[FRONT COVER]
ENDEAVOR
Series Trust
T. Rowe Price International Stock Portfolio
Dreyfus Small Cap Value Portfolio
Endeavor Enhanced Index Portfolio
Prospectus
May 1, 2000
Like all securities, these securities have not been approved
or disapproved by the Securities and Exchange Commission, nor
has the Securities and Exchange
Commission passed upon the accuracy or adequacy of this
Prospectus. Any representation to the contrary is
a criminal offense.
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<PAGE>
Table of Contents
INTRODUCTION..................................................................3
Understanding the Trust..............................................3
THE PORTFOLIOS...................................... 4
Investment Summary.................................. 4
Investment Objectives, Investment Strategies, Risks and Past Performance for:
T. Rowe Price International Stock Portfolio..................6
Dreyfus Small Cap Value Portfolio...................10
Endeavor Enhanced Index Portfolio........................ 13
Primary Risks of Investing in the Portfolios............................ 17
Additional Investment Strategies......................... 19
Management.................................................. 27
The Manager........................................ 27
The Investment Advisers............................ 28
Brokerage Enhancement Plan......................... 30
Financial Highlights......................................... 31
YOUR INVESTMENT............................................. 40
Shareholder Information............................ 40
Dividends, Distributions and Taxes................. 40
Sales and Purchases of Shares...................... 40
GLOSSARY OF INVESTMENT TERMS................................ 42
FOR MORE INFORMATION....................................Back Cover
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<PAGE>
INTRODUCTION
Understanding the Trust
Endeavor Series Trust (the "Trust") is an open-end management investment company
that offers a selection of thirteen managed investment portfolios or mutual
funds, only three of which are offered through this Prospectus (the
"Portfolios"). Each of the Portfolios described in this Prospectus has its own
investment objective designed to meet different investment goals. Please see the
Investment Summary section of this Prospectus for specific information on each
Portfolio. Certain terms are defined in the Glossary of Investment Terms in the
back of this Prospectus.
Investing Through a Variable Insurance Contract
Each Portfolio currently sells its shares only to separate accounts of
PFL Life Insurance Company and certain of its affiliates ("PFL") and, in the
future, may sell its shares to qualified pension and profit sharing plans. PFL
created the separate accounts to fund different insurance contracts
("Contracts") including:
o variable life insurance policies (scheduled premium, flexible
premium and single premium)
o variable annuity contracts
As a Contract owner, your premium payments are allocated to one or more of these
Portfolios in accordance with your Contract.
[SIDE BAR:
--------
Please see the Contracts prospectus that accompanies this Prospectus
for a detailed explanation of your Contract.]
Understanding The Portfolios
After this Introduction you will find an Investment Summary for each Portfolio.
Each Investment Summary presents important facts about a Portfolio, including
information about its investment objective, principal investment strategy,
primary risks and past performance.
-3-
<PAGE>
THE PORTFOLIOS
Investment Summary
Each Portfolio's summary discusses the following :
o Investment Objective
What is the Portfolio's investment goal?
o Principal Investment Strategy
How does the Portfolio attempt to achieve its investment goal?
What types of investments does it contain? What style of
investing and investment philosophy does it follow?
o Primary Risks
What are the specific risks of investing in the Portfolio?
o Past Performance
How well has the Portfolio performed over time?
In addition to its principal investment strategy, each Portfolio may invest in
various types of securities and engage in various investment techniques and
practices which are not the principal focus of the Portfolio and therefore are
not described in this section of the Prospectus. These other securities and
investment techniques and practices in which a Portfolio may engage, together
with their risks, are briefly discussed in "Additional Investment Strategies" in
this Prospectus.
Following the Investment Summary is the section entitled "Primary Risks of
Investing in the Portfolios" which lists some of the factors that may affect the
value of a Portfolio's investments. Shares of a Portfolio are not deposits or
obligations of, or guaranteed by, any banks, and are not federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other agency of the U.S. government.
The Statement of Additional Information provides more detailed information
regarding the various types of securities that a Portfolio may purchase and
certain investment techniques and practices of its investment adviser. For
details about how to obtain a copy of the Statement of Additional Information
and other reports and information, see the back cover of this Prospectus.
[SIDE BAR: A Portfolio's investment adviser may sell a portfolio security when
the value of the investment reaches or exceeds its estimated fair value, when
the issuer's investment fundamentals begin to deteriorate, when the Portfolio
must meet redemptions, or for other investment reasons.]
[SIDE BAR: Each Portfolio in this Prospectus is a mutual fund: a pooled
investment that is professionally managed and that gives you the opportunity to
participate in financial markets. Each Portfolio strives to reach its stated
investment objective, which can be changed without shareholder approval. As with
all mutual funds, there is no guarantee that a Portfolio will achieve its
investment objective. You could lose money investing in a Portfolio, but you
also have the potential to make money.]
A NOTE ON FEES
As an investor in any of the Portfolios, you will incur various
operating costs, including management expenses. You also will incur fees
associated with the Contracts which you purchase. Detailed information about the
cost of investing in a Portfolio is presented in the "Annuity Policy Fee Table"
section of the accompanying prospectus for the Contracts through which Portfolio
shares are offered to you.
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<PAGE>
[Left Side:]
---------
T. Rowe Price International Stock Portfolio
[SIDE BAR:
--------
This Portfolio may be appropriate for you if you seek:
o To diversify your domestic stock portfolio by adding
foreign investments and are comfortable with the
risks accompanying these investments
o Long-term growth of capital]
Investment Objective
To provide long-term growth of capital through investments primarily in the
common stocks of established non-U.S. companies.
Principal Investment Strategy
The Portfolio's investment adviser expects to invest substantially all
of the Portfolio's assets in established companies located outside the United
States and to diversify broadly among developed and emerging countries
throughout the world. Stock selection reflects a growth style. The investment
adviser may purchase the equity securities (primarily common stocks) of
companies of any size, but the focus will typically be on large- and, to a
lesser extent, medium-sized companies.
The investment adviser employs in-depth fundamental research in an
effort to identify companies capable of achieving and sustaining above-average,
long-term earnings growth. The investment adviser seeks to purchase such stocks
at reasonable prices in relation to present or anticipated earnings, cash flow,
or book value, and
valuation factors, such as price/earnings and price/cash flow ratios. Valuation
factors often influence the investment adviser's allocations among large- or
mid-cap companies.
While the investment adviser invests with an awareness of the global
economic backdrop and its outlook for individual countries, bottom-up stock
selection is the focus of decision-making. Country allocation is driven largely
by stock selection, though investments may be limited in markets that appear to
have poor overall prospects.
[SIDE BAR:
--------
When investment advisers use a "bottom-up" approach, they look
primarily at individual companies against the context of broader market or
country factors.]
[SIDE BAR:
--------
Market capitalization is the most commonly used measure of the size and
value of a company. It is the total value of a company's stock in the
marketplace and is computed by multiplying the current market price of a share
of the company's stock by the total number of its shares outstanding. Generally,
large-cap companies have market capitalizations in excess of $5 billion; mid-cap
companies have market capitalizations ranging from $1.5 billion to $5 billion;
and small-cap companies have market capitalizations ranging from $150 million to
$1.5 billion.]
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[Right Side:]
----------
Primary Risks:
- -------------
The value of your investment in the Portfolio may be affected by one or
more of the following risks, which are described in detail on page 17, any of
which could cause the Portfolio's return or the price of its shares to decrease:
o Market risk
o Foreign investment risk
o Market capitalization risk
o Investment style risk
In addition, investments in emerging markets include all of the risks
of investments in foreign securities and are subject to abrupt and severe price
declines. The economic and political structures of developing nations, in most
cases, do not compare favorably with the U.S. or other developed countries in
terms of wealth and stability, and their financial markets often lack liquidity.
Such countries may have relatively unstable governments, immature economic
structures, national policies restricting investments by foreigners and
economies based on only a few industries. For these reasons, all of the risks of
investing in foreign securities are heightened by investing in emerging markets
countries. The markets of developing countries have been more volatile than the
markets of developed countries with more mature economies. These markets often
have provided significantly higher or lower rates of return than developed
markets, and significantly greater risks, to investors.
Past Performance
The information below provides an indication of the risks of investing
in the Portfolio by showing the volatility of the Portfolio's returns. Both
tables assume reinvestment of dividends and distributions. Note that the results
in each table do not include the effect of Contract charges. If these Contract
charges had been included, performance would have been lower. As with all mutual
funds, past returns are not a prediction of future returns.
The bar chart below shows you the Portfolio's performance for each full
calendar year since its inception (4/8/91) and indicates how it has varied from
year to year. The Portfolio can also experience short-term performance swings as
indicated in the high and low quarter information at the bottom of the chart.
<TABLE>
<CAPTION>
Year-by-Year Total Return as of 12/31 of Each Year
<S> <C> <C> <C> <C> <C> <C> <C>
(3.61)% 18.48% (5.67)% 10.37% 15.23% 2.54% 15.44% 32.35 %
92 93 94 95 96 97 98 99
</TABLE>
High Quarter: 4th - 1999 +23.26%
Low Quarter: 3rd - 1998 -14.19%
The table below compares the Portfolio's average annual compounded
total returns for the 1-year period, 5-year period, and from inception through
12/31/99 with the MSCI EAFE Index, a widely recognized index measuring the broad
market performance of equity securities throughout Europe, Australia and the Far
East, and with the Lipper VA International Index, an equally weighted
performance index of international funds underlying 30 variable annuities. An
index does not include transaction costs associated with buying and selling
securities or any mutual fund expenses. It is not possible to invest directly in
an index.
Average Annual Total Return as of 12/31/99
-------------------------------------
Since
1 Year 5 Year Inception
-------- ------- ----------
Portfolio 32.35% 14.79% 9.78%
MSCI EAFE Index 26.96% 12.83% 13.11%*
Lipper VA International 36.66% 14.12% 15.46%**
Index
* From 3/31/91
** Since Index's inception on 12/31/91
[SIDE BAR:
--------
Portfolio Management
o Rowe Price-Fleming International, Inc.
see page 27
o For financial highlights see page 31]
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<PAGE>
[Left Side:]
---------
Dreyfus Small Cap Value Portfolio
[SIDE BAR:
--------
This Portfolio may be appropriate for you if you seek:
o Long-term growth of capital
o A less conservative investment with greater risk and
reward potential than a portfolio investing in
large-capitalization companies]
Investment Objective
To seek capital growth by investing in companies with a
median-capitalization of approximately $750 million, with at least 75% of the
Portfolio's investments in companies with capitalizations between $150 million
and $1.5 billion.
Principal Investment Strategy
The Portfolio normally invests in "value" companies. The investment
adviser uses its own research and computer models to identify by various
measures those companies that appear to be underpriced, but have good prospects
for capital growth and dividend growth.
In selecting investments, the investment adviser generally favors
companies with the following:
o relatively low price-to-book ratios
o low price-to-earnings ratios
o higher-than-average dividend payments in relation to price
Because a company could remain undervalued for years, value investors
search for factors that could trigger a rise in price, including new products or
markets, opportunities for greater market share and more effective management.
Most of the Portfolio's assets will be invested in equity securities,
primarily common stocks of U.S. issuers. Normally, the Portfolio will not invest
more than 20% of its total assets in foreign securities.
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<PAGE>
[Right side:]
Primary Risks:
- -------------
The value of your investment in the Portfolio may be affected by one or
more of the following risks, which are described in detail on page 17, any of
which could cause the Portfolio's return or the price of its shares to decrease:
o Market risk
o Foreign investment risk
o Market capitalization risk
o Investment style risk
Past Performance
The information below provides an indication of the risks of investing
in the Portfolio by showing the volatility of the Portfolio's returns. Both
tables assume reinvestment of dividends and distributions. Note that the results
in each table do not include the effect of Contract charges. If these Contract
charges had been included,
performance would have been lower. As with all mutual funds, past returns are
not a prediction of future returns.
The bar chart below shows you the Portfolio's performance for each full
calendar year since its inception (5/4/93) and indicates how it has varied from
year to year. The Portfolio can also experience short-term performance swings as
indicated in the high and low quarter information at the bottom of the chart.
Year-by-Year Total Return as of 12/31 of Each Year
(1.79)% 14.05% 25.63% 25.56% (2.18)% 29.39%
94 95 96 97 98 99
High Quarter: 2nd - 1999 +31.03%
Low Quarter: 3rd - 1998 -27.73%
The table below compares the Portfolio's average annual compounded
total returns for the 1-year period, 5-year period, and since inception through
12/31/99 with the Russell 2000 Index, a widely recognized unmanaged index that
measures small company stock performance, and with the Lipper VA Small-Cap
Index, an equally
weighted performance index of small cap funds underlying 30 variable annuities.
An index does not include transaction costs associated with buying and selling
securities, or any mutual fund expenses. It is not possible to invest directly
in an index.
Average Annual Total Return as of 12/31/99
-------------------------------------
Since
1 Year 5 Year Inception
-------- ------ ---------
--------------------------------------------
Portfolio 29.39% 17.88% 14.74%
Russell 2000 Index 21.26% 16.69% 14.66%*
Lipper VA Small-Cap
Index 43.03% 20.17% 16.57%*
* From 4/30/93
[SIDE BAR:
--------
Portfolio Management:
o The Dreyfus Corporation
see page 27
o For financial highlights
see page 31]
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[Left Side:]
---------
Endeavor Enhanced Index Portfolio
[SIDE BAR:
--------
This Portfolio may be appropriate for you if you seek:
o A slightly higher return than the S&P 500 Index
with a comparable level of risk]
Investment Objective
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.
Principal Investment Strategy
The Portfolio invests primarily in large- and medium-capitalization
U.S. companies but may invest in foreign companies included in the S&P 500
Index. Industry by industry, the Portfolio's weightings are similar to those of
the S&P 500 Index. The Portfolio does not look to overweight or underweight
industries. Holdings by industry sector will normally approximate those of the
S&P 500 Index.
[SIDE BAR:
--------
The S&P 500 Index is a widely recognized unmanaged index that measures the stock
performance of 500 large- and medium-sized publicly traded companies and is
often used to indicate the performance of the overall stock market.]
Within each industry, the Portfolio's investment adviser modestly
overweights stocks that are ranked as undervalued or fairly valued while
modestly underweighting or not holding stocks that appear overvalued. The
investment adviser employs a three- step process in valuing stocks:
o Research - The investment adviser takes an in-depth look at
company prospects over a relatively long period -- often as much
as five years --rather than focusing on near-term expectations.
