series Trust
Opportunity Value Portfolio
March 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Value
Shares (Note 1)
------ ------
<S> <C>
COMMON STOCK - (Continued)
Electronics - 3.0%
2,800 National Semiconductor Corporation+.............. $77,000
1,500 Varian Associates, Inc........................... 80,250
-----------
157,250
-----------
Telecommunications - 3.0%
13,000 Tele-Communications, Inc., Class A+ ............. 156,000
-----------
Waste Disposal - 2.9%
2,000 Browning-Ferris Industries, Inc.................... 57,750
3,000 WMX Technologies, Inc............................ 91,875
-----------
149,625
-----------
Toys, Games and Hobbies - 2.8%
6,000 Mattel, Inc ..................................... 144,000
-----------
Food and Beverages - 2.3%
3,000 Heinz (H.J.) Company............................. 118,500
-----------
Transportation - 0.8%
700 Union Pacific Corporation........................ 39,725
-----------
Metals and Mining - 0.4%
700 Freeport McMoRan Copper & Gold, Inc., Class B ... 21,263
-----------
Drugs and Medical Products - 0.3%
400 Becton, Dickinson & Company ..................... 18,000
-----------
Total Common Stock
(Cost $3,149,798)............................. 3,020,563
-----------
</TABLE>
See Notes to Financial Statements.
<PAGE>
Portfolio of Investments (Continued)
Endeavor Series Trust
Opportunity Value Portfolio
March 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Principal Value
Amount (Note 1)
------ ------
<S> <C>
AGENCY SECURITIES - 20.5%
Federal Farm Credit Bank (FFCB) - 12.9%
FFCB, Discount Notes:
$120,000 5.200%# due 04/07/1997................................ $119,896
550,000 5.340%# due 04/30/1997................................ 547,634
-----------
667,530
-----------
Federal Home Loan Bank (FHLB) - 7.6%
395,000 FHLB, Discount Note,
5.370%# due 04/17/1997................................ 394,057
-----------
Total Agency Securities
(Cost $1,061,587)..................................... 1,061,587
-----------
COMMERCIAL PAPER - 24.2% (Cost $1,249,389)
1,255,000 Ford Motor Credit Corporation,
5.550%# due 04/30/1997............................... 1,249,389
-----------
TOTAL INVESTMENTS (Cost $5,460,774*)........................... 103.2 % 5,331,539
OTHER ASSETS AND LIABILITIES (Net)............................. (3.2) (164,070)
---------- -----------
NET ASSETS..................................................... 100.0 % $5,167,469
========== ===========
</TABLE>
* Aggregate cost for federal tax purposes.
+ Non-income producing security.
# Rate represents annualized yield at date of purchase.
Abbreviation:
Ord. - Ordinary
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
Endeavor Series Trust
Opportunity Value Portfolio
March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost $5,460,774) (Note 1)
See accompanying schedule................................................ $ 5,331,539
Cash........................................................................ 8,515
Receivable for Portfolio shares sold........................................ 173,798
Unamortized organization costs (Note 5)..................................... 24,073
Dividends receivable........................................................ 2,948
Receivable from investment manager (Note 2)................................. 2,802
---------------
Total Assets................................................................ 5,543,675
LIABILITIES:
Payable for investment securities purchased................................. $ 344,092
Organization costs payable (Note 5)......................................... 26,000
Investment management fee payable (Note 2).................................. 2,972
Custodian fees payable (Note 2)............................................. 1,205
Transfer agent fees payable ................................................ 167
Accrued Trustees' fees and expenses (Note 2)................................ 148
Accrued expenses and other payables......................................... 1,622
-------------
Total Liabilities........................................................... 376,206
---------------
NET ASSETS.................................................................. $ 5,167,469
===============
NET ASSETS consist of:
Undistributed net investment income.......................................... $ 13,737
Accumulated net realized gain on investments sold............................ 1,956
Net unrealized depreciation of investments................................... (129,235)
Paid-in capital.............................................................. 5,281,011
---------------
Total Net Assets............................................................. $ 5,167,469
===============
NET ASSET VALUE,
offering price and redemption price per share:
($5,167,469 / 515,792 shares of beneficial interest outstanding).......... $ 10.02
===============
</TABLE>
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
Endeavor Series Trust
Opportunity Value Portfolio
For the Three Months Ended March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest............................................................................. $ 15,822
Dividends............................................................................ 6,495
--------------
Total Investment Income.............................................................. 22,317
EXPENSES:
Investment management fee (Note 2)................................................... $ 5,354
Custodian fees (Note 2).............................................................. 1,721
Amortization of organization costs (Note 5).......................................... 1,300
Transfer agent fees.................................................................. 202
Trustees fees and expenses (Note 2).................................................. 50
Other................................................................................ 245
----------
Total expenses.................................................................... 8,872
--------------
NET INVESTMENT INCOME................................................................ 13,445
--------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(Notes 1 and 3):
Net realized gain on investments during the period................................ 1,956
Net change in unrealized depreciation of investments during the period............ (129,395)
--------------
Net realized and unrealized loss on investments...................................... (127,439)
--------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS......................................................................... $ (113,994)
==============
</TABLE>
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
Endeavor Series Trust
Opportunity Value Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months
Ended
03/31/97
(unaudited)
---------
<S> <C>
Net investment income............................................................... $ 13,445
Net realized gain on investments during the period.................................. 1,956
Net unrealized depreciation of investments during the period........................ (129,395)
-------------
Net decrease in net assets resulting from operations................................ (113,994)
Net increase in net assets from Portfolio share transactions (Note 4)............... 4,580,338
-------------
Net increase in net assets.......................................................... 4,466,344
NET ASSETS:
Beginning of period................................................................. 701,125
-------------
End of period (including undistributed net investment income of $13,737)............ $ 5,167,469
=============
</TABLE>
See Notes to Financial Statements.
