Prospectus
ENDEAVORSM SERIES TRUST
Endeavor Series Trust (the "Fund") is a diversified, open-end
management investment company that offers a selection of managed investment
portfolios, each with its own investment objective designed to meet different
investment goals. There can be no assurance that these investment objectives
will be achieved.
This Prospectus describes only the following three
portfolios currently offered by the Fund (the "Portfolios").
o T. Rowe Price International Stock Portfolio
o Dreyfus Small Cap Value Portfolio
o Endeavor Enhanced Index Portfolio
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus sets forth concisely the information about the Fund and
the Portfolios that a prospective investor should know before investing. Please
read the Prospectus and retain it for future reference. Additional information
contained in a Statement of Additional Information also dated May 1, 1998 has
been filed with the Securities and Exchange Commission (the "SEC") 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. In
addition, the SEC maintains a website (http://www.sec.gov) that contains the
Statement of Additional Information and other information regarding the Fund.
The Statement of Additional Information is incorporated by reference into this
Prospectus.
The date of this Prospectus is May 1, 1998.
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EndeavorSM is a registered service mark of Endeavor Management Co.
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THE FUND
Endeavor Series Trust is a diversified, open-end management investment
company that offers a selection of managed investment portfolios. Each portfolio
constitutes a separate mutual fund with its own investment objective and
policies. The Fund currently issues shares of eleven portfolios, three of which
are offered pursuant to this Prospectus. The Trustees of the Fund may establish
additional portfolios at any time.
Shares of the Portfolios are issued and redeemed at their net asset
value without a sales load and currently are offered only to various separate
accounts of PFL Life Insurance Company and certain of its affiliates ("PFL") to
fund various insurance contracts, including variable life insurance policies
(whether scheduled premium, flexible premium or single premium policies) or
variable annuity contracts. These insurance contracts are hereinafter referred
to as the "Contracts." The rights of PFL as the record holder for a separate
account of shares of the Portfolios are different from the rights of the owner
of a Contract. The terms "shareholder" or "shareholders" in this Prospectus
refer to PFL and not to any Contract owner.
The structure of the Fund permits Contract owners, within the
limitations described in the appropriate Contract, to allocate the amounts held
by PFL under the Contracts for investment in the various portfolios of the Fund.
See the prospectus and other material accompanying this Prospectus for a
description of the Contracts, which portfolios of the Fund are available to
Contract owners, and the relationship between increases or decreases in the net
asset value of shares of the portfolios (and any dividends and distributions on
such shares) and the benefits provided under the Contracts.
It is conceivable that in the future it may be disadvantageous for
scheduled premium variable life insurance separate accounts, flexible and single
premium variable life insurance separate accounts, and variable annuity separate
accounts to invest simultaneously in the Fund due to tax or other
considerations. The Trustees of the Fund intend to monitor events for the
existence of any irreconcilable material conflict between or among such
accounts, and PFL will take whatever remedial action may be necessary.
Investment Objectives
The investment objectives of the Portfolios are as follows:
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T. Rowe Price International Stock Portfolio - seeks long-term growth of
capital through investments primarily in common stocks of established non-U.S.
companies.
Dreyfus Small Cap Value Portfolio (formerly, Value Small Cap Portfolio)
- - seeks capital appreciation through investment in a diversified portfolio of
equity securities of companies with a median market capitalization of
approximately $750 million, provided that under normal market conditions at
least 75% of the Portfolio's investments will be in equity securities of
companies with capitalizations at the time of purchase between $150 million and
$1.5 billion.
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Endeavor Enhanced Index Portfolio (formerly, Enhanced Index Portfolio)
- - seeks to earn a total return modestly in excess of the total return
performance of the S&P 500 Composite Stock Price Index (the "S&P 500 Index")
while maintaining a volatility of return similar to the S&P 500 Index.
FINANCIAL HIGHLIGHTS
The following tables are based on a Portfolio share outstanding
throughout each period and should be read in conjunction with the financial
statements and related notes that appear in the Fund's Annual Report dated
December 31, 1997 which financial statements are 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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<TABLE>
<CAPTION>
T. ROWE PRICE INTERNATIONAL STOCK
PORTFOLIO*
Year Year Year
Year Ended Ended Ended Ended
12/31/97 12/31/94 12/31/96+++ 12/31/95##
<S> <C> <C> <C> <C>
Operating
performance:
Net asset value,
beginning of
period $13.95 $12.19 $11.31 $11.99
----- ----- ----- -----
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Net investment
income/(loss)# 0.10 0.09 0.09 (0.02)
Net realized and
unrealized
gain/(loss) on
investments 0.26 1.76 1.06 (0.66)
---- ---- ---- ------
Net increase/
(decrease) in
net assets
resulting from
investment
operations 0.36 1.85 1.15 (0.68)
---- ---- ---- ------
Distributions:
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Dividends from
net investment
income (0.10) (0.09) --- ---
Distributions
from net
realized gains --- (0.00)### (0.27) ---
--------- ------ ---
Total
Distributions (0.10) (0.09) (0.27) ---
------ ------ ------ ---
Net asset value,
end of period $14.21 $13.95 $12.19 $11.31
===== ===== ===== =====
Total return++ 2.54% 15.23% 10.37% (5.67)%
===== ===== ===== ======
Ratios to
average net
assets/
supplemental
data:
Net assets, end
of period (in
000's) $164,560 $134,435 $92,352 $84,102
Ratio of net
investment
income/(loss) to
average net
assets 0.74% 0.73% 0.81% (0.16)%
Ratio of
operating
expenses to
average net
assets** 1.07%*** 1.18% 1.15% 1.16%
Portfolio
turnover rate 19% 11% 111% 88%
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Average
commission rate
(per share of
security) (a) $0.0016 $0.0024 --- ---
===============================
Year Year Period
Ended Ended Ended
12/31/93+++ 12/31/92+++ 12/31/91*
Operating
performance:
Net asset value,
beginning of
period $10.12 $10.52 $10.00
----- ----- -----
Net investment
income/(loss)# (0.04) 0.00### 0.06
Net realized and
unrealized
gain/(loss) on
investments 1.91 (0.38) 0.46
---- ------ ----
Net increase/
(decrease) in
net assets
resulting from
investment
operations 1.87 (0.38) 0.52
---- ------ ----
Distributions:
Dividends from
net investment
income --- (0.02) ---
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Distributions
from net
realized gains --- --- ---
--- --- ---
Total
Distributions --- (0.02) ---
--- ------ ---
Net asset value,
end of period $11.99 $10.12 $10.52
===== ===== =====
Total return++ 18.48% (3.61)% 5.20%
===== ====== =====
Ratios to
average net
assets/
supplemental
data:
Net assets, end
of period (in
000's) $52,777 $6,305 $3,200
Ratio of net
investment
income/(loss) to
average net
assets (0.31)% 0.01% 3.18%+
Ratio of
operating
expenses to
average net
assets** 1.52% 1.43% 0.00%+
Portfolio
turnover rate 37% 34% 0%
Average
commission rate
(per share of
security) (a) --- --- ---
---
</TABLE>
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* Effective March 24, 1995, the name of the Global Growth Portfolio was
changed to T. Rowe Price International Stock Portfolio and the
investment objective was changed from investment on a global basis to
investment on an international basis (i.e., in non-U.S. companies). The
Portfolio commenced operations on April 8, 1991.
** Annualized operating expense ratios before waiver of fees and/or
reimbursement of expenses by investment manager for the year ended
December 31, 1992 and the period ended December 31, 1991 were 2.10% and
6.83%, respectively.
*** Annualized operating expense ratio before credits allowed by the
custodian for the year ended December 31, 1997 was 1.12%.
+ Annualized.
++ Total return represents aggregate total return for the periods
indicated. The total return of the Portfolio does not reflect the
charges against the separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method which more appropriately presents the per share data for this
period since use of the undistributed method does not accord with
results of operations.
# Net investment loss before fees waived and/or reimbursement of expenses
by investment manager for the year ended December 31, 1992 and the
period ended December 31, 1991 were $(0.07) and $(0.07), respectively.
## Rowe Price-Fleming International, Inc. became the
Portfolio's Adviser effective January 3, 1995.
### Amount represents less than $0.01 per share.
(a) Average commission rate paid per share of securities purchased and sold
by the Portfolio.
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<CAPTION>
DREYFUS SMALL CAP VALUE PORTFOLIO*
Year Year Year Year Period
Ended Ended Ended Ended Ended
12/31/97 12/31/96+++## 12/31/95 12/31/94+++ 12/31/93*+++
-------- ------------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating
performance:
Net asset
value,
beginning of
period $14.69 $12.22 $10.98 $11.18 $10.00
----- ----- ----- ----- -----
Net investment
income# 0.02 0.12 0.15 0.10 0.22
Net realized
and unrealized
gain/(loss) on
investments 3.52 2.95 1.36 (0.30) 0.96
---- ---- ---- ------ ----
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Net increase/
(decrease) in
net assets
resulting from
investment
operations 3.54 3.07 1.51 (0.20) 1.18
---- ---- ---- ------ ----
Distributions:
Dividends from
net investment
income (0.10) (0.14) (0.10) --- ---
Distributions
from net
realized gains (1.72) (0.46) (0.17) --- ---
------ ------ ------ --- ---
Total
distributions (1.82) (0.60) (0.27) --- ---
------ ------ ------ --- ---
Net asset
value, end of
period $16.41 $14.69 $12.22 $10.98 $11.18
====== ===== ===== ===== =====
Total return++ 25.56% 25.63% 14.05% (1.79)% 11.80%
===== ===== ===== ====== ======
Ratios to
average net
assets/
supplemental
data:
Net assets,
end of period
(in 000's) $146,195 $85,803 $52,597 $35,966 $12,699
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Ratio of net
investment
income to
average net
assets 0.20% 0.95% 1.56% 0.89% 3.98%+
Ratio of
operating
expenses to
average net
assets 0.91%*** 0.92% 0.87% 1.03% 1.30%+**
Portfolio
turnover rate 127% 171% 75% 77% 41%
Average
commission
rate (per
share of
security) (a) $0.0533 $0.0539 --- --- ---
</TABLE>
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* Effective October 29, 1996, the name of the Value Small Cap Portfolio
was changed to Dreyfus Small Cap Value Portfolio. On May 1, 1996, the
name of the Quest for Value Small Cap Portfolio was changed to Value
Small Cap Portfolio. The Portfolio commenced operations on May 4, 1993.
** Annualized operating expense ratio before waiver of fees by investment
manager for the period ended December 31, 1993 was 2.10%.
*** Annualized operating expense ratio before credits allowed by the
custodian for the year ended December 31, 1997 was 0.91%.
+ 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
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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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<CAPTION>
ENDEAVOR ENHANCED INDEX PORTFOLIO*
Period
Ended
12/31/97*
<S> <C>
Operating performance:
Net asset value, beginning of period $10.00
------
Net investment income# 0.02
Net realized and unrealized gain on
investments 2.27
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Period
Ended
12/31/97*
Net increase in net assets resulting
from investment operations 2.29
------
Net asset value, end of period $12.29
------
Total return++ 22.90%
======
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $19,811
Ratio of net investment income to
average net assets 0.55%+
Ratio of operating expenses to average
net assets**
1.30+***
Portfolio turnover rate 6%
Average commission rate (per share of
security) (a)
$0.0306
</TABLE>
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* Effective May 1, 1998, the Enhanced Index Portfolio changed
its name to Endeavor Enhanced Index Portfolio. The
Portfolio commenced operations on May 2, 1997.
** Annualized operating expense ratio before
waiver/reimbursement by investment manager for the period
ended December 31, 1997 was 1.56%.
*** Annualized operating expense ratio before waiver/reimbursement of fees
by investment manager and custody fee credits for the period ended
December 31, 1997 was 1.56%.
+ Annualized
++ Total return represents aggregate total return for the
period indicated. The total return of the Portfolio does
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not reflect the charges against the separate accounts of PFL
or the Contracts.
# Net investment income before waiver/reimbursement of expenses by
investment manager for the period ended December 31, 1997 was $0.01.
(a) Average commission rate paid per share of securities purchased and sold
by the Portfolio.