The team of approximately 23 analysts with an average of over ten
years of experience follows over 900 large- and medium-sized U.S.
companies. The research goal is to provide insight into a
company's real growth potential.
o Valuation - The research findings allow the investment adviser
to rank the companies in each industry group according to
their relative value. The greater a company's estimated worth
compared to the current market price of its stock, the more
undervalued the company. The valuation rankings are produced
with the help of a variety of models that quantify the
research team's findings.
o Stock Selection - The Portfolio's investment adviser uses
research and valuation rankings as a basis for choosing which
stocks to buy and sell. In general, the investment adviser buys
approximately 300 stocks that are identified as undervalued and
considers selling them when they appear overvalued. Along with
attractive valuation, the investment adviser often considers a
number of other criteria, including:
o catalysts that could trigger a rise in a stock's price
o high potential reward compared to potential risk
o temporary mispricings caused by market overreactions
The Portfolio invests at least 65% of its assets in equity securities,
primarily common stocks. During ordinary market conditions, the Portfolio's
investment adviser will keep the Portfolio as fully invested as practicable in
equity securities. The Portfolio may invest up to 35% of its assets in
short-term fixed income instruments including:
o U.S. government securities
o bankers' acceptances, commercial paper, certificates of deposit
and Eurodollar obligations issued or guaranteed by bank holding
companies in the U.S., their subsidiaries and their foreign
branches or of the World Bank
o commercial paper and other short-term obligations of, and
variable amount master demand notes and variable rate notes
issued by, U.S. and foreign corporations
o repurchase agreements
o short-term bonds and notes with remaining maturities of 13
months or less
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<PAGE>
[Right Side:]
----------
Primary Risks:
- -------------
The value of your investment in the Portfolio may be affected by one or
more of the following risks, which are described in detail on page 17, any of
which could cause the Portfolio's return or the price of its shares to decrease:
o Market risk
o Interest rate risk
o Credit risk
o Market capitalization risk
o Investment style risk
Past Performance:
- ----------------
The information below provides an indication of the risks of investing
in the Portfolio by showing the volatility of the Portfolio's returns. Both
tables assume reinvestment of dividends and distributions. Note that the results
in each table do not include the effect of Contract charges. If these Contract
charges had been included,
performance would have been lower. As with all mutual funds, past returns are
not a prediction of future returns.
The bar chart below shows you the Portfolio's performance for each full
calendar year since its inception (5/2/97) and indicates how it has varied from
year to year. The Portfolio can also experience short-term performance swings as
indicated in the high and low quarter information at the bottom of the chart.
Total Return as of 12/31 of Each Year
31.39% 18.16%
98 99
High Quarter: 4th - 1998 +22.37%
Low Quarter: 3rd - 1998 -9.63%
-10-
<PAGE>
The table below compares the Portfolio's average annual compounded
total returns for the 1-year period and since inception through 12/31/99 with
the S&P 500 Index and with the Lipper VA Growth & Income Index, an equally
weighted performance index of growth and income funds underlying 10 variable
annuities. An index does not include transaction costs associated with buying
and selling securities or any mutual fund expenses. It is not possible to invest
directly in an index.
Average Annual Total Return as of 12/31/99
-------------------------------------
Since
1 Year Inception
-------- ----------
Portfolio 18.16% 27.39%
S&P 500 Index 21.03% 27.36%*
Lipper VA Growth &
Income Index 11.61% 18.12%*
* From 4/30/97
[SIDE BAR:
--------
Portfolio management:
o J.P. Morgan Investment Management Inc.
see page 27
o For financial highlights see page 31]
-11-
<PAGE>
Primary Risks of Investing in the Portfolios
One or more of the following primary risks may apply to your Portfolio. Please
see the Investment Summary for your particular Portfolio to determine which
risks apply and for a discussion of other risks that may apply to the Portfolio.
Market Risk
A Portfolio's share price can fall because of weakness in the broad market, a
particular industry, or specific holdings. The market as a whole can decline for
many reasons, including disappointing corporate earnings, adverse political or
economic developments here or abroad, changes in investor psychology, or heavy
institutional selling. The prospects for an industry or a company may
deteriorate. In addition, an assessment by a Portfolio's investment adviser of
particular companies may prove incorrect, resulting in losses or poor
performance by those holdings, even in a rising market. A Portfolio could miss
attractive investment opportunities if its investment adviser underweights fixed
income markets or industries where there are significant returns and could lose
value if the investment adviser overweights fixed income markets or industries
where there are significant declines.
Interest Rate Risk
The values of debt securities are subject to change when prevailing interest
rates
change. When interest rates go up, the value of debt securities tends to fall.
If your Portfolio invests a significant portion of its assets in debt securities
or stocks purchased primarily for dividend income and interest rates rise, then
the value of your investment may decline. Alternatively, when interest rates go
down, the value of debt securities and certain dividend paying stocks may rise.
Interest rate risk will affect the price of a fixed income security more if the
security has a longer maturity because changes in interest rates are
increasingly difficult to predict over longer periods of time. Fixed income
securities with longer maturities will therefore be more volatile than other
fixed income securities with shorter maturities. Conversely, fixed income
securities with shorter maturities will be less volatile but generally provide
lower returns than fixed income securities with longer maturities. The average
maturity of a Portfolio's fixed income investments will affect the volatility of
the Portfolio's share price.
[SIDE BAR:
--------
A fixed income security's term to maturity is the time until a fixed
income security provides its final payment.]
Credit Risk
The value of debt securities is directly affected by an issuer's ability to pay
principal and interest on time. If your Portfolio invests in debt securities,
the value of your investment may be adversely affected when an issuer fails to
pay an obligation on a timely basis.
Foreign Investment Risk
Investments in foreign securities involve risks relating to political, social
and economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject:
o These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or transfer of
portfolio assets, and political or social instability.
o Enforcing legal rights may be difficult, costly and slow in
foreign countries, and there may be special problems enforcing
claims against foreign governments.
o Foreign companies may not be subject to accounting standards
or governmental supervision comparable to U.S. companies, and
there may be less public information about their operations.
o Foreign markets may be less liquid and more volatile than U.S. markets.
o Foreign securities often trade in currencies other than the U.S. dollar, and a
Portfolio may directly hold foreign currencies and purchase and sell foreign
currencies. Changes in currency exchange rates will affect a Portfolio's net
asset value, the value of dividends and interest earned, and gains and losses
realized on the sale of foreign securities. An increase in the strength of the
U.S. dollar relative to these other currencies may cause the value of a
Portfolio to decline. Certain foreign currencies may be particularly volatile,
and foreign governments may intervene in the currency markets, causing a decline
in value or liquidity of a Portfolio's foreign currency or securities holdings.
o Costs of buying, selling and holding foreign securities,
including brokerage, tax and custody costs, may be higher than
those involved in domestic transactions.
Market Capitalization Risk
Stocks fall into three broad market capitalization categories - large, medium
and small. Investing primarily in one category carries the risk that due to
current market conditions that category may be out of favor. If valuations of
large capitalization companies appear to be greatly out of proportion to the
valuations of small or medium capitalization companies, investors may migrate to
the stocks of small and mid-sized companies causing a Portfolio that invests in
these companies to increase in value more rapidly than a Portfolio that invests
in larger, fully-valued companies. Investing in medium and small capitalization
companies may be subject to special risks associated with narrower product
lines, more limited financial resources, smaller management groups, and a more
limited trading market for their stocks as compared with larger companies.
Securities of smaller capitalization issuers may therefore be subject to greater
price volatility and may decline more significantly in market downturns than
securities of larger companies.
Investment Style Risk
Different investment styles tend to shift in and out of favor depending upon
market and economic conditions as well as investor sentiment. A Portfolio may
outperform or underperform other funds that employ a different investment style.
A Portfolio may also employ a combination of styles that impact its risk
characteristics. Examples of different investment styles include growth and
value investing. Growth stocks may be more volatile than other stocks because
they are more sensitive to investor perceptions of the issuing company's growth
of earnings potential. Also, since growth companies usually invest a high
portion of earnings in their business, growth stocks may lack the dividends of
value stocks that can cushion stock prices in a falling market. Growth oriented
funds will typically underperform when value investing is in favor. Value stocks
are those which are undervalued in comparison to their peers due to adverse
business developments or other factors. Value investing carries the risk that
the market will not recognize a security's inherent value for a long time, or
that a stock judged to be undervalued may actually be appropriately priced or
overvalued. Value oriented funds will typically underperform when growth
investing is in favor.
Additional Investment Strategies
In addition to the principal investment strategies discussed in each
individual Portfolio's Investment Summary, a Portfolio, as indicated, may at
times invest a portion of its assets in the investment strategies and may engage
in certain investment techniques as described below. These strategies and
techniques may involve risks.
Although a Portfolio that is not identified below in connection with a
particular strategy or technique generally has the ability to engage in such a
transaction, its
investment adviser currently intends to invest little, if any, of the
Portfolio's assets in that strategy or technique. (Please note that some of
these strategies may be a principal investment strategy for a particular
Portfolio and consequently are also described in that Portfolio's Investment
Summary.)
For a description of each of these investment techniques and strategies, please
refer to the Glossary of Investment Terms on page 43.
<TABLE>
<CAPTION>
INVESTMENT
STRATEGY PORTFOLIO RISKS
- ----------- --------- -----
<S> <C> <C>
Foreign Debt Securities T. Rowe Price International Foreign debt securities may be subject to foreign investment
Stock risk, credit risk, and interest
rate risk. Securities in developing countries are also
subject to the additional risks
associated with emerging
markets.
U.S. Government Securities All Portfolios U.S. government securities are subject to interest rate risk.
Credit risk is remote.
-12-
<PAGE>
INVESTMENT
High Quality Short- All Portfolios These instruments are subject to credit risk and interest
term Debt Obligations rate risk.
including Bankers'
Acceptances,
Commercial Paper,
Certificates of
Deposit and
Eurodollar
Obligations issued
or guaranteed by
Bank Holding
Companies in the
U.S., their
Subsidiaries and
Foreign Branches
or of the World
Bank; Variable
Amount Master
Demand Notes and
Variable Rate Notes
issued by U.S. and
Foreign
Corporations; and
Short-term
Corporate Bonds
-13-
<PAGE>
INVESTMENT
Foreign Currency Transactions T. Rowe Price International Foreign currency exchange
Stock rates may fluctuate significantly over short periods of
time. A forward foreign currency exchange contract
reduces the Portfolio's exposure to changes in the value
of the currency it will deliver and increases its
exposure to changes in the value of the currency it will
exchange into. Contracts to sell foreign currency will
limit any potential gain which might be realized by the
Portfolio if the value of the hedged currency increases.
In the case of forward contracts entered into for the
purpose of increasing return, the Portfolio may sustain
losses which will reduce its gross income. Forward
foreign currency exchange contracts also involve the risk
that the party with which the Portfolio enters the
contract may fail to perform its obligations to the
Portfolio. The purchase and sale of foreign currency
futures contracts and the purchase of call and put options
on foreign currency futures contracts and on foreign
currencies involve certain risks associated with
derivates.
-14-
<PAGE>
INVESTMENT
Convertible Securities Dreyfus Small Cap Value Traditionally, convertible
Endeavor Enhanced Index securities have paid dividends or interest rates higher
than common stocks but lower than nonconvertible
securities. They generally participate in the
appreciation or depreciation of the underlying stock into
which they are convertible, but to a lesser degree.
These securities are also subject to market risk and
credit risk.
Rights and Warrants T. Rowe Price International These investments carry the
Stock risk that they may be worthless
Endeavor Enhanced Index to the Portfolio at the time it
may exercise its rights, due to
the fact that the underlying
securities have a market value
less than the exercise price of
the right or warrant.
Depositary Receipts T. Rowe Price International These investments are subject
Stock to market risk and foreign
Endeavor Enhanced Index investment risk.
Illiquid Securities Endeavor Enhanced Index The Portfolio could have difficulty valuing these holdings
precisely or could be unable to
sell those holdings at the time
or price it desires.
-15-
<PAGE>
INVESTMENT
Reverse Repurchase Endeavor Enhanced Index Reverse repurchase agreements will be used
Agreements primarily to provide cash to satisfy unusually high
redemption requests, or for other temporary or emergency
purposes. Reverse repurchase agreements are considered
a form of borrowing by the Portfolio and, therefore, are
a form of leverage. Leverage may cause any gains or
losses of the Portfolio to be magnified.
Forward Commitments, T. Rowe Price International The Portfolio does not earn interest on such securities until
When-Issued and Stock settlement and bears the risk
Delayed Delivery of market value fluctuations in
Securities between the purchase and
settlement dates.
Hybrid Instruments T. Rowe Price International Hybrids may bear interest or pay dividends at below market
Stock (or even relatively nominal) rates. Under certain
conditions, the redemption value of the instrument could
be zero. Hybrids can have volatile prices and limited
liquidity and their use by the Portfolio may not be
successful.
Investment Grade Endeavor Enhanced Index Interest rate risk and credit risk. Securities rated in the
Corporate Debt fourth investment category by a nationally recognized
Securities rating agency may have speculative characteristics.
-16-
<PAGE>
INVESTMENT
Investments in T. Rowe Price International When the Portfolio invests in another investment company,
Other Investment Stock it must bear the management and other fees of the
Companies investment company, in addition to its own expenses. As
including Passive a result, the Portfolio may be exposed to duplicate
Foreign Investment expenses which could lower its value. Investments in
Companies passive foreign investment companies also are subject to
foreign investment risk.
</TABLE>
Defensive Investments
Under adverse market or economic conditions, a Portfolio could invest
for temporary defensive purposes some or all of its assets in money market
securities or utilize other investment strategies that may be inconsistent with
a Portfolio's principal investment strategy. Although a Portfolio would employ
these measures only in seeking to avoid losses, they could reduce the benefit
from an upswing in the market or prevent the Portfolio from meeting its
investment objective.
Portfolio Turnover
The Portfolios' investment advisers will sell a security when they
believe it is appropriate to do so, regardless of how long a Portfolio has owned
that security. Buying and selling securities generally involves some expense to
a Portfolio, such as commissions paid to brokers and other transaction costs.
