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 four
portfolios currently offered by the Fund (the "Portfolios").
* Value Equity Portfolio
* Dreyfus Small Cap Value Portfolio
* T. Rowe Price Equity Income Portfolio
* T. Rowe Price Growth Stock 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 August 4, 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 August 4, 1997.
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, four 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:
Value Equity Portfolio (formerly, Quest for Value Equity Portfolio) -
seeks long term capital appreciation through investment in a diversified
portfolio of equity securities selected on the basis of a value oriented
approach to investing.
Dreyfus Small Cap Value Portfolio (formerly known as the Value Small
Cap Portfolio and prior to that the Quest for Value Small Cap Portfolio) - seeks
capital appreciation through investment in a diversified portfolio of equity
securities of companies with a median market capitalization of approximately
$750 million, provided that under normal market conditions at least 75% of the
Portfolio's investments will be in equity securities of companies with
capitalizations at the time of purchase between $150 million and $1.5 billion.
T. Rowe Price Equity Income Portfolio - seeks to provide substantial
dividend income and also capital appreciation by investing primarily in
dividend-paying common stocks of established companies.
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T. Rowe Price Growth Stock Portfolio - seeks long-term growth of
capital and to increase dividend income through investment primarily in common
stocks of well-established growth companies.
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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VALUE EQUITY PORTFOLIO*
Year Year Year Period
Ended Ended Ended Ended
12/31/96+++ 12/31/95 12/31/94 12/31/93*+++
Operating
Performance:
Net asset value,
beginning of
period $14.23 $10.69 $10.28 $10.00
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Net investment
income# 0.20 0.15 0.09 0.05
Net realized and
unrealized gain
on investments 3.15 3.52 0.33 0.23
Net increase in
net assets
resulting from
investment
operations 3.35 3.67 0.42 0.28
Distributions:
Dividends from
net investment
income (0.13) (0.09) (0.01) ---
Distributions
from net
realized gains (0.24) (0.04) --- ---
Total
distributions (0.37) (0.13) (0.01) ---
Net asset value,
end of period $17.21 $14.23 $10.69 $10.28
Total return++ 23.84% 34.59% 4.09% 2.80%
Ratios to
average net
assets/
supplemental
data:
Net assets, end
of period (in
000's) $127,927 $68,630 $32,776 $11,178
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Ratio of net
investment
income to
average net
assets 1.29% 1.56% 1.31% 0.84%+
Ratio of
operating
expenses to
average net
assets** 0.91% 0.86% 1.02% 1.30%+
Portfolio
turnover rate 27% 28% 56% 1%
Average
commission rate
(per share of
security)(a) $0.0569 --- --- ---
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* Effective May 1, 1996, the name of the Quest for Value Equity Portfolio
was changed to Value Equity Portfolio. The Portfolio commenced
operations on May 27, 1993.
** Annualized expense ratio before waiver of fees by investment manager
for the period ended December 31, 1993 was 2.10%.
+ Annualized.
++ Total return represents aggregate total return for the periods
indicated. The total return of the Portfolio does not reflect the
charges against the separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for this
period since use of the undistributed method did not accord with
results of operations.
# Net investment income before fees waived by investment manager for the
period ended December 31, 1993 was $0.00.
(a) Average commission rate paid per share of securities
purchased and sold by the Portfolio.
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DREYFUS SMALL CAP VALUE PORTFOLIO*
Year Year Year Period
Ended Ended Ended Ended
12/31/96+++## 12/31/95 12/31/94+++ 12/31/93*+++
Operating
Performance:
Net asset
value,
beginning of
period $12.22 $10.98 $11.18 $10.00
Net investment
income# 0.12 0.15 0.10 0.22
Net realized
and unrealized
gain/(loss) on
investments 2.95 1.36 (0.30) 0.96
Net increase/
(decrease) in
net assets
resulting from
investment
operations 3.07 1.51 (0.20) 1.18
Distributions:
Dividends from
net investment
income (0.14) (0.10) --- ---
Distributions
from net
realized gains (0.46) (0.17) --- ---
Total
distributions (0.60) (0.27) --- ---
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Net asset
value, end of
period $14.69 $12.22 $10.98 $11.18
Total return++ 25.63% 14.05% (1.79)% 11.80%
Ratios to
average net
assets/
supplemental
data:
Net assets,
end of period
(in 000's) $85,803 $52,597 $35,966 $12,699
Ratio of net
investment
income to
average net
assets 0.95% 1.56% 0.89% 3.98%+
Ratio of
operating
expenses to
average net
assets** 0.92% 0.87% 1.03% 1.30%+
Portfolio
turnover rate 171% 75% 77% 41%
Average
commission
rate (per
share of
security) (a) $0.0539 --- --- ---
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* 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.
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** Annualized operating expense ratio before waiver of fees by investment
manager for the period ended December 31, 1993 was 2.10%.
+ Annualized.
++ Total return represents aggregate total return for the periods
indicated. The total return of the Portfolio does not reflect the
charges against the separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for this
period since use of the undistributed method did not accord with
results of operations.
# Net investment income before fees waived by investment manager for the
period ended December 31, 1993 was $0.18.
## The Dreyfus Corporation became the Portfolio's Adviser effective
September 16, 1996.
(a) Average commission rate paid per share of securities purchased and
sold by the Portfolio.
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T. ROWE PRICE EQUITY INCOME
PORTFOLIO
Year Year
Ended Ended
12/31/96+++ 12/31/95*+++
Operating performance:
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Net asset value,
beginning of $10.00
year
$13.05
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Net investment income 0.41 0.34
Net realized and
unrealized gain on
investments 2.17 2.71
Net increase in net
assets resulting from
investment operations 2.58 3.05
Distributions:
Dividends from net
investment income (0.10) ---
Distribution from net
realized gains (0.04) ---
Total distributions (0.14) ---
Net asset value, end
of year $15.49 $13.05
Total return++ 19.88% 30.50%
Ratios to average net
assets/supplemental
data:
Net assets, end of
year (in 000's) $78,251 $21,910
Ratio of net
investment income to
average net assets 2.89% 3.24%+
Ratio of operating
expenses to average
net assets 0.96% 1.15%+
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Portfolio turnover
rate 19% 16%
Average commission
rate (per share of
security) (a) $0.0396 ---
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* The Portfolio commenced operations on January 3, 1995.
+ Annualized.
++ Total return represents aggregate total return for the periods
indicated. The total return of the Portfolio does not reflect the
charges against the separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method which more appropriately presents the per share data for the
period since use of the undistributed method did not accord with
results of operations.
(a) Average commission rate paid per share of securities purchased and
sold by the Portfolio.
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T. ROWE PRICE GROWTH STOCK PORTFOLIO
Year Year
Ended Ended
12/31/96+++ 12/31/95*+++
Operating performance:
Net asset value,
beginning of year $13.72 $10.00
Net investment income 0.11 0.08
Net realized and
unrealized gain on
investments 2.71 3.64
Net increase in net
assets resulting from
investment operations 2.82 3.72
Distributions:
Dividends from net
investment income (0.01) ---
Distributions from net
realized gains (0.24) ---
Total distributions (0.25) ---
Net asset value, end
of year $16.29 $13.72
Total return++ 20.77% 37.20%
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Ratios to average net
assets/supplemental
data:
Net assets, end of
year (in 000's) $59,732 $21,651
Ratio of net
investment income to
average net assets 0.75% 0.69%+
Ratio of operating
expenses to average
net assets 1.01% 1.26%+
Portfolio turnover 44% 64%
rate
Average commission
rate (per share of
security) (a) $0.0385 ---
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* The Portfolio commenced operations on January 3, 1995.
+ Annualized.
++ Total return represents aggregate total return for the periods
indicated. The total return of the Portfolio does not reflect the
charges against the separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method which more appropriately presents the per share data for the
period since use of the undistributed method did not accord with
results of operations.
(a) Average commission rate paid per share of securities purchased and
sold by the Portfolio.
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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: Value Equity - 1.30%, Dreyfus
Small Cap Value -1.30%, T. Rowe Price Equity Income - 1.30% and T. Rowe Price
Growth Stock - 1.30%
.
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
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Portfolios will be able to achieve their respective investment objectives.
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Value Equity Portfolio
The investment objective of the Value Equity Portfolio is long-term
capital appreciation through investment in securities (primarily equity
securities) of companies that are believed by the Portfolio's Adviser to be
undervalued in the marketplace in relation to factors such as the companies'
assets or earnings.