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Endeavor Investment Advisers (the "Manager") has agreed, until
terminated by the Manager, to assume expenses of the Portfolios that exceed the
rates stated below. This has the effect of lowering each Portfolio's expense
ratio and of increasing returns otherwise available to investors at the time
such amounts are assumed. While this arrangement is in effect, the Manager pays
all expenses of the Portfolios to the extent they exceed the following
percentages of a Portfolio's average net assets: T. Rowe Price International
Stock - 1.53%, Dreyfus Small Cap Value - 1.30% and Endeavor Enhanced Index -
1.30%
.
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INVESTMENT OBJECTIVES AND POLICIES
The following is a brief description of the investment objectives and
policies of the Portfolios. The investment objective and the policies of each
Portfolio other than those listed under the caption "Investment Restrictions" in
the Statement of Additional Information are not fundamental policies and may be
changed by the Trustees of the Fund without the approval of shareholders.
Certain portfolio investments and techniques discussed below are described in
greater detail in the Statement of Additional Information. Due to the
uncertainty inherent in all investments, there can be no assurance that the
Portfolios will be able to achieve their respective investment objectives.
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T. Rowe Price International Stock Portfolio
The T. Rowe Price International Stock Portfolio was formerly known as
the Global Growth Portfolio. Effective March 24, 1995, the name of the Global
Growth Portfolio was changed to T. Rowe Price International Stock Portfolio and
the Portfolio's investment objective was changed from seeking long-term capital
appreciation through a policy of investing in small- capitalization common
stocks and their convertible equivalents on a global basis to the investment
objective and policies set forth below.
The investment objective of the T. Rowe Price International Stock
Portfolio is to seek long-term growth of capital through investments primarily
in common stocks of established non-U.S.
companies.
Over the last 30 years, many foreign economies have grown faster than
the United States' economy, and the return from equity investments in these
countries has often exceeded the return on similar investments in the United
States. Moreover, there has normally been a wide and largely unrelated variation
in performance between international equity markets over this period. Although
there can be no assurance that these conditions will continue, the Portfolio's
Adviser, within the framework of diversification, seeks to identify and invest
in companies participating in the faster growing foreign economies and markets.
The Adviser believes that investment in foreign securities offers significant
potential for long-term capital appreciation and an opportunity to achieve
investment diversification.
The Adviser intends to invest substantially all of the Portfolio's
assets outside the United States and diversify investments broadly among
countries throughout the world developed, newly industrialized and emerging - by
having at least five different countries represented in the Portfolio. The
Portfolio may invest in countries of the Far East and Europe as well as South
Africa, Australia, Canada, and other areas (including developing countries). In
addition, the Adviser will consider factors applicable to United States
investors in making investment decisions for the Portfolio.
In seeking its objective, the Portfolio invests primarily in common
stocks of established foreign companies which have, in the
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Adviser's opinion, the potential for growth of capital. However, the Portfolio
may also invest in a variety of other equity related securities such as
preferred stocks, warrants and convertible securities, as well as corporate and
governmental debt securities, when considered consistent with the Portfolio's
investment objective and program. The Portfolio may also invest in investment
funds which have been authorized by the governments of certain countries
specifically to permit foreign investment in securities of companies listed and
traded on the stock exchanges in these respective countries. The Portfolio's
investment in these funds is subject to the provisions of the Investment Company
Act of 1940 (the "1940 Act"). If the Portfolio invests in such investment funds,
the Portfolio's shareholders will bear not only their proportionate share of the
expenses of the Portfolio (including operating expenses and the fees of the
investment manager), but also will bear indirectly similar expenses of the
underlying investment funds. In addition, the securities of these investment
funds may trade at a premium of their net asset value. Under normal conditions,
the Portfolio's investments in securities other than common stocks is limited to
no more than 35% of its total assets.
In determining the appropriate distribution of investments among
various countries and geographic regions, the Portfolio's Adviser ordinarily
considers the following factors: prospects for relative economic growth between
foreign countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
In analyzing companies for investment, the Adviser ordinarily looks for
one or more of the following characteristics: an above-average earnings growth
per share; high return on invested capital; healthy balance sheet; sound
financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
successfully in their market place. While current dividend income is not a
prerequisite in the selection of portfolio companies, the companies in which the
Portfolio invests normally will have a record of paying dividends, and will
generally be expected to increase the amounts of such dividends in future years
as earnings increase. It is expected that the Portfolio's investments will
ordinarily be traded on exchanges located at
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least in the respective countries in which the various issuers of such
securities are principally based.
In the event that future economic or financial conditions abroad
adversely affect equity securities, or stocks are considered overvalued, or the
Portfolio's Adviser believes that investing for defensive purposes is
appropriate, or in order to meet anticipated redemption requests, the Portfolio
may invest part or all of its assets in U.S. government securities,
investment-grade debt obligations of U.S. companies and high quality (within the
two highest rating categories assigned by a nationally recognized statistical
rating organization ("NRSRO")) short-term debt securities (with remaining
maturities of one year or less) including certificates of deposit, bankers'
acceptances, commercial paper, short-term corporate securities and repurchase
agreements.
The international objectives of the Portfolio allow investors an
opportunity to achieve potentially higher returns, reflecting participation in
countries and economies with higher growth rates than those available
domestically. However, foreign investments involve certain risks that are not
present in domestic securities. Because the Portfolio intends to purchase
securities denominated in foreign currencies, a change in the value of any such
currency against the U.S. dollar will result in a change in the U.S. dollar
value of the Portfolio's assets and the Portfolio's income. In addition,
although a portion of the Portfolio's investment income may be received or
realized in such currencies, the Portfolio will be required to compute and
distribute its income in U.S. dollars. Therefore, if the exchange rate for any
such currency declines after the Portfolio's income has been earned and computed
in U.S. dollars but before conversion and payment, the Portfolio could be
required to liquidate portfolio securities to make such distributions.
The values of foreign investments and the investment income derived
from them may also be affected unfavorably by changes in currency exchange
control regulations. Although the Portfolio will invest only in securities
denominated in foreign currencies that are fully exchangeable into U.S. dollars
without legal restriction at the time of investment, there can be no assurance
that currency controls will not be imposed subsequently. In addition, the values
of foreign fixed income investments will fluctuate in response to changes in
U.S. and foreign interest rates.
There may be less information publicly available about a
foreign issuer than about a U.S. issuer, and foreign issuers are
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not generally subject to accounting, auditing and financial reporting standards
and practices comparable to those in the United States. Foreign stock markets
are generally not as developed or efficient as, and may be more volatile than,
those in the United States. While growing in volume, they usually have
substantially less volume than U.S. markets and the Portfolio's investment
securities may be less liquid and subject to more rapid and erratic price
movements than securities of comparable U.S. companies. Equity securities may
trade at price/earnings multiples higher than comparable United States
securities and such levels may not be sustainable. There is generally less
government supervision and regulation of foreign stock exchanges, brokers and
listed companies than in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in United States markets.
Such differences may include delays beyond periods customary in the United
States and practices, such as delivery of securities prior to receipt of
payment, which increase the likelihood of a "failed settlement." Failed
settlements can result in losses to the Portfolio. In less liquid and well
developed stock markets, such as those in some Asian and Latin American
countries, volatility may be heightened by actions of a few major investors. For
example, substantial increases or decreases in cash flows of mutual funds
investing in these markets could significantly affect stock prices and,
therefore, share prices.
Foreign brokerage commissions, custodial expenses and other fees are
also generally higher than for securities traded in the United States.
Consequently, the overall expense ratios of international funds are usually
somewhat higher than those of typical domestic stock funds.
In addition, the economies, markets and political structures of a
number of the countries in which the Portfolio can invest do not compare
favorably with the United States and other mature economies in terms of wealth
and stability. Therefore, investments in these countries may be riskier, and
will be subject to erratic and abrupt price movements. Some economies are less
well developed and less diverse (for example, Latin America, Eastern Europe and
certain Asian countries), and more vulnerable to the ebb and flow of
international trade, trade barriers and other protectionist or retaliatory
measures (for example, Japan, southeast Asia and Latin America). Some countries,
particularly in Latin America, are grappling with severe inflation and high
levels of national debt. Investments in countries that have recently begun
moving away from central planning and state-owned industries toward free
markets, such as
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the Eastern European or Chinese economies, should be regarded as
speculative.
Certain portfolio countries have histories of instability and upheaval
(Latin America) and internal politics that could cause their governments to act
in a detrimental or hostile manner toward private enterprise or foreign
investment. Any such actions, for example, nationalizing an industry or company,
could have a severe and adverse effect on security prices and impair the
Portfolio's ability to repatriate capital or income. The Portfolio's Adviser
will not invest the Portfolio's assets in countries where it believes such
events are likely to occur.
Income received by the Portfolio from sources within foreign countries
may be reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. The Portfolio's Adviser will attempt to minimize such
taxes, but there can be no assurance that such efforts will be successful. Any
such taxes paid by the Portfolio will reduce its net income available for
distribution to shareholders.
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The Portfolio may employ certain investment strategies which are
discussed under the caption "Investment Strategies" below and in the Statement
of Additional Information.
Dreyfus Small Cap Value Portfolio
The investment objective of the Dreyfus Small Cap Value Portfolio is to
seek capital appreciation through investments in a diversified portfolio of
equity securities of companies with a median market capitalization of
approximately $750 million, provided that under normal market conditions at
least 75% of the
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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
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addition, the Portfolio may purchase securities issued by closed-end investment
companies and foreign securities that are listed on a domestic or foreign
securities exchange, traded in domestic or foreign over-the-counter markets or
represented by American Depositary Receipts.
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. Smaller-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 above in the section of this Prospectus describing the T.
Rowe Price International Stock Portfolio.
The Portfolio may employ certain investment strategies which are
discussed under the caption "Investment Strategies" below and in the Statement
of Additional Information.
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Endeavor Enhanced Index Portfolio
The investment objective of the Endeavor Enhanced Index Portfolio is to
earn a total return modestly in excess of the total return performance of the
S&P 500 Index (including the reinvestment of dividends) while maintaining a
volatility of return similar to the S&P 500 Index. The Portfolio is appropriate
for investors who seek a modestly enhanced total return relative to that of
large and medium sized U.S. companies typically represented in the S&P 500
Index. The Portfolio intends to invest in securities of approximately 300
issuers, which securities are rated by the Portfolio's Adviser to have above
average expected returns.
The Portfolio seeks to achieve its investment objective through
fundamental analysis, systematic stock valuation and disciplined portfolio
construction.
o Fundamental research: The Portfolio Adviser's
approximately 25 domestic equity analysts, each an
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industry specialist with an average of approximately 12 years
experience, follow over 900 predominantly large and medium
sized U.S. companies -- approximately 525 of which form the
universe for the Portfolio's investments. A substantial
majority of these companies are issuers of securities which
are included in the S&P 500 Index. The analysts' research goal
is to forecast normalized, longer term earnings and dividends
for the companies that they cover.
o Systematic valuation: The analysts' forecasts are
converted into comparable expected returns by a
dividend discount model, which calculates those
expected returns by solving for the rate of return that
equates the company's current stock price to the
present value of its estimated long-term earnings
power. Within each sector, companies are ranked by
their expected return and grouped into quintiles; those
with the highest expected returns (Quintile 1) are
deemed the most undervalued relative to their long-term
earnings power, while those with the lowest expected
returns (Quintile 5) are deemed the most overvalued.
o Disciplined portfolio construction: A diversified
portfolio is constructed using disciplined buy and sell
rules. Portfolio sector weightings will generally
approximate those of the S&P 500 Index. The Portfolio
will normally be principally comprised, based on the
dividend discount model, of stocks in the first three
Quintiles. Finally, the Portfolio holds a large number
of stocks to enhance its diversification.
Under normal market circumstances, the Portfolio's Adviser will invest
at least 65% of its net assets in equity securities consisting of common stocks
and other securities with equity characteristics such as trust interests,
limited partnership interests, preferred stocks, warrants, rights and securities
convertible into common stock. The Portfolio's primary equity investments will
be the common stock of large and medium sized U.S. companies with market
capitalizations above $1 billion. Such securities will be listed on a national
securities exchange or traded in the over-the-counter market. The Portfolio may
invest in similar securities of foreign corporations, provided that the
securities of such corporations are included in the S&P 500 Index.
The Portfolio intends to manage its portfolio actively in
pursuit of its investment objective. Since the Portfolio has a
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long-term investment perspective, it does not intend to respond to short-term
market fluctuations or to acquire securities for the purpose of short-term
trading; however, it may take advantage of short-term trading opportunities that
are consistent with its objective.