Generally speaking, the higher a Portfolio's annual portfolio turnover rate, the
greater its brokerage costs. Increased brokerage costs may adversely affect a
Portfolio's performance. The
Portfolios, with the exception of Dreyfus Small Cap Value Portfolio, generally
intend to purchase securities for long-term investment and therefore have a
relatively low turnover rate. Annual turnover rate of 100% or more is considered
high and will result in increased costs to the Portfolios. Dreyfus Small Cap
Value Portfolio generally will have annual turnover rates in excess of 100%.
The turnover rates for the Portfolios can be found in the Financial
Highlights
section of this Prospectus.
Downgrades in Fixed Income Debt Securities
Unless required by applicable law, the Portfolios are not required to
sell or dispose of any debt security that either loses its rating or has its
rating reduced after a Portfolio purchases the security.
-17-
<PAGE>
Management
The Manager
Endeavor Management Co. (the "Manager"), 2101 East Coast Highway, Suite 300,
Corona del Mar, California 92625, has overall responsibility for the general
management and administration of all of the Portfolios. The Manager selects and
pays the fees of the investment advisers for each of the Trust's Portfolios and
monitors each investment adviser's investment program.
The annual management fee, as a percentage of a Portfolio's average daily
net assets, that the Manager receives from each Portfolio for these services is
as follows:
T. Rowe Price International Stock Portfolio - .90%
Dreyfus Small Cap Value Portfolio - .80%
Endeavor Enhanced Index Portfolio - .75%
The Trust and the Manager have received an exemptive order from the Securities
and Exchange Commission that permits the Manager, subject to certain conditions,
and without the approval of shareholders to: (a) employ a new unaffiliated
investment adviser for a Portfolio pursuant to the terms of a new investment
advisory agreement, in each case either as a replacement for an existing
investment adviser or as an additional investment adviser; (b) change the terms
of any investment advisory agreement; and (c) continue the employment of an
existing investment adviser on the same advisory contract terms where a contract
has been assigned because of a change in control of the investment adviser. In
such circumstances, shareholders would receive notice of such action, including
the information concerning the investment adviser that normally is provided in a
proxy statement. The exemptive order also permits disclosure of fees paid to
multiple unaffiliated investment advisers of a Portfolio on an aggregate basis
only.
-18-
<PAGE>
The Investment Advisers
The investment adviser of each Portfolio makes day-to-day investment
decisions, arranges for the execution of portfolio transactions, and generally
manages each Portfolio's investments.
T. Rowe Price International Stock Portfolio
Rowe Price-Fleming International, Inc. ("Rowe Price-Fleming"), 100 East
Pratt Street, Baltimore, Maryland 21202, a joint venture established in 1979
between T. Rowe Price Associates, Inc. and the London-based Robert Fleming
Holdings Limited, is the Portfolio's investment adviser. As of December 31,
1999, Rowe Price-Fleming managed approximately $42 billion in investments for
individual and institutional accounts.
o An investment advisory group makes the Portfolio's day-to-day
investment decisions. This group also manages the T. Rowe Price
International Stock Fund and the Foreign Equity Fund.
Dreyfus Small Cap Value Portfolio
The Dreyfus Corporation ("Dreyfus"), 200 Park Avenue, New York, New
York 10166, is the Portfolio's investment adviser. Dreyfus, established in 1951,
is one of the nation's leading fund companies, currently managing more than $125
billion in more than 160 mutual fund portfolios nationwide as of December 31,
1999. Dreyfus is a wholly-owned subsidiary of Mellon Bank Corporation, a global
financial services company with approximately $480 billion in assets under
management.
o Peter I. Higgins is the portfolio manager for the Dreyfus Small Cap Value
Portfolio. Mr. Higgins has been employed by The Boston Company, Inc., a
subsidiary of Mellon Bank Corporation, since August 1988 and by Dreyfus since
February 1996. He has managed the Dreyfus Small Company Value Fund since
November 1997.
Endeavor Enhanced Index Portfolio
J.P. Morgan Investment Management Inc. ("J.P. Morgan"), 522 Fifth Avenue,
New York, New York 10036, is the Portfolio's investment adviser. J.P. Morgan is
a subsidiary of J.P. Morgan & Co. Incorporated, which has approximately $349
billion in assets under management as of December 31, 1999.
o An investment advisory group makes the Portfolio's day-to-day investment
decisions. The advisory group also manages the J.P. Morgan Smart Index Fund.
-19-
<PAGE>
Brokerage Enhancement Plan
The Trust has adopted, in accordance with the substantive provisions of
Rule 12b-1 under the Investment Company Act of 1940, a Brokerage Enhancement
Plan
(the "Plan") for each of its Portfolios. The Plan uses available brokerage
commissions to promote the sale and distribution of each Portfolio's shares.
Under the Plan, the Trust is using recaptured commissions to pay for
distribution expenses. Except for recaptured commissions, unlike asset based
charges imposed by many mutual funds for sales expenses, the Portfolios do not
incur any asset based or additional fees or charges under the Plan.
How the Plan Works
Under the Plan, the Manager is authorized to direct investment advisers
to use certain broker-dealers for securities transactions. (The duty of best
price and execution still applies to these transactions.) These broker-dealers
have agreed to give a percentage of their commission from the sale and purchase
of securities to Transamerica Capital, Inc. (formerly known as Endeavor Group),
the distributor of the Trust's shares.
Transamerica Capital, Inc. will not make any profit from participating
in the Plan. It is obligated to use any money given to it under the Plan for
distribution expenses (other than a minimal amount to defray its legal and
administrative costs). The rest will be spent on activities that are meant to
result in the sale of the Portfolios' shares, including:
o holding or participating in seminars and sales meetings promoting the
sale of the Portfolios' shares o paying marketing fees requested by
broker-dealers who sell Contracts o training sales personnel o
compensating broker-dealers and/or registered representatives in
connection with the allocation of cash values and premiums of the
Contracts to the Trust
o printing and mailing Trust prospectuses, statements of additional information
and shareholder reports to prospective Contract holders
o creating and mailing advertising and sales literature
[SIDE BAR:
--------
If you would like to learn more about the Plan including the amount of
commissions recaptured in 1999, please read the Statement of Additional
Information which discusses the legal terms and conditions of the Plan.]
Financial Highlights
The following financial highlights tables are intended to help you
understand each Portfolio's financial performance for the past 5 years (or for
its period of operation in the case of Portfolios that have operated for less
than 5 years). Certain information reflects financial results for a single
Portfolio share. Total return in each table shows how much an investment in a
Portfolio would have increased (or decreased) during
each period (assuming reinvestment of all dividends and distributions). This
information has been audited by Ernst & Young LLP, whose report, along with each
Portfolio's financial statements, is included in the Trust's Annual Report,
which is available upon request.
-20-
<PAGE>
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO*
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/99 12/31/98++ 12/31/97 12/31/96++ 12/31/95#
-------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Operating
performance:
Net asset value,
beginning of
year........................... $16.19 $14.21 $13.95 $12.19
----- ----- ----- -----
$11.31
-----
Net investment
income......................... 0.10 0.12 0.10 0.09
0.09
Net realized and
unrealized gain on
investments....................
5.02 2.08 0.26 1.76 1.06
---- ---- ---- ---- ----
Net increase in net
assets
resulting from
investment
operations.....................
5.12 2.20 0.36 1.85
---- ---- ---- ----
1.15
------
Distributions:
Dividends from
net investment
income......................... (0.26) (0.11) (0.10) (0.09)
---
Distributions from net
realized gains................. (0.17) (0.11) --- --- (0.27)
------ ------ --- --- ------
-21-
<PAGE>
Year Year Year Year Year
Total distributions (0.43) (0.22) (0.10) (0.09) (0.27)
------ ------ ------ ------ ------
Net asset value, end
of year........................ $20.88 $16.19 $14.21 $13.95
===== ===== ===== =====
$12.19
=====
Total return+.................. 32.35% 15.44% 2.54% 15.23% 10.37%
===== ===== ==== ===== =====
Ratios to average
net assets/
supplemental data:
Net assets, end of
year (in 000's)................ $228,655 $184,856 $164,560 $134,435
$92,352
Ratio of net
investment income to
average net
assets.........................
0.73% 0.76% 0.74% 0.73% 0.81%
Ratio of net
expenses to average
net assets..................... 0.91% 0.98% 1.07% 1.18% 1.15%
Ratio of operating
expenses to average
net assets before
credits allowed by 1.00% 1.10% 1.12% 1.18% 1.15%
the custodian..................
Portfolio turnover 30% 21% 19% 11% 111%
rate...........................
- -----------------
* 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).
+ Total return represents aggregate total return for the years 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 average share method
which more appropriately presents the per share data for the year since
use of the undistributed method did not accord with results of
operations.
# Rowe Price-Fleming International, Inc. became the Portfolio's investment adviser effective January 3, 1995.
-22-
<PAGE>
DREYFUS SMALL CAP VALUE PORTFOLIO
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/99 12/31/98 12/31/97 12/31/96++# 12/31/95
-------- -------- -------- ----------- --------
Operating
performance:
Net asset value,
beginning of
year......................... $14.14 $16.41 $14.69 $12.22 $10.98
----- ----- ----- ----- -----
Net investment
income/(loss)................ (0.04) (0.03) 0.02 0.12 0.15
Net realized and
unrealized
gain/(loss) on
investments.................. 4.00 (0.13) 3.52 2.95 1.36
------ ---- ---- ----
Net increase/
(decrease) in net
assets resulting
from investment
operations................... 3.96 (0.16) 3.54 3.07 1.51
---- ------ ---- ---- ----
Distributions:
Dividends from
net investment
income....................... --- (0.02) (0.10) (0.14) (0.10)
Distributions from
net realized
gains........................ (1.59) (2.09) (1.72) (0.46) (0.17)
------ ------ ------ ------ ------
-23-
<PAGE>
Year Year Year Year Year
Total distributions (1.59) (2.11) (1.82) (0.60) (0.27)
------ ------ ------ ------ ------
Net asset value,
end of year.................. $16.51 $14.14 $16.41 $14.69 $12.22
===== ===== ===== ===== =====
Total return+................ 29.39% (2.18)% 25.56% 25.63% 14.05%
===== ====== ===== ===== =====
Ratios to average net assets/ supplemental data:
Net assets, end of
year (in 000's).............. $187,803 $158,662 $146,195 $85,803 $52,597
Ratio of net
investment
income/(loss) to
average net assets........... (0.28)% (0.23)% 0.20% 0.95% 1.56%
Ratio of net
expenses to
average net
assets ...................... 0.90% 0.86% 0.91% 0.92% 0.87%
Ratio of expenses
to average net
assets ...................... 1.22% 0.94% 0.91% 0.92% 0.87%
Portfolio turnover
rate......................... 216% 183% 127% 171% 75%
- -----------------------
+ Total return represents aggregate total return for the years 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 average share method
which more appropriately presents the per share data for the year since
use of the undistributed method did not accord with results of
operations.
# The Dreyfus Corporation became the Portfolio's investment adviser effective
September 16, 1996.
-24-
<PAGE>
ENDEAVOR ENHANCED INDEX PORTFOLIO*
Year Year Period
Ended Ended Ended
12/31/99 12/31/98 12/31/97*
-------- -------- ---------
Operating performance:
Net asset value,
beginning of period................................ $16.08 $12.29 $10.00
----- -----
Net investment income.............................. 0.08 0.04 0.02
Net realized and
unrealized gain on investments..................... 2.78 3.81 2.27
---- ---- ----
Net increase in net
assets resulting from
investment operations.............................. 2.86 3.85 2.29
---- ---- ----
Distributions:
Dividends from net investment
income............................................. (0.03) (0.02) ---
Distributions from net realized gains.............. (0.75) (0.04) ---
------
Total distributions................................ (0.78) (0.06) ---
------ ------ ----
Net asset value, end
of period.......................................... $18.16 $16.08 $12.29
===== ===== =====
Total return++................................... 18.16% 31.39%
===== =====
22.90%
</TABLE>
-25-
<PAGE>
<TABLE>
<CAPTION>
Year Year Period
<S> <C> <C> <C>
Ratios to average net assets/supplemental data:
Net assets, end of
period (in 000's).................................. $153,967 $64,058 $19,811
Ratio of net
investment income to average
net assets......................................... 0.73% 0.48% 0.55%+
Ratio of net
expenses to average
net assets......................................... 0.78% 1.10% 1.30%+
Ratio of expenses to average net
assets............................................. 0.78% 1.10%
1.56%+
Ratio of net expenses to average
net assets before waivers.......................... 0.78% 1.10% 1.30%+
Portfolio turnover
rate............................................... 56% 78% 6%
</TABLE>
- -----------------
* 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.
++ 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.
-26-
<PAGE>
YOUR INVESTMENT
Shareholder Information
The separate accounts of PFL are the record owners of the Portfolios'
shares. Any reference to the shareholder in this Prospectus technically refers
to PFL's separate
accounts and not to you, the Contract owner. The legal rights of you, the
Contract owner, are different from the legal rights of PFL.
However, PFL is required to solicit instructions from the Contract
owners when voting on shareholder issues. Any voting by PFL as shareholder would
therefore reflect the actual votes of Contract owners. Please see "Voting
Rights" in the prospectus for the Contracts accompanying this Prospectus for
more information on your voting rights.
Dividends, Distributions and Taxes
Each Portfolio distributes its dividends from its net investment income to PFL's
separate accounts once a year and not to you, the Contract owner. These
distributions are in the form of additional shares of stock and not cash. The
result is that a Portfolio's investment performance, including the effect of
dividends, is reflected in the cash value of the Contracts. Please see the
Contracts prospectus accompanying this Prospectus for more information.
All net realized long- or short-term capital gains of each Portfolio
are also declared once a year and reinvested in the Portfolio.
Please see the Contracts prospectus accompanying this Prospectus for a
discussion of the tax impact on you resulting from the income taxes PFL owes as
a result of its ownership of a Portfolio's shares and its receipt of dividends
and capital gains.
Sales and Purchases of Shares
The Trust does not sell its shares directly to the public. The Trust
continuously sells shares of each Portfolio only to PFL's separate accounts and
may in the future offer its shares to qualified pension and profit-sharing
plans. It could also offer shares to other separate accounts of other insurers
if approved by the Board of Trustees.
AFSG Securities Corporation ("AFSG Securities"), an affiliate of PFL,
is the principal underwriter and distributor of the Contracts. AFSG Securities
places orders for the purchase or redemption of shares of each Portfolio based
on, among other
things, the amount of net Contract premiums or purchase payments transferred to
the separate accounts, transfers to or from a separate account investment
division 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 on that same date.