It is the Portfolio Adviser's intention to invest in securities which
in its opinion possess one or more of the following characteristics: undervalued
assets, valuable consumer or commercial franchises, securities valuation below
peer companies, substantial and growing cash flow and/or a favorable price to
book value relationship.
Investment policies aimed at achieving the Portfolio's objective are
set in a flexible framework of securities selection which primarily includes
equity securities, such as common stocks, preferred stocks, convertible
securities, rights and warrants in proportions which vary from time to time.
Under normal circumstances at least 65% of the Portfolio's assets will be
invested in common stocks or securities convertible into common stocks. The
Portfolio will invest primarily in stocks listed on the New York Stock
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Exchange. In addition, it may also purchase securities listed on other domestic
securities exchanges or traded in the domestic over-the-counter market and
foreign securities that are listed on a domestic or foreign securities exchange,
traded in the domestic or foreign over-the-counter markets or represented by
American Depositary Receipts.
In the event that future economic or financial conditions adversely
affect equity securities, or stocks are considered overvalued, or the
Portfolio's Adviser believes that investing for defensive purposes is
appropriate, or in order to meet anticipated redemption requests, the Portfolio
may invest part or all of its assets in U.S. government securities and high
quality short-term debt securities (with remaining maturities of one year or
less) including certificates of deposit, bankers' acceptances, commercial paper,
short-term corporate securities and repurchase agreements.
The Portfolio may invest in certain foreign securities which may represent
a greater degree of risk than investing in domestic securities. These risks are
discussed in the "Investment Strategies" section of this Prospectus
below under the heading "Foreign Securities."
It is the present intention of the Portfolio's Adviser to invest no
more than 5% of the Portfolio's net assets in bonds rated below Baa3 by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Service,
a division of McGraw - Hill Companies, Inc. ("Standard & Poor's") (commonly
known as "junk bonds"). In the event that the Portfolio's Adviser intends in the
future to invest more than 5% of the Portfolio's net assets in junk bonds,
appropriate disclosures will be made to existing and prospective shareholders.
For information about the possible risks of investing in junk bonds see
"Investment Strategies - Lower Rated Bonds" below.
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
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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 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
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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.
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
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"Investment Strategies" section of this Prospectus below under the heading
"Foreign Securities."
The Portfolio may employ certain investment strategies which are
discussed under the caption "Investment Strategies" below and in the Statement
of Additional Information.
T. Rowe Price Equity Income Portfolio
The investment objective of the T. Rowe Price Equity Income Portfolio
is to seek to provide substantial dividend income and also capital appreciation
by investing primarily in dividend-paying common stocks of established
companies. In pursuing its objective, the Portfolio emphasizes companies with
favorable prospects for increasing dividend income, and secondarily, capital
appreciation. Over time, the income component (dividends and interest earned) of
the Portfolio's investments is expected to be a significant contributor to the
Portfolio's total return. The Portfolio's yield is expected to be significantly
above that of the S&P Composite Stock Price Index (the "S&P 500 Index"). Total
return will consist primarily of dividend income and secondarily of capital
appreciation (or depreciation).
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The investment program of the Portfolio is based on several premises.
First, the Portfolio's Adviser believes that, over time, dividend income can
account for a significant component of the total return from equity investments.
Second, dividends are normally a more stable and predictable source of return
than capital appreciation. While the price of a company's stock generally
increases or decreases in response to short-term earnings and market
fluctuations, its dividends are generally less volatile. Finally, the
Portfolio's Adviser believes that stocks which distribute a high level of
current income tend to have less price volatility than those which pay below
average dividends.
To achieve its objective, the Portfolio, under normal circumstances,
will invest at least 65% of its total assets in income-producing common stocks,
whose prospects for dividend growth and capital appreciation are considered
favorable by its Adviser. To enhance capital appreciation potential, the
Portfolio also uses a "value" approach and invests in stocks and other
securities its Adviser believes are temporarily undervalued by various measures,
such as price/earnings ratios. The Portfolio's investments will generally be
made in companies which share some of the following characteristics:
* established operating histories;
* above-average current dividend yields relative to the S&P 500
Index;
* low price/earnings ratios relative to the S&P 500 Index;
* sound balance sheets and other financial characteristics; and
* low stock price relative to company's underlying value as
measured by assets, earnings, cash flow or business
franchises.
Although the Portfolio will invest primarily in U.S. common stocks, it
may also purchase other types of securities, for example, foreign securities,
preferred stocks, convertible securities and warrants, when considered
consistent with the Portfolio's investment objective and program.
In the event that future economic or financial conditions adversely
affect equity securities, or stocks are considered overvalued, or the
Portfolio's Adviser believes that investing for defensive purposes is
appropriate, or in order to meet anticipated redemption requests, the Portfolio
may invest part
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or all of its assets in U.S. government securities and high quality (within the
two highest rating categories assigned by a nationally recognized statistical
rating organization ("NRSRO")) U.S. and foreign dollar-denominated money market
securities including certificates of deposit, bankers' acceptances, commercial
paper, short-term corporate securities and repurchase agreements.
The Portfolio may invest up to 25% of its total assets in foreign
securities. These include non-dollar denominated securities traded outside the
U.S. and dollar denominated securities traded in the U.S. (such as American
Depositary Receipts). Such investments increase a portfolio's diversification
and may enhance return, but they may represent a greater degree of risk than
investing in domestic securities. These risks are discussed in the "Investment
Strategies" section of this Prospectus below under the heading "Foreign
Securities."
The Portfolio may invest in debt securities of any type including
municipal securities, without regard to quality or rating. Such securities would
be purchased in companies which meet the investment criteria for the Portfolio.
The price of a bond fluctuates with changes in interest rates, rising when
interest rates fall and falling when interest rates rise. The Portfolio,
however, will not invest more than 10% of its total assets in securities rated
below Baa by Moody's or BBB by Standard & Poor's (commonly known as "junk
bonds"). Such securities may include bonds rated as low as C by Moody's and by
Standard & Poor's. See the Appendix to the Statement of Additional Information.
Investments in non-investment grade securities entail certain risks which are
discussed in the "Investment Strategies" section of this Prospectus below under
the heading "Lower-Rated Securities."
The Portfolio may employ certain investment strategies which are
discussed under the caption "Investment Strategies" below and in the Statement
of Additional Information.
T. Rowe Price Growth Stock Portfolio
The investment objectives of the T. Rowe Price Growth Stock Portfolio
are to seek long-term growth of capital and to increase dividend income through
investment primarily in common stocks of well-established growth companies. A
growth company is defined by the Portfolio's Adviser as one which: (1) has
demonstrated historical growth of earnings faster than the growth of inflation
and the economy in general; and (2)
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has indications of being able to continue this growth pattern in the future.
Total return will consist primarily of capital appreciation or depreciation and
secondarily of dividend income.
More than fifty years ago, Thomas Rowe Price pioneered the Growth Stock
Theory of Investing. It is based on the premise that inflation represents a more
serious, long-term threat to an investor's portfolio than stock market
fluctuations or recessions. Mr. Price believed that when a company's earnings
grow faster than both inflation and the economy in general, the market will
eventually reward its long-term earnings growth with a higher stock price. In
addition, the company should be able to raise its dividend in line with its
growth in earnings.
Although corporate earnings can be expected to be lower during periods
of recession, it is the Portfolio Adviser's opinion that, over the long term,
the earnings of well-established growth companies will not be affected adversely
by unfavorable economic conditions to the same extent as the earnings of more
cyclical companies. However, investors should be aware that the Portfolio's
share value may not always reflect the long-term earnings trend of growth
companies.
The Portfolio will invest primarily in the common stocks of a
diversified group of well-established growth companies. While current dividend
income is not a prerequisite in the selection of a growth company, the companies
in which the Portfolio will invest normally have a record of paying dividends
and are generally expected to increase the amounts of such dividends in future
years as earnings increase.
Although the Portfolio will invest primarily in U.S. common stocks, it
may also purchase other types of securities, for example, foreign securities,
preferred stocks, convertible securities and warrants, when considered
consistent with the Portfolio's investment objectives and program.
