Prospectus
ENDEAVORSM 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 only the following three
portfolios currently offered by the Fund (the "Portfolios").
o T. Rowe Price International Stock Portfolio
o Dreyfus Small Cap Value Portfolio
o 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 October 8, 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 October 8, 1997.
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EndeavorSM is a registered service mark of Endeavor Management Co.
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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, three of which are
offered pursuant to this Prospectus. 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
(collectively "PFL") to fund various insurance contracts, including variable
annuity contracts and variable life insurance policies (whether scheduled
premium, flexible premium or single premium policies) . 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
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The investment objectives of the Portfolios are as follows:
T. Rowe Price International Stock Portfolio - seeks long-term growth of
capital through investments primarily in common stocks of established non-U.S.
companies.
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.
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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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T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO*
Year Year Year
Ended Ended Ended
12/31/95## 12/31/94 12/31/96+++
Operating
Performance:
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Net asset value,
beginning of
period
$11.31 $11.99
$12.19
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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) ---
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:
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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
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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) ---
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
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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.
** 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
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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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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
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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) --- ---
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:
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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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* 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.
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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 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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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: T. Rowe Price International
Stock - 1.53%, Dreyfus Small Cap Value - 1.30% and Enhanced Index - 1.30%.
The offering of shares of the Enhanced Index Portfolio commenced on May
1, 1997. Accordingly, no financial highlight data is available for shares of
this Portfolio.
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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.
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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 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
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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 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
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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 categories assigned by a nationally recognized statistical
rating organization ("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.
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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 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
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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 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.
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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.
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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.
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
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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 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.
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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.
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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
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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.
o 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.
o Systematic valuation: The analysts' forecasts are
converted into comparable expected returns by a
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.
o 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.
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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 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 Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings
Service, a division of McGraw-Hill Companies, Inc. ("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.
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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 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 Dreyfus Small Cap Value Portfolio does not 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 and Enhanced Index Portfolios may engage in foreign
currency exchange transactions in an attempt to protect against changes in
future exchange rates. All Portfolios may invest in American Depositary Receipts
, European Depositary Receipts and Global 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 International Stock Portfolio may
invest in hybrid instruments. The investment strategies referred to above and
the risks related to them are summarized below and certain of
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these strategies are described in more detail in the Statement of Additional
Information.
Options and Futures Transactions. A Portfolio may seek to increase the
current return on its investments by writing covered call or covered put
options. The Adviser to the Dreyfus Small Cap Value Portfolio has no present
intention to engage in this strategy, but may do so in the future.
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 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
Adviser to the Dreyfus Small Cap Value Portfolio has no present intention to use
this strategy, but may do so in the future.
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A 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.
A Portfolio may not purchase futures contracts or related
options if, immediately thereafter, more than 33 1/3% (25% for
the T.
Rowe Price International
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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 T. Rowe Price International Stock
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 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 in an attempt to protect
against uncertainty in the level of future exchange rates in connection with the
purchase and sale of portfolio securities ("transaction hedging") and in an
attempt to protect the value of specific portfolio positions ("position
hedging").
Hedging transactions involve costs and may result in losses. The T. Rowe
Price International Stock and Enhanced Index Portfolios may write covered call
options on foreign currencies in an attempt to offset some of the costs of
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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.
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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.
The Dreyfus Small Cap Value Portfolio may borrow money for temporary
purposes in amounts up to 5% of its total assets.
The T. Rowe Price International Stock Portfolio 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. The Portfolio
may pledge up to 33 1/3% of its total assets to secure these borrowings. The
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Portfolio may not purchase additional securities when borrowings exceed 5% of
total assets.
The Enhanced Index Portfolio may borrow money from banks as a temporary
measure for extraordinary or emergency purposes in amounts up to 10% of its
total assets. The Portfolio may not purchase additional securities when
borrowings exceed 5% of total assets.
As a matter of operating policy, the T. Rowe Price International Stock
Portfolio will limit all borrowings to no more than 25% of its net assets.
American , European and Global Depositary Receipts. All Portfolios may
purchase foreign securities in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs") or other securities convertible into securities of corporations in
which the Portfolios are permitted to invest . These securities may not
necessarily be denominated in the same currency into which they may be
converted. Depositary receipts are receipts typically issued in connection with
a U.S. or foreign bank or trust company and evidence ownership of underlying
securities issued by a foreign corporation.