The net asset value per share of each Portfolio for the purpose of
pricing orders for the purchase and sale of shares is generally calculated as of
the close of trading on the New York Stock Exchange (usually 4:00 p.m. Eastern
time) every day the Exchange is open. 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.
Each Portfolio's investments are valued based on market value, or where
market quotations are not readily available, based on fair value as determined
in good faith by the Trust's Board of Trustees. Amortized cost is also used to
value the short-term (60 days or less) assets of the Trust's other Portfolios.
Transamerica Capital, Inc., an affiliate of the Manager, serves as the
distributor for the Trust. Transamerica Capital, Inc.'s office is located at
2101 East Coast Highway, Suite 300, Corona del Mar, California 92625.
-27-
<PAGE>
GLOSSARY OF INVESTMENT TERMS
This glossary provides a more detailed description of some of the types
of securities in which the Portfolios may invest. The Portfolios may invest in
these securities to the extent permitted by their investment objectives and
policies. The Portfolios are not limited by this discussion and may invest in
any other types of securities not precluded by the policies discussed elsewhere
in this Prospectus. Please refer to the Statement of Additional Information for
a more detailed discussion of certain of these and other securities.
Bonds are also called debt securities or debt obligations. The issuer of the
bond, which could be the U.S. government, a corporation, or a city or state,
borrows money from investors and agrees to pay back the loan amount (the
principal) on a certain date (the maturity date). Usually, the issuer also
agrees to pay interest on certain dates during the period of the loan. Some
bonds, such as zero-coupon bonds, do not pay interest, but instead pay back more
at maturity than the original loan. Most bonds pay a fixed rate of interest (or
income), but some bonds' interest rates may change based on market or other
factors.
Brady Bonds are fixed income securities created through the exchange of existing
commercial bank loans to public and private entities in certain emerging markets
for new bonds in connection with debt restructurings.
Commercial paper is a short-term debt obligation with a maturity ranging from
one to 270 days issued by banks, corporations, and other borrowers to investors
seeking to invest idle cash.
Common stocks are equity securities representing shares of ownership in a
company and usually carry voting rights and earn dividends. Unlike preferred
stock, dividends on common stock are not fixed but are declared at the
discretion of the issuer's board of directors.
Convertible securities are preferred stocks or bonds that pay a fixed dividend
or interest payment and are convertible into common stock at a specified price
or conversion ratio.
Debt securities are securities representing money borrowed that must be repaid
at a later date. Such securities have specific maturities and usually a specific
rate of interest or an original purchase discount. They include bonds and high
yield debt securities (junk bonds). Some debt securities have variable or
floating rates of interest. Variable and floating rate securities carry interest
rates that may be adjusted periodically to reflect changes in interest rates.
Depositary receipts are receipts for shares of a foreign-based corporation that
entitle the holder to dividends and capital gains on the underlying security.
Receipts include those issued by domestic banks (American Depositary Receipts),
foreign banks (Global or European Depositary Receipts), and broker-dealers
(depositary shares).
Equity Securities include common stocks, preferred stocks, convertible
securities, warrants and other rights to purchase common stock.
Eurodollar obligations are dollar-denominated securities issued outside the
U.S. by foreign corporations and financial institutions and by foreign branches
of U.S. corporations and financial institutions.
Fixed income securities are securities that pay a specified rate of return. The
term generally includes short- and long-term government, corporate and municipal
obligations that pay a specified rate of interest or coupon for a specified
period of time, and preferred stock, which pays fixed dividends. Coupon and
dividend rates may be fixed for the life of the issue or, in the case of
adjustable and floating rate securities, for a shorter period.
Foreign currency transactions are entered into for the purpose of hedging
against foreign exchange risk arising from the Portfolio's investment or
anticipated investment in securities denominated in foreign currencies. The
Portfolio also may enter into these contracts for purposes of increasing
exposure to a foreign currency or to shift exposure to foreign currency
fluctuations from one country to another. Foreign currency transactions include
the purchase of foreign currency on a spot (or cash) basis, contracts to
purchase or sell foreign currencies at a future date (forward contracts), the
purchase and sale of foreign currency futures contracts, and the purchase of
exchange traded and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies.
These hedging transactions 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 can be achieved
at some future point in time.
Foreign debt securities are issued by foreign corporations and governments. They
may include Eurodollar obligations and Yankee bonds.
Forward commitments, when-issued and delayed delivery securities generally
involve the purchase of a security with payment and delivery at some time in the
future -i.e., beyond normal settlement. The Portfolios do not earn interest on
such securities until settlement and bear the risk of market value fluctuations
in between the purchase and settlement dates. New issues of stocks and bonds,
private placements and U.S. government securities may be sold in this manner.
Forward contracts are contracts to purchase or sell a specified amount of a
financial instrument for an agreed upon price at a specified time.
Futures are contracts that obligate the buyer to receive and the seller to
deliver an instrument or money at a specified price on a specified date.
Hybrid Instruments were recently developed and combine the elements of futures
contracts or options with those of debt, preferred equity or a depositary
instrument. They are often indexed to the price of a commodity, particular
currency, or a domestic or foreign debt or equity security index. Examples of
hybrid instruments include 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 or preferred stock with
dividend rates determined by reference to the value of a currency.
Investment grade corporate debt securities are securities rated in one of the
four highest rating categories by Standard & Poor's Ratings Services ("Standard
& Poor's"), Moody's Investors Service, Inc. ("Moody's") or other nationally
recognized rating agency. Securities rated in the fourth category (e.g., BBB by
Standard & Poor's and Baa by Moody's) may have some speculative characteristics.
Illiquid securities are securities that cannot be disposed of quickly in the
normal course of business.
Notes are debt securities with shorter-term obligations than bonds.
Passive foreign investment companies are any foreign corporations which generate
certain amounts of passive income or hold certain amounts of assets for the
production of passive income. Passive income includes dividends, royalties,
rent, and annuities.
Preferred stocks are equity securities that generally pay dividends at a
specified rate and have preference over common stock in the payment of dividends
and liquidation. Preferred stock generally does not carry voting rights.
Repurchase agreements involve the purchase of a security by a Portfolio and a
simultaneous agreement by the seller (generally a bank or dealer) to repurchase
the security from the Portfolio at a specified date or upon demand. This
technique offers a method of earning income on idle cash.
Reverse repurchase agreements involve the sale of a security by a Portfolio to
another party (generally a bank or dealer) in return for cash and an agreement
by the Portfolio to buy the security back at a specified price and time.
U.S. government securities include direct obligations of the U.S. government
that are supported by its full faith and credit, like Treasury bills. Treasury
bills have initial maturities of less than one year, Treasury notes have initial
maturities of one to ten years and Treasury bonds may be issued with any
maturity but generally have maturities of at least ten years. U.S. government
securities also include indirect obligations of the U.S. government that are
issued by federal agencies and government-sponsored entities, like bonds and
notes issued by the Federal Home Loan Bank, Government National Mortgage
Association ("Ginnie Mae"), Federal National Mortgage Association ("Fannie
Mae"), and Student Loan Marketing Association ("Sallie Mae"). Unlike Treasury
securities, agency securities generally are not backed by the full faith and
credit of the U.S. government. Some agency securities are supported by the right
of the issuer to borrow from the Treasury, others are supported by the
discretionary authority of the U.S. government to purchase the agency's
obligations and others are supported only by the credit of the sponsoring
agency.
Variable amount master demand notes differ from ordinary commercial paper in
that they are issued pursuant to a written agreement between the issuer and the
holder, their amounts may be increased from time to time by the holder (subject
to an agreed maximum) or decreased by the holder or the issuer, they are payable
on demand, the rate of interest payable on them varies with an agreed formula
and they are typically not rated by a rating agency. Transfer of such notes is
usually restricted by the issuer, and there is no secondary trading market for
them. Any variable amount master demand note purchased by a Portfolio will be
regarded as an illiquid security.
Warrants are securities, typically issued with preferred stock or bonds, that
give the holder the right to buy a proportionate amount of common stock at a
specified price, usually at a price that is higher than the market price at the
time of issuance of the warrant. The right may last for a period of years or
indefinitely.
Yankee bonds are dollar-denominated securities issued in the U.S. by
foreign issuers.
-28-
<PAGE>
FOR MORE INFORMATION
If you would like more information about a Portfolio, the following documents
are available to you free upon request:
Annual/ Semi-annual Reports
Contain additional information about a Portfolio's
performance. In a Portfolio's annual report, you will find a
discussion of the market conditions and investment strategies
that significantly affected the Portfolio's performance during
its last fiscal year.
Statement of Additional Information ("SAI")
Provides a fuller technical and legal description of the
Portfolio's policies, investment restrictions, and business
structure. The SAI is legally considered to be a part of this
Prospectus.
If you would like a copy of the current versions of these documents, or other
information about a Portfolio, contact:
ENDEAVOR SERIES TRUST
2101 East Coast Highway, Suite 300
Corona del Mar, California 92625
1-800-854-8393
Information about a Portfolio, including the Annual and Semi-annual Reports and
SAI, may also be obtained from the Securities and Exchange Commission ('SEC"):
o In person Review and copy documents in the SEC's Public Reference Room in
Washington, D.C. (for information call 1-800-SEC-0330).
o On line Retrieve information from the SEC's web site at: http://www.sec.gov.
o By mail Request documents, upon payment of a duplicating fee, by writing to
SEC, Public Reference Section, Washington, D.C. 20549.
SEC FILE # 811-5780
-29-
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
ENDEAVOR(SM) SERIES TRUST
This Statement of Additional Information provides supplementary
information pertaining to shares of three of the thirteen investment portfolios
("Portfolios") of Endeavor Series Trust (the "Fund"), a diversified, open-end,
management investment company. This Statement of Additional Information is not a
prospectus and should be read in conjunction with the
Prospectus dated May 1, 2000 for the T. Rowe Price International
Stock Portfolio, the Dreyfus Small Cap Value Portfolio and the Endeavor Enhanced
Index Portfolio of 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 calling (800) 854-8393. Unless otherwise defined herein, capitalized terms
have the meanings given to them in the Prospectus.
The date of this Statement of Additional Information is May 1, 2000.
Endeavor(SM) is a registered service mark of Endeavor Management Co.
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TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVES AND POLICIES..................................4
U.S. Government Securities.................................4
Money Market Securities....................................4
Mortgage-Backed Securities.................................5
Stripped Mortgage-Backed Securities.................................... 6
Non-Mortgage Asset-Backed Securities.......................... 7
Preferred Stocks.............................................. 8
Rights and Warrants.............................................9
Convertible Securities....................................... 9
Foreign Securities.......................................... 10
Investment Grade Corporate Debt Securities.....................11
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds
......................................... 11
Loans and Other Direct Indebtedness................11
Other Investment Companies................... 12
Reverse Repurchase Agreements................ 13
Depositary Receipts.......................... 13
Hybrid Instruments........................... 13
Illiquid Securities.......................... 14
Short Sales....................................14
High Yield/High Risk Debt Securities..................... 15
Options and Futures Strategies........................... 15
Foreign Currency Transactions............................ 22
Repurchase Agreements.................................... 26
Forward Commitments, When-Issued and Delayed Delivery
Securities................................ 26
Securities Loans................................... 27
Interest Rate Transactions......................... 28
Dollar Roll Transactions........................... 29
Municipal Fixed-Income Securities.................. 30
Portfolio Turnover................................. 31
INVESTMENT RESTRICTIONS...................... 32
Other Policies...................... 34
PERFORMANCE INFORMATION...................... 34
Total Return........................34
Non-Standardized Performance.................................. 36
PORTFOLIO TRANSACTIONS................................................. 36
Brokerage Enhancement Plan.................................... 38
MANAGEMENT OF THE FUND................................................. 40
Trustees and Officers......................................... 40
INVESTMENT ADVISORY AND OTHER SERVICES................................. 47
The Manager................................................... 47
The Investment Advisers....................................... 49
Code ........................................... 51
Custodian..................................................... 51
Transfer Agent................................................ 52
Legal Matters................................................. 52
Independent Auditors.......................................... 52
REDEMPTION OF SHARES................................................... 52
NET ASSET VALUE........................................................ 52
TAXES .............................................................. 54
Federal Income Taxes.......................................... 54
ORGANIZATION AND CAPITALIZATION OF THE FUND............................ 56
FINANCIAL STATEMENTS................................................... 58
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.
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INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the
investment objectives and policies of the Portfolios in the
Prospectus. The Fund is managed by Endeavor Management Co. 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.
U.S. Government Securities (All Portfolios)
- --------------------------
Securities issued or guaranteed as to principal and interest by the
U.S. government or its agencies and government-sponsored entities include U.S.
Treasury obligations, consisting of bills, notes and bonds, which principally
differ in their interest rates, maturities and times of issuance, and
obligations issued or guaranteed by agencies and government-sponsored entities
which are supported by (i) the full faith and credit of the U.S. Treasury (such
as securities of the Small Business Administration), (ii) the limited authority
of the issuer to borrow from the U.S. Treasury (such as securities of the
Student Loan Marketing Association) or (iii) the authority of the U.S.
government to purchase certain obligations of the issuer (such as securities of
the Federal National Mortgage Association). No assurance can be given that the
U.S. government will provide financial support to U.S. government agencies or
government- sponsored entities as described in clauses (ii) or (iii) above in
the future, other than as set forth above, since it is not obligated to do so by
law.
Money Market Securities (All Portfolios)
- -----------------------
Money market securities in which the Portfolios may invest include U.S.
government securities, U.S. dollar denominated instruments (such as bankers'
acceptances, commercial paper, domestic or Yankee certificates of deposit and
Eurodollar obligations) issued or guaranteed by bank holding companies in the
United States, their subsidiaries and their foreign branches. These bank
obligations may be general obligations of the parent bank holding company or may
be limited to the issuing entity by the terms of the specific obligation or by
government regulation.
Obligations of the International Bank for Reconstruction and
Development (also known as the World Bank) are supported by subscribed but
unpaid commitments of its member countries. There can be no assurance that these
commitments will be undertaken or complied with in the future.
Other money market securities in which a Portfolio may invest also
include certain variable and floating rate instruments and participations in
corporate loans to corporations in whose commercial paper or other short-term
obligations a Portfolio may invest. Because the bank issuing the participations
does not guarantee them in any way, they are subject to the credit risks
generally associated with the underlying corporate borrower. To the extent that
a Portfolio may be regarded as a creditor of the issuing bank (rather than of
the underlying corporate borrower under the terms of the loan participation),
the Portfolio may also be subject to credit risks associated with the issuing
bank. The secondary market, if any, for these loan participations is extremely
limited and any such participations purchased by a Portfolio will be regarded as
illiquid.