In the event that future economic or financial conditions adversely
affect equity securities, or stocks are considered overvalued, or the
Portfolio's Adviser believes that investing for defensive purposes is
appropriate, or in order to meet anticipated redemption requests, the Portfolio
may invest part or all of its assets in U.S. government securities and high
quality (within the two highest rating categories assigned by a NRSRO) U.S. and
foreign dollar-denominated money market securities including certificates of
deposit, bankers'
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acceptances, commercial paper, short-term corporate securities
and repurchase agreements.
The Portfolio may invest up to 30% of its total assets in foreign
securities. These include non-dollar denominated securities traded outside the
U. S. and dollar denominated securities traded in the U. S. (such as American
Depositary Receipts). Such investments increase a portfolio's diversification
and may enhance return, but they may represent a greater degree of risk than
investing in domestic securities. These risks are discussed in the "Investment
Strategies" section of this Prospectus below under the heading "Foreign
Securities."
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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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
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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 Equity Income and T.
Rowe Price Growth Stock 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 Equity Income and T. Rowe Price Growth Stock Portfolios may
invest in hybrid instruments. The investment strategies referred to above and
the risks related to them are summarized below and certain of these strategies
are described in more detail in the Statement of Additional Information.
Options and Futures Transactions. A Portfolio 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.
A Portfolio may purchase and sell
<PAGE>
interest rate futures contracts as a hedge against changes in interest rates. A
futures contract is an agreement between two parties to buy and sell a security
for a set price on a future date. Futures contracts are traded on designated
"contracts markets" which, through their clearing corporations, guarantee
performance of the contracts. Currently, there are futures contracts based on
securities such as long-term U.S. Treasury bonds, U.S. Treasury notes and
three-month U.S. Treasury bills.
Generally, if market interest rates increase, the value of outstanding
debt securities declines (and vice versa). Entering into a futures contract for
the sale of securities has an effect similar to the actual sale of securities,
although the sale of the futures contracts might be accomplished more easily and
quickly. For example, if the Portfolio holds long-term U.S. government
securities and the Adviser anticipates a rise in long-term interest rates, it
could, in lieu of disposing of its portfolio securities, enter into futures
contracts for the sale of similar long-term securities. If interest rates
increased and the value of a Portfolio's securities declined, the value of the
Portfolio's futures contracts would increase, thereby protecting the Portfolio
by preventing the net asset value from declining as much as it otherwise would
have. Similarly, entering into futures contracts for the purchase of securities
has an effect similar to the actual purchase of the underlying securities, but
permits the continued holding of securities other than the underlying
securities. For example, if the Adviser expects long-term interest rates to
decline, a Portfolio might enter into futures contracts for the purchase of
long-term securities, so that it could gain rapid market exposure that may
offset anticipated increases in the cost of securities it intends to purchase,
while continuing to hold higher-yielding short-term securities or waiting for
the long-term market to stabilize.
A Portfolio 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.
<PAGE>
A Portfolio may not purchase futures contracts or related options if,
immediately thereafter, more than 33 1/3% (25% for the T. Rowe Price Equity
Income Portfolio and the T. Rowe Price Growth 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 Equity Income and T. Rowe
Price Growth Stock 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
<PAGE>
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 Equity Income and T. Rowe Price Growth Stock Portfolios may write
covered call options on foreign currencies in an attempt to offset some of the
costs of hedging those currencies. A Portfolio will engage in over-the-counter
transactions only when appropriate exchange traded transactions are unavailable
and when, in the opinion of the Portfolio's Adviser, the pricing mechanism and
liquidity are satisfactory and the participants are responsible parties likely
to meet their contractual obligations. A Portfolio's ability to engage in
hedging and related option transactions may be limited by tax considerations.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency.
<PAGE>
<PAGE>
Reverse Repurchase Agreements. Each Portfolio is permitted to enter
into reverse repurchase agreements. In a reverse repurchase agreement, the
Portfolio sells a security and agrees to repurchase it at a mutually agreed upon
date and price, reflecting the interest rate effective for the term of the
agreement. For the purposes of the 1940 Act it is considered a form of borrowing
by the Portfolio and, therefore, is a form of leverage. Leverage may cause any
gains or losses of the Portfolio to be magnified.
Borrowings. A Portfolio other than the T. Rowe Price Equity Income and
T. Rowe Price Growth Stock Portfolios may borrow money for temporary purposes in
amounts up to 5% of its total assets. The
T. Rowe Price Equity Income and T. Rowe Price Growth
Stock Portfolios may
borrow money as a temporary measure for emergency purposes, to
<PAGE>
facilitate redemption requests, or for other purposes consistent with the
Portfolio's investment objective and program in an amount up to 33 1/3% of the
Portfolio's net assets. Each Portfolio may pledge up to 33 1/3% of its total
assets to secure these borrowings. These Portfolios may not purchase additional
securities when borrowings exceed 5% of total assets.
As a matter of operating policy, each of the T. Rowe Price Equity Income and T.
Rowe Price Growth Stock Portfolios will limit all borrowings to no more than 25%
of such Portfolio's 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
<PAGE>
into by a Portfolio will provide that the value of the collateral underlying the
repurchase agreement will always be at least equal to the repurchase price,
including any accrued interest. The Portfolio's right to liquidate such
securities in the event of a default by the seller could involve certain costs,
losses or delays . 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 Equity Income and T. Rowe Price
Growth Stock Portfolios may invest up to 10% of their total assets in hybrid
instruments. Hybrid instruments have recently been developed and combine the
elements of futures contacts or options with those of debt, preferred equity or
a depository instrument. Often
<PAGE>
these hybrid instruments are indexed to the price of a commodity, particular
currency, or a domestic or foreign debt or equity securities index. Hybrid
instruments may take a variety of forms, including, but not limited to, debt
instruments with interest or principal payments or redemption terms determined
by reference to the value of a currency or commodity or securities index at a
future point in time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity. Hybrid instruments may bear
interest or pay dividends at below market (or even relatively nominal) rates.
Under certain conditions, the redemption value of such an instrument could be
zero. Hybrid instruments can have volatile prices and limited liquidity and
their use by a Portfolio may not be successful.
Fixed-Income Securities - Downgrades. If any security invested in by
any of the Portfolios loses its rating or has its rating reduced after the
Portfolio has purchased it, unless required by law, the Portfolio is not
required to sell or otherwise dispose of the security, but may consider doing
so.
Illiquid Securities. Each Portfolio may invest up to 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 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
<PAGE>
such security does not result in a Portfolio having more than 15% of its assets
invested in illiquid or not readily marketable securities.
Lower-Rated Securities. Lower-rated securities are those securities
rated below Baa by Moody's or BBB by Standard & Poor's (commonly known as "junk
bonds"). Such securities may include bonds rated as low as C by Moody's and by
Standard & Poor's. See the Appendix to the Statement of Additional Information.
Lower-rated and comparable unrated securities (collectively referred to
in this discussion as "lower-rated securities") will likely have some quality
and protective characteristics that, in the judgment of the rating organization,
are out-weighed by large uncertainties or major risk exposures to adverse
conditions; and are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation.
While the market values of lower-rated securities tend to react less to
fluctuations in interest rate levels than the market values of higher-rated
securities, the market values of certain lower-rated securities also tend to be
more sensitive to individual corporate developments and changes in economic
conditions than higher-rated securities. In addition, lower- rated securities
generally present a higher degree of credit risk. Issuers of lower-rated
securities are often highly leveraged and may not have more traditional methods
of financing available to them so that their ability to service their debt
obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired. The risk of loss due to default by such issuers
is significantly greater because lower-rated securities generally are unsecured
and frequently are subordinated to the prior payment of senior indebtedness. A
Portfolio may incur additional expenses to the extent that it is required to
seek recovery upon a default in the payment of principal or interest on its
portfolio holdings. The existence of limited markets for lower-rated securities
may diminish a Portfolio's ability to obtain accurate market quotations for
purposes of valuing such securities and calculating its net asset value For
additional information about the possible risks of investing in junk bonds, see
"Investment Objectives and Policies - Lower-Rated Bonds" in the Statement of
Additional Information.
<PAGE>
Foreign Securities. Foreign investments involve certain risks that are
not present in domestic securities. Because a 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 a 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 a 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 a 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 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,
<PAGE>
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 a 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 a
Portfolio's ability to repatriate capital or income. A Portfolio's Adviser will
not invest the Portfolio's assets in countries where it believes such events are
likely to occur.