During ordinary market conditions, the Portfolio's Adviser will keep
the Portfolio as fully invested as practicable in the equity securities
described above. In the event that future economic or financial conditions
adversely affect equity securities, or stocks are considered overvalued, or the
Portfolio's Adviser believes that investing for defensive purposes is
appropriate, or in order to meet anticipated redemption requests, the Portfolio
may invest part or all of its assets in U.S. government securities and high
quality (within the two highest rating categories assigned by a NRSRO) U.S.
dollar-denominated money market securities including certificates of deposit,
bankers' acceptances, commercial paper, short-term debt securities and
repurchase agreements.
Convertible bonds and other fixed income securities (other than money
market instruments) in which the Portfolio may invest will, at the time of
investment, have ratings within the four highest rating categories established
by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings
Service, a division of McGraw-Hill Companies, Inc. ("Standard & Poor's"), or a
similar NRSRO or, if not rated, be of comparable quality as determined by the
Portfolio's Adviser. The NRSROs' descriptions of these bond ratings are set
forth in the Appendix to the Statement of Additional Information. Securities
rated in the fourth highest category may have speculative characteristics;
changes in economic or business conditions are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade bonds. Like the three highest grades, however, these securities are
considered investment grade.
The Portfolio may invest in certain foreign securities which may
represent a greater degree of risk than investing in domestic securities. These
risks are discussed above in the section of this Prospectus describing the T.
Rowe Price International Stock Portfolio.
The Portfolio may employ certain investment strategies which are
discussed under the caption "Investment Strategies" below and in the Statement
of Additional Information.
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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 International Stock and
Endeavor Enhanced Index Portfolios may engage in foreign currency exchange
transactions to protect against changes in future exchange rates. All Portfolios
may invest in American Depositary Receipts, European Depositary Receipts and
Global Depositary Receipts. All Portfolios may enter into repurchase agreements,
may make forward commitments to purchase securities, lend their portfolio
securities and borrow funds under certain limited circumstances. The T. Rowe
Price International Stock Portfolio may invest in hybrid instruments. The
investment strategies referred to above and the risks related to them are
summarized below and certain of these strategies are described in more detail in
the Statement of Additional Information.
Options and Futures Transactions. A Portfolio may seek to increase the
current return on its investments by writing covered call or covered put
options. The Adviser to the Dreyfus Small Cap Value Portfolio has no present
intention to engage in this strategy, but may do so in the future.
In addition, a Portfolio may at times seek to hedge against either a
decline in the value of its portfolio securities or an increase in the price of
securities which its Adviser plans to purchase through the writing and purchase
of options on securities and any index of securities in which the Portfolio may
invest and the purchase and sale of futures contracts and related options. The
Adviser to the Dreyfus Small Cap Value Portfolio has no present intention to use
this strategy, but may do so in the future.
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Each Portfolio may purchase and sell interest rate futures contracts as a hedge
against changes in interest rates. A futures contract is an agreement between
two parties to buy and sell a security for a set price on a future date. Futures
contracts are traded on designated "contracts markets" which, through their
clearing corporations, guarantee performance of the contracts. Currently, there
are futures contracts based on securities such as long-term U.S. Treasury bonds,
U.S. Treasury notes, GNMA Certificates and three-month U.S. Treasury bills.
Generally, if market interest rates increase, the value of outstanding
debt securities declines (and vice versa). Entering into a futures contract for
the sale of securities has an effect similar to the actual sale of securities,
although the sale of the futures contracts might be accomplished more easily and
quickly. For example, if a Portfolio holds long-term U.S. government securities
and the Adviser anticipates a rise in long-term interest rates, it could, in
lieu of disposing of its portfolio securities, enter into futures contracts for
the sale of similar long-term securities. If interest rates increased and the
value of the Portfolio's securities declined, the value of the Portfolio's
futures contracts would increase, thereby protecting the Portfolio by preventing
the net asset value from declining as much as it otherwise would have.
Similarly, entering into futures contracts for the purchase of securities has an
effect similar to the actual purchase of the underlying securities, but permits
the continued holding of securities other than the underlying securities. For
example, if the Adviser expects long-term interest rates to decline, the
Portfolio might enter into futures contracts for the purchase of long-term
securities, so that it could gain rapid market exposure that may offset
anticipated increases in the cost of securities it intends to purchase, while
continuing to hold higher-yielding short-term securities or waiting for the
long-term market to stabilize.
A Portfolio 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
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futures position is accompanied by cash representing the difference between the
current market price of the futures contract and the exercise price of the
option.
A Portfolio may not purchase futures contracts or related options if,
immediately thereafter, more than 33 1/3% (25% for the T. Rowe Price
International 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 SEC considers
over-the-counter options to be illiquid. A Portfolio's ability to terminate
option positions established in the over-the-counter market may be more limited
than in the case of exchange traded options and may also involve the risk that
securities dealers participating in such transactions would fail to meet their
obligations to the Portfolio. There can be no assurance that a Portfolio will be
able to effect closing transactions at any particular time or at an acceptable
price. The use of options and futures involves the risk of imperfect correlation
between movements in options and futures prices and movements in the prices of
the securities that are being hedged. Expenses and losses incurred as a result
of these hedging strategies will reduce the Portfolio's current return. In many
foreign countries, futures and options markets do not exist or are not
sufficiently developed to be effectively used by a Portfolio.
Foreign Currency Transactions. The
T. Rowe Price International Stock
and Endeavor Enhanced Index
Portfolios may purchase foreign currency on a spot (or cash)
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basis, enter into contracts to purchase or sell foreign currencies at a future
date ("forward contracts"), purchase and sell foreign currency futures
contracts, and purchase exchange traded and over-the-counter call and put
options on foreign currency futures contracts and on foreign currencies. The
Adviser to a Portfolio may engage in these transactions to protect against
uncertainty in the level of future exchange rates in connection with the
purchase and sale of portfolio securities ("transaction hedging") and to protect
the value of specific portfolio positions ("position hedging").
Hedging transactions involve costs and may result in losses. The T.
Rowe Price International Stock and Endeavor Enhanced Index Portfolios may write
covered call options on foreign currencies to offset some of the costs of
hedging those currencies. A Portfolio will engage in over-the-counter
transactions only when appropriate exchange traded transactions are unavailable
and when, in the opinion of the Portfolio's Adviser, the pricing mechanism and
liquidity are satisfactory and the participants are responsible parties likely
to meet their contractual obligations. A Portfolio's ability to engage in
hedging and related option transactions may be limited by tax considerations.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency.
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Reverse Repurchase Agreements. Each Portfolio is permitted to enter
into reverse repurchase agreements. In a reverse repurchase agreement, the
Portfolio sells a security and agrees to repurchase it at a mutually agreed upon
date and price, reflecting the interest rate effective for the term of the
agreement. For the purposes of the 1940 Act it is considered a form of borrowing
by the Portfolio and, therefore, is a form of leverage. Leverage may cause any
gains or losses of the Portfolio to be magnified.
Borrowings.
The Dreyfus Small Cap Value Portfolio may borrow
money for temporary purposes in amounts up to 5% of its total
assets.
The T. Rowe Price International Stock
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Portfolio may borrow money as a temporary measure for emergency purposes, to
facilitate redemption requests, or for other purposes consistent with the
Portfolio's investment objective and program in an amount up to 33 1/3% of the
Portfolio's net assets. The Portfolio may pledge up to 33 1/3% of its total
assets to secure these borrowings. The Portfolio may not purchase additional
securities when borrowings exceed 5% of total assets.
The Endeavor Enhanced Index Portfolio may borrow money from banks as a
temporary measure for extraordinary or emergency purposes in amounts up to 10%
of its total assets. The Portfolio may not purchase additional securities when
borrowings exceed 5% of total assets.
As a matter of operating policy,
the T. Rowe Price International Stock
Portfolio will limit all borrowings to no
more than 25% of its net assets.
The purchase of securities while borrowings are outstanding will have
the effect of leveraging a Portfolio. Such leveraging or borrowing increases the
Portfolio's exposure to capital risk and borrowed funds are subject to interest
costs which will reduce net income.
Depositary Receipts. All Portfolios may purchase foreign securities in
the form of American Depositary Receipts, European Depositary Receipts, Global
Depositary Receipts or other securities convertible into securities of
corporations in which the Portfolios are permitted to invest pursuant to their
respective investment objectives and policies. These securities may not
necessarily be denominated in the same currency into which they
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may be converted. Depositary receipts are receipts typically
issued by a U.S. or foreign bank or trust company and evidence
ownership of underlying securities issued by a foreign
corporation.
Repurchase Agreements. All Portfolios may enter into repurchase
agreements with a bank, broker-dealer or other financial institution as a means
of earning a fixed rate of return on its cash reserves for periods as short as
overnight. A repurchase agreement is a contract pursuant to which a Portfolio,
against receipt of securities of at least equal value including accrued
interest, agrees to advance a specified sum to the financial institution which
agrees to reacquire the securities at a mutually agreed upon time (usually one
day) and price. Each repurchase agreement entered into by a Portfolio will
provide that the value of the collateral underlying the repurchase agreement
will always be at least equal to the repurchase price, including any accrued
interest. The Portfolio's right to liquidate such securities in the event of a
default by the seller could involve certain costs, losses or delays and, to the
extent that proceeds from any sale upon a default of the obligation to
repurchase are less than the repurchase price, the Portfolio could suffer a
loss.
Forward Commitments. Each Portfolio may make contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments") if it holds, and maintains until the settlement date in
a segregated account, cash or 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, which risk is in addition to
the risk of decline in value of the Portfolio's other assets. Where such
purchases are made through dealers, the Portfolio relies on the dealer to
consummate the sale. The dealer's failure to do so may result in the loss to the
Portfolio of an advantageous yield or price.
Securities Loans. Each Portfolio may seek to obtain additional income
by making secured loans of its portfolio securities with a value up to 33 1/3%
of its total assets. All securities loans will be made pursuant to agreements
requiring the loans to be continuously secured by collateral in cash or 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
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securities. The Portfolio retains all or a portion of the interest received on
investment of cash collateral or receives a fee from the borrower. Lending
portfolio securities involves risks of delay in recovery of the loaned
securities or in some cases loss of rights in the collateral should the borrower
fail financially.
Hybrid Instruments. The T. Rowe Price International Stock Portfolio may
invest up to 10% of its total assets in hybrid instruments. Hybrid instruments
have recently been developed and combine the elements of futures contracts or
options with those of debt, preferred equity or a depository instrument. Often
these hybrid instruments are indexed to the price of a commodity, particular
currency, or a domestic or foreign debt or equity securities index. Hybrid
instruments may take a variety of forms, including, but not limited to, debt
instruments with interest or principal payments or redemption terms determined
by reference to the value of a currency or commodity or securities index at a
future point in time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity. Hybrid instruments may bear
interest or pay dividends at below market (or even relatively nominal) rates.
Under certain conditions, the redemption value of such an instrument could be
zero. Hybrid instruments can have volatile prices and limited liquidity and
their use by the Portfolio may not be successful.
Fixed-Income Securities - Downgrades. If any security invested in by
any of the Portfolios loses its rating or has its rating reduced after the
Portfolio has purchased it, unless required by law, the Portfolio is not
required to sell or otherwise dispose of the security, but may consider doing
so.
Illiquid Securities. Each Portfolio may invest up to 15% of its net
assets in illiquid securities and other securities which are not readily
marketable, including non-negotiable time deposits, certain restricted
securities not deemed by the Fund's Trustees to be liquid and repurchase
agreements with maturities longer than seven days. Securities eligible for
resale pursuant to Rule 144A under the Securities Act of 1933, which have been
determined to be liquid, will not be considered by the Portfolios' Advisers to
be illiquid or not readily marketable and, therefore, are not subject to the
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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 such security does not result in a Portfolio having more than 15%
of its assets invested in illiquid or not readily marketable securities.
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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
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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. ("Investor Services Group") 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:
T. Rowe Price International Stock Portfolio - .90%; Dreyfus Small Cap Value
Portfolio - .80%; Endeavor Enhanced Index Portfolio - .75% . The management fees
paid by the Portfolios , although higher than the fees paid by most other
investment companies in general, are comparable to management fees paid for
similar services by many investment companies with similar investment objectives
and policies. From the management fees, the Manager pays the expenses of
providing investment advisory services to the Portfolios, including the fees of
the Adviser of each Portfolio.