A Portfolio may also invest in bonds and notes with remaining
maturities of thirteen months or less, variable rate notes and variable amount
master demand notes. A variable amount master demand note differs from ordinary
commercial paper in that it is issued pursuant to a written agreement between
the issuer and the holder, its amount may be increased from time to time by the
holder (subject to an agreed maximum) or decreased by the holder or the issuer,
it is payable on demand, the rate of interest payable on it varies with an
agreed formula and it is typically not rated by a rating agency. Transfer of
such notes is usually restricted by the issuer, and there is no secondary
trading market for them. Any variable amount master demand note purchased by a
Portfolio will be regarded as an illiquid security.
The Portfolios will invest only in high quality money market
instruments, i.e., securities which have been assigned the highest quality
ratings by nationally recognized statistical rating organizations ("NRSROs")
such as "A-1" by Standard & Poor's Ratings Services ("Standard & Poor's") or
"Prime-1" by Moody's Investors Service, Inc. ("Moody's"), or if not rated,
determined to be of comparable quality by the Portfolio's investment adviser.
Mortgage-Backed Securities (T. Rowe Price International Stock Portfolio)
- --------------------------
The mortgage-backed securities in which a Portfolio invests represent
participation interests in pools of mortgage loans which are guaranteed by
agencies or instrumentalities of the U.S. government. However, the guarantee of
these types of securities runs only to the principal and interest payments and
not to the market value of such securities. In addition, the guarantee only runs
to the portfolio securities held by the Portfolio and not the purchase of shares
of the Portfolio.
Mortgage-backed securities are issued by lenders such as mortgage
bankers, commercial banks, and savings and loan associations. Such securities
differ from conventional debt securities which provide for periodic payment of
interest in fixed amounts (usually semiannually) with principal payments at
maturity or specified call dates. Mortgage-backed securities provide for monthly
payments which are, in effect, a "pass- through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans. Principal prepayments result from the sale of the
underlying property or the refinancing or foreclosure of underlying mortgages.
The yield of mortgage-backed securities is based on the average life of
the underlying pool of mortgage loans, which is computed on the basis of the
maturities of the underlying instruments. The actual life of any particular pool
may be shortened by unscheduled or early payments of principal and interest. The
occurrence of prepayments is affected by a wide range of economic, demographic
and social factors and, accordingly, it is not possible to accurately predict
the average life of a particular pool. For pools of fixed rate 30-year
mortgages, it has been common practice to assume that prepayments will result in
a 12-year average life. The actual prepayment experience of a pool of mortgage
loans may cause the yield realized by the Portfolio to differ from the yield
calculated on the basis of the average life of the pool. In addition, if any of
these mortgage-backed securities are purchased at a premium, the premium may be
lost in the event of early prepayment which may result in a loss to the
Portfolio.
Prepayments tend to increase during periods of falling interest rates,
while during periods of rising interest rates prepayments will most likely
decline. Reinvestment by the Portfolio of scheduled principal payments and
unscheduled prepayments may occur at higher or lower rates than the original
investment, thus affecting the yield of the Portfolio. Monthly interest payments
received by the Portfolio have a compounding effect which will increase the
yield to shareholders as compared to debt obligations that pay interest
semiannually. Because of the reinvestment of prepayments of principal at current
rates, mortgage-backed securities may be less effective than Treasury bonds of
similar maturity at maintaining yields during periods of declining interest
rates. Also, although the value of debt securities may increase as interest
rates decline, the value of these pass-through type of securities may not
increase as much due to the prepayment feature.
Stripped Mortgage-Backed Securities (T. Rowe Price International Stock
Portfolio) -----------------------------------
Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities. SMBS are usually structured with two classes that receive
different proportions of the interest and principal distributions from a pool of
mortgage assets. The Portfolio will only invest in SMBS whose mortgage assets
are guaranteed by agencies of the U.S. government or government-sponsored
entities.
A common type of SMBS will be structured so that one class receives
some of the interest and most of the principal from the mortgage assets, while
the other class receives most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the interest
(the interest- only or "IO" class) while the other class will receive all of the
principal (the principal-only or "PO" class). The yield to maturity on an IO
class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Portfolio's yield
to maturity from these securities. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the Portfolio may fail to
fully recoup its initial investment in these securities even if the security is
in one of the highest rating categories.
Non-Mortgage Asset-Backed Securities
(T. Rowe Price International Stock Portfolio)
- ------------------------------------
Non-mortgage asset-backed securities include interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables. Such securities are generally issued as pass-through
certificates, which represent undivided fractional ownership interests in the
underlying pools of assets.
Non-mortgage asset-backed securities are not issued or guaranteed by
the U.S. government or its agencies or government- sponsored entities; however,
the payment of principal and interest on such obligations may be guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities. In addition, such securities generally will have
remaining estimated lives at the time of purchase of five years or less.
The purchase of non-mortgage asset-backed securities raises
considerations peculiar to the financing of the instruments underlying such
securities. For example, most organizations that issue asset-backed securities
relating to motor vehicle installment purchase obligations perfect their
interests in their respective obligations only by filing a financing statement
and
by having the servicer of the obligations, which is usually the originator, take
custody thereof. In such circumstances, if the servicer were to sell the same
obligations to another party, in violation of its duty not to do so, there is a
risk that such party could acquire an interest in the obligations superior to
that of holders of the asset-backed securities. Also, although most such
obligations grant a security interest in the motor vehicle being financed, in
most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the asset-backed securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the asset-backed securities. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on those securities. In addition, various state and federal laws give
the motor vehicle owner the right to assert against the holder of the owner's
obligation certain defenses such owner would have against the seller of the
motor vehicle. The assertion of such defenses could reduce payments on the
related asset-backed securities. Insofar as credit card receivables are
concerned, credit card holders are entitled to the protection of a number of
state and federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit card,
thereby reducing the amounts paid on such receivables. In addition, unlike most
other asset-backed securities, credit card receivables are unsecured obligations
of the card holder.
Preferred Stocks (All Portfolios except Dreyfus Small Cap Value Portfolio)
- ----------------
A Portfolio may purchase preferred stock. Preferred stock, unlike
common stock, has a stated dividend rate payable from the corporation's
earnings. Preferred stock dividends may be cumulative or non-cumulative,
participating, or auction rate. "Cumulative" dividend provisions require all or
a portion of prior unpaid dividends to be paid.
If interest rates rise, the fixed dividend on preferred stocks may be
less attractive, causing the price of preferred stocks to decline. Preferred
stock may have mandatory sinking fund provisions, as well as call/redemption
provisions prior to maturity, which can be a negative feature when interest
rates decline. Preferred stock also generally has a preference over common stock
on the distribution of a corporation's assets in the event of liquidation of the
corporation. Preferred stock may be "participating" stock, which means that it
may be entitled to a dividend exceeding the stated dividend in certain cases.
The
rights of preferred stock on distribution of a corporation's assets in the event
of a liquidation are generally subordinate to the rights associated with a
corporation's debt securities.
Rights and Warrants (All Portfolios except Dreyfus Small Cap Value Portfolio)
- -------------------
A Portfolio may purchase rights and warrants. Warrants basically are
options to purchase equity securities at specific prices valid for a specific
period of time. Their prices do not necessarily move parallel to the prices of
the underlying securities. Rights are similar to warrants, but normally have a
short duration and are distributed directly by the issuer to its shareholders.
Rights and warrants have no voting rights, receive no dividends and have no
rights with respect to the assets of the issuer. These investments carry the
risk that they may be worthless to the Portfolio at the time it may exercise its
rights, due to the fact that the underlying securities have a market value less
than the exercise price.
Convertible Securities (All Portfolios)
- ----------------------
A Portfolio may invest in convertible securities of domestic and,
subject to the Portfolio's investment strategy, foreign issuers. The convertible
securities in which a Portfolio may invest include any debt securities or
preferred stock which may be converted into common stock or which carry the
right to purchase common stock. Convertible securities entitle the holder to
exchange the securities for a specified number of shares of common stock,
usually of the same company, at specified prices within a certain period of
time.
Convertible securities may be converted at either a stated price or
stated rate into underlying shares of common stock. Although to a lesser extent
than with fixed-income securities, the market of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock. While no securities investments are without
risk, investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
Convertible securities are investments that provide for a stable stream
of income with generally higher yields than common stocks. There can be no
assurance of current income because the issuers of the convertible securities
may default on their obligations. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because securities prices fluctuate. Convertible
securities, however, generally offer lower interest or dividend yields than
non-convertible securities of similar quality because of the potential for
capital appreciation.
Foreign Securities (All Portfolios)
- ------------------
A Portfolio may invest in foreign equity and debt securities or U.S.
securities traded in foreign markets. In addition to securities issued by
foreign companies, permissible investments may also consist of obligations of
foreign branches of U.S. banks and of foreign banks, including European
certificates of deposit, European time deposits, Canadian time deposits, Yankee
certificates of deposit, Eurodollar bonds and Yankee bonds. The Portfolio may
also invest in Canadian commercial paper and Europaper. These instruments may
subject the Portfolio to additional investment risks from those related to
investments in obligations of U.S. issuers. See the prospectus for a discussion
of the risks of investing in foreign securities. In addition, foreign branches
of U.S. banks and foreign banks may be subject to less stringent reserve
requirements than those applicable to domestic branches of U.S. banks.
The debt obligations of foreign governments and entities may or may not
be supported by the full faith and credit of the foreign government. A Portfolio
may buy securities issued by certain "supra-national" entities, which include
entities designated or supported by governments to promote economic
reconstruction or development, international banking organizations and related
government agencies. Examples are the International Bank for Reconstruction and
Development (commonly called the "World Bank"), the Asian Development bank and
the Inter-American Development Bank.
The governmental members of these supranational entities are
"stockholders" that typically make capital contributions and may be committed to
make additional capital contributions if the entity is unable to repay its
borrowings. A supra-national entity's lending activities may be limited to a
percentage of its total capital, reserves and net income. There can be no
assurance that the constituent foreign governments will continue to be able or
willing to honor their capitalization commitments for those entities.
Investment Grade Corporate Debt Securities (All Portfolios except
Dreyfus Small Cap Value Portfolio)
- ------------------------------------------
Debt securities are rated by national bond ratings agencies. Securities
rated BBB by Standard & Poor's or Baa by Moody's are considered investment grade
securities, but are somewhat riskier than higher rated investment grade
obligations because they are regarded as having only an adequate capacity to pay
principal and interest, and are considered to lack outstanding investment
characteristics and may be speculative. See the Appendix to this Statement of
Additional Information for a description of the various securities ratings.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds
(T. Rowe Price International Stock Portfolio)
- --------------------------------------------------------
Zero coupon and deferred interest bonds are debt obligations which are
issued at a significant discount from face value. The discount approximates the
total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. Payment-in-kind ("PIK") bonds are debt obligations which provide that
the issuer thereof may, at its option, pay interest on such bonds in cash or in
the form of additional debt obligations. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of such
cash. Such investments may experience greater volatility in market value due to
changes in interest rates than debt obligations which make regular payments of
interest. The Portfolio will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Portfolio's
distribution obligations.
Loans and Other Direct Indebtedness
(T. Rowe Price International Stock Portfolio)
- -----------------------------------
By purchasing a loan, the Portfolio acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate
borrower. Many such loans are secured, and most impose restrictive covenants
which must be met by the borrower. These loans are made generally to finance
internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs
and other corporate activities. Such loans may be in default at the time of
purchase. The Portfolio may also purchase trade or other
claims against companies, which generally represent money owed by the company to
a supplier of goods or services. These claims may also be purchased at a time
when the company is in default. Certain of the loans acquired by the Portfolio
may involve revolving credit facilities or other standby financing commitments
which obligate the Portfolio to pay additional cash on a certain date or on
demand.
The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions. Loans
and other direct investments may not be in the form of securities or may be
subject to restrictions on transfer, and only limited opportunities may exist to
resell such instruments. As a result, the Portfolio may be unable to sell such
investments at an opportune time or may have to resell them at less than fair
market value.
Other Investment Companies (All Portfolios)
- --------------------------
In connection with its investments in accordance with the various
investment disciplines, a Portfolio may invest up to 10% of its total assets in
shares of other investment companies investing exclusively in securities in
which it may otherwise invest. Because of restrictions on direct investment by
U.S. entities in certain countries, other investment companies may provide the
most practical or only way for a Portfolio to invest in certain markets. Such
investments may involve the payment of substantial premiums above the net asset
value of those investment companies' portfolio securities and are subject to
limitations under the Investment Company Act of 1940, as amended ("1940 Act"). A
Portfolio also may incur tax liability to the extent it invests in the stock of
a foreign issuer that is a "passive foreign investment company" regardless of
whether such "passive foreign investment company" makes distributions to the
Portfolio.
Each Portfolio does not intend to invest in other investment companies
unless, in the investment adviser's judgment, the potential benefits exceed
associated costs. As a shareholder in an investment company, a Portfolio bears
its ratable share of that investment company's expenses, including advisory and
administration fees.
It is expected that the T. Rowe Price International Stock
Portfolio will invest its cash reserves primarily in a money market fund
established for the exclusive use of the T. Rowe Price family of mutual funds
and other clients of the Portfolios' investment advisers. The Reserve Investment
Fund ("RIF") is a series of Reserve Investment Funds, Inc. Additional series may
be created in the future. The RIF was created and operates under an exemptive
order issued by the Securities and Exchange Commission.
The RIF must comply with the requirements of Rule 2a-7 under the 1940
Act governing money market funds. The RIF invests at least 95% of its total
assets in prime money market instruments receiving the highest credit rating.
The RIF provides a very efficient means of managing the cash reserves
of the Portfolio. While the RIF does not pay an advisory fee to its investment
adviser, it will incur other expenses. However, the RIF is expected by its
investment adviser to operate at a very low expense ratio. The Portfolio will
only invest in RIF to the extent it is consistent with its objective and
program.
In addition to the above, pursuant to an exemptive order issued by the
Securities and Exchange Commission, each Portfolio may invest its uninvested
cash in shares of the Endeavor Money Market Portfolio if, in the opinion of the
Portfolio's investment adviser, such investment is in the Portfolio's best
interests.