Income received by a 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. A 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 a Portfolio will
<PAGE>
reduce its net income available for distribution to
shareholders.
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.
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:
Value Equity Portfolio - .80%; Dreyfus Small Cap Value
<PAGE>
Portfolio - .80%; T. Rowe Price Equity Income Portfolio - .80%; T. Rowe Price
Growth Stock Portfolio - .80% . 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 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
<PAGE>
broker-dealers. OpCap Advisors may select, under certain circumstances,
Oppenheimer & Co., Inc., one of its affiliates, to execute transactions for
the Value Equity Portfolio and T. Rowe Price Associates, 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 Equity
Income and T. Rowe Price Growth Stock Portfolios. 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 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
<PAGE>
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.
OpCap Advisors ("OpCap") (formerly known as Quest for Value Advisors) is the
Adviser to the Value Equity Portfolio. As compensation for its services as
investment adviser, the Manager pays OpCap a monthly fee at the annual rate of
.40% of the average daily net assets of the
Value Equity Portfolio .
OpCap is a majority-owned subsidiary of Oppenheimer Capital, a general
partnership which is registered as an investment adviser under the Investment
Advisers Act of 1940. The employees of Oppenheimer Capital render all investment
<PAGE>
management services performed under the investment advisory agreements to the
Portfolio. Oppenheimer Financial Corp. holds a 33% interest in Oppenheimer
Capital. Oppenheimer Capital, L.P., a Delaware limited partnership of which
Oppenheimer Financial Corp. is the sole general partner, owns the remaining 67%
interest of Oppenheimer Capital. The units of Oppenheimer Capital, L.P. are
traded on the New York Stock Exchange. OpCap and its affiliates have operated as
investment advisers to both mutual funds and other clients since 1968, and had
approximately $48.2 billion under management as of December 31, 1996.
On February 13, 1997, PIMCO Advisors L.P. ("PIMCO Advisors"), a
registered investment adviser with approximately $110 billion in assets under
management through various subsidiaries, signed an Agreement and Plan of Merger
with Oppenheimer Group, Inc. ("OGI") and its subsidiary Oppenheimer Financial
Corp. ("Opfin") pursuant to which PIMCO Advisors and its affiliate, Thomson
Advisory Group, Inc. ("TAG"), will acquire the one-third managing general
partner interest in Oppenheimer Capital, its 1.0% general partnership interest
in OpCap, and its 1.0% general partner interest in Oppenheimer Capital L.P. (the
"Transaction") and OGI will be merged with and into TAG. The Transaction is
subject to certain conditions being satisfied prior to closing, including
consents from certain lenders, approvals from regulatory authorities, including
a favorable tax ruling from the Internal Revenue Service, and consents of
clients, which are expected to take up to six months to obtain. If the
Transaction is consummated, it will involve a change in control of Oppenheimer
Capital and its subsidiary OpCap which will constitute an assignment and
termination of the investment advisory agreements between the Manager and OpCap.
At a meeting held on April 8, 1997, the Fund's Board of Trustees, including all
of the "disinterested Trustees" as defined in the 1940 Act, approved and
determined to submit to shareholders for approval, new investment advisory
agreements with OpCap, substantially upon the same terms and conditions as the
existing investment advisory agreements. Proxy material will be sent to
shareholders of the Value Equity Portfolio concerning approval of the new
investment advisory agreements.
Eileen Rominger, Managing Director of Oppenheimer Capital, is the portfolio
manager for the Value Equity Portfolio. Ms. Rominger has been with Oppenheimer
Capital since 1981.
<PAGE>
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 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 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
<PAGE>
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.
T. Rowe Price Associates, Inc. ("T. Rowe Price") is the Adviser to the T.
Rowe Price Equity Income Portfolio and the T. Rowe Price Growth Stock Portfolio.
As compensation for its services as investment adviser, the Manager pays T. Rowe
Price a monthly fee at the annual rate of .40% of the average daily net assets
of each of the T. Rowe Price Equity Income and T. Rowe Price Growth Stock
Portfolios. T. Rowe Price serves as investment manager to a variety of
individual and institutional investor accounts, including limited and real
estate partnerships and other mutual funds.
Investment decisions with respect to the T. Rowe Price Equity Income
Portfolio are made by an Investment Advisory Committee composed of the following
members: Brian C. Rogers, Chairman, Thomas H. Broadus, Jr., Richard P. Howard,
and William J. Stromberg. The Committee Chairman has day-to-day responsibility
for managing the Portfolio and works with the Committee in developing and
executing the Portfolio's investment program. Mr. Rogers has been Chairman of
the Committee since 1993. He joined T. Rowe Price in 1982 and has been managing
investments since 1983.
Investment decisions with respect to the T. Rowe Price Growth Stock
Portfolio are made by an Investment Advisory Committee composed of the following
members: Robert W. Smith, Chairman, James A.C. Kennedy and Brian C. Rogers. The
Committee Chairman has day-to-day responsibility for managing the Portfolio and
works with the Committee in developing and
<PAGE>
executing the Portfolio's investment program. Mr. Smith has served on the
Committee since 1995 and has been Chairman of the Committee since February,
1997. He joined T. Rowe Price in 1992. From 1987 to 1992, Mr. Smith was an
Investment Analyst for Massachusetts Financial Services.
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. As of December 31, 1996, T. Rowe Price and its affiliates managed more
than $95 billion of assets
<PAGE>
<PAGE>
.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Portfolio intends to qualify each year as a "regulated investment
company" under the Internal Revenue Code. By so qualifying, a Portfolio will not
be subject to federal income taxes to the extent that its net investment income
and net realized capital gains are distributed to shareholders.
It is the intention of each Portfolio to distribute substantially all
its net investment income. Although the Trustees of the Fund may decide to
declare dividends at other intervals, dividends from investment income of each
Portfolio are expected to be declared annually 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.
<PAGE>
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.
AEGON USA Securities, Inc. ("AEGON Securities"), an affiliate of PFL,
is the principal underwriter and distributor of the Contracts. AEGON Securities
places orders for the purchase or redemption of shares of each Portfolio based
on, among other things, the amount of net Contract premiums or purchase payments
transferred to the separate accounts, transfers to or from a separate account
investment division, policy loans, loan repayments, and benefit payments to be
effected on a given date pursuant to the terms of the Contracts. Such orders are
effected, without sales charge, at the net asset value per share for each
Portfolio determined as of the close of regular trading on the New York Stock
Exchange (currently 4:00 p.m., New York City time), 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
<PAGE>
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 Value Equity, Dreyfus Small Cap Value, T. Rowe
Price Equity Income and T. Rowe Price Growth Stock Portfolios and may compare
the performance of the Portfolios with that of other mutual funds with similar
investment objectives as listed in rankings prepared by Lipper Analytical
Services, Inc., or similar independent services monitoring mutual fund
performance, and with appropriate securities or other relevant indices. The
"average annual total return" of a Portfolio refers to the average annual
compounded rate of return over the stated period that would equate an initial
investment in that Portfolio at the beginning of the period to its ending
redeemable value, assuming reinvestment of all dividends and distributions and
deduction of all recurring charges other than charges and deductions which are,
or may be, imposed under the Contracts. Figures will be given for the recent
one, five and ten year periods and for the life of the Portfolio if it has not
been in existence for any such periods. When considering "average annual total
return" figures for periods longer than one year, it is important to note that a
Portfolio's annual total return for any given year might have been greater or
less than its average for the entire period. "Cumulative total return"
represents the total change in value of an investment in a Portfolio for a
specified period (again reflecting changes in Portfolio share prices and
assuming reinvestment of Portfolio distributions).
<PAGE>
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.
<PAGE>
<PAGE>
<PAGE>
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 four
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 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.
<PAGE>
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.
<PAGE>
TABLE OF CONTENTS
Page
The Fund ENDEAVOR SERIES TRUST
Financial Highlights
Investment Objectives and Policies 2101 East Coast Highway,
Suite 300
Corona del Mar, California 92625
(800) 854-8393
Manager
Value Equity Portfolio
Dreyfus Small Cap Value Portfolio Endeavor Investment Advisers
2101 East Coast Highway
Suite 300
T. Rowe Price Equity Income Corona del Mar, California 92625
Portfolio
T. Rowe Price Growth Stock Investment Advisers
Portfolio
Investment Strategies
Management of the Fund OpCap Advisors
The Manager One World Financial Center
New York, New York 10281
The Advisers
Dividends, Distributions and Taxes The Dreyfus Corporation
Sale and Redemption of Shares 200 Park Avenue
Performance Information New York, New York 10166
Organization and Capitalization
of the Fund T. Rowe Price Associates, Inc.