The Manager pays the fees and expenses
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of Investor Services Group pursuant to the administration agreement. The Manager
pays Investor Services Group an annual fee equal to $650,000 plus 0.01% of the
Fund's average daily net assets in excess of $1 billion. These fees are accrued
daily and paid monthly.
In addition to the management fees , the Fund pays all expenses not
assumed by the Manager, including, without limitation, expenses for legal,
accounting and auditing services, interest, taxes, costs of printing and
distributing reports to shareholders, proxy materials and prospectuses, charges
of its custodian, transfer agent and dividend disbursing agent, registration
fees, fees and expenses of the Trustees who are not interested persons of the
Fund, insurance, brokerage costs, litigation, and other extraordinary or
nonrecurring expenses. All general Fund expenses are allocated among and charged
to the assets of the Portfolios of the Fund on a basis that the Trustees deem
fair and equitable, which may be on the basis of relative net assets of each
Portfolio or the nature of the services performed and relative applicability to
each Portfolio.
Year 2000. Like other mutual funds, the Fund and the service providers
for the Fund and each of its Portfolios rely heavily on the reasonably
consistent operation of their computer systems. Many software programs and
certain computer hardware in use today, cannot properly process information
after December 31, 1999 because of the method by which dates are encoded and
calculated in such programs and hardware. This problem, commonly referred to as
the "Year 2000 Issue," could, among other things, negatively impact the
processing of trades, the distribution of securities, the pricing of securities
and other investment-related and settlement activities. The Fund is currently
obtaining information with respect to the actions that have been taken and the
actions that are planned to be taken by each of its service providers to prepare
their computer systems for the Year 2000. While the Fund expects that each of
the Fund's service providers will have adapted their computer systems to address
the Year 2000 Issue, there can be no assurance that this will be the case or
that the steps taken by the Fund will be sufficient to
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avoid any adverse impact to the Fund and each of its
Portfolio.
The Advisers
Pursuant to an investment advisory agreement with the Manager, each Adviser
to a Portfolio furnishes continuously an investment program for the Portfolio,
makes investment decisions on behalf of the Portfolio, places all orders for the
purchase and sale of investments for the Portfolio's account with brokers or
dealers selected by such Adviser and may perform certain limited related
administrative functions in connection therewith. For its services, the Manager
pays the Adviser a fee based on a percentage of the average daily net assets of
the Portfolio. An Adviser may place portfolio securities transactions with
broker-dealers who furnish it with certain services of value in advising the
Portfolio and other clients. In so doing, an Adviser may cause a Portfolio to
pay greater brokerage commissions than it might otherwise pay. In seeking the
most favorable price and execution available, an Adviser may, if permitted by
law, consider sales of the Contracts as a factor in the selection of
broker-dealers. T. Rowe Price Associates, Inc. and Rowe Price- Fleming
International, Inc. may utilize certain brokers indirectly related to them in
the capacity as broker in connection with the execution of transactions for the
T. Rowe Price International Stock Portfolio. J.P. Morgan Investment Management
Inc. may utilize certain brokers affiliated with it in connection with the
execution of transactions for the Endeavor Enhanced Index Portfolio.
See the Statement of
Additional Information for a further discussion of Portfolio
trading.
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The Dreyfus Corporation ("Dreyfus") is the Adviser to the Dreyfus Small Cap
Value Portfolio. Dreyfus, which was formed in 1947, is a wholly-owned subsidiary
of Mellon Bank, N.A., which is a wholly-owned subsidiary of Mellon Bank
Corporation ("Mellon"). As of January 31, 1998, Dreyfus managed or administered
approximately $96 billion in assets for more than 1.7 million investor accounts
nationwide. As compensation for its services as investment
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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.
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 $305 billion in assets as of December 31, 1997,
including approximately $104 billion in mutual fund assets. As of December 31,
1997, Mellon, through various subsidiaries, provided non-investment services,
such as custodial or administration services, for more than $1,532 billion in
assets, including approximately $60 billion in mutual fund assets.
The portfolio manager for the Dreyfus Small Cap Value
Portfolio is Peter I. Higgins. Mr. Higgins has been employed by
The Boston Company, Inc. since August, 1988 and by Dreyfus since
February, 1996.
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Rowe Price-Fleming International, Inc. ("Price-Fleming") is the Adviser to
the T. Rowe Price International Stock Portfolio (formerly the Global Growth
Portfolio). As compensation for its services as investment adviser, the Manager
pays Price-Fleming a monthly fee at an annual rate based on the Portfolio's
average daily net assets as follows: .75% up to $20 million; .60% in excess of
$20 million up to $50 million; and .50% of assets in excess of $50 million. At
such time as the net assets of the Portfolio exceed $200 million, the fee shall
be .50% of total average daily net assets.
Prior to January 1, 1995, Ivory & Sime International, Inc. and Ivory &
Sime plc acted as adviser and sub-adviser, respectively, for the Global Growth
Portfolio.
Price-Fleming was incorporated in Maryland in 1979 as a joint venture
between T. Rowe Price Associates, Inc. ("T. Rowe Price") and Robert Fleming
Holdings Limited ("Flemings"). Flemings is a diversified investment organization
which participates in a global network of regional investment offices in New
York, London, Zurich, Geneva, Tokyo, Hong Kong, Manila, Kuala Lampur, Seoul,
Taipei, Bombay, Jakarta, Singapore, Bangkok and Johannesburg.
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T. Rowe Price was incorporated in Maryland in 1947 as successor to the
investment counseling business founded by the late Thomas Rowe Price, Jr., in
1937. Flemings was incorporated in 1974 in the United Kingdom as successor to
the business founded by Robert Fleming in 1873. As of December 31, 1997, T. Rowe
Price and its affiliates managed more than $125 billion of assets of which
Price-Fleming managed the U.S. equivalent of approximately $30 billion.
The common stock of Price-Fleming is 50% owned by a wholly-owned
subsidiary of T. Rowe Price, 25% by a subsidiary of Fleming and 25% by Jardine
Fleming Group Limited ("Jardine Fleming"). (Half of Jardine Fleming is owned by
Flemings and half by Jardine Matheson Holdings Limited.) T. Rowe Price has the
right to elect a majority of the board of directors of Price-Fleming, and
Flemings has the right to elect the remaining directors, one of whom will be
nominated by Jardine Fleming.
Investment decisions with respect to the T. Rowe Price
International Stock Portfolio are made by an investment advisory
group composed of the following members: Martin G. Wade, Mark J.
T. Edwards, John R. Ford, James B. M. Seddon, Mark Bickford-Smith
and David J. L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 29 years of experience
with the Fleming Group in research, client service and investment management.
(Fleming Group includes Flemings and/or Jardine Fleming.) Mark Edwards joined
Price-Fleming in 1987 and has 16 years of experience in financial analysis. John
Ford joined Price-Fleming in 1982 and has 18 years of experience with the
Fleming Group in research and portfolio management. James Seddon joined
Price-Fleming in 1987 and has 11 years of experience in investment management.
Mark Bickford-Smith joined Price-Fleming in 1995 and has 13 years of experience
with the Fleming Group in research and financial analysis. David Warren joined
Price-Fleming in 1984 and has 17 years of experience in equity research, fixed
income research and portfolio management.
In providing its services, Price-Fleming receives certain
administrative support from T. Rowe Price and investment research and
administrative support for equity investments from Fleming Investment Management
Limited and Jardine Fleming Investment
Holdings Limited.
J.P. Morgan Investment Management Inc. ("Morgan") is the Adviser to the
Endeavor Enhanced Index Portfolio. As compensation for its services as
investment adviser the Manager pays Morgan a monthly fee at the annual rate of
.35% of the
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average daily net assets of the Endeavor Enhanced Index
Portfolio.
Morgan is a wholly-owned subsidiary of J.P. Morgan Co. Incorporated
("J.P. Morgan"), a bank holding company. Through offices in New York City and
abroad, J.P. Morgan, through Morgan and other subsidiaries, including Morgan
Guaranty Trust Company of New York, offers a wide range of services to
governmental, institutional, corporate and individual customers and acts as
investment adviser to individual and institutional clients with combined assets
under management (as of December 31, 1997) of over $255 billion. J.P. Morgan has
a long history of service as adviser, underwriter and lender to an extensive
roster of major companies and as a financial adviser to national governments.
The firm, through its predecessor firms, has been in business for over a century
and has been managing investments since 1913.
Investment decisions with respect to the Endeavor Enhanced Index Portfolio
are made by an investment advisory group composed of Frederic A. Nelson, III,
James Wiess, and Timothy J. Devlin.
Mr. Nelson is a Managing Director of Morgan and is responsible for the U.S.
equity business, including active equity and structured strategies. Mr. Nelson
joined Morgan in 1994 after 14 years at Bankers Trust Company where he was part
of the Global Investment Management Group. Mr. Wiess, a Vice President of
Morgan, is a portfolio manager in the Equity and Balanced Accounts Group with
responsibility for portfolio rebalancing and product research and development in
structured equity strategies. Mr. Wiess joined Morgan in 1992 and from 1984 to
1991 was employed by Oppenheimer & Co. Mr. Devlin joined Morgan in 1996 and is a
member of the Structured Equity Group with the dual responsibilities of client
servicing and portfolio management. From 1988 to 1996, Mr. Devlin was at
Mitchell Hutchins where he managed quantitatively driven equity portfolios.
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<PAGE>
Brokerage Enhancement Plan
The Board of Trustees of the Fund, including all of the Trustees who
are not "interest persons" (as defined in the 1940 Act) of the Fund, the Manager
or Endeavor Group (the "Distributor") (hereinafter referred to as "Independent
Trustees"), have voted to adopt a Brokerage Enhancement Plan (the "Plan") for
the purpose of utilizing the Fund's brokerage commissions, to the extent
available, to promote the sale and distribution of the Fund's shares. Neither
the Fund nor any series of the Fund, including the Portfolios, will incur any
new fees or charges. As part of the Plan, the Fund and the Distributor will
enter into a Distribution Agreement. Under the Distribution Agreement, the
Distributor will become the principal underwriter of the Fund, with
responsibility for promoting sales of the shares of each Portfolio.
The Distributor, however, will not receive any additional compensation
from the Fund for performing this function. Instead, under the Plan, the Manager
is authorized to direct that the Adviser of each Portfolio effect brokerage
transactions in portfolio securities through certain broker-dealers, consistent
with each Adviser's obligations to achieve best price and execution. It is
anticipated that these broker-dealers will agree that a percentage of the
commission will be directed to the Distributor. The Distributor will use a part
of these directed commissions to defray legal and administrative costs
associated with implementation of the Plan. These expenses are expected to be
minimal. The remainder of the commissions received by the Distributor will be
used to finance activities principally intended to result in the sale of shares
of the Portfolios. It is anticipated that these activities will include: holding
or
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<PAGE>
participating in seminars and sales meetings designed to promote the sale of
Fund shares; paying marketing fees requested by broker-dealers who sell
Contracts; training sales personnel; compensating broker-dealers and/or their
registered representatives in connection with the allocation of cash values and
premiums of the Contracts to the Fund; printing and mailing Fund prospectuses,
statements of additional information, and shareholder reports for existing and
prospective Contract holders; and creating and mailing advertising and sales
literature.
The Distributor will be obligated to use all of the funds directed to
it for distribution expenses, except for a small amount to be used to defray the
incidental costs associated with implementation of the Plan. Accordingly, the
Distributor will not make any profit from the operation of the Plan.
Both the Plan and the Distribution Agreement provide (A) that they will
be subject to annual approval by the Trustees and the Independent Trustees; (B)
that any person authorized to make payments under the Plan or Distribution
Agreement must provide the Trustees a quarterly written report of payments made
and the purpose of the payments; (C) that the Plan may be terminated at any time
by the vote of a majority of the Independent Trustees; (D) that the Distribution
Agreement may be terminated without penalty at any time by a vote of a majority
of the Independent Trustees or, as to a Portfolio, by vote of a majority of the
outstanding securities of the Portfolio on not more than 60 days' written
notice; and (E) that the Distribution Agreement terminates if it is assigned.
The Plan may not be amended to increase materially the amount to be spent for
distribution without shareholder approval, and all material Plan amendments must
be approved by a vote of the Independent Trustees. In addition, the selection
and nomination of the Independent Trustees must be committed to the Independent
Trustees.