Reverse Repurchase Agreements (All Portfolios)
- -----------------------------
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.
Depositary Receipts (All Portfolios)
-------------------
A Portfolio 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
Portfolio is permitted to invest pursuant to its investment objectives and
policies. These securities may not necessarily be denominated in the same
currency into which they 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. Because American Depositary Receipts are listed on a U.S.
securities exchange, the Portfolio's investment adviser does not treat them as
foreign securities. However, like other depositary receipts, American Depositary
Receipts are subject to many of the risks of foreign securities such as changes
in exchange rates and more limited information about foreign issuers.
Hybrid Instruments (T. Rowe Price International Stock Portfolio)
- ------------------
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.
Illiquid Securities (All Portfolios)
- -------------------
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' investment advisers to be illiquid or not readily
marketable and, therefore, are not subject to the aforementioned 15% limit. The
inability of a Portfolio to dispose of illiquid or not readily marketable
investments readily or at a reasonable price could impair the Portfolio's
ability to raise cash for redemptions or other purposes. The liquidity of
securities purchased by a Portfolio which are eligible for resale pursuant to
Rule 144A will be monitored by the Portfolios' investment 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.
Short Sales (T. Rowe Price International Stock and Endeavor Enhanced Index
Portfolios)
--------------------------------------------------------
A Portfolio may sell securities "short against the box." A
short sale is the sale of a security that the Portfolio does not
own. A short sale is "against the box" if at all times when the short position
is open, the Portfolio owns an equal amount of the securities sold short or
securities convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities sold short.
High Yield/High Risk Debt Securities
(T. Rowe Price International Stock Portfolio)
- ------------------------------------
Certain lower rated securities purchased by the Portfolio, such as
those rated Ba or B by Moody's or BB or B by Standard & Poor's (commonly known
as junk bonds), may be subject to certain risks with respect to the issuing
entity's ability to make scheduled payments of principal and interest and to
greater market fluctuations. While generally providing greater income than
investments in higher quality securities, lower quality fixed income securities
involve greater risk of loss of principal and income, including the possibility
of default or bankruptcy of
the issuers of such securities, and have greater price volatility, especially
during periods of economic uncertainty or change. These lower quality fixed
income securities tend to be affected by economic changes and short-term
corporate and industry developments to a greater extent than higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. To the extent that the Portfolio invests in such lower quality
securities, the achievement of its investment objective may be more dependent on
the investment adviser's own credit analysis.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to value accurately the Portfolio's
portfolio securities for purposes of determining the Portfolio's net asset
value.
In determining suitability of investment in a particular unrated
security, the investment adviser takes into consideration asset and debt service
coverage, the purpose of the financing, history of the issuer, existence of
other rated securities of the issuer, and other relevant conditions, such as
comparability to other issuers.
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 investment
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 investment 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. The investment advisers to the T. Rowe Price
International Stock Portfolio and Endeavor Enhanced Index Portfolio do not
presently intend to write or purchase put or call options, but may do so in the
future. Expenses and losses incurred as a result of such hedging strategies will
reduce a Portfolio's current return.
The ability of a Portfolio to engage in the options and futures
strategies described below will depend on the availability of liquid markets in
such instruments. Markets in options and futures with respect to stock indices
and U.S. government securities are relatively new and still developing. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures. Therefore no assurance can be given that a
Portfolio will be 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 investment 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.
-3-
<PAGE>
A Portfolio will receive a premium from writing an option, which
increases the Portfolio's return in the event the option expires unexercised or
is terminated at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option, and the volatility of the
market price of the underlying security. By writing a call option, a Portfolio
will limit its opportunity to profit from any increase in the market value of
the underlying security above the exercise price of the option. By writing a put
option, a Portfolio will assume the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
price, resulting in a potential capital loss if the purchase price exceeds the
market price plus the amount of the premium received.
A Portfolio may terminate an option which it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. The Portfolio will
realize a profit (or loss) from such transaction if the cost of such transaction
is less (or more) than the premium received from the writing of the option.
Because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option may be offset in whole or in part by
unrealized appreciation of the underlying security owned by the Portfolio.
Purchasing Put and Call Options on Securities. A Portfolio may purchase
put options to protect its portfolio holdings in an underlying security against
a decline in market value. This protection is provided during the life of the
put option since the Portfolio, as holder of the put, is able to sell the
underlying security at the exercise price regardless of any decline in the
underlying security's market price. For the purchase of a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs. By using put options in this manner, any profit which the Portfolio might
otherwise have realized on the underlying security will be reduced by the
premium paid for the put option and by transaction costs.
A Portfolio may also purchase a call option to hedge against an
increase in price of a security that it intends to purchase. This protection is
provided during the life of the call option since the Portfolio, as holder of
the call, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. For the
purchase of a call option to be profitable, the market price of
the underlying security must rise sufficiently above the exercise price to cover
the premium and transaction costs. By using call options in this manner, any
profit which the Portfolio might have realized had it bought the underlying
security at the time it purchased the call option will be reduced by the premium
paid for the call option and by transaction costs.
No Portfolio intends to purchase put or call options if, as a result of
any such transaction, the aggregate cost of options held by the Portfolio at the
time of such transaction would exceed 5% of its total assets.
Purchase and Sale of Options and Futures on Stock Indices. A Portfolio
may purchase and sell options on stock indices and stock index futures contracts
either as a hedge against movements in the equity markets or for other
investment purposes.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, 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 investment 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
investment adviser expects general stock market prices to decline, it might
purchase a put option or sell a futures contract on the index. If that index
does in fact decline, the value of some or all of the equity securities held by
the Portfolio may also be expected to decline, but that decrease would be offset
in part by the increase in the value of the Portfolio's position in such put
option or futures contract.
Purchase and Sale of Interest Rate Futures. A Portfolio may purchase
and sell interest rate futures contracts on 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 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.
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 investment adviser
deems it desirable to do so.
Although a Portfolio will not enter into an option or futures position unless
its investment 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 investment advisers generally
expect that options and futures transactions for the Portfolios will be
conducted on recognized exchanges. In certain instances, however, a Portfolio
may purchase and sell options in the over-the-counter market. The staff of the
Securities and Exchange Commission considers over-the-counter options to be
illiquid. A Portfolio's ability to terminate option positions established in the
over-the-counter market may be more limited than in the case of exchange traded
options and may also involve the risk that securities dealers participating in
such transactions would fail to meet their obligations to the Portfolio.
The use of options and futures involves the risk of imperfect
correlation between movements in options and futures prices and movements in the
price of the securities that are the subject of the hedge. The successful use of
these strategies also depends on the ability of a Portfolio's investment 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 Portfolio)
- -----------------------------
Foreign Currency Exchange Transactions. The Portfolio may engage in
foreign currency exchange transactions to protect against uncertainty in the
level of future exchange rates. The investment adviser to the 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").
The 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, the 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 or
exposed to that foreign currency.
If conditions warrant, the 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, the Portfolio may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives the Portfolio the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives the 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 the Portfolio the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives the Portfolio the right to purchase a
currency at the exercise price until the expiration of the option.
The 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 exposed (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,
the 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, the 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 the 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. The
Portfolio may write covered call options on foreign currencies to offset some of
the costs of hedging those currencies. The 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 investment adviser,
the pricing mechanism and liquidity are satisfactory and the participants are
responsible parties likely to meet their contractual obligations. The
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.
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, the Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market in such
contracts. Although the 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, the 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 the Portfolio's investment adviser believes that a liquid secondary market
exists for such options. There can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. Options on
foreign currencies are affected by all of those factors which influence foreign
exchange rates and investments generally. The investment adviser for the
Endeavor High Yield Portfolio does not intend to engage in foreign currency
options.
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 the Portfolio at one
rate, while offering a lesser rate of exchange should the 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 illiquid securities,
including 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 investment adviser to be creditworthy.
If an institution enters an insolvency proceeding, the resulting delay in
liquidation of the securities serving as collateral could cause a Portfolio some
loss, as well as legal expense, if the value of the securities declines prior to
liquidation.
Forward Commitments, When-Issued and Delayed Delivery Securities (All
Portfolios)
- ----------------------------------------------------------------
A Portfolio may purchase securities on a when-issued or delayed
delivery basis and may purchase or sell securities on a forward commitment
basis. Settlement of such transactions normally occurs within a month or more
after the purchase or sale commitment is made.
A Portfolio may purchase securities under such conditions
only with the intention of actually acquiring them, but may enter into a
separate agreement to sell the securities before the settlement date. Since the
value of securities purchased may fluctuate prior to settlement, the Portfolio
may be required to pay more at settlement than the security is worth. In
addition, the purchaser is not entitled to any of the interest earned prior to
settlement.
Upon making a commitment to purchase a security on a when- issued,
delayed delivery or forward commitment basis the Portfolio will hold liquid
assets in a segregated account at the Portfolio's custodian bank worth at least
the equivalent of the amount due. The liquid assets will be monitored on a daily
basis and adjusted as necessary to maintain the necessary value.
Purchases made under such conditions may involve the risk that yields
secured at the time of commitment may be lower than otherwise available by the
time settlement takes place, causing an unrealized loss to the Portfolio. In
addition, when the Portfolio engages in such purchases, it relies on the other
party to consummate the sale. If the other party fails to perform its
obligations, the Portfolio may miss the opportunity to obtain a security at a
favorable price or yield. Although a Portfolio will generally enter into forward
commitments to purchase securities with the intention of actually acquiring the
security 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 investment 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 Portfolio may lend its portfolio securities to qualified
institutional buyers for the purpose of realizing additional income. Each of the
Portfolios may pay reasonable finders', administrative and custodial fees in
connection with loans of its portfolio securities. Such loans must be
continuously secured by liquid assets at least equal to the market value of the
securities loaned. 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 investment adviser to be creditworthy
under guidelines adopted by the Trustees of the Fund. Securities lending may
involve some credit risk to a Portfolio if the borrower defaults and the
Portfolio is delayed or prevented from recovering the collateral.
Interest Rate Transactions (T. Rowe Price International Stock Portfolio)
- --------------------------
Among the strategic transactions into which the T. Rowe
Price International Stock Portfolio may enter are interest rate swaps and the
purchase or sale of related caps and floors. The Portfolio expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. The Portfolio intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Portfolio may be obligated to pay. Interest rate swaps involve the exchange by
the Portfolio with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser, to the
extent that a specific index exceeds a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling such
cap. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount.
The Portfolio will usually enter into swaps on a net basis, i.e., the
two payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps and floors are entered into for good faith hedging purposes, the
investment adviser to the Portfolio and the Fund believe such obligations do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to its borrowing restrictions. The Portfolio will not
enter into any swap, cap and floor transaction unless, at the time of entering
into such transaction, the unsecured long-term debt of the counterparty,
combined with any credit enhancements, is rated at least "A" by Standard &
Poor's or Moody's or has an equivalent rating from an NRSRO or is determined to
be of equivalent credit quality by the investment adviser. For a description of
the NRSROs and their ratings, see the Appendix. If there is a default by the
counterparty, the Portfolio may have contractual remedies pursuant to the
agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. Caps and floors are more recent innovations for which
standardized documentation has not yet been fully developed and, accordingly,
they are less liquid than swaps.
With respect to swaps, the Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess. Caps and floors require
segregation of assets with a value equal to the Portfolio's net obligations, if
any.
Dollar Roll Transactions (T. Rowe Price International Stock Portfolio)
- ------------------------
The T. Rowe Price International Stock Portfolio may enter into "dollar
roll" transactions, which consist of the sale by the Portfolio to a bank or
broker-dealer (the "counterparty") of Government National Mortgage Association
certificates or other mortgage-backed securities together with a commitment to
purchase from the counterparty similar, but not identical, securities at a
future date. The counterparty receives all principal and interest payments,
including prepayments, made on the security while it is the holder. The
Portfolio receives a fee from the counterparty as consideration for entering
into the commitment to purchase. Dollar rolls may be renewed over a period of
several months with a different repurchase price and a cash settlement made at
each renewal without physical delivery of securities.
Moreover, the transaction may be preceded by a firm commitment agreement
pursuant to which the Portfolio agrees to buy a security on a future date.
The Portfolio will not use such transactions for leveraging purposes
and, accordingly, will segregate cash, U.S. government securities or other
liquid assets in an amount sufficient to meet
its purchase obligations under the transactions.
Dollar rolls are treated for purposes of the 1940 Act as borrowings of
the Portfolio because they involve the sale of a security coupled with an
agreement to repurchase. Like all borrowings, a dollar roll involves costs to
the Portfolio. For example, while the Portfolio receives a fee as consideration
for agreeing to repurchase the security, the Portfolio forgoes the right to
receive all principal and interest payments while the counterparty holds the
security. These payments to the counterparty may exceed the fee received by the
Portfolio, thereby effectively charging the Portfolio interest on its borrowing.
Further, although the Portfolio can estimate the
amount of expected principal prepayment over the term of the dollar roll, a
variation in the actual amount of prepayment could increase or decrease the cost
of the Portfolio's borrowing.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Portfolio's right to
purchase from the counterparty might be restricted. Additionally, the value of
such securities may change adversely before the Portfolio is able to purchase
them. Similarly, the Portfolio may be required to purchase securities in
connection with a dollar roll at a higher price than may otherwise be available
on the open market. Since, as noted above, the counterparty is required to
deliver a similar, but not identical, security to the Portfolio, the security
that the Portfolio is required to buy under the dollar roll may be worth less
than an identical security. Finally, there can be no assurance that the
Portfolio's use of the cash that it receives from a dollar roll will provide a
return that exceeds borrowing costs.
Municipal Fixed-Income Securities (T. Rowe Price International Stock Portfolio)
- ---------------------------------
The Portfolio may invest in municipal bonds of any state, territory or
possession of the United States ("U.S."), including the District of Columbia.
The Portfolio may also invest in municipal bonds of any political subdivision,
agency or instrumentality (e.g., counties, cities, towns, villages, districts,
authorities) of the U.S. or its possessions. Municipal bonds are debt
instruments issued by or for a state or local government to support its general
financial needs or to pay for special projects such as airports, bridges,
highways, public transit, schools, hospitals, housing and water and sewer works.
Interest payments received by holders of these securities are generally
tax-free. Municipal bonds may also be issued to refinance public debt.