<PAGE>
Financial Highlights
Endeavor Series Trust
Opportunity Value Portfolio
For a Portfolio share outstanding throughout the period
<TABLE>
<CAPTION>
Three Months
Ended
03/31/97
(unaudited)+++
--------------
<S> <C>
Operating performance:
Net asset value, beginning of period................................................. $ 10.06
--------------
Net investment income................................................................ 0.05
Net realized and unrealized loss on investments...................................... (0.09)
--------------
Net decrease in net assets resulting from investment operations...................... (0.04)
--------------
Net asset value, end of period....................................................... $ 10.02
==============
Total return ++...................................................................... (0.04)%
==============
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's)................................................. $ 5,167
Ratio of net investment income to average net assets................................. 1.97%+
Ratio of operating expenses to average net assets.................................... 1.30%+
Portfolio turnover rate.............................................................. 4%
Average commission rate (per share of security)(a)................................... $ 0.0564
</TABLE>
- ---------------------------------------
+ Annualized.
++ Total return represents aggregate total return for the period indicated.
+++ Per share amounts have been calculated using the monthly average share
method which more appropriately presents the per share data for the period
since use of the undistributed method did not accord with results of
operations.
(a) Average commission rate paid per share of securities purchased and sold by
the Portfolio.
See Notes to Financial Statements.
<PAGE>
ENDEAVOR SERIES TRUST
OPPORTUNITY VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. Significant Accounting Policies
Endeavor Series Trust (the "Fund") was organized as a Massachusetts business
trust on November 19, 1988 under the laws of the Commonwealth of Massachusetts.
The Fund is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. As of the date of these financial statements,
the Fund offers nine managed investment portfolios. The information presented
in these financial statements pertains only to the Opportunity Value Portfolio
(the "Portfolio"). The following is a summary of significant accounting
policies consistently followed by the Portfolio in the preparation of its
financial statements. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
Portfolio Valuation:
Generally, the Portfolio's investments are valued at market value or, in the
absence of market value with respect to any portfolio securities, at fair value
as determined by, or under the direction of, the Board of Trustees. Portfolio
securities for which the primary market is on a domestic or foreign exchange, or
which are traded over-the-counter and quoted on the NASDAQ System, are valued at
the last sale price on the day of valuation or, if there was no sale that day,
at the last reported bid price using prices as of the close of trading.
Portfolio securities not quoted on the NASDAQ System that are actively traded in
the over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the most recently
quoted bid price provided by the principal market makers. In the case of any
securities which are not actively traded, these investments are stated at fair
value as determined under the direction of the Board of Trustees. Short-term
investments that mature in 60 days or less are valued at amortized cost.
Foreign securities traded outside the United States are generally valued as
of the time their trading is complete, which is usually different from the close
of the New York Stock Exchange. Occasionally, events affecting the value of
such securities may occur between such times and the close of the New York Stock
Exchange that will not be reflected in the computation of the Portfolio's net
asset value. If events materially affecting the value of such securities occur
during such period, these securities will be valued at their fair value
according to procedures decided upon in good faith by the Fund's Board of
Trustees. All securities and other assets of the Portfolio initially expressed
in foreign currencies will be converted to U.S. dollar values at the mean of the
bid and offer prices of such currencies against U.S. dollars last quoted on a
valuation date by any recognized dealer.
Securities Transactions and Investment Income:
Securities transactions are recorded as of the trade date. Realized gains
and losses from securities transactions are recorded on the identified cost
basis. Dividend income is recorded on the ex-dividend date. Interest income is
recorded on the accrual basis.
Securities purchased or sold on a when-issued or delayed-delivery basis may
be settled a month or more after the trade date. Interest income is not accrued
until settlement date.
<PAGE>
ENDEAVOR SERIES TRUST
OPPORTUNITY VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
Forward Foreign Currency Contracts:
The Opportunity Value Portfolio may engage in forward foreign currency
exchange contracts. The Portfolio engages in forward foreign currency exchange
transactions to protect against changes in future exchange rates. Forward
foreign currency exchange contracts are valued at the forward rate and are
marked-to-market daily. The change in market value is recorded by the Portfolio
as an unrealized gain or loss. When the contract is closed, the Portfolio
records a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The use of forward foreign currency exchange contracts does not eliminate
fluctuations in the underlying prices of the Portfolio's securities, but it does
establish a rate of exchange that can be achieved in the future. Although
forward foreign currency contracts limit the risk of loss due to a decline in
the value of the hedged currency, they also limit any potential gain that might
result should the value of the currency increase. In addition, the Portfolio
could be exposed to risks if the counterparties to the contracts are unable to
meet the terms of their contracts.
Foreign Currency:
The books and records of the Portfolio are maintained in U.S. dollars.