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. 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
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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 . 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 liquid assets 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. This 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 liquid
assets 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.
Hybrid Instruments. The T. Rowe Price International Stock Portfolio may
invest up to 10% 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
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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 the 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 15% 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 15% limit. The inability of a 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
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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
15% 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
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.
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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:
T. Rowe Price International Stock Portfolio - .90%; Dreyfus Small Cap Value
Portfolio - .80%; Enhanced Index Portfolio - .75%. The management fees paid by
the Portfolios , 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 affiliated persons of the
Manager or an Adviser, 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.
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
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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.
Rowe Price-Fleming International, Inc. may utilize certain brokers
indirectly related to it in the capacity as broker in connection with the
execution of transactions for the T. Rowe Price International Stock Portfolio.
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 non-affiliated broker-dealer acting as an
"introducing broker" in the transactions. 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 a non-affiliated broker-dealer can be used to promote the
distribution of the Fund's shares including the costs of training and educating
such broker-dealers with respect to the Contracts . Periodically, the Manager
will instruct the "introducing broker" to transmit funds in its possession to
third-party
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broker-dealers to pay for such training and education costs. No portion of the
commissions received by the "introducing broker" will be paid to the Manager or
any of its affiliates. On a quarterly basis, the Manager will report to the
Board of Trustees the aggregate commissions received by the "introducing broker"
and the distribution expenses paid from such commissions. The Board of Trustees
will periodically review whether 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.
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The Dreyfus Corporation ("Dreyfus") is the Adviser to 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 .375% of
the average daily net assets of the Dreyfus Small Cap Value Portfolio.
Prior to September 16, 1996, OpCap Advisors ("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 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
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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.
The portfolio managers for the Dreyfus Small Cap Value Portfolio are David
L. Diamond and Peter I. Higgins. Mr. Diamond has been employed by The Boston
Company Asset Management, Inc. ("Boston Company"), an affiliate of Dreyfus,
since June, 1991 and by Dreyfus since October, 1994. Boston Company is a
wholly-owned subsidiary of The Boston Company, Inc., which is an indirect
wholly-owned subsidiary of Mellon.
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.
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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. ("ISI") 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 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 Associates, Inc. ("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.
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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
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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 quantitative
analyst/portfolio manager at 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
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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 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 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.
Providian Securities Corporation ("PSC"), an affiliate of PFL, is the
principal
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underwriter and distributor of the Contracts. PSC 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), as of 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 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.
PERFORMANCE INFORMATION
From time to time, the Fund may advertise the "average annual or
cumulative total return" of the Dreyfus Small Cap Value, T. Rowe Price
International Stock and Enhanced Index 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
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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 methods used to calculate
"average annual and cumulative total return" 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.
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The Enhanced Index Portfolio commenced operations on May 1, 1997 and,
consequently, does not have a significant operating history.
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Morgan is the investment manager of certain Private Accounts which 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.
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.
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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 table does 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, 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 including the three
Portfolios offered by this Prospectus. 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
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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 forms
a part, each such statement being qualified in all respects by such reference.
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TABLE OF CONTENTS
Page
The Fund ENDEAVOR SERIES TRUST
Financial Highlights 2101 East Coast Highway,
Investment Objectives and Policies Suite 300
Corona del Mar, California 92625
(800) 854-8393
T. Rowe Price International Stock Manager
Portfolio
Endeavor Investment Advisers
Dreyfus Small Cap Value Portfolio 2101 East Coast Highway
Suite 300
Corona del Mar, California 92625
Investment Advisers
Enhanced Index Portfolio
Investment Strategies
Management of the Fund
The Manager The Dreyfus Corporation
200 Park Avenue
The Advisers New York, New York 10166
Dividends, Distributions and Taxes
Sale and Redemption of Shares
Performance Information
Organization and Capitalization
of the Fund Rowe Price-Fleming International,
Inc.
Additional Information 100 East Pratt Street
Transfer Agent and Custodian Baltimore, Maryland 21202
Independent Auditors J.P. Morgan Investment
Management Inc.