The shareholders of the Portfolios approved the Plan at a shareholders'
meeting held on February 23, 1998.
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
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taxes to the extent that its net investment income and net realized capital
gains are distributed to shareholders.
It is the intention of each Portfolio to distribute substantially all
its net investment income. Although the Trustees of the Fund may decide to
declare dividends at other intervals, dividends from investment income of each
Portfolio are expected to be declared annually and will be distributed to the
various separate accounts of PFL and not to Contract owners in the form of
additional full and fractional shares of the Portfolio and not in cash. The
result is that the investment performance of the Portfolios, including the
effect of dividends, is reflected in the cash value of the Contracts. See the
prospectus for the Contracts accompanying this Prospectus.
All net realized long- or short-term capital gains of each Portfolio,
if any, will be declared and distributed at least annually either during or
after the close of the Portfolio's fiscal year and will be reinvested in
additional full and fractional shares of the Portfolio. In certain foreign
countries, interest and dividends are subject to a tax which is withheld by the
issuer. U.S. income tax treaties with certain countries reduce the rates of
these withholding taxes. The Fund intends to provide the documentation necessary
to achieve the lower treaty rate of withholding whenever applicable or to seek
refund of amounts withheld in excess of the treaty rate.
The T. Rowe Price International Stock Portfolio may purchase the
securities of certain foreign investment funds or trusts called passive foreign
investment companies. Such trusts have been the only or primary way to invest in
certain countries. In addition to bearing their proportionate share of the
Portfolio's expenses (management fees and operating expenses), shareholders will
also indirectly bear similar expenses of such trusts. Capital gains on the sale
of such holdings are considered ordinary income regardless of how long the
Portfolio held its investment. In addition, the Portfolio may be subject to
corporate income tax and an interest charge on certain dividends and capital
gains earned from these investments, regardless of whether such income and gains
are distributed to shareholders.
To avoid such tax and interest, the T. Rowe Price International Stock
Portfolio's Adviser intends to treat these securities as sold on the last day of
its fiscal year and recognize any gains for tax purposes at that time; losses
will not be recognized. Such gains will be considered ordinary
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<PAGE>
income, which the Portfolio will be required to distribute even though it has
not sold the security.
For a discussion of the impact on Contract owners of income taxes PFL
may owe as a result of (i) its ownership of shares of the Portfolios, (ii) its
receipt of dividends and distributions thereon, and (iii) its gains from the
purchase and sale thereof, reference should be made to the prospectus for the
Contracts accompanying this Prospectus.
SALE AND REDEMPTION OF SHARES
The Fund continuously offers shares of each Portfolio only to separate
accounts of PFL, but may at any time offer shares to a separate account of any
other insurer approved by the Trustees.
Providian Securities Corporation ("PSC"), an affiliate of PFL, is the
principal underwriter and distributor of the Contracts. PSC places orders for
the purchase or redemption of shares of each Portfolio based on, among other
things, the amount of net Contract premiums or purchase payments transferred to
the separate accounts, transfers to or from a separate account investment
division, policy loans, loan repayments, and benefit payments to be effected on
a given date pursuant to the terms of the Contracts. Such orders are effected,
without sales charge, at the net asset value per share for each Portfolio
determined as of the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., New York City time), on that same date.
Endeavor Group, an affiliate of the Manager, whose office is located at
2101 East Coast Highway, Suite 300, Corona del Mar, California 92625, serves as
the Distributor for the Fund.
The net asset value of the shares of each Portfolio for the purpose of
pricing orders for the purchase and redemption of shares is determined as of the
close of the New York Stock Exchange, Monday through Friday, exclusive of
national business holidays. Net asset value per share is computed by dividing
the value of all assets of a Portfolio (including accrued interest and
dividends), less all liabilities of the Portfolio (including accrued expenses
and dividends payable), by the number of outstanding shares of the Portfolio.
The assets of the Portfolios are valued on the basis of their market values or,
in the absence of a market value with respect to any portfolio securities, at
fair value as determined by or under the direction of the Fund's Board of
Trustees including the
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<PAGE>
employment of an independent pricing service, as described in the
Statement of Additional Information.
Shares of the Portfolios may be redeemed on any day on which the Fund
is open for business.
PERFORMANCE INFORMATION
From time to time, the Fund may advertise the "average annual or
cumulative total return" of the Dreyfus Small Cap Value, T. Rowe Price
International Stock and Endeavor Enhanced Index Portfolios and may compare the
performance of the Portfolios with that of other mutual funds with similar
investment objectives as listed in rankings prepared by Lipper Analytical
Services, Inc., or similar independent services monitoring mutual fund
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).
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<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.
Prior Performance of Comparable Fund
Endeavor Enhanced Index Portfolio
Morgan is the investment manager of certain Private Accounts.
The Endeavor Enhanced Index Portfolio commenced operations on May 2,
1997 and, consequently, does not have a significant operating history. See
"Financial Highlights." However, these Private Accounts and the Endeavor
Enhanced Index Portfolio have substantially similar investment objectives,
policies and strategies.
Investors should not rely on the following financial information as an
indication of the future performance of the Endeavor Enhanced Index Portfolio.
The performance of the Endeavor Enhanced Index Portfolio may vary from the
Private Account composite information because the Portfolio will be actively
managed and its investments will vary from time to time and will not be
identical to the past portfolio investments of the Private Accounts. Moreover,
the Private Accounts are not registered under the 1940 Act and therefore are not
subject to certain investment restrictions that are imposed by the 1940 Act,
which, if imposed, could have adversely affected the Private Accounts'
performances. In addition, the Private Accounts are not subject to the
provisions of the Internal Revenue Code with respect to "regulated investment
companies," which provisions, if
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<PAGE>
imposed, could have adversely affected the Private Accounts'
performances.
The table below shows performance information derived from historical
composite performance of the Private Accounts included in the Structured Stock
Selection Composite and the historical performance information of the Endeavor
Enhanced Index Portfolio. The performance figures represent the actual
performance results of the composite of comparable Private Accounts, adjusted to
reflect the deduction of the fees and expenses anticipated to be paid by the
Endeavor Enhanced Index Portfolio. The actual Private Account composite
performance figures are time-weighted rates of return which include all income
and accrued income and realized and unrealized gains or losses, but do not
reflect the deduction of investment advisory fees actually charged to the
Private Accounts.
Average Annual Total Return of Endeavor Enhanced Index Portfolio
and Average Annual Total Return Information Derived from Private
Account Composite
<TABLE>
<CAPTION>
For the For the Five For the Period
Year Ended Years Ended From Inception
December 31, December 31, to December 31,
1997 1997 1997(1)
<S> <C> <C> <C>
Endeavor
Enhanced
Index
Portfolio N/A N/A 22.90%(2)
Structured
Stock
Selection
Composite 32.27% 19.62% 16.65%
</TABLE>
- ---------------
(1) The Endeavor Enhanced Index Portfolio commenced operations on May 2,
1997. The Structured Stock Selecting Composite commenced operations on
November 1, 1989.
(2) Reflects waiver of a portion of the advisory fee. Without
such waiver, the average annual total return during the period would
have been lower.
------------------
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<PAGE>
The calculations of total return assume the reinvestment of all
dividends and capital gain distributions on the reinvestment dates during the
period and the deduction of all recurring expenses that were charged to
shareholder accounts. The above table does not reflect charges and deductions
which are, or may be, imposed under the Contracts. For a description of such
charges and deductions, see the prospectus accompanying this Prospectus which
describes the Contracts.
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<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 eleven
series of shares, one for each of the Fund's eleven Portfolios, including the
three Portfolios offered by this Prospectus. Shares are freely transferable, are
entitled to dividends as declared by the Trustees, and in liquidation are
entitled to receive the net assets of their respective Portfolios, but not the
net assets of the other Portfolios.
Fund shares are entitled to vote at any meeting of shareholders. The
Fund does not generally hold annual meetings of shareholders and will do so only
when required by law. Matters submitted to a shareholder vote must be approved
by 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. Investor Services Group, 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.
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<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.
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<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
T. Rowe Price International Stock
Portfolio Manager
Dreyfus
Small Cap Value Portfolio Endeavor Investment Advisers
2101 East Coast Highway
Suite 300
Corona del Mar, California 92625
Investment Advisers
Endeavor Enhanced Index Portfolio
Investment Strategies
Management of the Fund
The Manager
The Advisers
Brokerage Enhancement Plan The Dreyfus Corporation
Dividends, Distributions and Taxes 200 Park Avenue
Sale and Redemption of Shares New York, New York 10166
Performance Information
Prior Performance of Comparable Fund
Organization and Capitalization
of the Fund
Additional Information Rowe Price-Fleming International,
Transfer Agent and Custodian Inc.
Independent Auditors 100 East Pratt Street
Baltimore, Maryland 21202
--------------
J.P. Morgan Investment
No person has been authorized to give any Management Inc.
information or to make any representation not 522 Fifth Avenue
contained in this Prospectus and, if given or New York, New York 10036
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
registered securities to which it relates or Custodian
an offer to any person in any state or
jurisdiction of the United States or any Boston Safe Deposit and Trust
country where such offer would be unlawful. Company
One Boston Place
Boston, Massachusetts 02108
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
ENDEAVOR(sm) SERIES TRUST
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus dated May 1, 1998 for the T. Rowe
Price International Stock Portfolio, the Dreyfus Small Cap Value Portfolio
(formerly, Value Small Cap Portfolio) and the Endeavor Enhanced Index Portfolio
(formerly, Enhanced Index Portfolio) of Endeavor Series Trust (the "Fund") (the
"Prospectus"), which may be obtained by writing the Fund at 2101 East Coast
Highway, Suite 300, Corona del Mar, California 92625 or by telephoning (800)
854-8393. Unless otherwise defined herein, capitalized terms have the meanings
given to them in the Prospectus.
Endeavor(sm) is a registered service mark of Endeavor Management Co.
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<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
Portfolio Turnover........................... 14
Investment Restrictions........................... 15
Other Policies............................... 17
Performance Information........................... 17
Total Return................................. 17
Non-Standardized Performance................. 19
Portfolio Transactions............................ 20
Management of the Fund............................ 22
Trustees and Officers........................ 22
The Manager.................................. 28
The Advisers................................. 29
Redemption of Shares.............................. 32
Net Asset Value................................... 32
Taxes............................................. 34
Federal Income Taxes......................... 34
Organization and Capitalization of the Fund....... 35
Legal Matters..................................... 38
Custodian......................................... 38
Financial Statements.............................. 38
Appendix.......................................... A-1
----------------------
No person has been authorized to give any information or to make any
representation not contained in this Statement of Additional Information or in
the Prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized. This Statement of Additional
Information does not constitute an offering of any securities other than the
registered securities to which it relates or an offer to any person in any state
or other jurisdiction of the United States or any country where such offer would
be unlawful.
The date of this Statement of Additional Information is May 1, 1998.
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the
investment objectives and policies of the Portfolios in the
Prospectus of the Fund. The Fund is managed by Endeavor
Investment Advisers. The Manager has selected
Rowe Price-Fleming International, Inc. as investment
adviser for the T. Rowe Price International Stock Portfolio,
The Dreyfus Corporation as investment adviser for
the
Dreyfus Small Cap Value Portfolio
and J.P.
Morgan Investment Management Inc. as investment adviser for the
Endeavor Enhanced Index Portfolio
.
Options and Futures Strategies (All Portfolios
)
A Portfolio may seek to increase the current return on its investments
by writing covered call or covered put options. In addition, a Portfolio may at
times seek to hedge against either a decline in the value of its portfolio
securities or an increase in the price of securities which its Adviser plans to
purchase through the writing and purchase of options including options on stock
indices and the purchase and sale of futures contracts and related options. A
Portfolio may utilize options or futures contracts and related options for other
than hedging purposes to the extent that the aggregate initial margins and
premiums do not exceed 5% of the Portfolio's net asset value. The Adviser to the
Dreyfus Small Cap Value Portfolio does not presently intend to utilize options
or 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
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<PAGE>
availability of liquid markets in such instruments. Markets in options and
futures with respect to stock indices and U.S. government securities are
relatively new and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of options or futures.