Foreign currencies, investments and other assets and liabilities are translated
into U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investment securities, and items of income and expense
are translated on the respective dates of such transactions. Unrealized gains
and losses which result from changes in foreign currency exchange rates have
been included in the unrealized appreciation/ (depreciation) of investments and
net other assets. Net realized foreign currency gains and losses include the
effect of changes in exchange rates between trade date and settlement date on
investment security transactions, foreign currency transactions and interest and
dividends received. The portion of foreign currency gains and losses related to
fluctuation in exchange rates between the initial purchase trade date and
subsequent sale trade date is included in realized gains and losses on
investment securities sold.
Dividends and Distributions to Shareholders:
Dividends from net investment income of the Portfolio are declared and paid
at least annually. For the Portfolio, all net realized long-term or short-term
capital gains, if any, will be declared and distributed at least annually.
Income dividends and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments of
income, gains and losses on various investment securities held by the Portfolio,
timing differences in the recognition of income, gains and losses and differing
characterizations of distributions made by the Fund.
<PAGE>
ENDEAVOR SERIES TRUST
OPPORTUNITY VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
Federal Income Taxes:
The Fund intends that the Portfolio qualify annually as a regulated
investment company, if such qualification is in the best interest of its
shareholders, by complying with the requirements of the Internal Revenue Code of
1986, as amended, applicable to regulated investment companies and by
distributing substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
2. Investment Management Fee, Administrative Fee, Investment Advisory Fee and
Other Related Party Transactions
The Fund is managed by Endeavor Investment Advisers (the "Investment
Manager") pursuant to a management agreement. The Investment Manager is a
general partnership of which Endeavor Management Co. is the managing partner.
The Investment Manager is responsible for providing investment management and
administrative services to the Fund, including selecting the investment adviser
(the "Adviser") for the Fund's Portfolio. As compensation for these services,
the Portfolio pays the Investment Manager a monthly fee at the annual rate of
0.80% of the Portfolio's average daily net assets.
From the investment management fees, the Investment Manager pays the expenses
of providing investment advisory services to the Portfolio, including the fees
of the Adviser of the Portfolio. The Investment Manager also pays the fees and
expenses of First Data Investor Services Group, Inc. ("FDISG"), a wholly-owned
subsidiary of First Data Corporation. FDISG assists the Investment Manager in
the performance of its administrative responsibilities to the Portfolio. As
compensation for these services, the Investment Manager pays FDISG a fee
computed and payable monthly at an annual rate of .10% of the Fund's aggregate
daily net assets on the first $600 million, .06% on the next $400 million and
.01% on assets exceeding $1 billion, with a minimum annual fee for the Portfolio
of $40,000 until its assets reach $40 million.
OpCap Advisors ("OpCap"), a subsidiary of Oppenheimer Capital, serves as the
Adviser to the Portfolio pursuant to a separate investment advisory agreement
between the Investment Manager and OpCap. As compensation for its services as
investment adviser, the Investment Manager pays OpCap a monthly fee at the
annual rate of .40% of the average daily net assets of the Portfolio.
From time to time the Investment Manager may waive a portion or all of the
fees otherwise payable to it and/or reimburse expenses. The Investment Manager
has voluntarily undertaken to waive its fees and has agreed to bear certain
expenses so that total expenses of the Portfolio do not exceed 1.30% of the
Portfolio's average daily net assets. For the three month period ended March
31, 1997, the Investment Manager did not waive fees or reimburse expenses of the
Portfolio.
Boston Safe Deposit and Trust Company, an indirect wholly-owned subsidiary of
Mellon Bank Corporation, serves as the Fund's custodian. FDISG serves as the
Fund's transfer agent.
<PAGE>
ENDEAVOR SERIES TRUST
OPPORTUNITY VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
For the three month period ended March 31, 1997, the Portfolio incurred total
brokerage commissions of $2,900 of which $2,035 was paid to Oppenheimer &
Company, Inc., an affiliate broker-dealer of the Adviser.
No director, officer or employee of the Investment Manager, Endeavor
Management Co., the Adviser or FDISG received any compensation from the
Portfolio for serving as an officer or Trustee of the Fund. The Fund pays each
Trustee who is not a director, officer or employee of the Investment Manager,
Endeavor Management Co., the Adviser, FDISG or any of their affiliates $2,500
per annum plus $500 per regularly scheduled meeting attended and reimburses them
for travel and out-of-pocket expenses. Each series of the Fund, including the
Portfolio, bears its proportionate share of such fees and expenses.
3. Purchases and Sales of Securities
Purchases of securities, excluding short-term investments, for the three
month period ended March 31, 1997 were $180,713. Purchases and proceeds from
sales of securities excluding U.S. government securities and short-term
investments, for the three month period ended March 31, 1997 were $2,789,128 and
$64,645, respectively.
At March 31, 1997, aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost and aggregate gross
unrealized depreciation for all securities in which there was an excess of tax
cost over value was $27,152 and $156,387, respectively.
4. Shares of Beneficial Interest
The Fund has authorized an unlimited number of shares of beneficial interest
without par value. Changes in shares of beneficial interest for the Portfolio
were as follows:
<TABLE>
<CAPTION>
Three Month
Period Ended
03/31/97
------------
Shares Amount
------- ----------
<S> <C> <C>
Sold.......... 458,614 $4,708,736
Redeemed...... (12,535) (128,398)
------- ----------
Net increase.. 446,079 $4,580,338
======= ==========
</TABLE>
<PAGE>
ENDEAVOR SERIES TRUST
OPPORTUNITY VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
5. Organization Costs
Organization costs are amortized on a straight-line basis over a period of
five years from the commencement of operations of the Portfolio. In the event
that any of the 10 initial shares of the Portfolio owned by a separate account
of PFL Life Insurance Company are redeemed during such amortization period, the
redemption proceeds will be reduced for any unamortized organization costs in
the same proportion as the number of shares redeemed bears to the number of
initial shares outstanding at the time of the redemption. The Fund bears the
expense of registering and qualifying the shares of the Portfolio for
distribution under Federal and state securities regulations.