-------------- 522 Fifth Avenue
New York, New York 10036
No person has been authorized to give any
information or to make any representation not Custodian
contained in this Prospectus and, if given or
made, such information or representation must Boston Safe Deposit and Trust
not be relied upon as having been authorized. Company
This Prospectus does not constitute an One Boston Place
offering of any securities other than the Boston, Massachusetts 02108
registered securities to which it relates or
an offer to any person in any state or
jurisdiction of the United States or any
country where such offer would be unlawful.
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
ENDEAVOR(sm) SERIES TRUST
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus for the T. Rowe Price International
Stock Portfolio (formerly, the Global Growth Portfolio), the Dreyfus Small Cap
Value Portfolio (formerly, the Value Small Cap Portfolio and prior to that the
Quest for Value Small Cap Portfolio) and the Enhanced Index Portfolio of
Endeavor Series Trust (the "Fund"), dated October 8, 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.
Endeavor(sm) is a registered service mark of Endeavor Management Co.
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TABLE OF CONTENTS
Page
Investment Objectives and Policies................ 3
Options and Futures Strategies............... 3
Foreign Currency Transactions................ 8
Repurchase Agreements........................ 12
Forward Commitments.......................... 13
Securities Loans............................. 13
Portfolio Turnover........................... 13
Investment Restrictions........................... 14
Other Policies............................... 16
Performance Information........................... 16
Total Return................................. 17
Non-Standardized Performance................. 18
Portfolio Transactions............................ 19
Management of the Fund............................ 22
Trustees and Officers........................ 22
The Manager.................................. 29
The Advisers................................. 30
Redemption of Shares.............................. 33
Net Asset Value................................... 33
Taxes.............................................
34
Federal Income Taxes......................... 34
Organization and Capitalization of the Fund....... 36
Legal Matters..................................... 38
Custodian......................................... 38
Financial Statements.............................. 39
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 October 8, 1997.
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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 Rowe
Price-Fleming International, Inc. as investment adviser for the T. Rowe Price
International Stock Portfolio, The Dreyfus Corporation as investment adviser for
the Dreyfus Small Cap Value Portfolio and J.P. Morgan Investment Management Inc.
as investment adviser for the Enhanced Index Portfolio.
Options and Futures Strategies (All Portfolios
)
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
Dreyfus Small Cap Value Portfolio does 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
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that may exist in various types of options or futures. Therefore no assurance
can be given that a Portfolio will be 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
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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 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
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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, 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.
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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 futures contracts. A Portfolio may use such options
on futures contracts in connection with its hedging strategies in
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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
, rather than selling futures contracts, in anticipation of a decline in general
stock market prices , or purchase call options or write put options on stock
index futures, rather than purchasing such futures, to hedge against possible
increases in the price of equity securities , which the Portfolio intends to
purchase.
In connection with transactions in stock index options, stock index
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
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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.
Foreign Currency Transactions (T. Rowe Price International Stock and Enhanced
Index Portfolios)
Foreign Currency Exchange Transactions. The T. Rowe Price International
Stock 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.
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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.
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
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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 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.
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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 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.
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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.
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 15% 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
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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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Portfolio Turnover
While it is impossible to predict portfolio turnover rates, the Advisers
to the Portfolios other than the Dreyfus Small Cap Value Portfolio anticipate
that portfolio turnover will generally not exceed 100% per year. The Adviser to
the Dreyfus Small Cap Value Portfolio anticipates that the Portfolio's portfolio
turnover rate will generally not exceed 175%. Higher portfolio turnover rates
usually generate additional brokerage commissions and expenses.
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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.
INVESTMENT RESTRICTIONS
Except for restriction numbers 2, 3, 4, 11 and 12 with respect to the
Enhanced Index Portfolio 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 Investment Company Act of 1940 (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 T. Rowe Price International Stock Portfolio may (i) borrow for
non-leveraging, temporary or emergency purposes and (ii)
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engage in reverse repurchase agreements and make other investments or engage in
other transactions, which may involve a borrowing, in a manner consistent with
the Portfolio's investment objective and program, provided that the combination
of (i) and (ii) shall not exceed 33 1/3% of the value of the Portfolio'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; 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.
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 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.
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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.
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 .