Therefore no assurance can be given that a Portfolio will be 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 liquid assets
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
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than its then current market price, resulting in a potential capital loss if the
purchase price exceeds the market price plus the amount of the premium received.
A Portfolio may terminate an option which it has written prior to its
expiration by entering into a closing purchase 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.
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<PAGE>
Purchase and Sale of Options and Futures on Stock Indices. A Portfolio
may purchase and sell options on stock indices and stock index futures contracts
either as a hedge against movements in the equity markets or for other
investment purposes.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars times a specified multiple. The writer
of the option is obligated, in return for the premium received, to make delivery
of this amount. Unlike options on specific securities, all settlements of
options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than price movements in
particular stocks. Currently options traded include the Standard & Poor's 500
Composite Stock Price Index, the NYSE Composite Index, the AMEX Market Value
Index, the National Over-The-Counter Index, the Nikkei 225 Stock Average Index,
the Financial Times Stock Exchange 100 Index and other standard broadly based
stock market indices. Options are also traded in certain industry or market
segment indices such as the Pharmaceutical Index.
A stock index futures contract is an agreement in which one party agrees
to deliver to the other an amount of cash equal to a specific dollar amount
times the difference between the value of a specific stock index at the close of
the last trading day of the contract and the price at which the agreement is
made. No physical delivery of securities is made.
If a Portfolio's Adviser expects general stock market prices to rise, it
might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
it wants ultimately to buy for the Portfolio. If in fact the stock index does
rise, the price of the particular equity securities intended to be purchased may
also increase, but that increase would be offset in part by the increase in the
value of the Portfolio's index option or futures contract resulting from the
increase in the index. If, on the other hand, the Portfolio's Adviser expects
general stock market prices to decline, it might purchase a put option or sell a
futures contract on the index. If that index does in fact decline, the value of
some or all of the equity securities held by the Portfolio may also be expected
to decline, but that decrease would be offset in part by the increase in the
value of the Portfolio's position in such put option or futures contract.
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Purchase and Sale of Interest Rate Futures. A Portfolio may purchase and
sell interest rate futures contracts on fixed income securities or indices of
such securities, including municipal indices and any other indices of fixed
income securities that may become available for trading 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
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contracts in connection with its hedging strategies in lieu of purchasing and
writing options directly on the underlying securities or stock indices or
purchasing or selling the underlying futures. For example, a Portfolio may
purchase put options or write call options on stock index futures or interest
rate futures, rather than selling futures contracts, in anticipation of a
decline in general stock market prices or rise in interest rates, respectively,
or purchase call options or write put options on stock index or interest rate
futures, rather than purchasing such futures, to hedge against possible
increases in the price of equity 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
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securities dealers participating in such transactions would fail to meet their
obligations to the Portfolio.
The use of options and futures involves the risk of imperfect
correlation between movements in options and futures prices and movements in the
price of the securities that are the subject of the hedge. The successful use of
these strategies also depends on the ability of a Portfolio's Adviser to
forecast correctly interest rate movements and general stock market price
movements. This risk increases as the composition of the securities held by the
Portfolio diverges from the composition of the relevant option or futures
contract.
Foreign Currency Transactions
(T. Rowe Price International Stock
and Endeavor Enhanced Index
Portfolios)
Foreign Currency Exchange Transactions. A Portfolio may engage in
foreign currency exchange transactions to protect against uncertainty in the
level of future exchange rates. The Adviser to a Portfolio may engage in foreign
currency exchange transactions in connection with the purchase and sale of
portfolio securities ("transaction hedging"), and to protect the value of
specific portfolio positions ("position hedging").
A Portfolio may engage in "transaction hedging" to protect against a
change in the foreign currency exchange rate between the date on which the
Portfolio contracts to purchase or sell the security and the settlement date, or
to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. For that purpose, a Portfolio may purchase or sell a foreign
currency on a spot (or cash) basis at the prevailing spot rate in connection
with the settlement of transactions in portfolio securities denominated in that
foreign currency.
If conditions warrant, a Portfolio may also enter into contracts to
purchase or sell foreign currencies at a future date ("forward contracts") and
purchase and sell foreign currency futures contracts as a hedge against changes
in foreign currency exchange rates between the trade and settlement dates on
particular transactions and not for speculation. A foreign currency forward
contract is a negotiated agreement to exchange currency at a future time at a
rate or rates that may be higher or lower than the spot rate. Foreign currency
futures contracts are standardized exchange-traded contracts and have margin
requirements.
For transaction hedging purposes, a Portfolio may also
purchase exchange-listed and over-the-counter call and put
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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 currencies to offset some of the costs
of hedging those currencies. A Portfolio will engage in over-the-counter
transactions only when
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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.
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
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a closing transaction involving the purchase or sale of an offsetting contract.
Closing transactions with respect to forward contracts are usually effected with
the currency trader who is a party to the original forward contract. Closing
transactions with respect to futures contracts are effected on a commodities
exchange; a clearing corporation associated with the exchange assumes
responsibility for closing out such contracts.
Positions in foreign currency futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market in such
contracts. Although a Portfolio intends to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there appears to be
an active secondary market, there can be no assurance that a secondary market on
an exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, a Portfolio would
continue to be required to make daily cash payments of variation margin.
Foreign Currency Options. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when a Portfolio's Adviser believes that a liquid secondary market exists for
such options. There can be no assurance that a liquid secondary market will
exist for a particular option at any specific time. Options on foreign
currencies are affected by all of those factors which influence foreign exchange
rates and investments generally.
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The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Portfolio at one rate, while offering a lesser rate of exchange should a
Portfolio desire to resell that currency to the dealer.
Repurchase Agreements (All Portfolios)
Each of the Portfolios may enter into repurchase agreements with a bank,
broker-dealer, or other financial institution but no Portfolio may invest more
than 15% of its net assets in repurchase agreements having maturities of greater
than seven days. A Portfolio may enter into repurchase agreements, provided the
Fund's custodian always has possession of securities serving as collateral whose
market value at least equals the amount of the repurchase obligation. To
minimize the risk of loss a Portfolio will enter into repurchase agreements only
with financial institutions which are considered by its Adviser to be
creditworthy under guidelines adopted by the Trustees of 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
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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 other liquid assets equal to the Portfolio's
commitment will be deposited in a segregated account at the Fund's custodian
bank to secure the Portfolio's obligation. Although a Portfolio will generally
enter into forward commitments to purchase securities with the intention of
actually acquiring the securities for its portfolio (or for delivery pursuant to
options contracts it has entered into), the Portfolio may dispose of a security
prior to settlement if its Adviser deems it advisable to do so. The Portfolio
may realize short-term gains or losses in connection with such sales.
Securities Loans (All Portfolios)
Each of the Portfolios may pay reasonable finders', administrative and
custodial fees in connection with loans of its portfolio securities. Although
voting rights or the right to consent accompanying loaned securities pass to the
borrower, a Portfolio retains the right to call the loan at any time on
reasonable notice, and will do so in order that the securities may be voted by
the Portfolio with respect to matters materially affecting the investment. A
Portfolio may also call a loan in order to sell the securities involved. Loans
of portfolio securities will only be made to borrowers considered by a
Portfolio's Adviser to be creditworthy under guidelines adopted by the Trustees
of the Fund.
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Portfolio Turnover
While it is impossible to predict portfolio turnover rates, the Advisers
to the T. Rowe Price International Stock and the Endeavor Enhanced Index
Portfolios 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.
INVESTMENT RESTRICTIONS
Except for restriction numbers 2, 3, 4, 11 and 12 with respect to the
Endeavor Enhanced Index Portfolio and restriction number 11 with respect to the
T. Rowe Price International Stock and Dreyfus Small Cap Value Portfolios (which
restrictions are not fundamental policies), the following investment
restrictions (numbers 1 through 12) are fundamental policies, which may not be
changed without the approval of a majority of the outstanding shares of the
Portfolio, and apply to each of the Portfolios except as otherwise indicated. As
provided in the Investment Company Act of 1940 (the "1940 Act"), a vote of a
majority of the outstanding shares necessary to amend a fundamental policy means
the affirmative vote of the lesser of (1) 67% or more of the shares present at a
meeting, if the holders of more than 50% of the outstanding shares of the
Portfolio are present or represented by proxy, or (2) more than 50% of the
outstanding shares of the Portfolio.
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A Portfolio may not:
1. Borrow money or issue senior securities (as defined in the 1940 Act),
provided that a Portfolio may borrow amounts not exceeding 5% of the value of
its total assets (not including the amount borrowed) for temporary purposes;
except that the T. Rowe Price International Stock Portfolio may (i) borrow for
non-leveraging, temporary or emergency purposes and (ii) engage in reverse
repurchase agreements and make other investments or engage in other
transactions, which may involve a borrowing, in a manner consistent with the
Portfolio's investment objective and program, provided that the combination of
(i) and (ii) shall not exceed 33 1/3% of the value of the Portfolio's total
assets (including the amount borrowed) less liabilities (other than borrowings)
and may pledge up to 33 1/3% of the value of its total assets to secure those
borrowings; and except that the Endeavor Enhanced Index Portfolio may borrow
money from banks or through reverse repurchase agreements for temporary or
emergency purposes in amounts up to 10% of its total assets.
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
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securities or owns securities which, without payment of any further
consideration, are convertible or exchangeable for securities of the same issue
as, and in equal amounts to, the securities sold short.
5. Underwrite securities issued by other persons, except to the extent that in
connection with the disposition of its portfolio investments it may be deemed to
be an underwriter under federal securities laws.
6. Purchase or sell real estate, although a Portfolio may purchase securities
of issuers which deal in real estate, securities which are secured by interests
in real estate and securities representing interests in real estate.
7. Purchase or sell commodities or commodity contracts, except that all
Portfolios may purchase or sell financial futures contracts and related options.
For purposes of this restriction, currency contracts or hybrid investments shall
not be considered commodities.
8. Make loans, except by purchase of debt obligations in which the Portfolio
may invest consistently with its investment policies, by entering into
repurchase agreements or through the lending of its portfolio securities.
9. Invest in the securities of any issuer if, immediately after such
investment, more than 5% of the total assets of the Portfolio (taken at current
value) would be invested in the securities of such issuer or acquire more than
10% of the outstanding voting securities of any issuer, provided that this
limitation does not apply to obligations issued or guaranteed as to principal
and interest by the U.S. government or its agencies and instrumentalities or to
repurchase agreements secured by such obligations and that up to 25% of the
Portfolio's total assets (taken at current value) may be invested without regard
to this limitation.
10. Invest more than 25% of the value of its total assets in any one industry,
provided that this limitation does not apply to obligations issued or guaranteed
as to interest and principal by the U.S. government, its agencies and
instrumentalities, and repurchase agreements secured by such obligations .
11. Invest more than 15% of its net assets (taken at current value at the time
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of each purchase) in illiquid securities including repurchase agreements
maturing in more than seven days.
12. Purchase securities of any issuer for the purpose of exercising control or
management.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and partially or completely as a
result of such investment.
Other Policies
The
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Dreyfus Small Cap Value Portfolio may not invest more than 5% of the value of
its total assets in warrants not listed on either the New York or American Stock
Exchange. The Endeavor Enhanced Index Portfolio will not invest in warrants if,
as a result thereof, more than 2% of the value of the total assets of the
Portfolio would be invested in warrants which are not listed on the New York
Stock Exchange, the American Stock Exchange, or a recognized foreign exchange,
or more than 5% of the value of the total assets of the Portfolio would be
invested in warrants whether or not so listed. However, the acquisition of
warrants attached to other securities is not subject to this restriction. The T.
Rowe Price International Stock Portfolio will not invest in warrants if, as a
result thereof, the Portfolio will have more than 5% of the value of its total
assets invested in warrants; provided that this restriction does not apply to
warrants acquired as a result of the purchase of another security.
PERFORMANCE INFORMATION
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Total return will be computed as described below.
Total Return
Each Portfolio's "average annual total return" figures described and
shown in the Prospectus are computed according to a formula prescribed by the
Securities and Exchange Commission.
The formula can be expressed as follows:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1000 payment
made at the beginning of the 1, 5, or 10 years (or other) periods at the end of
the 1, 5, or 10 years (or other) periods (or fractional portion thereof)
The table below shows the average annual total return for
the T. Rowe Price International Stock,
Dreyfus Small Cap Value and
Endeavor Enhanced Index Portfolios for the specific periods.