Additional Information 100 East Pratt Street
Transfer Agent and Custodian Baltimore, Maryland 21202
Independent Auditors
--------------
No person has been authorized to give any
information or to make any representation not
contained in this Prospectus and, if given or
made, such information or representation must
not be relied upon as having been authorized.
This Prospectus does not constitute an
offering of any securities other than the Custodian
registered securities to which it relates or
an offer to any person in any state or Boston Safe Deposit and Trust
jurisdiction of the United States or any Company
country where such offer would be unlawful. One Boston Place
Boston, Massachusetts 02108
<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 Value Equity Portfolio
(formerly, the Quest for Value Equity Portfolio), the Dreyfus Small Cap Value
Portfolio (formerly, the Value Small Cap Portfolio and prior to that the Quest
for Value Small Cap Portfolio), the T. Rowe Price Equity Income Portfolio and
the T. Rowe Price Growth Stock Portfolio of Endeavor Series Trust (the "Fund"),
dated August 4, 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.
EndeavorSM is a registered service mark of Endeavor Management Co.
<PAGE>
TABLE OF CONTENTS
Page
Investment Objectives and Policies................ 3
Options and Futures Strategies............... 3
Foreign Currency Transactions................ 9
Repurchase Agreements........................ 13
Forward Commitments.......................... 14
Securities Loans............................. 14
Lower Rated Bonds ........................... 14
Portfolio Turnover........................... 15
Investment Restrictions........................... 16
Other Policies............................... 18
Performance Information........................... 18
Total Return................................. 18
Non-Standardized Performance................. 20
Portfolio Transactions............................ 20
Management of the Fund............................ 23
Trustees and Officers........................ 23
The Manager.................................. 31
The Advisers................................. 34
Redemption of Shares.............................. 34
Net Asset Value................................... 36
Taxes............................................. 36
Federal Income Taxes......................... 36
Organization and Capitalization of the Fund....... 38
Legal Matters..................................... 40
Custodian......................................... 40
Financial Statements.............................. 40
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 August 4, 1997.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the investment
objectives and policies of the Portfolios in the Prospectus of the Fund. The
Fund is managed by Endeavor Investment Advisers. The Manager has selected OpCap
Advisors (formerly, Quest for Value Advisors) as investment adviser for the
Value Equity Portfolio, The Dreyfus Corporation as investment adviser for
the Dreyfus Small Cap Value Portfolio and T. Rowe Price Associates, Inc. as
investment adviser for the T. Rowe Price Equity Income Portfolio and T. Rowe
Price Growth Stock 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.
<PAGE>
It is impossible to predict the amount of trading interest that may exist in
various types of options or futures. Therefore no assurance can be given that a
Portfolio will be 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
<PAGE>
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
<PAGE>
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.
<PAGE>
Purchase and Sale of Interest Rate Futures. A Portfolio may purchase and
sell interest rate futures contracts on U.S. Treasury bills, notes and bonds and
Government National Mortgage Association ("GNMA") certificates either for the
purpose of hedging its portfolio securities against the adverse effects of
anticipated movements in interest rates or for other investment purposes.
A Portfolio may sell interest rate futures contracts in anticipation of
an increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the securities held by a Portfolio will fall, thus
reducing the net asset value of the Portfolio. This interest rate risk can be
reduced without employing futures as a hedge by selling such securities and
either reinvesting the proceeds in securities with shorter maturities or by
holding assets in cash. However, this strategy entails increased transaction
costs in the form of dealer spreads and brokerage commissions and would
typically reduce the Portfolio's average yield as a result of the shortening of
maturities.
The sale of interest rate futures contracts provides a means of hedging
against rising interest rates. As rates increase, the value of a Portfolio's
short position in the futures contracts will also tend to increase thus
offsetting all or a portion of the depreciation in the market value of the
Portfolio's investments that are being hedged. While the Portfolio will incur
commission expenses in selling and closing out futures positions (which is done
by taking an opposite position in the futures contract), commissions on futures
transactions are lower than transaction costs incurred in the purchase and sale
of portfolio securities.
A Portfolio may purchase interest rate futures contracts in anticipation
of a decline in interest rates when it is not fully invested. As such purchases
are made, it is expected that an equivalent amount of futures contracts will be
closed out.
A Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges, and are standardized as to maturity date
and the underlying financial instrument. Futures exchanges and trading in the
United States are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC"). Futures are traded in London at the London
International Financial Futures Exchange, in Paris, at the MATIF, and in Tokyo
at the Tokyo Stock Exchange.
Options on Futures Contracts. A Portfolio may purchase and write call and
put options on stock index and interest rate futures contracts. A Portfolio may
use such options on futures contracts in connection with its hedging strategies
in
<PAGE>
lieu of purchasing and writing options directly on the underlying securities or
stock indices or purchasing or selling the underlying futures. For example, a
Portfolio may purchase put options or write call options on stock index futures
or interest rate futures, rather than selling futures contracts, in anticipation
of a decline in general stock market prices or rise in interest rates,
respectively, or purchase call options or write put options on stock index or
interest rate futures, rather than purchasing such futures, to hedge against
possible increases in the price of equity securities or debt securities,
respectively, which the Portfolio intends to purchase.
In connection with transactions in stock index options, stock index
futures, interest rate futures and related options on such futures, a Portfolio
will be required to deposit as "initial margin" an amount of cash and short-term
U.S. government securities. The current initial margin requirement per contract
is approximately 2% of the contract amount. Thereafter, subsequent payments
(referred to as "variation margin") are made to and from the broker to reflect
changes in the value of the futures contract. Brokers may establish deposit
requirements higher than exchange minimums.
Limitations. A Portfolio will not purchase or sell futures contracts or
options on futures contracts or stock indices for non-hedging purposes if, as a
result, the sum of the initial margin deposits on its existing futures contracts
and related options positions and premiums paid for options on futures contracts
or stock indices would exceed 5% of the net assets of the Portfolio unless the
transaction meets certain "bona fide hedging" criteria.
Risks of Options and Futures Strategies. The effective use of options
and futures strategies depends, among other things, on a Portfolio's ability to
terminate options and futures positions at times when its Adviser deems it
desirable to do so. Although a Portfolio will not enter into an option or
futures position unless its Adviser believes that a liquid market exists for
such option or future, there can be no assurance that a Portfolio will be able
to effect closing transactions at any particular time or at an acceptable price.
The Advisers generally expect that options and futures transactions for the
Portfolios will be conducted on recognized exchanges. In certain instances,
however, a Portfolio may purchase and sell options in the over-the-counter
market. The staff of the Securities and Exchange Commission considers
over-the-counter options to be illiquid. A Portfolio's ability to terminate
option positions established in the over-the-counter market may be more limited
than in the case of exchange traded options and may also involve the risk that
securities dealers participating in such
<PAGE>
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 Equity Income and T. Rowe Price
Growth Stock Portfolios)
Foreign Currency Exchange Transactions. The T. Rowe Price Equity Income and
T. Rowe Price Growth Stock 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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
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
<PAGE>
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% (10% with respect to Value Equity Portfolio) of its net assets in
repurchase agreements having maturities of greater than seven days. A Portfolio
may enter into repurchase agreements, provided the Fund's custodian always has
possession of securities serving as collateral whose market value at least
equals the amount of the repurchase obligation. To minimize the risk of loss a
Portfolio will enter into repurchase agreements only with financial institutions
which are considered by its Adviser to be creditworthy under guidelines adopted
by the Trustees of the Fund. If an institution enters an insolvency proceeding,
the resulting delay in liquidation of the securities serving as collateral could
cause a Portfolio some loss, as well as legal expense, if the value of the
securities declines prior to liquidation.
Forward Commitments (All Portfolios)
Each of the Portfolios may enter into forward commitments to purchase
securities. An amount of cash or short-term U.S. government securities equal to
the Portfolio's commitment will be deposited in a segregated account at the
Fund's custodian bank to secure the Portfolio's obligation. Although a Portfolio
will generally enter into forward commitments to purchase securities with the
intention of actually acquiring the securities for its portfolio (or for
delivery pursuant to
<PAGE>
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.