<PAGE>
ENDEAVOR SERIES TRUST
OPPORTUNITY VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
- --------------------------------------------------------------------------------
The Financial Statements contained herein are submitted for the general
information of the policyholders of The Endeavor Variable Annuity. This
report is not authorized for distribution to prospective investors
unless preceded or accompanied by an effective prospectus.
- --------------------------------------------------------------------------------
<PAGE>
ENDEAVOR SERIES TRUST
PART C
Other Information
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Included in Part A:
Audited Financial Highlights for the
TCW Money Market Portfolio, TCW
Managed Asset Allocation Portfolio,
Value Equity Portfolio, Dreyfus
Small Cap Value Portfolio, Dreyfus
U.S. Government Securities Portfolio,
T. Rowe Price International Stock
Portfolio, T. Rowe Price Equity
Income Portfolio, T. Rowe Price
Growth Stock Portfolio and
Opportunity Value Portfolio for the
period ended December 31, 1996.
Unaudited Financial Highlights for
the Opportunity Value Portfolio for
the three year period ended March 31,
1997.
Included in Part B:
The following audited Financial
Statements for the TCW Money Market
Portfolio, TCW Managed Asset
Allocation Portfolio, Value Equity
Portfolio, Dreyfus Small Cap Value
Portfolio, Dreyfus U.S. Government
Securities Portfolio, T. Rowe Price
International Stock Portfolio and T.
Rowe Price Equity Income Portfolio,
T. Rowe Price Growth Stock Portfolio
and the Opportunity Value Portfolio
for the period ended December 31,
1996 are incorporated by reference:
Portfolio of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Notes to Financial Statements
-146-
<PAGE>
The following unaudited Financial
Statements for Opportunity Value
Portfolio for the period January 1,
1997 to March 31, 1997 are included
herein:
Portfolio of Investments Statement
of Assets and Liabilities Statement
of Operations Statement of Changes
in Net Assets Notes to Financial
Statements
Included in Part C:
Consent of Independent Auditors is
filed herein.
(b) Exhibits:
All references are to the Registrant's
registration statement on Form N-1A as filed
with the SEC on March 7, 1989, File Nos.
33-27352 and 811-5780 (the "Registration
Statement").
Exhibit No. Description of Exhibits
(1)(a) Agreement and Declaration of
Trust is incorporated by
reference to Post-Effective
Amendment No. 14 to the
Registration Statement as filed
with the SEC on April 29, 1996
("Post-Effective Amendment No. 14").
(1)(b) Amendment No. 1 to Agreement
and Declaration of Trust is
incorporated by reference to
Post-Effective Amendment No. 14.
(1)(c) Amendment No. 2 to Agreement
and Declaration of Trust is
incorporated by reference to
Post-Effective Amendment No. 14.
(1)(d) Amendment No. 3 to Agreement
and Declaration of Trust is
incorporated by reference to
Post-Effective Amendment No. 14.
-147-
<PAGE>
(1)(e) Amendment No. 4 to Agreement
and Declaration of Trust is
incorporated by reference to
Post-Effective Amendment No. 14
(1)(f) Amendment No. 5 to Agreement
and Declaration of Trust is
incorporated by reference to
Post-Effective Amendment No. 14.
(1)(g) Amendment No. 6 to Agreement
and Declaration of Trust is
incorporated by reference to
Post-Effective Amendment No. 14.
(1)(h) Amendment No. 7 to Agreement
and Declaration of Trust is
incorporated by reference to
Post-Effective Amendment No.
16 to the Registration
Statement as filed with the SEC
on February 14, 1997 ("Post-
Effective Amendment No. 16").
(2) Amended and Restated By-Laws
are incorporated by reference
to Post-Effective Amendment No. 14.
(3) Not Applicable.
(4)(a) Specimen certificate for shares
of beneficial interest of the
Domestic Money Market Portfolio
(now known as TCW Money Market
Portfolio) is incorporated by
reference to Post-Effective
Amendment No. 14.
(4)(b) Deleted
(4)(c) Specimen certificate for
shares of beneficial
interest of the Domestic
Managed Asset Allocation
Portfolio (now known as
TCW Managed Asset
Allocation Portfolio) is
incorporated by reference
to Post-Effective Amendment No. 14.
(4)(d) Deleted
-148-
<PAGE>
(4)(e) Specimen certificate for shares
of beneficial interest of the
Global Growth Portfolio (now
known as T. Rowe Price
International Stock Portfolio)
is incorporated by reference to
Post-Effective Amendment No. 14.
(4)(f) Specimen certificate for
shares of beneficial
interest of the Quest for
Value Equity Portfolio
(now known as Value
Equity Portfolio) is
incorporated by reference
to Post-Effective Amendment No. 14.