With respect to the T. Rowe Price International Stock Portfolio which
commenced operation April 8, 1991, effective January 1, 1995, the Portfolio's
Adviser was changed to Rowe Price-Fleming International, Inc. ("Price-Fleming").
Prior to March 24, 1995, the Portfolio was known as the Global Growth Portfolio.
Subsequent to such time, the Portfolio's investment objective was changed from
investments in small capitalization companies on a global basis to investments
in a broad range of established companies on an international basis (i.e.,
non-U.S. companies). Average annual total return information for the period from
January 1, 1995 to December 31, 1997 is available upon written request to the
Fund.
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<TABLE>
<CAPTION>
For Period
For the One For the Five From Incep-
Year Period Year Period tion to
Ended December Ended December December 31,
31, 1997 31, 1997 1997
<S> <C> <C> <C>
T. Rowe Price
International
Stock(1)........... 2.54%/2.54%* 7.84%/7.84%* 5.99%/5.99%*
Dreyfus Small
Cap Value(2)....... 25.56%/25.56%* N/A 15.74%/15.64%*
Endeavor Enhanced
Index(3)........ N/A N/A 22.90%/22.79%*
</TABLE>
- ------------------------
* 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) The Portfolio commenced operations on April 8, 1991.
(2) The Portfolio commenced operations on May 4, 1993.
(3) The Portfolio commenced operations on May 2, 1997.
The calculations of total return assume the reinvestment of all
dividends and capital gain distributions on the reinvestment dates during the
period and the deduction of all recurring expenses that were charged to
shareholders' accounts. The above
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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.
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Non-Standardized Performance
In addition to the performance information described above, the Fund
may provide total return information with respect to the Portfolios for
designated periods, such as for the most recent six months or most recent twelve
months. This total return information is computed as described under "Total
Return" above except that no annualization is made.
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
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a net basis with dealers acting as principal for their own account without a
stated commission, although prices of such securities usually include a profit
to the dealer. In over-the-counter transactions, orders are placed directly with
a principal market maker unless a better price and execution can be obtained by
using a broker. In underwritten offerings, securities are usually purchased at a
fixed price which includes an amount of compensation to the underwriter
generally referred to as the underwriter's concession or discount. Certain money
market securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid. U.S. government securities are generally
purchased from underwriters or dealers, although certain newly-issued U.S.
government securities may be purchased directly from the U.S. Treasury or from
the issuing agency or instrumentality. Each Portfolio's Adviser is responsible
for effecting its portfolio transactions and will do so in a manner deemed fair
and reasonable to the Portfolio and not according to any formula. The primary
consideration in all portfolio transactions will be prompt execution of orders
in an efficient manner at a favorable price. In selecting broker-dealers and
negotiating commissions, an Adviser considers the firm's reliability, the
quality of its execution services on a continuing basis and its financial
condition. When more than one firm is believed to meet these criteria,
preference may be given to brokers that provide the Portfolios or their Advisers
with brokerage and research services within the meaning of Section 28(e) of the
Securities Exchange Act of 1934. Each Portfolio's Adviser is of the opinion
that, because this material must be analyzed and reviewed, its receipt and use
does not tend to reduce expenses but may benefit the Portfolio by supplementing
the Adviser's research. In seeking the most favorable price and execution
available, an Adviser may, if permitted by law, consider sales of the Contracts
as described in the Prospectus a factor in the selection of broker-dealers.
An Adviser may effect portfolio transactions for other investment
companies and advisory accounts. Research services furnished by broker-dealers
through which a Portfolio effects its securities transactions may be used by the
Portfolio's Adviser in servicing all of its accounts; not all such services may
be used in connection with the Portfolio. In the opinion of each Adviser, it is
not possible to measure separately the benefits from research services to each
of its accounts, including a Portfolio. Whenever concurrent decisions are made
to purchase or sell securities by a Portfolio and another account, the
Portfolio's Adviser will attempt to allocate equitably portfolio transactions
among the Portfolio and other accounts. In making such allocations between the
Portfolio and other accounts, the main factors to be considered are the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for
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investment, the size of investment commitments generally held, and the opinions
of the persons responsible for recommending investments to the Portfolio and the
other accounts. In some cases this procedure could have an adverse effect on a
Portfolio. In the opinion of each Adviser, however, the results of such
procedures will, on the whole, be in the best interest of each of the accounts.
The Adviser to the T. Rowe Price International Stock Portfolio may
execute portfolio transactions through certain affiliates of Robert Fleming
Holdings Limited and Jardine Fleming Group Limited, persons indirectly related
to the Adviser, acting as agent in accordance with procedures established by the
Fund's Board of Trustees, but will not purchase any securities from or sell any
securities to any such affiliate acting as principal for its own account.
The Adviser to the Endeavor Enhanced Index Portfolio may execute
portfolio transactions through certain of its affiliated brokers, acting as
agent in accordance with the procedures established by the Fund's Board of
Trustees, but will not purchase any securities from or sell any securities to
such affiliate acting as principal for its own account.
For the year ended December 31, 1995, the T. Rowe Price International
Stock Portfolio and the Dreyfus Small Cap Value Portfolio paid $395,753 and
$101,885, respectively, in brokerage commissions of which $33,338 (8.42%) and
$15,101 (3.82%) with respect to the T. Rowe Price International Stock Portfolio
was paid to Robert Fleming Holdings Limited and Jardine Fleming Group Limited,
and Ord Minnett, respectively.
For the year ended December 31,
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<PAGE>
1996, the T. Rowe Price International Stock Portfolio and the Dreyfus Small Cap
Value Portfolio paid $136,536 and $398,554, respectively, in brokerage
commissions of which $4,462 (3.27%) and $2,908 (2.13%) with respect to the T.
Rowe Price International Stock Portfolio was paid to Robert Fleming Holdings
Limited and Jardine Fleming Group Limited, and Ord Minnett, respectively.
For the year ended December 31, 1997, the T. Rowe Price International
Stock Portfolio and the Dreyfus Small Cap Portfolio paid $205,850
and $525,982, respectively, in brokerage commissions of which $14,665 (7.13%)
and $608 (.30%) with respect to the T. Rowe Price International Stock Portfolio
was paid to Robert Fleming Holdings and Jardine Fleming Group Limited, and Ord
Minnett, respectively. For the fiscal period ended December 31, 1997, the
Endeavor Enhanced Index Portfolio paid $9,494 in brokerage commissions.
For a discussion regarding the use of the Fund's brokerage commissions
to promote the distribution of the Fund's shares, see the section of the
Prospectus titled "Management of the Fund Brokerage Enhancement Plan."
-139-
<PAGE>
MANAGEMENT OF THE FUND
Trustees and Officers
The Trustees and executive officers of the Trust, their ages and their
principal occupations during the past five years are set forth below. Unless
otherwise indicated, the business address of each is 2101 East Coast Highway,
Suite 300, Corona del Mar, California 92625.
-140-
<PAGE>
<TABLE>
<CAPTION>
Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
<S> <C> <C>
*+Vincent J. McGuinness, Jr. President, From July, 1997 to
(32) Trustee November, 1997, Executive
Vice
President
Administration
of
Registrant;
from
September,
1996
to
June,
1997,
Chief
Financial
Officer
(Treasurer)
of
Registrant;
from
January,
1997
to
December,
1997,
Executive
Vice-President
of
Operations
and
since
December,
1997,
Chief
Operating
Officer
of
Endeavor
Group;
from
September,
1996
to
June,
1997,
Chief
Financial
Officer,
since
May,
1996,
Director
and
since
June,
1997,
Executive
Vice
President
-
Administration
of
Endeavor
Management
Co.;
since
August,
1996,
Chief
Financial
Officer
of
VJM
Corporation;
from
May,
1996
to
January,
1997,
Executive
Vice
President
and
Director
of
Sales,
Western
Division
of
Endeavor
Group;
since
May,
1996,
Chief
Financial
Officer
of
McGuinness
&
Associates;
from
July,
1993
to
August,
1995,
Rocky
Mountain
Regional
Marketing
Director
for
Endeavor
Group.
-141-
<PAGE>
Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
*Vincent J. McGuinness Trustee Chairman, Chief Executive
(63) 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 (63) 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).
Thomas J. Hawekotte (63) Trustee President, Thomas J.
6007 North Sheridan Road Hawekotte, P.C. (law
Chicago, Illinois 60660 practice).
Steven L. Klosterman (46) Trustee Since July, 1995,
5973 Avenida Encinas President of Klosterman
Suite 300 Capital Corporation
Carlsbad, CA (investment adviser);
92008 Investment Counselor,
Robert J. Metcalf &
Associates, Inc.
(investment adviser) from
August, 1990 to June,
1995.
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<PAGE>
Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
*Halbert D. Lindquist (52)
1650 E. Fort Lowell Road Trustee President, Lindquist
Tucson, Arizona 85719-2324 Associates, Inc.
(investment
adviser)
and
since
December,
1987,
Tucson
Asset
Management,
Inc.
(commodity
trading
adviser),
and
since
November,
1987,
Presidio
Government
Securities,
Incorporated
(broker-dealer),
and
since
January,
1998,
Chief
Investment
Officer
of
Blackstone
Alternative
Asset
Management.
R. Daniel Olmstead, Jr. (66) Trustee Rancher until January,
2661 Point del Mar 1997. Since January,
Corona del Mar, 1997, real estate
California 92625 consultant.
Keith H. Wood (62) Trustee Since 1972, Chairman and
39 Main Street Chief Executive Officer of
Chatham, New Jersey 07928 Jameson, Eaton & Wood
(investment adviser) and
from 1978 to December,
1997, President of Ivory &
Sime International, Inc.
(investment adviser).
Trustee President, PFL Life
*William L. Busler (55) Insurance Company.
4333 Edgewood Road NE
Cedar Rapids, Iowa 52499
-143-
<PAGE>
Principal
Position(s) Occupation(s)
Held with During Past
Name, Age and Address Registrant 5 Years
Michael J. Roland (39) Chief Since June, 1996, Chief
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.
Pamela A. Shelton (48) Secretary Since October, 1993,
Executive Secretary to
Chairman of the Board and
Chief Executive Officer
of, and since April, 1996,
Secretary of McGuinness &
Associates, Endeavor
Group, VJM Corporation,
McGuinness Group (until
July, 1996) and Endeavor
Management Co.; from July,
1992 to October, 1993,
Administrative Secretary,
Mayor and City Council,
City of Laguna Niguel,
California.
</TABLE>
* An "interested person" of the Fund as defined in the 1940 Act.
-144-
<PAGE>
*+ 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 $10,000 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, 1997.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Total
Compensation
From Fund
Aggregate and Fund
Name of Compensation Complex
Person From Fund Paid to Trustees
<S> <C> <C>
Vincent J. McGuinness $ - $ -
Timothy A. Devine 8,125 8,125
Thomas J. Hawekotte 8,125 8,125
Steven L. Klosterman 8,125 8,125
Halbert D. Lindquist 8,125 8,125
R. Daniel Olmstead 8,125 8,125
Keith H. Wood 2,375 2,375
Vincent J. McGuinness, Jr. - -
William L. Busler - -
</TABLE>
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
-145-
<PAGE>
The Management Agreement between the Fund and the Manager with respect
to the T. Rowe Price International Stock Portfolio was approved by the Trustees
of the Fund (including all of the Trustees who are not "interested persons" [as
defined in the 1940 Act] of the Manager) on July 20, 1992, and by the
shareholders of the Fund on November 23, 1992. With respect to the Dreyfus Small
Cap Value Portfolio, the Management Agreement was approved by the Trustees of
the Fund (including all of the Trustees who are not "interested persons" of the
Manager) on April 19, 1993 and by PFL Life Insurance Company, the sole
shareholder of the Dreyfus Small Cap Value Portfolio, on April 19, 1993. With
respect to the Endeavor Enhanced Index Portfolio, the Management Agreement was
approved by the Trustees of the Fund (including all of the Trustees who are not
"interested persons" of the Manager) on August 13, 1996 and by PFL Life
Insurance Company, the sole shareholder of the Endeavor Enhanced Index
Portfolio, on August 26, 1996. See "Organization and Capitalization of the
Fund."