Lower Rated Bonds (Value Equity and T. Rowe Price Equity Income
Portfolios)
The Value Equity Portfolio may invest up to 5% of its assets and the T.
Rowe Price Equity Income Portfolio may invest up to 10% of its assets in bonds
rated below Baa3 by Moody's Investors Service Inc. ("Moody's") or BBB by
Standard & Poor's Ratings Service, a division of McGraw-Hill Companies, Inc.
("Standard & Poor's") (commonly known as "junk bonds"). Securities rated less
than Baa by Moody's or BBB by Standard & Poor's are classified as non-investment
grade securities and are considered speculative by those rating agencies. It is
each Portfolio Adviser's policy not to rely exclusively on ratings issued by
credit rating agencies but to supplement such ratings with the Adviser's own
independent and ongoing review of credit quality. Junk bonds may be issued as a
consequence of corporate restructurings, such as leveraged buyouts, mergers,
acquisitions, debt recapitalizations, or similar events or by smaller or highly
leveraged companies. When economic conditions appear to be deteriorating, junk
bonds may decline in market value due to investors' heightened concern over
credit quality, regardless of prevailing interest rates. Although the growth of
the high yield securities market in the 1980s had paralleled a long economic
expansion, in the past many issuers have been affected by adverse economic and
market conditions. It should be recognized that an economic downturn or increase
in interest rates is likely to have a negative effect on (i) the high yield bond
market, (ii) the value of high yield securities and (iii) the ability of the
securities' issuers to service their principal and
<PAGE>
interest payment obligations, to meet their projected business goals or to
obtain additional financing. The market for junk bonds, especially during
periods of deteriorating economic conditions, may be less liquid than the market
for investment grade bonds. In periods of reduced market liquidity, junk bond
prices may become more volatile and may experience sudden and substantial price
declines. Also, there may be significant disparities in the prices quoted for
junk bonds by various dealers. Under such conditions, a Portfolio may find it
difficult to value its junk bonds accurately. Under such conditions, a Portfolio
may have to use subjective rather than objective criteria to value its junk bond
investments accurately and rely more heavily on the judgment of the Fund's Board
of Trustees. Prices for junk bonds also may be affected by legislative and
regulatory developments. For example, recent federal rules require that savings
and loans gradually reduce their holdings of high-yield securities. Also, from
time to time, Congress has considered legislation to restrict or eliminate the
corporate tax deduction for interest payments or to regulate corporate
restructurings such as takeovers, mergers or leveraged buyouts. Such
legislation, if enacted, could depress the prices of outstanding junk bonds.
<PAGE>
<PAGE>
<PAGE>
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.
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 T.
Rowe Price Equity Income and T. Rowe Price Growth Stock Portfolios and
restriction number 11 with respect to Dreyfus Small Cap Value Portfolio (which
restrictions are not fundamental policies), the following investment
restrictions (numbers 1 through 12) are fundamental policies, which may not be
changed without the approval of a majority of the outstanding shares of the
Portfolio, and apply to each of the Portfolios except as otherwise indicated. As
provided in the 1940 Act, a vote of a majority of the outstanding shares
necessary to amend a fundamental policy means the affirmative vote of the lesser
of (1) 67% or more of the shares present at a meeting, if the holders of more
than 50% of the outstanding shares of the Portfolio are present or represented
by proxy, or (2) more than 50% of the outstanding shares of the Portfolio.
<PAGE>
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 Equity Income Portfolio and the T. Rowe Price
Growth Stock Portfolio may (i) borrow for non-leveraging, temporary or emergency
purposes and (ii) engage in reverse repurchase agreements and make other
investments or engage in other transactions, which may involve a borrowing, in a
manner consistent with each Portfolio's investment objective and program,
provided that the combination of (i) and (ii) shall not exceed 33 1/3% of the
value of each Portfolios's total assets (including the amount borrowed) less
liabilities (other than borrowings) and may pledge up to 33 1/3% of the value of
its total assets to secure those borrowings .
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.
<PAGE>
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.
8. Make loans, except by purchase of debt obligations in which the Portfolio
may invest consistent 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.
<PAGE>
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
<PAGE>
Each of the Value Equity and Dreyfus Small Cap Value Portfolios may not
invest more than 5% of the value of its total assets in warrants not listed on
either the New York or American Stock Exchange. However, the acquisition of
warrants attached to other securities is not subject to this restriction. Each
of the T. Rowe Price Equity Income and T. Rowe Price Growth Stock Portfolios
will not invest in warrants if, as a result thereof, the Portfolio will have
more than 5% of the value of its total assets invested in warrants; provided
that this restriction does not apply to warrants acquired as a result of the
purchase of another security.
PERFORMANCE INFORMATION
Total return and yield will be computed as described below.
<PAGE>
Total Return
Each Portfolio's "average annual total return" figures described and
shown in the Prospectus are computed according to a formula prescribed by the
Securities and Exchange Commission. The formula can be expressed as follows:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1000 payment
made at the beginning of the 1, 5, or 10 years (or other) periods at the end of
the 1, 5, or 10 years (or other) periods (or fractional portion thereof)
The table below shows the average annual total return for the Value Equity,
Dreyfus Small Cap Value, T. Rowe Price Equity Income and T. Rowe Price Growth
Stock Portfolios for the specific periods.
<PAGE>
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
Value Equity(1)....... 23.84%/23.84%* N/A 17.46%/17.29%*
Dreyfus Small
Cap
Value(2)....... 25.63%/25.63%* N/A 13.19%/13.07%*
T. Rowe Price
Equity
Income(3)... 19.88%/19.88%* N/A 25.19%/25.19%*
T. Rowe Price Growth
Stock(3)............ 20.77%/20.77%* N/A 28.85%/28.85%*
- ------------------------
* 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)
<PAGE>
The Portfolio commenced operations on May 27, 1993.
(2) The Portfolio commenced operations on May 4, 1993.
(3) The Portfolio commenced operations on January 3, 1995.
The calculations of total return assume the reinvestment of all
dividends and capital gains distributions on the reinvestment dates during the
period and the deduction of all recurring expenses that were charged to
shareholders accounts. The above table does not reflect charges and deductions
which are, or may be, imposed under the Contracts.
The performance of each Portfolio will vary from time to time in
response to fluctuations in market conditions, interest rates, the composition
of the Portfolio's investments and expenses. Consequently, a Portfolio's
performance figures are historical and should not be considered representative
of the performance of the Portfolio for any future period.
<PAGE>
<PAGE>
Non-Standardized Performance
In addition to the performance information described above, the Fund
may provide total return information with respect to the Portfolios for
designated periods, such as for the most recent six months or most recent twelve
months. This total return information is computed as described under "Total
Return" above except that no annualization is made.
PORTFOLIO TRANSACTIONS
Subject to the supervision and control of the Manager and the Trustees
of the Fund, each Portfolio's Adviser is responsible for decisions to buy and
sell securities for its account and for the placement of its portfolio business
and the negotiation of commissions, if any, paid on such 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
<PAGE>
Portfolio by supplementing the Adviser's research. In seeking the most favorable
price and execution available, an Adviser may, if permitted by law, consider
sales of the Contracts as described in the Prospectus a factor in the selection
of broker-dealers.
The Board of Trustees of the Fund has authorized the Manager and the
Advisers to enter into arrangements with brokers who execute brokerage
transactions for the Portfolios whereby a portion of the commissions earned by
such brokers will be shared with a 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
<PAGE>
services may be used in connection with the Portfolio. In the opinion of each
Adviser, it is not possible to measure separately the benefits from research
services to each of its accounts, including a Portfolio. Whenever concurrent
decisions are made to purchase or sell securities by a Portfolio and another
account, the Portfolio's Adviser will attempt to allocate equitably portfolio
transactions among the Portfolio and other accounts. In making such allocations
between the Portfolio and other accounts, the main factors to be considered are
the respective investment objectives, the relative size of portfolio holdings of
the same or comparable securities, the availability of cash for investment, the
size of investment commitments generally held, and the opinions of the persons
responsible for recommending investments to the Portfolio and the other
accounts. In some cases this procedure could have an adverse effect on a
Portfolio. In the opinion of each Adviser, however, the results of such
procedures will, on the whole, be in the best interest of each of the accounts.