(4)(g) Specimen certificate for
shares of beneficial
interest of the Quest for
Value Small Cap Portfolio
(now known as Dreyfus
Small Cap Value Portfolio)
is incorporated by reference
to Post-Effective Amendment No. 14.
(4)(h) Specimen certificate for shares
of beneficial interest of the
U.S. Government Securities
Portfolio (now known as Dreyfus
U.S. Government Securities
Portfolio) is incorporated by
reference to Post-Effective
Amendment No. 14.
(4)(i) Specimen certificate for shares
of beneficial interest of the
T. Rowe Price Equity Income
Portfolio is incorporated by
reference to Post-Effective
Amendment No. 14.
(4)(j) Specimen certificate for shares
of beneficial interest of the
T. Rowe Price Growth Stock
Portfolio is incorporated by
reference to Post-Effective
Amendment No. 14.
(4)(k) Specimen certificate for shares
of beneficial interest of the
Opportunity Value Portfolio is
incorporated by reference to
Post-Effective Amendment No. 15
-149-
<PAGE>
as filed with the SEC on August
21, 1996 ("Post-Effective
Amendment No. 15").
(4)(l) Specimen certificate for
shares of beneficial
interest of the Enhanced
Index Portfolio is
incorporated by reference
to Post-Effective
Amendment No.
15.
(5)(a) Management Agreement dated
November 23, 1992 between
Registrant and Endeavor
Investment Advisers is
incorporated by reference to
Post-Effective Amendment No.
14.
(5)(a)(1) Supplement dated April
29, 1993 to Management
Agreement between Registrant
and Endeavor Investment Advisers
with respect to Quest for
Value Equity Portfolio
and Quest for Value Small
Cap Portfolio is incorporated
by reference to Post-Effective
Amendment No. 14.
(5)(a)(2) Supplement dated March
25, 1994 to Management
Agreement between Registrant
and Endeavor Investment Advisers
with respect to U.S. Government
Securities Portfolio is incorporated
by reference to Post-Effective
Amendment No. 14.
(5)(a)(3) Supplement dated December 28,
1994 to Management Agreement
between Registrant and Endeavor
Investment Advisers with
respect to the T. Rowe Price
Equity Income Portfolio and T.
Rowe Price Growth Stock
Portfolio is incorporated by
reference to Post-Effective
Amendment No. 14.
(5)(a)(4) Supplement to Management
Agreement between Registrant
and Endeavor Investment
Advisers with respect to
-150-
<PAGE>
Opportunity Value Portfolio and
Enhanced Index Portfolio is
incorporated by
reference to Post-Effective
Amendment No. 16.
(5)(b) Investment Advisory Agreement
between TCW Funds Management,
Inc. and Endeavor Investment
Advisers with respect to the
Money Market Portfolio and
Managed Asset Allocation
Portfolio is incorporated by
reference to Post-Effective
Amendment No. 14.
(5)(c) Deleted
(5)(d) Deleted
(5)(e) Deleted
(5)(f) Investment Advisory
Agreement between Quest
for Value Advisors and
Endeavor Investment
Advisers with respect to
Quest for Value Equity
Portfolio is incorporated
by reference to
Post-Effective Amendment
No. 14.
(5)(g) Investment Advisory Agreement
between The Boston Company
Asset Management, Inc. and
Endeavor Investment Advisers
with respect to the U.S.
Government Securities Portfolio
is incorporated by reference to
Post-Effective Amendment No. 14.
(5)(g)(1) Transfer and Assumption
of Investment Advisory
Agreement among The
Boston Company Asset
Management, Inc., The
Dreyfus Corporation,
Endeavor Investment
Advisers and Registrant
with respect to the
Dreyfus U.S. Government
Securities Portfolio is
incorporated by reference
to Post-Effective
Amendment No.
14.
-151-
<PAGE>
(5)(h) Investment Advisory Agreement
between T. Rowe Price
Associates, Inc. and Endeavor
Investment Advisers with
respect to the T. Rowe Price
Equity Income Portfolio is
incorporated by reference to
Post-Effective Amendment No.
14.
(5)(i) Investment Advisory Agreement
between T. Rowe Price
Associates, Inc. and Endeavor
Investment Advisers with
respect to the T. Rowe Price
Growth Stock Portfolio is
incorporated by reference to
Post-Effective Amendment No.
14.
(5)(j) Investment Advisory Agreement
between Rowe Price-Fleming,
International, Inc. and
Endeavor Investment Advisers
with respect to the Global
Growth Portfolio is
incorporated by reference to
Post-Effective Amendment No.
14.
(5)(k) Investment Advisory Agreement
between The Dreyfus Corporation
and Endeavor Investment
Advisers with respect to the
Dreyfus Small Cap Value
Portfolio is
incorporated by reference to
Post-Effective Amendment No. 16.
(5)(l) Investment Advisory Agreement
between OpCap Advisors and
Endeavor Investment Advisers
with respect to the Opportunity
Value Portfolio is
incorporated by
reference to Post-Effective
Amendment No. 16.
(5)(m) Form of Investment Advisory
Agreement between J.P. Morgan
Investment Management Inc. and
Endeavor Investment Advisers
with respect to the Enhanced
Index Portfolio is incorporated
-152-
<PAGE>
by reference to Post-Effective
Amendment No. 15.
(6) Participation Agreement between
Registrant, Endeavor Management
Co. and PFL Life Insurance
Company is incorporated by
reference to Post-Effective
Amendment No. 14.
