<PAGE>
PROSPECTUS
[LOGO OF ENDEAVOR APPEARS HERE]
THE ENDEAVOR
VARIABLE ANNUITY
Issued by
AUSA
LIFE INSURANCE
COMPANY, INC.
May 1, 1995
<PAGE>
PROSPECTUS May 1, 1995
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THE ENDEAVOR VARIABLE ANNUITY
Issued Through
AUSA ENDEAVOR VARIABLE ANNUITY ACCOUNT
by
AUSA LIFE INSURANCE COMPANY, INC.
This Prospectus describes the Endeavor Variable Annuity (the "Policy"), a
Flexible Premium Variable Annuity offered by AUSA Life Insurance Company, Inc.
The Policy is designed to aid in long-term financial planning and provides for
the accumulation of capital by individuals on a tax-deferred basis for
retirement or other long-term purposes. The Policy may be purchased with a
minimum initial Premium Payment of $5,000 if the Policy is purchased on a non-
tax qualified basis ("Nonqualified Policy") or $1,000 if the Policy is
purchased and used in connection with a plan qualifying for favorable income
tax treatment ("Qualified Policy") ($50 if the Policy is purchased and used in
connection with a Tax Deferred 403(b) Annuity). An Owner generally may make
additional Premium Payments of at least $500 each (or $50 for a Policy used in
connection with a Tax Deferred 403(b) Annuity) at any time before the Annuity
Commencement Date.
The Owner may allocate Premium Payments to one or more Subaccounts of the
AUSA Endeavor Variable Annuity Account (the "Mutual Fund Account"), to a Fixed
Account which guarantees a minimum fixed return, or to a combination of these
(the Fixed Account and the Subaccounts of the Mutual Fund Account are the
"Investment Options" available under the Policies). The Mutual Fund Account
currently has nine different Subaccounts (the "Subaccounts"). Assets of each
Subaccount are invested in a corresponding Portfolio of a mutual fund, the WRL
Growth Portfolio of the WRL Series Fund, Inc., managed by Janus Capital
Corporation, and the Endeavor Series Trust (the "Underlying Funds"). The
Underlying Funds currently have nine Portfolios available for the Policies:
the WRL Growth Portfolio, managed by Janus Capital Corporation; the Managed
Asset Allocation Portfolio; the Money Market Portfolio; the T. Rowe Price
International Stock Portfolio; the Quest for Value Equity Portfolio; the Quest
for Value Small Cap Portfolio; the U.S. Government Securities Portfolio; the
T. Rowe Price Equity Income Portfolio; and the T. Rowe Price Growth Stock
Portfolio. The Underlying Funds are described in separate prospectuses that
accompany this Prospectus.
THE POLICY IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK OR DEPOSITORY INSTITUTION AND THE POLICY IS NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVES
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR THE
ENDEAVOR SERIES TRUST AND FOR THE WRL GROWTH PORTFOLIO OF THE WRL SERIES FUND,
INC. CERTAIN PORTFOLIOS MAY NOT BE AVAILABLE IN ALL STATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
The Policy Value will vary in accordance with the investment performance of
the Subaccounts selected by the Owner. Therefore, the Owner bears the entire
investment risk under this Policy for all amounts allocated to the Mutual Fund
Account. Amounts allocated to the Fixed Account are guaranteed by AUSA Life
Insurance Company, Inc. ("AUSA") and will earn a specified rate of interest
declared periodically.
The Policies provide for monthly annuity payments to be made by AUSA for the
life of the Annuitant or for some other period, beginning on the Annuity
Commencement Date selected by the Owner. Prior to the Annuity Commencement
Date, the Owner can transfer amounts among the Investment Options, that is,
between the Fixed Account or Subaccounts of the Mutual Fund Account (some
prohibitions and restrictions apply, especially on transfers out of the Fixed
Account). The Owner can also elect to surrender all or any portion of the Cash
Value in exchange for a cash withdrawal payment from AUSA; however, withdrawals
may be subject to a 10% federal tax penalty if made before age 59 1/2, taxable,
subject to a Contingent Deferred Sales Charge, and withdrawals from the Fixed
Account may be delayed.