The Adviser to the Value Equity Portfolio may execute brokerage
transactions through Oppenheimer & Co. Inc. ("Opco"), an affiliated
broker-dealer of the Adviser, acting as agent in accordance with procedures
established by the Fund's Board of Trustees, but will not purchase any
securities from or sell any securities to Opco acting as principal for its own
account.
The Adviser to the T. Rowe Price Equity Income and T. Rowe Price Growth
Stock Portfolios may execute portfolio transactions through certain affiliates
of Robert Fleming Holdings Limited and Jardine Fleming Group Limited, persons
indirectly related to the Adviser, acting as agent in accordance with procedures
established by the Fund's Board of Trustees, but will not purchase any
securities from or sell any securities to any such affiliate acting as principal
for its own account.
For the year ended December 31, 1994, the Value Equity Portfolio and
Dreyfus Small Cap Value Portfolio paid $58,472 and $100,262, respectively, in
brokerage commissions, of which $32,796 (78.29%) with respect to the Value
Equity Portfolio and
<PAGE>
$58,028 (72.78%) with respect to the Dreyfus Small Cap Value Portfolio was paid
to Opco. For the year ended December 31, 1995, the Value Equity Portfolio and
the Dreyfus Small Cap Value Portfolio paid $57,800, and $101,885, respectively,
in brokerage commissions of which $29,271 (50.64%) with respect to the Value
Equity Portfolio and $36,216 (35.55%) with respect to the Dreyfus Small Cap
Value Portfolio was paid to OpCo. For the fiscal period ended December 31, 1995,
the T. Rowe Price Equity Income Portfolio and the T. Rowe Price Growth Stock
Portfolio paid $18,059 and $39,447, respectively in brokerage commissions of
which $10 (0.06%) with respect to the T. Rowe Price Equity Income Portfolio was
paid to OpCo and $536 (1.36%), $507 (1.29%) and $23 (0.06%) with respect to the
T. Rowe Price Growth Stock Portfolio was paid to Boston Safe Deposit and Trust
Company, Jardine Fleming Group Limited and OpCo, respectively. For the year
ended December 31, 1996, the Value Equity Portfolio and the Dreyfus Small Cap
Value Portfolio paid $90,589, and $398,554, respectively, in brokerage
commissions of which $35,624 (39.32%) with respect to the Value Equity Portfolio
and $34,511 (8.66%) with respect to the Dreyfus Small Cap Value Portfolio was
paid to OpCo. For the fiscal year ended December 31, 1996, the T. Rowe Price
Equity Income Portfolio and the T. Rowe Price Growth Stock Portfolio paid
$55,261 and $69,409, respectively in brokerage commissions of which $120 (.22%)
with respect to the T. Rowe Price Equity Income Portfolio was paid to OpCo and
$3,037 (4.38%) and $63 (.09%) with respect to the T. Rowe Price Growth Stock
Portfolio was paid to Robert Flemings Holdings Limited and OpCo, respectively.
MANAGEMENT OF THE FUND
<PAGE>
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.
*Vincent J. McGuinness (62) Trustee Chairman, Chief Executive
Officer and Director of
McGuinness & Associates,
Endeavor Group, VJM
Corporation (oil and gas),
until July, 1996
McGuinness Group
(insurance marketing) and
until January, 1994 Swift
Energy Marketing Company
and since September, 1988
Endeavor Management Co.;
President of VJM
Corporation, Endeavor
Management Co. and, since
February, 1996, McGuinness
& Associates.
Timothy A. Devine (62) Trustee Prior to September, 1993,
1424 Dolphin Terrace President and Chief
Corona del Mar, California Executive Officer, Devine
92625 Properties, Inc. Since
September, 1993, Vice
President, Plant Control,
Inc. (landscape
contracting and
maintenance).
<PAGE>
Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
Thomas J. Hawekotte (62)
1200 Lake Shore Drive Trustee President, Thomas J.
Chicago, Illinois 60610 Hawekotte, P.C. (law
practice).
Steven L. Klosterman (45) Trustee Since July, 1995,
462 Stevens Avenue President of Klosterman
Suite 206 Capital Corporation
Solana Beach, California (investment adviser);
92075 Investment Counselor,
Robert J. Metcalf &
Associates, Inc.
(investment adviser) from
August, 1990 to June,
1995.
*Halbert D. Lindquist (51) Trustee President, Lindquist
1650 E. Fort Lowell Road Enterprises, Inc.
Tucson, Arizona 85719-2324 (financial services) and
since December, 1987
Tucson Asset Management,
Inc. (financial services),
and since November, 1987,
Presidio Government
Securities, Incorporated
(broker-dealer).
R. Daniel Olmstead, Jr. (66) Trustee Rancher until January,
2661 Point Del Mar 1997. Since January,
Corona Del Mar, California 1997, real estate
92625 consultant.
Norman Ridley (51) Vice Since 1985, Senior Vice
865 S. Figueroa Street President President, TCW Asset
Suite 1800 Management Company and
Los Angeles, California Trust Company of the West.
90017
<PAGE>
Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
Ronald E. Robison (58) Vice Since November, 1987,
865 S. Figueroa Street President Managing Director and
Suite 1800 Chief Operating Officer,
Los Angeles, California TCW Funds Management Inc.;
90017 since March, 1990,
Managing Director, Trust
Company of the West and
TCW Asset Management
Company.
James M. Goldberg (51) Vice Since June, 1984, Managing
865 S. Figueroa Street President Director, TCW Asset
Suite 1800 Management Company and
Los Angeles, California Trust Company of the West
90017 and since January, 1987
Managing Director, TCW
Funds Management, Inc.
Eileen Rominger (42) Vice Since May, 1994, Managing
One World Financial Center President Director, Oppenheimer
New York, New York 10281 Capital, prior thereto
Senior Vice President,
Oppenheimer Capital;
Portfolio Manager,
Oppenheimer Quest Value
Fund, Inc., OCC
Accumulation Trust,
Enterprise Accumulation
Trust and Penn Series
Fund, open-end investment
companies.
<PAGE>
Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
**Vincent J. McGuinness, Jr. From September, 1996 to
(32) Executive May, 1997, Chief Financial
Vice- Officer (Treasurer) of
President- Registrant; since January,
Admini- 1997, Executive Vice-
stration 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, Director
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.
<PAGE>
Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
Chief Since June, 1996, Chief
Michael J. Roland (39) Financial Financial Officer of
Officer Endeavor Group and
(Treasurer) 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.
<PAGE>
Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
Secretary Since October, 1993,
Pamela A. Shelton (48) Executive Secretary to
Chairman of the Board and
Chief Executive Officer
of, and since April, 1996,
Secretary of McGuinness &
Associates, Endeavor
Group, VJM Corporation,
McGuinness Group (until
July, 1996) and Endeavor
Management Co.; from July,
1992 to October, 1993,
Administrative Secretary,
Mayor and City Council,
City of Laguna Niguel,
California; and from
November, 1986 to July,
1992, Executive Secretary
to Chairman of the Board
and Chief Executive
Officer of, and from
October, 1990 to July,
1992, Secretary of
McGuinness & Associates,
Endeavor Group, VJM
Corporation, McGuinness
Group, Endeavor Management
Co. and Swift Energy
Marketing Company.
* An "interested person" of the Fund as defined in the 1940
Act.
** Vincent J. McGuinness, Jr. is the son of Vincent J.
McGuinness.
No remuneration will be paid by the Fund to any Trustee or officer of
the Fund who is affiliated with the Manager or the Advisers. Each Trustee who is
not an affiliated person of the 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.
<PAGE>
COMPENSATION TABLE
Total
Compensation
From Fund
Aggregate and Fund
Name of Compensation Complex
Person From Fund Paid to Trustees
Vincent J. McGuinness $ - $ -
Timothy A. Devine 4,500 4,500
Thomas J. Hawekotte 4,500 4,500
Steven L. Klosterman 4,500 4,500
Halbert D. Lindquist 3,500 3,500
R. Daniel Olmstead 4,500 4,500
The Agreement and Declaration of Trust of the Fund provides that the
Fund will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Fund, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Fund or that such indemnification would relieve any officer or Trustee of any
liability to the Fund or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of his duties. The Fund, at its
expense, provides liability insurance for the benefit of its Trustees and
officers.
As of the date of this Statement of Additional Information, the
officers and Trustees of the Fund as a group owned less than 1% of the
outstanding shares of the Fund.