11. Invest more than 15% 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 partially or completely as a
result of such investment.
Other Policies
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The Dreyfus Small Cap Value Portfolio 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. The Enhanced Index Portfolio 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. The
T. Rowe Price International Stock Portfolio 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)
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The table below shows the average annual total return for the Dreyfus
Small Cap Value Portfolio 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 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
T. Rowe Price
International
Stock.............. 15.23%/15.23%* N/A 12.77%/12.77%*
Dreyfus Small
Cap Value(2)....... 25.63%/25.63%* N/A 13.19%/13.07%*
- ------------------------
* 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 May 4, 1993.
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.
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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.
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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.
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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 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
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brokers who execute brokerage transactions for the Portfolios whereby a portion
of the commissions earned by such brokers will be shared with a non-affiliated
broker-dealer acting 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 a non-affiliated broker-dealer can be used to promote the
distribution of the Fund's shares including the costs of training and educating
such broker-dealers with respect to the Contracts . Periodically, the Manager
will instruct the "introducing broker" to transmit funds in its possession to
third party broker-dealers to pay for such training and education costs. No
portion of the commissions received by the "introducing broker" will be paid to
the Manager or any of its affiliates. On a quarterly basis, the Manager will
report to the Board of Trustees the aggregate commissions received by the
"introducing broker" and the distribution expenses paid from such commissions.
The Board of Trustees will periodically review whether 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.
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
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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 T. Rowe Price International Stock Portfolio 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 T. Rowe Price International
Stock Portfolio paid $554,048 in brokerage commissions. For the year ended
December 31, 1994, the Dreyfus Small Cap Value Portfolio paid $100,262 in
brokerage commissions, of which $58,028 (72.78%) was paid to Oppenheimer & Co.
Inc. ("OpCo"). For the year ended December 31,
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1995, the T. Rowe Price International Stock Portfolio and the Dreyfus Small Cap
Value Portfolio paid $395,753 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, and $36,216 (35.55%) with respect to the Dreyfus Small Cap
Value Portfolio was paid to OpCo. For the year ended December 31, 1996, the T.
Rowe Price International Stock Portfolio and the Dreyfus Small Cap Value
Portfolio paid $136,536 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, and
$34,511 (8.66%) with respect to the Dreyfus Small Cap Value Portfolio was paid
to OpCo.
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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
1424 Dolphin Terrace September, 1993,
Corona del Mar, California President and
92625 Chief Executive
Officer, Devine
Properties, Inc.
Since September,
1993, Vice
President, Plant
Control, Inc.
(landscape
contracting and
maintenance).
Thomas J. Hawekotte (62) Trustee President, Thomas
1200 Lake Shore Drive J. Hawekotte, P.C.
Chicago, Illinois 60610 (law practice).
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Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
- ---------------------
Steven L. Klosterman
(46) Trustee Since July, 1995,
5973 President of
Avenida Encinas Klosterman Capital
#300 Corporation
Carlsbad, CA 92008 (investment
adviser);
Investment
Counselor, Robert
J. Metcalf &
Associates, Inc.
(investment
adviser) from
August, 1990 to
June, 1995.
*Halbert D. Lindquist (51) Trustee President,
1650 E. Fort Lowell Road Lindquist
Tucson, Arizona 85719-2324 Enterprises, Inc.
(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.
180 Newport Center Drive Since January,
Suite 180 1997, real estate
consultant.
Newport Beach, CA
92660
Norman Ridley (51) Vice Since 1985, Senior
865 S. Figueroa Street President Vice President,
Suite 1800 TCW Asset
Los Angeles, California Management Company
90017 and Trust Company
of the West.
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Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
Ronald E. Robison (58)
865 S. Figueroa Street Vice Since November,
Suite 1800 President 1987, Managing
Los Angeles, California Director and Chief
90017 Operating Officer,
TCW Management
Inc.; March,
1990, Managing
Director, Trust
Company of
the West and
TCW Asset Management
Company.
James M. Goldberg (51) Vice Since June, 1984,
865 S. Figueroa Street President Managing Director,
Suite 1800 TCW Asset
Los Angeles, California Management Company
90017 and Trust Company
of the West and
since January,
1987 Managing
Director, TCW
Funds Management,
Inc.