This Prospectus sets forth the information that a prospective investor should
consider before investing in a Policy. A Statement of Additional Information
about the Policy and the Mutual Fund Account, which has the same date as this
Prospectus, has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. The Statement of Additional Information dated
May 1, 1995 is available at no cost to any person requesting a copy by writing
AUSA at the Service Office or by calling 1-800-525-6205. The table of contents
of the Statement of Additional Information is included at the end of this
Prospectus.
This Prospectus and the Statement of Additional Information generally
describe only the Policies and the Mutual Fund Account, except when the Fixed
Account is specifically mentioned.
Service Office: Administrative Office:
Financial Markets Division-- AUSA Life Insurance
Variable Annuity Dept. Company, Inc.
4333 Edgewood Road, N.E. 666 Fifth Avenue, 25th floor
Cedar Rapids, IA 52499 New York, NY 10103
Please Read This Prospectus Carefully And Retain it For Future Reference.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESPERSON OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
Quest for Value is a service mark of Oppenheimer Capital.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS............................................................... 4
SUMMARY................................................................... 7
CONDENSED FINANCIAL INFORMATION........................................... 15
FINANCIAL STATEMENTS...................................................... 16
HISTORICAL PERFORMANCE DATA............................................... 16
Standardized Performance Data........................................... 16
Hypothetical Performance Data of Subaccounts............................ 17
T. Rowe Price Equity Income Subaccount and T. Rowe Price Growth Stock
Subaccount............................................................ 17
T. Rowe Price International Stock Subaccount............................ 18
Non-Standardized Performance Data....................................... 19
PUBLISHED RATINGS......................................................... 20
AUSA LIFE INSURANCE COMPANY, INC.......................................... 20
THE ENDEAVOR ACCOUNTS..................................................... 21
The Mutual Fund Account................................................. 21
The Fixed Account....................................................... 25
Transfers............................................................... 26
Dollar Cost Averaging................................................... 27
THE POLICY................................................................ 27
Policy Application and Issuance of Policies............................. 27
Premium Payments........................................................ 28
Policy Value............................................................ 29
Non-participating Policy................................................ 30
DISTRIBUTIONS UNDER THE POLICY............................................ 30
Surrenders.............................................................. 30
Systematic Withdrawal Plan.............................................. 31
Annuity Payments........................................................ 32
Annuity Commencement Date............................................. 32
Election of Payment Option............................................ 32
Premium Tax........................................................... 33
Supplementary Policy.................................................. 33
Annuity Payment Options................................................. 33
Death Benefit........................................................... 37
Death of Annuitant Prior to Annuity Commencement Date................. 37
Death of Annuitant On or After Annuity Commencement Date.............. 38
Beneficiary........................................................... 38
Death of Owner.......................................................... 38
Restrictions Under Section 403(b) Plans................................. 38
CHARGES AND DEDUCTIONS.................................................... 39
Contingent Deferred Sales Charge........................................ 39
Mortality and Expense Risk Charge....................................... 40
Administrative Charges.................................................. 41
Premium Taxes........................................................... 41
Federal, State and Local Taxes.......................................... 42
Transfer Charge......................................................... 42
Other Expenses Including Investment Advisory Fees....................... 42
Employee and Agent Purchases............................................ 42
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................... 42
Tax Status of the Policy................................................ 43
Taxation of Annuities................................................... 44
DISTRIBUTOR OF THE POLICIES............................................... 48
VOTING RIGHTS............................................................. 49
LEGAL PROCEEDINGS......................................................... 50
STATEMENT OF ADDITIONAL INFORMATION....................................... 51
</TABLE>
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<PAGE>
DEFINITIONS
Accumulation Unit--An accounting unit of measure used in calculating the
Policy Value.
Administrative Office--666 Fifth Avenue, 25th Floor, New York, New York
10103.
Annuitant--The person entitled to receive Annuity Payments after the Annuity
Commencement Date and during whose life any Annuity Payments involving life
contingencies will continue.
Annuity Commencement Date--The date upon which Annuity Payments are to
commence.
Annuity Payment Option or Payment Option--A method of receiving a stream of
Annuity Payments.
Annuity Purchase Value--An amount equal to the Policy Value for the Valuation
Period which ends immediately preceding the Annuity Commencement Date reduced
by any applicable premium or similar taxes.