Municipal bonds are mainly divided between "general obligation" and
"revenue" bonds. General obligation bonds are backed by the full faith and
credit of governmental issuers with the power to tax. They are repaid from the
issuer's general revenues. Payment, however, may be dependent upon legislative
approval and may be subject to limitations on the issuer's taxing power.
Enforcement of payments due under general obligation bonds varies according to
the law applicable to the issuer. In contrast, revenue bonds are supported only
by the revenues generated by the project or facility.
The Portfolio may also invest in industrial development bonds. Such
bonds are usually revenue bonds issued to pay for facilities with a public
purpose operated by private
corporations. The credit quality of industrial development bonds is usually
directly related to the credit standing of the owner or user of the facilities.
To qualify as a municipal bond, the interest paid on an industrial development
bond must qualify as fully exempt from federal income tax. However, the interest
paid on an industrial development bond may be subject to the federal alternative
minimum tax.
The yields on municipal bonds depend on such factors as market
conditions, the financial condition of the issuer and the issue's size, maturity
date and rating. Municipal bonds are rated by Standard & Poor's, Moody's and
Fitch IBCA, Inc. Such ratings, however, are opinions, not absolute standards of
quality. Municipal bonds with the same maturity, interest rates and rating may
have different yields, while municipal bonds with the same maturity and interest
rate, but different ratings, may have the same yield. Once purchased by the
Portfolio, a municipal bond may cease to be rated or receive a new rating below
the minimum required for purchase by the Portfolio. Neither event would require
the Portfolio to sell the bond, but the Portfolio's investment adviser would
consider such events in determining whether the Portfolio should continue to
hold it.
The ability of the Portfolio to achieve its investment objective
depends upon the continuing ability of the issuers of municipal bonds to pay
interest and principal when due. Municipal bonds are subject to the provisions
of bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors. Such laws extend the time for payment of principal and/or interest,
and may otherwise restrict the Portfolio's ability to enforce its rights in the
event of default. Since there is generally less information available on the
financial condition of municipal bond issuers compared to other domestic issuers
of securities, the Portfolio's investment adviser may lack sufficient knowledge
of an issue's weaknesses. Other influences, such as litigation, may also
materially affect the ability of an issuer to pay principal and interest when
due. In addition, the market for municipal bonds is often thin and can be
temporarily affected by large purchases and sales, including those by the
Portfolio.
From time to time, Congress has considered restricting or eliminating
the federal income tax exemption for interest on municipal bonds. Such actions
could materially affect the availability of municipal bonds and the value of
those already owned by the Portfolio. If such legislation were passed, the
Fund's Board of Trustees may recommend changes in the Portfolio's investment
objectives and policies.
Portfolio Turnover
While it is impossible to predict portfolio turnover rates,
the investment advisers to the Portfolios other than the Dreyfus Small Cap Value
Portfolio anticipate that portfolio turnover will generally not exceed 100% per
year. The investment adviser to the Dreyfus Small Cap Value Portfolio
anticipates that the Portfolio's portfolio turnover rate will generally not
exceed 200%. 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 1940 Act, a vote of a majority of the outstanding
shares necessary to amend a fundamental policy means the affirmative vote of the
lesser of (1) 67% or more of the shares present at a meeting, if the holders of
more than 50% of the outstanding shares of the Portfolio are present or
represented by proxy, or (2) more than 50% of the outstanding shares of the
Portfolio.
A Portfolio may not:
1. Borrow money, except to the extent permitted by applicable
law.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure borrowings permitted by restriction 1 above. Collateral arrangements with
respect to margin for futures contracts and options are not deemed to be pledges
or other encumbrances for purposes of this restriction.
3. Purchase securities on margin, except a Portfolio may obtain such
short-term credits as may be necessary for the clearance of securities
transactions and may make margin deposits in connection with transactions in
options, futures contracts and options on such contracts.
4. Make short sales of securities or maintain a short position for the account
of the Portfolio, unless at all times when a short position is open the
Portfolio owns an equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible or exchangeable
for securities of the same issue as, and in equal amounts to, the securities
sold short.
5. Underwrite securities issued by other persons, except to the extent that in
connection with the disposition of its portfolio investments it may be deemed to
be an underwriter under federal securities laws.
6. Purchase or sell real estate, although a Portfolio may
purchase securities of issuers which deal in real estate,
securities which are secured by interests in real estate and
securities representing interests in real estate.
7. Purchase or sell commodities or commodity contracts, except
that all Portfolios may purchase or sell financial futures contracts and related
options. For purposes of this restriction, currency contracts or hybrid
investments shall not be considered commodities.
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 government-sponsored
entities 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 government-sponsored
entities, and repurchase agreements secured by such obligations.
11. Invest more than 15% of its net assets (taken at current value at the time
of each purchase) in illiquid securities including repurchase agreements
maturing in more than seven days.
12. Purchase securities of any issuer for the purpose of
exercising control or management.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and partially or completely as a
result of such investment.
Other Policies
The
Dreyfus Small Cap Value Portfolio may not invest more than 5% of the value of
its total assets in warrants not listed on either the New York or American Stock
Exchange. The 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 10% 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.
With respect to borrowing, in general, under the 1940 Act, a Portfolio
may not borrow money except that (1) a Portfolio may borrow from banks or enter
into reverse repurchase agreements, in
amounts up to 331/3% of its total assets (including the amount borrowed); and
(2) a Portfolio may borrow up to an additional 5% of its total assets for
temporary purposes.
PERFORMANCE INFORMATION
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 investment
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, 1999 is available upon written request to the
Fund.
<TABLE>
<CAPTION>
For the One For the Five For Period From
Year Period Year Period Inception to
Ended December Ended December December 31, 1999
31, 1999 31, 1999
<S> <C> <C> <C>
T. Rowe Price
32.35% 14.79% 14.79%
International
Stock(1)...........
29.39% 17.88% 14.74%/14.73%*
Dreyfus Small
Cap Value(2).......
18.16% N/A 27.39%/27.38%*
Endeavor
Enhanced
Index (3)..........
- ------------------------
</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 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.
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 investment adviser is responsible for decisions to
buy and sell securities for its account and for the placement of its portfolio
business and the negotiation of commissions, if any, paid on such transactions.
Brokerage commissions are paid on transactions in equity securities traded on a
securities exchange and on options, futures contracts and options thereon. Fixed
income securities and certain equity securities in which the Portfolios invest
are traded in the over-the-counter market. These securities are generally traded
on a net basis with dealers acting as principal for their own account without a
stated commission, although prices of such securities usually include a profit
to the dealer. In over-the-counter transactions, orders are placed directly with
a principal market maker unless a better price and execution can be obtained by
using a broker. In underwritten offerings, securities are usually purchased at a
fixed price which includes an amount of compensation to the underwriter
generally referred to as the underwriter's concession or discount. Certain money
market securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid. U.S. government securities are generally
purchased from underwriters or dealers, although certain newly-issued U.S.
government securities may be purchased directly from the U.S. Treasury or from
the issuing agency or instrumentality. Each Portfolio's investment 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 investment 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 investment advisers with
brokerage and research services within the meaning of Section 28(e) of the
Securities Exchange Act of 1934. Each Portfolio's investment 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 investment adviser's research. In seeking the most favorable
price and execution available, an investment 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 investment 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 investment adviser in servicing all of its accounts;
not all such services may be used in connection with the Portfolio. In the
opinion of each investment 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 investment adviser will attempt
to allocate equitably portfolio transactions among the Portfolio and other
accounts. In making such allocations between the Portfolio and other accounts,
the main factors to be considered are the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and the opinions of the persons responsible for recommending
investments to the Portfolio and the other accounts. In some cases this
procedure could have an adverse effect on a Portfolio. In the opinion of each
investment adviser, however, the results of such procedures will, on the whole,
be in the best interest of each of the accounts.
The investment advisers to the T. Rowe Price International
Stock and Endeavor Enhanced Index Portfolios may execute portfolio transactions
through certain of their 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 any such affiliate acting
as principal for its own account.
For the year ended December 31, 1997, the T. Rowe Price International
Stock Portfolio and the Dreyfus Small Cap Value 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 Limited and Jardine Fleming Group
Limited, and Ord Minnett Securities, Ltd., respectively. For the fiscal period
ended December 31, 1997, the Endeavor Enhanced Index Portfolio paid $9,494 in
brokerage commissions.
For the year ended December 31, 1998, the T. Rowe Price International
Stock Portfolio and the Dreyfus Small Cap Value Portfolio paid $121,001 and
$889,611, respectively, in brokerage commissions of which $1,917 (1.58%),
$10,301 (8.51%) and $759 (0.63%) with respect to the T. Rowe Price International
Stock Portfolio was paid to Robert Fleming Holdings Limited, Jardine Fleming
Group Limited, and Ord Minnett Securities, Ltd., respectively. For the year
ended December 31, 1998, the Endeavor Enhanced Index Portfolio paid $46,321 in
brokerage commissions.
For the year ended December 31, 1999, the T. Rowe Price International
Stock Portfolio and the Dreyfus Small Cap Value Portfolio paid $193,255 and
$1,384,644, respectively, in brokerage commissions of which $3,858 (2.00%) and
$1,260 (0.65%) with respect to the T. Rowe Price International Stock Portfolio
was paid to Robert Fleming Holdings Limited and Jardine Fleming Group Limited,
respectively. For the year ended December 31, 1999, the Endeavor Enhanced Index
Portfolio paid $89,427 in brokerage commissions.
For 1999, the percentage of the Portfolio's aggregate dollar amount of
commissionable transactions effected through an affiliated broker is as follows:
T. Rowe Price International Stock Portfolio - 2.53% (Robert
Fleming Holdings Limited)
T. Rowe Price International Stock Portfolio - 1.44% (Jardine
Fleming Group Limited)
Brokerage Enhancement Plan
The Board of Trustees of the Fund, including all of the Trustees who
are not "interested persons" (as defined in the 1940 Act) of the Fund, Endeavor
Management Co. or Transamerica Capital, Inc. (formerly known as Endeavor Group)
(the "Distributor") (hereinafter referred to as "Independent Trustees"), and
each Portfolio's shareholders, have voted pursuant to the substantive provisions
of Rule 12b-1 under the 1940 Act 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.
Under the Plan, the Fund is using recaptured commissions to pay for distribution
expenses. However, under the Plan, except for recaptured commissions, neither
the Fund nor any series of the Fund, including the Portfolios, will incur any
additional fees or charges. As part of the Plan, the Fund and the Distributor
have entered into a Distribution Agreement.
Under the Distribution Agreement, the Distributor is the principal underwriter
of the Fund, with responsibility for promoting sales of the shares of each
Portfolio.
The Distributor, however, does not receive any additional compensation
from the Fund for performing this function. Instead, under the Plan, the Manager
is authorized to direct that the investment adviser of each Portfolio effect
brokerage transactions in portfolio securities through certain broker- dealers,
consistent with each investment 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. These activities will include: holding or
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 prospective
Contract holders; and creating and mailing advertising and sales literature.
The Distributor is 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.
For the year ended December 31, 1999, the Distributor received an
aggregate for all of the Portfolios of the Fund of $829,876 pursuant to the
Plan, of which $519,184 was attributable
to the Dreyfus Small Cap Value Portfolio. In 1999, $888,475 was utilized on
behalf of all of the Portfolios of the Fund, including the three Portfolios
described in the Prospectus, to pay the costs of seminars and sales meetings.
MANAGEMENT OF THE FUND
The Fund is supervised by a Board of Trustees that is responsible for
representing the interests of shareholders. The Trustees meet periodically
throughout the year to oversee the Portfolios' activities, reviewing, among
other things, each Portfolio's performance and its contractual arrangements with
various service providers.
Trustees and Officers
The Trustees and executive officers of the Fund, 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.
<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
(34) Chief November, 1997,
Financial Executive Vice
Officer President -Administration of
(Treasurer), Registrant; from
Trustee September, 1996 to
June,
1997
and
since
June,
1998,Chief
Financial
Officer
(Treasurer)
of
Registrant;
from
February,
1997
to
December,
1997,
Executive
Vice-
President,
Chief
of
Operations,
from
March,
1997
to
October,
1999,
Director,
from
December,
1997
to
October,
1999,
Chief
Operating
Officer,
and
from
June,
1998
to
October,
1999,
Chief
Financial
Officer,
from
July,
1999
to
October,
1999,
Chief
Executive
Officer
of
Endeavor
Group;
from
September,
1996
to
June,
1997,
and
from
June,
1998
to
October,
1999,
Chief
Financial
Officer,
since
May,
1996,
Director
and
from
June,
1997
to
October,
1998,
Executive
Vice
President
-Administration,
from
October,
1998
to
October,
1999,
Chief
-4-
<PAGE>
Principal
Executive
Officer,
of
Endeavor
Management
Co.;
since
August,
1996,
Chief
Financial
Officer
of
VJM
Corporation
(oil
and
gas);
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.
*Vincent J. McGuinness (65) Trustee Until December 31,
1901 Ocean Way 1999, Director of
Laguna Beach, California Endeavor Group and
92651 Endeavor Management
Co.;
President
of
VJM
corporation
(oil
and
gas);
until
July,
1999,
Chairman,
Chief
Executive
Officer
and
Director
of
McGuinness
&
Associates
and
VJM
Corporation;
until
July,
1996,
Chairman,
Chief
Executive
Officer
and
Director
of
McGuinness
Group
(insurance
marketing);
from
September,
1988
to
July,
1999,
Chief
Executive
Officer
of
Endeavor
Management
Co.;
until
October,
1998,
President
of
Endeavor
Management
Co.
Manager,
PFL
Endeavor
Target
Account
and
AUSA
Endeavor
Target
Account.
-5-
<PAGE>
Principal
Timothy A. Devine (65)
1424 Dolphin Terrace Trustee President, Chief
Corona del Mar, California Executive Officer,
92625 Devine Properties, Inc.
(landscape contracting
and maintenance);
Consultant, Plant
Control, Inc. Manager,
PFL Endeavor Target
Account and AUSA
Endeavor Target
Account.
Thomas J. Hawekotte (64) Trustee President, Thomas J.
6007 North Sheridan Road Hawekotte, P.C. (law
Chicago, Illinois 60660 practice). Manager,
PFL Endeavor Target
Account and AUSA
Endeavor Target
Account.
Steven L. Klosterman (48) Trustee Since July, 1995,
5973 Avenida Encinas President of Klosterman
Suite 300 Capital Corporation
Carlsbad, California 92008 (investment adviser);
Investment Counselor,
Robert J. Metcalf &
Associates, Inc.