The Management Agreement will continue in force for two years from its
date, November 23, 1992 with respect to the T. Rowe Price International Stock
Portfolio, April 19, 1993 with respect to the Dreyfus Small Cap Value Portfolio,
August 26, 1996 with respect to the Endeavor
-146-
<PAGE>
Enhanced Index Portfolio and from year to year thereafter, but only so long as
its continuation as to each Portfolio is specifically approved at least annually
(i) by the Trustees or by the vote of a majority of the outstanding voting
securities of the Portfolio, and (ii) by the vote of a majority of the Trustees
who are not parties to the Management Agreement or "interested persons" of any
such party, by votes cast in person at a meeting called for the purpose of
voting on such approval. The Management Agreement provides that it shall
terminate 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
-147-
<PAGE>
The Investment Advisory Agreement between the Manager and J.P. Morgan Investment
Management Inc. was approved by the Trustees of the Fund (including all of the
Trustees who are not "interested persons" of the Manager or of the Adviser) on
August 13, 1996 and by PFL Life Insurance Company as sole shareholder of the
Endeavor Enhanced Index Portfolio on August 26, 1996. Effective January 1, 1995,
Price-Fleming became the Adviser of the T. Rowe Price International Stock
Portfolio. The Investment Advisory Agreement with Price-Fleming for the T. Rowe
Price International Stock Portfolio was approved by the Trustees of the Fund
(including all of the Trustees who are not "interested persons" of the Manager
or of the Adviser) on December 19, 1994 and by shareholders of the Portfolio on
March 24, 1995. Effective September 16, 1996, The Dreyfus Corporation became the
Adviser of the Dreyfus Small Cap Value Portfolio. The Investment Advisory
Agreement with The Dreyfus Corporation was approved by the Trustees of the Fund
(including all of the Trustees who are not "interested persons" of the Manager
or of the Adviser) on August 13, 1996 and by the shareholders of the Portfolio
on October 29, 1996. See "Organization and Capitalization of the Fund."
Each agreement will continue in force for two years from its date,
January 1, 1995 with respect to the T. Rowe Price International Stock Portfolio,
September 16, 1996 with respect to the Dreyfus Small Cap Value Portfolio and
April 30, 1997 with respect to the Endeavor Enhanced Index Portfolio , and from
year to year thereafter, but only so long as its continuation as to a Portfolio
is specifically approved at least annually (i) by the Trustees or by the vote of
a majority of the outstanding voting securities of the Portfolio, and (ii) by
the vote of a majority of the Trustees who are not parties to the agreement or
"interested persons" of any such party, by votes cast in person at a meeting
called for the purpose of voting on such approval. Each Investment Advisory
Agreement provides that it shall terminate automatically if assigned or if the
Management Agreement with respect to the related Portfolio terminates, and that
it may be terminated as to a Portfolio without penalty by
-148-
<PAGE>
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' (90
days' with respect to the Endeavor Enhanced Index Portfolio) 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,
1995, December 31, 1996 and December 31, 1997.
-149-
<PAGE>
<TABLE>
<CAPTION>
1997
Investment
Management Investment Other
Fee Management Expenses
Paid Fee Waived Reimbursed
<S> <C> <C> <C>
T. Rowe Price
International
Stock Portfolio. 1,404,553 --- ---
Dreyfus Small
Cap Value
Portfolio....... 920,244 --- ---
Endeavor Enhanced
Index
Portfolio* 50,159 17,349 ---
1996
Investment Investment
Management Management Other
Fee Fee Expenses
Paid Waived Reimbursed
-150-
<PAGE>
T. Rowe Price
International
Stock Portfolio. 1,015,179 -- --
Dreyfus Small
Cap Value
Portfolio....... 535,895 -- --
1995
Investment Investment
Management Management Other
Fee Fee Expenses
Paid Waived Reimbursed
T. Rowe Price
International
Stock Portfolio. 759,830 --- ---
Dreyfus Small Cap
Value Portfolio. 339,672 --- ---
-151-
<PAGE>
- ---
</TABLE>
- ---------------
* The information presented with respect to the Endeavor Enhanced Index
Portfolio is for the period from May 2, 1997 (commencement of
operations) to December 31, 1997.
- ---------------------------
Each Investment Advisory Agreement provides that the Adviser shall not
be subject to any liability to the Fund or the Manager for any act or omission
in the course of or connected with rendering services thereunder in the absence
of willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties on the part of the Adviser.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of
payment on shares of the Portfolios for more than seven days during any period
(1) when the New York Stock Exchange is closed or trading on the Exchange is
restricted as determined by the Securities and Exchange Commission, (2) when an
emergency exists, as defined by the Securities and Exchange Commission, which
makes it not reasonably practicable for a Portfolio to dispose of securities
owned by it or fairly to determine the value of its assets, or (3) as the
Securities and Exchange Commission may otherwise permit.
The value of the shares on redemption may be more or less than the
shareholder's cost, depending upon the market value of the portfolio securities
at the time of redemption.
NET ASSET VALUE
The net asset value per share of each Portfolio is
determined as of the close of regular trading of the New York
Stock Exchange (currently 4:00 p.m., New York City time), Monday
through Friday, exclusive of national business holidays. The Fund
will be closed on the following national business holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
-152-
<PAGE>
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Portfolio securities for which the primary market is on a
domestic or foreign exchange or which are traded over-the-counter and quoted on
the NASDAQ System will be valued at the last sale price on the day of valuation
or, if there was no sale that day, at the last reported bid price, using prices
as of the close of trading. Portfolio securities not quoted on the NASDAQ System
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed to be over-the-counter, will
be valued at the most recently quoted bid price provided by the principal market
makers.
In the case of any securities which are not actively traded, reliable
market quotations may not be considered to be readily available. These
investments are stated at fair value as determined under the direction of the
Trustees. Such fair value is expected to be determined by utilizing information
furnished by a pricing service which determines valuations for normal,
institutional-size trading units of such securities using methods based on
market transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders.
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.
-153-
<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.
-154-
<PAGE>
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;
and (2) 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.
-155-
<PAGE>
The Fund intends to comply with section 817(h) of the Code and the
regulations issued thereunder. As required by regulations under that section,
the only shareholders of the Fund and its Portfolios will be life insurance
company segregated asset accounts (also referred to as separate accounts) that
fund variable life insurance or annuity contracts and the general account of PFL
Life Insurance Company which provided the initial capital for the Portfolios of
the Fund. See the prospectus or other material for the Contracts for additional
discussion of the taxation of segregated asset accounts and of the owner of the
particular Contract described therein.
Section 817(h) of the Code and Treasury Department regulations
thereunder impose certain diversification requirements on the segregated asset
accounts investing in the Portfolios of the Fund. These requirements, which are
in addition to the diversification requirements applicable to the Fund under the
1940 Act and under the regulated investment company provisions of the Code, may
limit the types and amounts of securities in which the Portfolios may invest.
Failure to meet the requirements of section 817(h) could result in current
taxation of the owner of the Contract on the income of the Contract.
The Fund may therefore find it necessary to take action to ensure that
a Contract continues to qualify as a Contract under federal tax laws. The Fund,
for example, may be required to alter the investment objectives of a Portfolio
or substitute the shares of one Portfolio for those of another. No such change
of investment objectives or substitution of 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 eleven series, three of
which are described in this Statement of Additional Information. Each series of
shares represents the beneficial interest in a separate Portfolio of assets of
the Fund, which is separately managed and has its own investment objective and
policies. The Trustees of
-156-
<PAGE>
the Fund have authority, without the necessity of a shareholder vote, to
establish additional portfolios and series of shares. The shares outstanding
are, and those offered hereby when issued will be, fully paid and nonassessable
by the Fund. The shares have no preemptive, conversion or subscription rights
and are fully transferable.
The assets received from the sale of shares of a Portfolio, and all
income, earnings, profits and proceeds thereof, subject only to the rights of
creditors, constitute the underlying assets of the Portfolio. The underlying
assets of a Portfolio are required to be segregated on the Fund's books of
account and are to be charged with the expenses with respect to that Portfolio.
Any general expenses of the Fund not readily attributable to a Portfolio will be
allocated by or under the direction of the Trustees in such manner as the
Trustees determine to be fair and equitable, taking into consideration, among
other things, the nature and type of expense and the relative sizes of the
Portfolio and the other Portfolios.
Each share has one vote, with fractional shares voting proportionately.
Shareholders of a Portfolio are not entitled to vote on any matter that requires
a separate vote of the shares of another Portfolio but which does not affect the
Portfolio. The Agreement and Declaration of Trust does not require the Fund to
hold annual meetings of shareholders. Thus, there will ordinarily be no annual
shareholder meetings, unless otherwise required by the 1940 Act. The Trustees of
the Fund may appoint their successors until fewer than a majority of the
Trustees have been elected by shareholders, at which time a meeting of
shareholders will be called to elect Trustees. Under the Agreement and
Declaration of Trust, any Trustee may be removed by vote of two-thirds of the
outstanding shares of the Fund, and holders of 10% or more of 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.
-157-
<PAGE>
As of January 31, 1998, the PFL Endeavor Variable Annuity Account owned
of record the following approximate percentages of the outstanding shares of
each Portfolio: 86.22% of the T. Rowe Price International Stock Portfolio;
85.22% of the Dreyfus Small Cap Value Portfolio; and 77.66% of the Endeavor
Enhanced Index Portfolio. As of January 31, 1998, the PFL Endeavor Platinum
Variable Annuity Account owned of record the following approximate percentages
of the outstanding shares of each Portfolio: 10.02% of the T. Rowe Price
International Stock Portfolio; 11.58% of the Dreyfus Small Cap Value Portfolio;
and 18.16% of the Endeavor Enhanced Index Portfolio. As of January 31, 1998, the
AUSA Endeavor Variable Annuity Account owned of record the following approximate
percentages of the outstanding shares of each Portfolio: 3.61% of the T. Rowe
Price International Stock Portfolio; 2.99% of the Dreyfus Small Cap Value
Portfolio; and 2.72% of the Endeavor Enhanced Index Portfolio. As of January 31,
1998, the Providian Life and Health Insurance Company Separate Account V owned
of record the following approximate percentages of the outstanding shares of
each Portfolio: 0.02% of the Dreyfus Small Cap Value Portfolio; 0.05% of the T.
Rowe Price International Stock Portfolio; and 1.46% of the Endeavor Enhanced
Index 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
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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 T. Rowe Price International Stock
Portfolio, Dreyfus Small Cap Value Portfolio and Endeavor Enhanced Index
Portfolio for the fiscal year ended December 31, 1997, including notes to the
financial statements and supplementary information and the Independent Auditors'
Report are included in the Fund's Annual Report to Shareholders. A copy of the
Annual Report accompanies this Statement of Additional Information. The
financial statements (including the Independent Auditors' Report) included in
the Annual Report are incorporated herein by reference.
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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 rating "C" is reserved for income bonds on which no interest is
being paid. Debt rated "D" is in default, and payment of interest and/or
repayment of principal is in arrears. 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 which are rated "Aaa" are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues. Bonds which are rated
"Aa" are judged to be of high quality by all standards. Together with the Aaa
group they comprise what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may not be as large as
in Aaa securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make long-term risks
appear somewhat
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larger than in Aaa securities. Moody's applies numerical modifiers 1, 2 and 3 in
the Aa and A rating categories. The modifier 1 indicates that the security ranks
at a higher end of the rating category, the modifier 2 indicates a mid-range
rating and the modifier 3 indicates that the issue ranks at the lower end of the
rating category. Bonds which are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future. Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. Bonds which are rated "Ba" are
judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate, and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class. Bonds
which are rated "B" generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small. Bonds
which are rated "Caa" are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated "Ca" represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated "C" are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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
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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 L.P. Commercial Paper Ratings. Fitch Investors Service
L.P. employs the rating F-1+ to indicate issues regarded as having the strongest
degree of assurance for timely payment. The rating F-1 reflects an assurance of
timely payment only slightly less in degree than issues rated F-1+, while the
rating F-2 indicates a satisfactory degree of 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
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short-term rating ("TBW-1", "TBW-2", "TBW-3", or "TBW-4") to each class of debt
(e.g., commercial paper or non-convertible debt), having a maturity of one-year
or less, issued by a holding company structure or an entity within the holding
company structure that is rated by BankWatch. Additionally, BankWatch will
assign an issuer rating ("A", "A/B", "B", "B/C", "C", "C/D", "D", "D/E", and
"E") to each issuer that it rates.
Various of the nationally recognized statistical rating organizations
("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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