Annuity Unit--An accounting unit of measure used in the calculation of the
amount of the second and each subsequent Variable Annuity Payment.
AUSA--AUSA Life Insurance Company, Inc., the issuer of the Policies.
Beneficiary--Before the Annuity Commencement Date, the person to whom the
death proceeds will be paid if the Annuitant, who is also the Owner, dies.
After the Annuity Commencement Date, the person to whom payments will be made
if the Annuitant dies. In the event the Annuitant, who is not the Owner, dies
prior to the Annuity Commencement Date, the Owner will become the Annuitant
unless the Owner specifically requests on the application or in writing that
the death benefit be paid upon the Annuitant's death and AUSA agrees to such an
election.
Business Day--A day when the New York Stock Exchange is open for business and
that is a regular business day of the Endeavor Service Office.
Cash Value--The Policy Value less the Contingent Deferred Sales Charge, if
any, and less any applicable premium taxes.
Code--The Internal Revenue Code of 1986, as amended.
Current Interest Guarantee--AUSA's guarantee to pay a declared Current
Interest Rate on amounts under a Policy allocated to the Fixed
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Account. A particular Current Interest Guarantee will be in effect for at least
one year.
Current Interest Guarantee Period--The period during which a Current Interest
Guarantee is in effect.
Current Interest Rate--The interest rate currently guaranteed to be paid on
amounts under a Policy allocated to the Fixed Account. This interest rate will
always equal or exceed a minimum of 4%.
Date of Issue--The date the Policy is issued, as shown on the Policy Schedule
Page.
Due Proof of Death--A certified copy of a death certificate, a certified copy
of a decree of a court of competent jurisdiction as to the finding of death, a
written statement by the attending physician, or any other proof satisfactory
to AUSA will constitute Due Proof of Death.
Fixed Account--All of the assets of AUSA that are not in separate accounts.
Fixed Annuity Payments--Payments made pursuant to an Annuity Payment Option
which do not fluctuate in amount.
Investment Options--The Fixed Account and any of the Subaccounts of the
Mutual Fund Account.
Mutual Fund Account--The AUSA Endeavor Variable Annuity Account, a separate
account established and registered as a unit investment trust under the
Investment Company Act of 1940 to which Premium Payments under the Policies may
be allocated and which invests in the WRL Growth Portfolio of the WRL Series
Fund, Inc., managed by Janus Capital Corporation, and the Endeavor Series
Trust.
Nonqualified Policy--A Policy other than a Qualified Policy.
Policy--One of the variable annuity policies offered by this Prospectus.
Policy Anniversary--Each anniversary of the Date of Issue.
Policy Owner or Owner--The person who may exercise all rights and privileges
under the Policy. The Policy Owner during the lifetime of the Annuitant and
prior to the Annuity Commencement Date is the person designated as the Policy
Owner in the application or a Successor Owner; the Policy Owner on and after
the Annuity Commencement Date is the Annuitant; and the Policy Owner after the
death of the Annuitant who is also the Owner (unless the Owner has elected in
writing that the death benefit be paid upon the Annuitant's death and AUSA
agrees to such an election), is the Beneficiary.
Policy Value--The sum of the value of all Accumulation Units credited to a
Policy for any particular Valuation Period in the Mutual Fund Account, plus the
value in the Fixed Account.
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Policy Year--A Policy Year begins on the Date of Issue and each anniversary
of the Date of Issue.
Premium Payment--An amount paid to AUSA by the Policy Owner or on the Policy
Owner's behalf as consideration for the benefits provided by the Policy.
Qualified Policy--A Policy that has received favorable tax treatment under
Section 401, 403, 408, 457 or any other similar provision of the Code.
Service Office--Financial Markets Division--Variable Annuity Dept., 4333
Edgewood Road, N.E., Cedar Rapids, IA 52499.
Subaccount--A segregated account within the Mutual Fund Account which invests
in a specified Portfolio of the Underlying Funds.
Successor Policy Owner--A person appointed by the Policy Owner to succeed to
ownership of the Policy in the event of the death of the Policy Owner who is
not the Annuitant before the Annuity Commencement Date.