(investment adviser)
from August, 1990 to
June, 1995. Manager,
PFL Endeavor Target
Account and AUSA
Endeavor Target
Account.
-6-
<PAGE>
Principal
Trustee President, Lindquist
Halbert D. Lindquist (53) and Associates
1650 E. Fort Lowell Road (investment adviser)
Suite 203 and since December,
Tucson, Arizona 85719-2324 1987 Tucson Asset
Management, Inc.
(commodity trading
adviser), and since
November, 1987,
Presidio Securities,
Inc. (broker-dealer),
and from January, 1998
to January 1999, Chief
Investment Officer and
since January, 1999,
Consultant, Blackstone
Alternative Asset
Management. Manager,
PFL Endeavor Target
Account and AUSA
Endeavor Target
Account.
Keith H. Wood (63) Trustee Since 1972, Chairman
39 Main Street and Chief Executive
Chatham, New Jersey 07928 Officer of Jamison,
Eaton
&
Wood
(investment
adviser)
and
from
1978
to
December,
1997,
President
of
Ivory
&
Sime
International,
Inc.
(investment
adviser);
since
1999,
President,
Wood
&
Anthony,
LLC
(investment
adviser).
Manager,
PFL
Endeavor
Target
Account
and
AUSA
Endeavor
Target
Account.
-7-
<PAGE>
Principal
Peter F. Muratore (67) Trustee From June, 1989 to
Too Far March, 1998, President
Posthouse Road of OCC Distributors
Morristown, New Jersey 07960 (broker-dealer), a
subsidiary of
Oppenheimer Capital.
Manager, PFL Endeavor
Target Account and AUSA
Endeavor Target
Account.
P. Michael Pond (46) Executive Since November 1, 1998,
Vice-President- Executive Vice-President-
Administration Administration and
and Compliance Compliance of Endeavor
Group; from November 1,
1998 to October, 1999,
Executive Vice
President -
Administration and
Compliance and Chief
Investment Officer of
Endeavor Management
Co.; since October,
1999, President, Chief
Executive Officer and
Chief Investment
Officer of Endeavor
Management Co.; from
November, 1991 to
November, 1996,
Chairman and President
of The Preferred Group
of Mutual Funds; from
October, 1989 to
December, 1996,
President of
Caterpillar Securities
Inc. and Caterpillar
Investment Manager Ltd.
-8-
<PAGE>
Principal
Gail A. Hanson(57) Secretary Since September, 1994,
Vice President for PFPC
Inc. (formerly known as
First Data Services
Investor Group, Inc.)
(mutual fund
administration).
</TABLE>
* May be deemed an "interested person" of the Fund as defined in
the 1940 Act.
+ Vincent J. McGuinness, Jr. is the son of Vincent J. McGuinness.
No remuneration will be paid by the Fund to any Trustee or officer of
the Fund who is affiliated with the Manager or the investment advisers. Each
Trustee who is not an affiliated person of the Manager or the investment
advisers will be reimbursed for out-of-pocket expenses and currently receives an
annual fee of $18,000 and $2,500 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, 1999.
COMPENSATION TABLE
Total
Compensation
From Fund
Aggregate and Fund
Name of Compensation Complex
Person From Fund Paid to Trustees
Vincent J. McGuinness $ - $ -
Timothy A. Devine $18,000 $19,400
Thomas J. Hawekotte $18,500 $19,900
Steven L. Klosterman $19,000 $20,400
Halbert D. Lindquist $18,000 $19,300
Keith H. Wood $18,500 $19,900
Peter F. Muratore $18,500 $19,900
Vincent J. McGuinness, Jr. - -
- ---------------
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.
INVESTMENT ADVISORY AND OTHER SERVICES
The Manager
The Fund is managed by Endeavor Management Co. (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. AUSA Holding Company ("AUSA"), an affiliate of PFL Life Insurance Company,
owns all of the outstanding common shares of the Manager and Transamerica
Capital, Inc.
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 and monitors the
investment 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, PFPC Inc. 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
investment adviser of each Portfolio.
The Manager pays the fees and expenses of PFPC Inc. pursuant to the
administration agreement and the Manager is entitled to be reimbursed for each
Portfolio's portion of the fees and expenses paid by the Manager to PFPC Inc.
with respect to each Portfolio.
The Manager pays 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 and allocable administrative fees,
the Fund pays all expenses not assumed by the Manager, including, without
limitation, expenses for legal, accounting and auditing services, interest,
taxes, costs of printing and distributing reports to shareholders, proxy
materials and prospectuses, charges of its custodian, transfer agent and
dividend disbursing agent, registration fees, fees and expenses of the Trustees
who are not affiliated persons of the Manager, insurance, brokerage costs,
litigation, and other extraordinary or nonrecurring expenses. All general Fund
expenses are allocated among and charged to the assets of the Portfolios of the
Fund on a basis that the Trustees deem fair and equitable, which may be on the
basis of relative net assets of each Portfolio or the nature of the services
performed and relative applicability to each Portfolio.
The Management Agreement continues in force for two years from its
commencement date, with respect to each 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 Independent Trustees, 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 Investment Advisers
Pursuant to an investment advisory agreement with the Manager, each
investment 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 investment adviser and may perform
certain limited related administrative functions in connection therewith. For
its services, the Manager pays each investment adviser a fee based on a
percentage of the average daily net assets of the Portfolios as follows:
T. Rowe Price International Stock - Rowe Price-Fleming
International, Inc. - .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 net assets exceed $200 million,
.50% of total net assets.
Dreyfus Small Cap Value - The Dreyfus Corporation - .375%
Endeavor Enhanced Index - J.P. Morgan Investment Management
Inc. - .35%
Effective January 1, 1995, Price-Fleming became the investment adviser of the T.
Rowe Price International Stock Portfolio; and effective September 16, 1996, The
Dreyfus Corporation became the investment adviser of the Dreyfus Small Cap Value
Portfolio. The investment adviser to each other Portfolio has managed the
Portfolio since its inception date.
Each investment advisory agreement will continue in force for two years
from its commencement date, 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
Independent Trustees by votes cast in person at a meeting called for the purpose
of voting on such approval. Each investment advisory agreement provides that it
shall terminate automatically if assigned or if the Management Agreement with
respect to the related Portfolio terminates, and that it may be terminated as to
a Portfolio without penalty by the Manager, by the Trustees of the Fund or by
vote of a majority of the outstanding voting securities of the Portfolio on not
less than 60 days' prior written notice to the investment adviser or by the
investment 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.
Each investment advisory agreement provides that the investment 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 investment adviser.
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,
1997, December 31, 1998 and
December 31, 1999.
<TABLE>
<CAPTION>
1999
Investment Investment Management Fee
Management Waived Other Expenses Reimbursed
------ -------------------------
Fee
Paid
<S> <C> <C> <C>
T. Rowe Price
International
Stock
$1,697,527 $-- $--
Portfolio....
Dreyfus Small
Cap Value
Portfolio..... $1,300,689 -- --
Endeavor
Enhanced Index
Portfolio..... $782,584 -- --
1998
Investment Management Fee Investment
Paid Management Fee Waived Other Expenses Reimbursed
---- --- -------------------------
T. Rowe Price
International
Stock
$1,603,389 $ -- $--
Portfolio. ...
Dreyfus Small
Cap Value
Portfolio..... $1,207,117 -- --
Endeavor
Enhanced Index
Portfolio..... $284,833 -- --
1997
Investment Management Fee Investment
Paid Management Fee Waived Other Expenses Reimbursed
---- --- -------------------------
T. Rowe Price
International
Stock
$1,404,553 $ -- $--
Portfolio....
Dreyfus Small
Cap Value $920,244 -- --
Portfolio.....
Endeavor
Enhanced Index
$50,159 $17,349 --
Portfolio* ....
- ---------------
</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.
- ---------------------------
For the year ended December 31, 1999, the following Portfolios
reimbursed, after waivers, the Manager for administrative expenses incurred by
the Manager on behalf of the Portfolios:
T. Rowe Price International Stock - $16,229 Endeavor Enhanced Index - $9,860
Dreyfus Small Cap Value - $34,255 Code of Ethics
The Fund, its Manager, its Distributor, and each of its investment
advisers, have adopted Codes of Ethics pursuant to Rule 17j-1 under the 1940
Act. Each of these Codes of Ethics permits the personnel of their respective
organizations to invest in securities for their own accounts. A copy of each of
the Codes of Ethics is on public file with, and is available from the Securities
and Exchange Commission.
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.
Transfer Agent
PFPC Inc., located at 4400 Computer Drive, Westborough,
Massachusetts 01581, serves as transfer agent for the Fund.
Legal Matters
Certain legal matters are passed on for the Fund by Sullivan
& Worcester LLP, 1025 Connecticut Avenue, N.W., Washington, D.C.
20036.
Independent Auditors
Ernst & Young LLP, located at Two Commerce Square, 2001 Market Street,
Suite 4000, Philadelphia, Pennsylvania 19103, serves as the Fund's independent
auditors.
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), each day the Exchange is open for trading. Currently, the
Exchange is closed on: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. Portfolio securities for which the primary market is on a
domestic or foreign exchange or which are traded over-the-counter and quoted on
the NASDAQ System will be valued at the last sale price on the
day of valuation or, if there was no sale that day, at the last reported bid
price, using prices as of the close of trading. Portfolio securities not quoted
on the NASDAQ System that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, will be valued at the most recently quoted bid price provided
by the principal market makers.
In the case of any securities which are not actively traded, reliable
market quotations may not be considered to be 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.
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.
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.
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.
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.
Portfolios that invest in foreign securities 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 a 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 a Portfolio held its
investment. In addition, a Portfolio could 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, a Portfolio's investment 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; deductions for losses are allowable
only to the extent of any gains resulting from these deemed sales for prior
taxable years. Such gains will be considered ordinary income, which a Portfolio
will be required to distribute even though it has not sold the security.
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 thirteen series. Each
series of shares represents the beneficial interest in a separate Portfolio of
assets of the Fund, which is separately managed and has its own investment
objective and policies. The Trustees of the Fund have authority, without the
necessity of a shareholder vote, to establish additional portfolios and series
of shares. The shares outstanding are, and those offered hereby when issued will
be, fully paid and nonassessable by the Fund. The shares have no preemptive,
conversion or subscription rights and are fully transferable.
The assets received from the sale of shares of a Portfolio, and all
income, earnings, profits and proceeds thereof, subject only to the rights of
creditors, constitute the underlying assets of the Portfolio. The underlying
assets of a Portfolio are required to be segregated on the Fund's books of
account and are to be charged with the expenses with respect to that Portfolio.
Any general expenses of the Fund not readily attributable to a Portfolio will be
allocated by or under the direction of the Trustees in such manner as the
Trustees determine to be fair and equitable, taking into consideration, among
other things, the nature and type of expense and the relative sizes of the
Portfolio and the other Portfolios.
Each share has one vote, with fractional shares voting proportionately.
Shareholders of a Portfolio are not entitled to vote on any matter that requires
a separate vote of the shares of another Portfolio but which does not affect the
Portfolio. The Agreement and Declaration of Trust does not require the Fund to
hold annual meetings of shareholders. Thus, there will ordinarily be no annual
shareholder meetings, unless otherwise required by the 1940 Act. The Trustees of
the Fund may appoint their successors until fewer than a majority of the
Trustees have been elected by shareholders, at which time a meeting of
shareholders will be called to elect Trustees. Under the Agreement and
Declaration of Trust, any Trustee may be removed by vote of two-thirds of the
outstanding shares of the Fund, and holders of 10% or more of 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 Life Insurance Company will vote shares of the Fund as described
under the caption "Voting Rights" in the prospectus or other material for the
Contracts which accompanies the Prospectus.
As of January 31, 2000, the PFL Endeavor Variable Annuity Account owned
of record the following approximate percentages of
the outstanding shares of each Portfolio: 79.48% of the T. Rowe
Price International Stock Portfolio; 80.37% of the Dreyfus Small
Cap Value Portfolio; and 66.20% of the Endeavor Enhanced Index Portfolio. As of
January 31, 2000, the PFL Endeavor Platinum Variable Annuity Account owned of
record the following approximate percentages of the outstanding shares of each
Portfolio: 18.28% of the T. Rowe Price International Stock Portfolio; 13.92% of
the Dreyfus Small Cap Value Portfolio; and 25.75% of the Endeavor Enhanced Index
Portfolio. As of January 31, 2000, the AUSA Life Insurance Variable Annuity
Account owned of record the following approximate percentages of the outstanding
shares of each Portfolio: 0.61% of the Dreyfus Small Cap Value Portfolio. As of
January 31, 2000, the People's Benefit Life Insurance Company Separate Account V
owned of record the following approximate percentages of the outstanding shares
of each Portfolio: 1.31% of the Dreyfus Small Cap Value Portfolio; 2.24% of the
T. Rowe Price International Stock Portfolio; and 4.63% 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
limited to circumstances in which the Fund would be unable to meet its
obligations. The likelihood of such circumstances is remote.
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 period ended December 31, 1999, including notes to the
financial statements and financial highlights and the Report of Ernst & Young
LLP, Independent Auditors, 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 Report of
Independent Auditors) included in the Annual Report are incorporated herein by
reference.
-9-
<PAGE>
APPENDIX
SECURITIES RATINGS
Standard & Poor's Bond Ratings
A Standard & Poor's corporate debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree. Debt rated "A" has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt of a higher rated category. Debt rated "BBB" is regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
to repay principal for debt in this category than for higher rated categories.
Bonds rated "BB", "B", "CCC" and "CC" are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. The 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 the long-term risks appear somewhat 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, 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
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.
Fitch IBCA, Inc. 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 short-term rating ("TBW-1", "TBW-2", "TBW-3", or
"TBW-4") to each class of debt (e.g., commercial paper or non-convertible debt),
having a maturity of one-year or less, issued by a holding company structure or
an entity within the holding company structure that is rated by BankWatch.
Additionally, BankWatch will assign an issuer rating ("A", "A/B", "B", "B/C",
"C", "C/D", "D", "D/E", and "E") to each issuer that it rates.
Various of the NRSROs utilize rankings within rating
categories indicated by a + or -. The Portfolios, in accordance
with industry practice, recognize such rankings within categories as
graduations, viewing for example Standard & Poor's rating of A-1+ and A-1 as
being in Standard & Poor's highest rating category.
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