Eileen Rominger (42) Vice Since May, 1994,
One World Financial Center President Managing Director,
New York, New York 10281 Oppenheimer
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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Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
**Vincent J. McGuinness,
Jr.
(32) Executive
Vice- From
President - September, 1996 to
Administra- May, 1997, Chief
tion Financial Officer
(Treasurer) of
Registrant; since
January, 1997,
Executive Vice-
President -
Chief of
Operations and
since May,
1997, Director
of Endeavor
Group; from
September, 1996
to June, 1997,
Chief Financial
Officer and
since May,
1996, of Endeavor
Management Co.;
since August,
1996, Chief
Financial Officer
of VJM
Corporation; from
May, 1996 to
January, 1997,
Executive Vice
President and
Director of
Sales, Western
Division of
Endeavor Group;
since May,
1996, Chief
Financial Officer
of McGuinness &
Associates; from
March, 1996
to May, 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
Michael J. Roland (39)
Chief Since June, 1996,
Financial Chief Financial
Officer Officer of
(Treasurer) Endeavor Group and
Endeavor Management
Co.; from January,
1995 to April, 1997,
Senior Vice
President, Treasurer
and Chief Financial
Officer of Pilgrim
America Group,
Pilgrim America
Investments, Inc.,
Pilgrim America
Securities and of
each of the funds in
the Pilgrim America
Group of Funds; from
July, 1994 to
December, 1994,
partner at the
consulting firm of
Corporate Savings
Group; from March,
1992 to June, 1994,
Vice President of
PIMCO Advisors, LP
and of the PIMCO
Institutional Funds.
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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.
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* 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 Manager or the Advisers will be reimbursed for
out-of-pocket expenses and currently receives an annual fee of $7,500 and $500
for attendance at each Trustees' Board or Committee 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.
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
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The Management Agreement between the Fund and the Manager with respect
to 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", as
defined in the 1940 Act, of the Manager) on July 20, 1992, and by the
shareholders of the Portfolio on November 23, 1992. With respect to the Dreyfus
Small Cap Value Portfolio, 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 Dreyfus Small Cap Value Portfolio, on April 19, 1993. With
respect to the Enhanced Index Portfolio, 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 Enhanced Index Portfolio, 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 T. Rowe Price International Stock
Portfolio, April 19, 1993 with respect to the Dreyfus Small Cap Value Portfolio,
August 26, 1996 with respect to the Enhanced Index Portfolio 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
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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
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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 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,
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 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.
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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.
1996
Investment Investment
Management Management Other
Fee Fee Expenses
Paid Waived Reimbursed
T. Rowe Price
International
Stock Portfolio. 1,015,179 -- --
Dreyfus Small
Cap Value
Portfolio....... 535,895 -- --
1995
Investment Investment
Management Management Other
Fee Fee Expenses
Paid Waived Reimbursed
T. Rowe Price
International
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Stock Portfolio. 759,830 --- ---
Dreyfus Small Cap
Value Portfolio. 339,672 --- ---
1994
Investment
Management Investment Other
Fee Management Expenses
Paid Fee Waived Reimbursed
T. Rowe Price
International
Stock Portfolio. 696,732 --- ---
Dreyfus Small
Cap Value
Portfolio....... 214,198 --- ---
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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, Martin Luther King, Jr. 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
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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.
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.
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<PAGE>
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
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<PAGE>
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).
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
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<PAGE>
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 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, three of
which are described in this Statement of Additional Information. 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
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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 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: 89% of the T. Rowe Price International Stock Portfolio; and 88%
of the Dreyfus Small Cap 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: 8% of the
T. Rowe Price International Stock Portfolio; and 9% of the
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Dreyfus Small Cap 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: 3% of the T. Rowe Price
International Stock Portfolio; and 2% of the Dreyfus Small Cap 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 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.
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FINANCIAL STATEMENTS
The financial statements of the T. Rowe Price International Stock
Portfolio and Dreyfus Small Cap 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.
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<PAGE>
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
A-1
<PAGE>
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
A-2
<PAGE>
timely payment only slightly less in degree than issues rated F-1+, while the
rating F-2 indicates a satisfactory degree of 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 nationally recognized statistical rating organizations
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.
A-3
<PAGE>