Underlying Funds--The WRL Growth Portfolio of the WRL Series Fund, Inc.,
managed by Janus Capital Corporation, and the Endeavor Series Trust.
Valuation Period--The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of values.
Such determination shall be made on each Business Day.
Variable Annuity Payments--Payments made pursuant to an Annuity Payment
Option which fluctuate as to dollar amount or payment term in relation to the
investment performance of the specified Subaccounts within the Mutual Fund
Account.
Written Notice or Request--Written notice, signed by the Policy Owner, that
gives AUSA the information it requires and is received at the Service Office.
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<PAGE>
THE ENDEAVOR VARIABLE ANNUITY
SUMMARY
THE POLICY
The Endeavor Variable Annuity is a Flexible Premium Variable Annuity which
can be purchased on a non-tax qualified basis ("Nonqualified Policy") or with
the proceeds from certain plans qualifying for favorable federal income tax
treatment ("Qualified Policy"). The Owner allocates the Premium Payments among
the two Endeavor Accounts of AUSA Life Insurance Company, Inc. ("AUSA"): the
AUSA Endeavor Variable Annuity Account (the "Mutual Fund Account") and the
Fixed Account.
THE ACCOUNTS
The Mutual Fund Account. The Mutual Fund Account is a separate account of
AUSA, which invests exclusively in shares of the WRL Growth Portfolio of the
WRL Series Fund, Inc., managed by Janus Capital Corporation, and the eight
portfolios of the Endeavor Series Trust (collectively the "Underlying Funds").
The Endeavor Series Trust is a mutual fund managed by Endeavor Investment
Advisers, a general partnership between Endeavor Management Co. and AUSA
Financial Markets, Inc., an affiliate of AUSA. Endeavor Investment Advisers
contracts with TCW Funds Management, Inc. (a subsidiary of The TCW Group,
Inc.), T. Rowe Price Associates, Inc., Quest for Value Advisors (a subsidiary
of Oppenheimer Capital), The Boston Company Asset Management, Inc. (an indirect
wholly-owned subsidiary of Mellon Bank Corporation) and Rowe Price-Fleming
International, Inc. for investment advisory services. The WRL Growth Portfolio,
managed by Janus Capital Corporation, is a portfolio within the WRL Series
Fund, Inc. which is a mutual fund whose investment adviser is Western Reserve
Life Assurance Co. of Ohio ("Western Reserve"), an affiliate of AUSA. Western
Reserve contracts with Janus Capital Corporation as a sub-adviser to the WRL
Growth Portfolio for investment advisory services. The Underlying Funds
currently have nine available Portfolios: the WRL Growth Portfolio, managed by
Janus Capital Corporation; the Managed Asset Allocation Portfolio; the Money
Market Portfolio; the T. Rowe Price International Stock Portfolio (formerly the
Global Growth Portfolio); the Quest for Value Equity Portfolio; the Quest for
Value Small Cap Portfolio; the U.S. Government Securities Portfolio; the T.
Rowe Price Equity Income Portfolio; and the T. Rowe Price Growth Stock
Portfolio (the "Portfolios"). Each of the nine Subaccounts of the Mutual Fund
Account invests solely in a corresponding Portfolio of the Underlying Funds.
Because Policy Values may depend on the investment experience of the selected
Subaccounts, the Owner bears the entire investment risk with respect to Premium
Payments allocated to, and amounts transferred to, the Mutual Fund Account.
(See the "Mutual Fund Account," p. 21.)
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<PAGE>
The Fixed Account. The Fixed Account guarantees safety of principal and a
minimum 4% return on Premium Payments allocated to, and amounts transferred to,
the Fixed Account. AUSA may, in its sole discretion, declare a higher Current
Interest Rate. A Current Interest Rate is guaranteed for at least one year.
(See "The Fixed Account," p. 25.)
PREMIUM PAYMENTS
A Nonqualified Policy may be purchased with an initial Premium Payment of at
least $5,000, and a Qualified Policy generally may be purchased with an initial
Premium Payment of at least $1,000, but a Policy purchased and used in
connection with a Tax Deferred 403(b) Annuity may be purchased with an initial
Premium Payment of at least $50. An Owner may make additional Premium Payments
of at least $500 each under either a Nonqualified Policy or a Qualified Policy,
or $50 each under a Policy used in connection with a Tax Deferred 403(b)
Annuity, at any time before the Annuity Commencement Date. There is nothing
deducted from Premium Payments, so all funds are invested immediately. (But see
"Contingent Deferred Sales Charge," p. 39.)