The Manager
The Management Agreement between the Fund and the Manager with respect
to the Value Equity and Dreyfus Small Cap Value Portfolios, was approved by the
Trustees of the Fund (including all of the Trustees who are not "interested
persons" [as defined in the 1940 Act] of the Manager) on April 19, 1993 and by
PFL Life Insurance Company, the sole shareholder of the Value Equity and Dreyfus
Small Cap Value Portfolios, on April 19, 1993.
<PAGE>
With respect to the T. Rowe Price Equity Income and T. Rowe Price Growth Stock
Portfolios, the Management Agreement was approved by the Trustees of the Fund
(including all of the Trustees who are not "interested persons" of the Manager)
on October 24, 1994 and by PFL Life Insurance Company, the sole shareholder of
the T. Rowe Price Equity Income and T. Rowe Price Growth Stock Portfolios, on
November 1, 1994. See "Organization and Capitalization of the Fund." The
Management Agreement will continue in force for two years from its date, April
19, 1993 with respect to the Value Equity and Dreyfus Small Cap Value
Portfolios, December 28, 1994 with respect to the T. Rowe Price Equity Income
and T. Rowe Price Growth Stock Portfolios and from year to year thereafter, but
only so long as its continuation as to each Portfolio is specifically approved
at least annually (i) by the Trustees or by the vote of a majority of the
outstanding voting securities of the Portfolio, and (ii) by the vote of a
majority of the Trustees who are not parties to the Management Agreement or
"interested persons" of any such party, by votes cast in person at a meeting
called for the purpose of voting on such approval. The Management Agreement
provides that it shall terminate automatically if assigned, and that it may be
terminated as to any Portfolio without penalty by the Trustees of the Fund or by
vote of a majority of the outstanding voting securities of the Portfolio upon 60
days' prior written notice to the Manager, or by the Manager upon 90 days' prior
written notice to the Fund, or upon such shorter notice as may be mutually
agreed upon. In the event the Manager ceases to be the Manager of the Fund, the
right of the Fund to use the identifying name of "Endeavor" may be withdrawn.
The Advisers
The Investment Advisory Agreement between the Manager and OpCap Advisors
(formerly known as Quest for Value Advisors) were initially
<PAGE>
approved by the Trustees of the Fund (including all of the Trustees who are not
"interested persons" of the Manager or of the Adviser) on April 19, 1993 with
respect to the Value Equity Portfolio and by PFL Life Insurance Company as sole
shareholder of the Value Equity Portfolio on April 19, 1993. As described in the
Prospectus, a transaction is pending whereby the ownership of OpCap Advisors is
being transferred which, under the 1940 Act, will result in the automatic
termination of the Investment Advisory Agreement between the Manager and OpCap
Advisors. On April 8, 1997 the Trustees of the Fund (including all of the
Trustees who are not "interested persons" of the Manager or the Adviser)
approved a new Investment Advisory Agreement between the Manager and OpCap
Advisors. The new Investment Advisory Agreement has been approved by the
shareholders of the Value Equity Portfolio
.
The Investment Advisory Agreements between the Manager and T. Rowe Price
Associates, Inc. were approved by the Trustees of the Fund (including all of the
Trustees who are not "interested persons" of the Manager or of the Adviser) on
October 24, 1994 and by PFL Life Insurance Company as sole shareholder of the T.
Rowe Price Equity Income and T. Rowe Price Growth Stock Portfolios on November
1, 1994.
<PAGE>
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,
April 19, 1993 with respect to the Value Equity Portfolio, December 28, 1994
with respect to the T. Rowe Price Equity Income and T. Rowe Price Growth Stock
Portfolios, September 16, 1996 with respect to the Dreyfus Small Cap Value
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' prior written notice to the Adviser or by the Adviser on not less than
150 days' prior written notice to the Manager, or upon such shorter notice as
may be mutually agreed upon.
The following table shows the fees paid by each of the Portfolios and
any fee waivers or reimbursements during the fiscal years ended December 31,
1994, December 31, 1995 and December 31, 1996.
1996
<PAGE>
Investment Investment
Management Management Other
Fee Fee Expenses
Paid Waived
Reimbursed
Value Equity
Portfolio....... 768,579 -- --
Dreyfus Small
Cap Value
Portfolio....... 535,895 -- --
T. Rowe Price
Equity Income
Portfolio....... 369,356 -- --
T. Rowe Price
Growth Stock
Portfolio....... 313,356 -- --
1995*
Investment Investment
Management Management Other
Fee Fee Expenses
Paid Waived
Reimbursed
Value Equity
Portfolio....... 395,205 --- ---
Dreyfus Small Cap
<PAGE>
Value Portfolio. 339,672 --- ---
T. Rowe Price
Equity Income
Portfolio. ...... 70,664 --- ---
T. Rowe Price
Growth Stock
Portfolio. ...... 75,681 --- ---
1994
Investment
Management Investment Other
Fee Management Expenses
Paid Fee Waived
Reimbursed
Value Equity
Portfolio....... 191,316 --- ---
Dreyfus Small
Cap Value
Portfolio....... 214,198 --- ---
- ---------------
* The information presented for the T. Rowe Price Equity Income and T.
Rowe Price Growth Stock Portfolios is for the period from January 3,
1995 (commencement of operations) to December 31, 1995.
<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's Birthday, 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
<PAGE>
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.
<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
<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
<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, four 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
<PAGE>
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: 85% of the Value Equity Portfolio; 88% of the Dreyfus Small Cap
Value Portfolio; 83% of the T. Rowe Price Equity Income Portfolio; and 81% of
the T. Rowe Price Growth Stock 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: 12% of the Value Equity
Portfolio; 9% of the
<PAGE>
Dreyfus Small Cap Value Portfolio; 14% of the T. Rowe Price Equity Income
Portfolio; and 10% of the T. Rowe Price Growth Stock Portfolio. As of March 31,
1997, the AUSA Endeavor Variable Annuity Account owned of record the following
approximate percentages of the outstanding shares of each Portfolio: 2% of the
Value Equity Portfolio; 2% of the Dreyfus Small Cap Value Portfolio; 3% of the
T. Rowe Price Equity Income Portfolio; and 3% of the T. Rowe Price Growth Stock
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.
FINANCIAL STATEMENTS
The financial statements of the Value Equity Portfolio, Dreyfus Small Cap
Value Portfolio, T. Rowe Price Equity Income Portfolio and T. Rowe Price Growth
Stock Portfolio for the fiscal year ended December 31, 1996,
<PAGE>
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.
<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
<PAGE>
corporate bond rating system. The modifier "1" indicates that the security ranks
in the higher end of its generic rating 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
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issues regarded as having the strongest degree of assurance for timely payment.
The rating F-1 reflects an assurance of timely payment only slightly less in
degree than issues rated F-1+, while the rating F-2 indicates a satisfactory
degree of assurance for timely payment, although the margin of safety is not as
great as indicated by the F-1+ and F-1 categories.
Duff & Phelps Inc. Commercial Paper Ratings. Duff & Phelps Inc. employs the
designation of Duff 1 with respect to top grade commercial paper and bank
money instruments. Duff 1+ indicates the highest certainty of timely
payment: short-term liquidity is clearly outstanding, and safety is just
below risk-free U.S. Treasury short-term obligations. Duff 1- indicates
high certainty of timely payment. Duff 2 indicates good certainty of timely
payment: liquidity factors and company fundamentals are sound.
Thomson BankWatch, Inc. ("BankWatch") Commercial Paper Ratings. BankWatch will
assign both short-term debt ratings and issuer ratings to the issuers it rates.
BankWatch will assign a short-term rating ("TBW-1", "TBW-2", "TBW-3", or
"TBW-4") to each class of debt (e.g., commercial paper or non-convertible debt),
having a maturity of one-year or less, issued by a holding company structure or
an entity within the holding company structure that is rated by BankWatch.
Additionally, BankWatch will assign an issuer rating ("A", "A/B", "B", "B/C",
"C", "C/D", "D", "D/E", and "E") to each issuer that it rates.
Various of the NRSROs utilize rankings within rating categories
indicated by a + or -. The Portfolios, in accordance with industry practice,
recognize such rankings within categories as graduations, viewing for example
Standard & Poor's rating of A-1+ and A-1 as being in Standard & Poor's highest
rating category.
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