(7) Not Applicable.
(8)(a) Custody Agreement between
Registrant and Boston Safe
Deposit and Trust Company is
incorporated by reference to
Post-Effective Amendment No.
14.
(8)(b) Supplement dated April
19, 1993 to Custody
Agreement between
Registrant and Boston
Safe Deposit and Trust
Company with respect to
the Quest for Value
Equity Portfolio and
Quest for Value Small Cap
Portfolio is incorporated
by reference to
Post-Effective Amendment
No.
14.
(8)(c) Supplement dated December 30,
1994 to Custody Agreement
between Registrant and Boston
Safe Deposit and Trust Company
with respect to the T. Rowe
Price Equity Income Portfolio
and T. Rowe Price Growth Stock
Portfolio is incorporated by
reference to Post-Effective
Amendment No. 14.
(8)(d) Supplement dated March
25, 1994 to Custody
Agreement between
Registrant and Boston
Safe Deposit and Trust
Company with respect to
the U.S. Government
Securities Portfolio is
incorporated by reference
to Post-Effective
Amendment No.
14.
(8)(e) Supplement to Custody Agreement
between Registrant and Boston
Safe Deposit and Trust Company
with respect to the Opportunity
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<PAGE>
Value Portfolio and Enhanced
Index Portfolio is
incorporated by
reference to Post-Effective
Amendment No. 16.
(9)(a) Transfer Agency and Registrar
Agreement between Registrant
and The Shareholder Services
Group, Inc. (currently known as
First Data Investor Services
Group, Inc.) is incorporated by
reference to Post-Effective
Amendment No. 14.
(9)(b) License Agreement between
Endeavor Management Co. and
Registrant is incorporated by
reference to Post-Effective
Amendment No. 14.
(9)(b)(1) Amendment to License Agreement
between Endeavor Management Co.
and Registrant is incorporated
by reference to Post-Effective
Amendment No. 14.
(9)(c) Administration Agreement
between Endeavor Management Co.
and The Boston Company
Advisors, Inc. is incorporated
by reference to Post-Effective
Amendment No. 14.
(9)(c)(1) Supplement dated April
19, 1993 to
Administration Agreement
between Endeavor
Investment Advisers and
The Boston Company
Advisors, Inc., with
respect to the Quest for
Value Equity Portfolio
and Quest for Value Small
Cap Portfolio is
incorporated by reference
to Post-Effective
Amendment No. 14.
(9)(c)(2) Consent to Assignment of
Administration Agreement dated
May 4, 1994 between Endeavor
Investment Advisers and The
Boston Company Advisors, Inc.
to The Shareholder Services
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<PAGE>
Group, Inc. (currently known as
First Data Investor Services
Group, Inc.) is incorporated by
reference to Post-Effective
Amendment No. 14
(9)(c)(3) Supplement dated October 24,
1994 to Administration
Agreement between Endeavor
Investment Advisers and The
Shareholder Services Group,
Inc. (currently known as First
Data Investor Services Group,
Inc.) with respect to the T.
Rowe Price Equity Income
Portfolio and T. Rowe Price
Growth Stock Portfolio is
incorporated by reference to
Post-Effective Amendment No.
14.
(9)(c)(4) Supplement dated March 25, 1994
to Administration Agreement
between Endeavor Investment
Advisers and The Boston Company
Advisors, inc. with respect to
the U.S. Government Securities
Portfolio is incorporated by
reference to Post-Effective
Amendment No. 14.
(9)(c)(5) Supplement dated July 1, 1996
to Administration Agreement
between Endeavor Investment
Advisors and First Data
Investor Services Group, Inc.
is incorporated
by reference to Post-Effective
Amendment No. 16.
(10) Not Applicable.
(11) Consent of Independent Auditors
is filed herein.
(12) Not Applicable.
(13) Subscription Agreement between
Registrant and PFL Life
Insurance Company is
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<PAGE>
incorporated by reference to
Post-Effective Amendment No.
14.
(14) Not Applicable.
(15) Not Applicable.
(16) Not Applicable.
(17) Financial Data
Schedule is filed herein.
(18) Not applicable.
(19) Powers of Attorney are
incorporated by reference to
Post-Effective Amendment No. 16.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT
As of the effective date of this Post-Effective Amendment, PFL Life
Insurance Company's separate accounts, PFL Endeavor Variable Annuity Account and
PFL Endeavor Platinum Variable Annuity Account, and AUSA Life Insurance
Company's separate account, AUSA Endeavor Variable Annuity Account, held all the
outstanding shares of the Registrant. PFL Life Insurance Company, a stock life
insurance company organized under the laws of the State of Iowa, and AUSA Life
Insurance Company, a stock life insurance company organized under the laws of
the State of New York, are each wholly-owned indirect subsidiaries of AEGON USA,
Inc., an Iowa corporation. All of the stock of AEGON USA, Inc. is indirectly
owned by AEGON n.v.
of The Netherlands.
Item 26. NUMBER OF HOLDERS OF SECURITIES
Set forth below are the number of record holders, as of March 31, 1997,
of the shares of beneficial interest of the Registrant.