On the Date of Issue, the initial Premium Payment is allocated among the
Investment Options (that is, among the Fixed Account and/or the Subaccounts of
the Mutual Fund Account) in accordance with the allocation percentages
specified by the Owner in the Policy application. Any allocation must be in
whole percents, and the total allocation must equal 100%. Allocations for
additional Premium Payments may be changed by sending Written Notice to AUSA's
Service Office. (See "Premiums Payments," p. 28.)
TRANSFERS
An Owner can transfer Policy Values from one Account or Subaccount to another
Account or Subaccount prior to the Annuity Commencement Date, with certain
limitations. The minimum amount which may be transferred is the lesser of $500
or the entire Account or Subaccount Value. However, following a transfer out of
a particular Account or Subaccount, at least $500 must remain in that Account
or Subaccount. Transfers out of the Mutual Fund Account currently may be made
as often as the Owner wishes by sending Written Notice to the Service Office.
Transfers from the One Year Option Fixed Account (see "The Fixed Account", p.
25), except through Dollar Cost Averaging, are not allowed. Transfers from the
Three Year Option of the Fixed Account are subject to a yearly limit equal to
the greater of 25% of the current policy value in the Three Year Option Fixed
Account, or the amount transferred out of the Three Year Option Fixed Account
during the prior Policy Year.
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<PAGE>
A charge may be imposed for any transfers in excess of 12 per Policy Year,
but currently there is no charge for any transfers. (See "Transfers," p. 26.)
SURRENDERS
The Owner may elect to surrender all or a portion of the Cash Value ($500
minimum) in exchange for a cash withdrawal payment from AUSA at anytime prior
to the earlier of the Annuitant's death or the Annuity Commencement Date. The
Cash Value equals the Policy Value less any applicable Contingent Deferred
Sales Charge (described below) and any applicable premium taxes. A surrender
request must be made by Written Request, and a request for a partial surrender
must specify the Accounts or Subaccounts from which the withdrawal is
requested. There is currently no limit on the frequency or timing of
withdrawals. (See "Surrenders," p. 30.) In addition to the Contingent Deferred
Sales Charge and any applicable premium taxes, surrenders may be subject to
income taxes and a 10% tax penalty.
CHARGES AND DEDUCTIONS
Contingent Deferred Sales Charge. In order to permit investment of the entire
Premium Payment, AUSA does not deduct sales or other charges at the time of
investment. However, a Contingent Deferred Sales Charge of up to 7% of the
amount withdrawn is imposed on certain full or partial withdrawals of Premium
Payments in order to cover expenses relating to the sale of the Policies. The
applicable Contingent Deferred Sales Charge is based on the period of time
elapsed since payment of the Premium Payment(s) being withdrawn, and there will
be no Charge imposed seven or more years after the Premium Payment(s) was paid.
For purposes of determining the applicable Contingent Deferred Sales Charge,
Premium Payments are considered to be withdrawn on a "first in--first out"
basis. (See "Contingent Deferred Sales Charge," p. 39.) Amounts withdrawn in
the first Policy Year, or the second and all subsequent withdrawals in any
other Policy Year, or in excess of 10% of the Policy Value, even if it is the
first withdrawal in any Policy Year, may be subject to a Contingent Deferred
Sales Charge (of up to 7%). (Put another way, after the first Policy Year, up
to 10% of the Policy Value may be withdrawn without a Contingent Deferred Sales
Charge if it is the first withdrawal in the Policy Year). Amounts applied to
provide an Annuity, if applied during the first five Policy Years and applied
under certain Payment Options, may also be subject to a Contingent Deferred
Sales Charge. See ("Surrenders," p. 30.)
Account Charges. AUSA deducts a daily charge equal to a percentage of the net
assets in the Mutual Fund Account for the mortality and expense risks assumed
by AUSA. The effective annual rate of this charge is 1.25% of the value of the
Account's net assets. (See "Mortality and Expense Risk Charge," p. 40.)