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<PAGE>
Number of
Record
Title of Class Holders
Shares of Beneficial Interest of the
TCW Money Market Portfolio...........................3
Shares of Beneficial Interest of the
TCW Managed Asset Allocation
Portfolio............................................3
Shares of Beneficial Interest of the
Value Equity Portfolio...............................3
Shares of Beneficial Interest of the
Value Small Cap Portfolio............................3
Shares of Beneficial Interest of the
Dreyfus U.S. Government Securities
Portfolio............................................3
Shares of Beneficial Interest of the
T. Rowe Price International Stock
Portfolio............................................3
Shares of Beneficial Interest of the
T. Rowe Price Equity Income Portfolio................3
Shares of Beneficial Interest of the
T. Rowe Price Growth Stock Portfolio.................3
Shares of Beneficial Interest of the
Opportunity Value Portfolio..........................3
Shares of Beneficial Interest of the
Enhanced Index Portfolio. . . . . . .................1
Item 27. INDEMNIFICATION
Reference is made to the following documents:
Agreement and Declaration of Trust, as amended, as
filed as Exhibits 1(a) - 1(h) hereto;
Amended and Restated By-Laws as filed as Exhibit 2
hereto; and
Participation Agreement between Registrant, Endeavor
Management Co. and PFL Life Insurance Company as
filed as Exhibit 6 hereto.
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<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the SEC 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 Registrant of expenses incurred
or paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by any such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant 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 is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
The Registrant, its Trustees and officers, Endeavor Investment Advisers
(the "Manager"), and persons affiliated with them are insured under a policy of
insurance maintained by the Registrant and the Manager within the limits and
subject to the limitations of the policy, against certain expenses in connection
with the defense of actions suits or proceedings, and certain liabilities that
might me imposed as a result of such actions, suits or proceedings, to which
they are parties by reason of being or having been such Trustees or officers.
The policy expressly excludes coverage for any Trustee or officer whose personal
dishonesty, fraudulent breach of trust, lack of good faith, or intention to
deceive or defraud has been finally adjudicated or may be established or who
willfully fails to act prudently.
Item 28. (a) Business and Other Connections of the
Investment Adviser
Investment Adviser - 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 28 of partners and their
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
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<PAGE>
pursuant to the Investment Advisers Act of 1940 (SEC No.
801-41827).
Item 28. (a) Business and Other Connections of Investment
Adviser
Investment Adviser - TCW Funds Management, Inc.
TCW Funds Management, Inc. ("TCW") is a wholly owned
subsidiary of The TCW Group, Inc. whose direct and indirect subsidiaries,
including Trust Company of the West and TCW Asset Management Company, provide a
variety of trust investment management and investment advisory services.
The list required by this Item 28 of officers and directors of
TCW, 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 Schedules A and D of
Form ADV filed by TCW pursuant to the Investment Advisers Act of 1940 (SEC file
No. 801-29075).
Item 28 (a) Business and Other Connections of Investment
Adviser
Investment Adviser - OpCap Advisors
OpCap Advisors ("OpCap") (formerly known as Quest for Value
Advisors) is a subsidiary of Oppenheimer Capital, a registered investment
adviser, which provides a variety of investment management services for clients.
OpCap manages registered investment companies other than certain Portfolios of
the Registrant.
The list required by this Item 28 of the officers and
directors of OpCap, 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
Schedules D and F of Form ADV filed by OpCap pursuant to the Investment Advisers
Act of 1940 (SEC file No. 801-27180).
Item 28 (a) Business and Other Connections of Investment
Adviser
Investment Adviser - The Dreyfus Corporation
The Dreyfus Corporation ("Dreyfus") is a wholly owned
subsidiary of Mellon Bank, N.A. Dreyfus is a registered investment adviser
founded in 1947 providing a variety of investment management services for
clients.
-159-
<PAGE>
The list required by this Item 28 of the officers and
directors of Dreyfus, 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
Schedules A and D of Form ADV filed by Dreyfus pursuant to the Investment
Advisers Act of 1940 (SEC file No. 801-8147).
Item 28 (a) Business and Other Connections of Investment
Adviser
Investment Adviser - T. Rowe Price Associates, Inc.
T. Rowe Price Associates, Inc. ("T. Rowe Price") serves as
investment manager to a variety of individual and institutional investors,
including limited and real estate partnerships and other mutual funds.
The list required by this Item 28 of officers and directors of
T. Rowe Price 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 Schedules A
and D of Form ADV filed by T. Rowe Price pursuant to the Investment Advisers Act
of 1940 (SEC file No. 801-856).
Item 28 (a) Business and Other Connections of Investment
Adviser
Investment Adviser - Rowe Price-Fleming
International, Inc.
Rowe Price-Fleming International, Inc. ("Price- Fleming") is a
joint venture between T. Rowe Price and Robert Fleming Holdings Limited
("Flemings"). Flemings is a diversified investment organization which
participates in a global network of regional investment offices in New York,
London, Zurich, Geneva, Tokyo, Hong Kong, Manila, Kuala Lumpur, South Africa and
Taiwan.
The list required by this Item 28 of officers and directors of
Price-Fleming, 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 Schedules A
and D of Form ADV filed by Price-Fleming pursuant to the Investment Advisers Act
of 1940 (SEC file No. 801-14714).
Item 28 (a) Business and Other Connections of Investment
Adviser
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<PAGE>
Investment Adviser - J.P. Morgan Investment
Management Inc.
J.P. Morgan Investment Management Inc. ("Morgan") manages
employee benefit funds of corporations, labor unions and state and local
governments and the accounts of other institutional investors, including
investment companies.
The list required by this Item 28 of officers and directors of
Morgan, 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 Schedules A and D of
Form ADV filed by Morgan pursuant to the Investment Advisers Act of 1940 (SEC
file No. 801-21011).
Item 29 Principal Underwriter
(a) Inapplicable
(b) Inapplicable
Item 30 Location of Accounts and Records
The Registrant maintains the records required by Section 31(a)
of the 1940 Act and Rules 31a-1 to 31a-3 inclusive thereunder at its principal
office, located at 2101 East Coast Highway, Suite 300, Corona del Mar,
California 92625 as well as at the offices of its investment advisers and
administrator: TCW Funds Management, Inc., 865 S. Figueroa Street, Los Angeles,
California 90071; OpCap Advisors, c/o Oppenheimer Capital, One World Financial
Center, New York, New York 10281; The Dreyfus Corporation, 200 Park Avenue, New
York, New York 10166; T. Rowe Price Associates, Inc., 100 East Pratt Street,
Baltimore, Maryland 21202; Rowe Price-Fleming International, Inc., 100 East
Pratt Street, Baltimore, Maryland 21202; J.P. Morgan Investment Management Inc.,
522 Fifth Avenue, New York, New York 10036 and First Data Investor Services
Group, Inc. ("FDISG") (formerly, The Shareholder Services Group, Inc.), a
subsidiary of First Data Corporation, located at 53 State Street, One Exchange
Place, Boston, Massachusetts 02109. Certain records, including records relating
to the Registrant's shareholders and the physical possession of its securities,
may be maintained pursuant to Rule 31a-3 at the main office of the Registrant's
transfer agent and dividend disbursing agent, FDISG and the Registrant's
custodian, Boston Safe Deposit and Trust Company, located at One Boston Place,
Boston, Massachusetts 02108.
Item 31 Management Services
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<PAGE>
None
Item 32 Undertakings
(a) Inapplicable
(b) The Registrant undertakes to file a post-effective
amendment, using financial ts for its Enhanced Index Portfolio, which financial
statements need not be certified, within four to six months from the
commencement of operations of the Portfolio.
(c) The Registrant will furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
-162-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940, as amended, the Registrant, ENDEAVOR SERIES
TRUST, has duly caused this Post-Effective Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Corona del Mar, State of California on the 13th day
of 29th day of April, 1997.
ENDEAVOR SERIES TRUST
Registrant
By: /s/James R. McInnis*
James R. McInnis
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities and on the date(s) indicated.
Signature Title Date
/s/James R. McInnis* President April 29, 1997
James R. McInnis (Principal executive
officer)
/s/Vincent J. McGuinness, Jr.* Chief Financial Officer April 29, 1997
Vincent J. McGuinness, Jr. (Treasurer) (principal
financial and accounting
officer)
/s/Vincent J. McGuinness* Trustee April 29, 1997
Vincent J. McGuinness
/s/Timothy A. Devine* Trustee April 29, 1997
Timothy A. Devine
/s/Thomas J. Hawekotte* Trustee April 29, 1997
Thomas J. Hawekotte
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<PAGE>
/s/Steven L. Klosterman* Trustee April 29, 1997
Steven L. Klosterman
/s/Halbert D. Lindquist* Trustee April 29, 1997
Halbert D. Lindquist
/s/R. Daniel Olmstead* Trustee April 29, 1997
R. Daniel Olmstead
* By: /s/Robert N. Hickey
Robert N. Hickey
Attorney-in-fact
-164-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER>10
<NAME> Endeavor Opportunity Value Portfolio
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 5,460,774
<INVESTMENTS-AT-VALUE> 5,331,539
<RECEIVABLES> 179,548
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 32,588
<TOTAL-ASSETS> 5,543,675
<PAYABLE-FOR-SECURITIES> 344,092
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 32,114
<TOTAL-LIABILITIES> 376,206
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,281,011
<SHARES-COMMON-STOCK> 515,792
<SHARES-COMMON-PRIOR> 69,713
<ACCUMULATED-NII-CURRENT> 13,737
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,956
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (129,235)
<NET-ASSETS> 5,167,469
<DIVIDEND-INCOME> 6,495
<INTEREST-INCOME> 15,822
<OTHER-INCOME> 0
<EXPENSES-NET> 8,872
<NET-INVESTMENT-INCOME> 13,445
<REALIZED-GAINS-CURRENT> 1,956
<APPREC-INCREASE-CURRENT> (129,395)
<NET-CHANGE-FROM-OPS> (113,994)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 458,614
<NUMBER-OF-SHARES-REDEEMED> (12,535)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4,466,344
<ACCUMULATED-NII-PRIOR> 292
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,354
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,872
<AVERAGE-NET-ASSETS> 2,767,509
<PER-SHARE-NAV-BEGIN> 10.06
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> (0.09)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.02
<EXPENSE-RATIO> 1.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" and "Independent Auditors" in the Endeavor Series Trust Prospectus
and "Financial Statements" in the Endeavor Series Trust Statement of Additional
Information in Post-Effective Amendment No. 17 to the Registration Statement
(Form N-1A, No. 33-27352) dated May 1, 1997.
We also consent to the incorporation by reference therein of our report dated
February 10, 1997, with respect to the financial statements and financial
highlights of Endeavor Series Trust in the Form N-1A.
ERNST & YOUNG LLP
Boston, Massachusetts
April 25, 1997
<PAGE>