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<PAGE>
AUSA also deducts a daily Administrative Charge from the net assets of the
Mutual Fund Account to partially cover expenses incurred by AUSA in connection
with the administration of the Account and the Policies. The effective annual
rate of this charge is currently .15% of the value of each Account's net
assets. This charge is guaranteed never to exceed .30%. (See "Administrative
Charges," p. 41.)
The account charges for mortality and expense risks and administrative
expenses are guaranteed not to exceed their current level of a total of 1.40%.
Policy Charges. There is also an annual Policy Maintenance Charge each year
for Policy maintenance and related administrative expenses. This charge is the
lesser of 2% of the Policy Value or $35 per year and is deducted only from the
Mutual Fund Account. For Policies issued on or after May 1, 1995, this charge
is waived if the sum of the Premium Payments made less the sum of all partial
withdrawals is at least $50,000 on the Policy Anniversary. THIS CHARGE WILL NOT
BE INCREASED IN THE FUTURE. (See "Administrative Charges," p. 41.)
Taxes. AUSA may incur premium taxes relating to the Policies. When permitted
by state law, AUSA will not deduct any premium taxes related to a particular
Policy from the Policy Value until withdrawal of all Policy Value or until the
Annuity Commencement Date. (See "Premium Taxes," p. 41.)
No charges are currently made against any of the Accounts for federal, state,
or local income taxes. Should AUSA determine that any such taxes may be imposed
with respect to any of the Accounts, AUSA may deduct such taxes from amounts
held in the relevant Account. (See "Federal, State and Local Taxes," p. 42.)
Charges Against the Underlying Funds. The value of the net assets of the
Subaccounts of the Mutual Fund Account will reflect the investment advisory fee
and other expenses incurred by the Underlying Funds.
Expense Data. The charges and deductions are summarized in the following
tables. This tabular information regarding expenses assumes that the entire
Policy Value is in the Mutual Fund Account.
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<TABLE>
<CAPTION>
T. ROWE QUEST QUEST T. ROWE T. ROWE
MANAGED PRICE FOR FOR U.S. PRICE PRICE
ASSET MONEY INTERNATIONAL WRL VALUE VALUE GOVERNMENT EQUITY GROWTH
ALLOCATION MARKET STOCK GROWTH EQUITY SMALL CAP SECURITIES INCOME STOCK
---------- ------ ------------- ------ ------ --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
POLICY OWNER TRANSACTION
EXPENSES/1/
Sales Load On Purchase
Payments.............. 0 0 0 0 0 0 0 0 0
Maximum Contingent
Deferred Sales Charge
(as a % of Premium
Payment
Surrendered)/2/....... 7% 7% 7% 7% 7% 7% 7% 7% 7%
Surrender Fees......... 0 0 0 0 0 0 0 0 0
--------------------------------------------------------------------------------------------------
Annual Policy Fee $35 Per Policy
--------------------------------------------------------------------------------------------------
Transfer Fee First 12 Transfers Per Year: NO FEE
More than 12 in One Year: Currently no fee
MUTUAL FUND ACCOUNT
ANNUAL EXPENSES (as a
percentage of account
value)
Mortality and Expense
Risk Fees............. 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
Administrative Charge.. 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Mutual Fund
Account Annual
Expenses.............. 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40%
UNDERLYING FUNDS ANNUAL
EXPENSES (as a
percentage of average
net assets)
Management Fees ....... 0.75% 0.50% 0.90% 0.80% 0.80% 0.80% 0.65% 0.80% 0.80%
Other Expenses......... 0.15% 0.35% 0.26% 0.04% 0.22% 0.23% 0.13% 0.50% 0.50%
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Underlying Funds
Annual Expenses/3/.... 0.90% 0.85% 1.16% 0.84% 1.02% 1.03% 0.78%(/3/) 1.30%(/4/) 1.30%(/4/)
</TABLE>
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/1/ The Contingent Deferred Sales Charge and Transfer Fee, if any is imposed,
apply to each Policy, regardless of how Policy Value is allocated among the
Mutual Fund Account and the Fixed Account. The Annual Policy Fee and Mutual
Fund Account Annual Expenses do not apply to the Fixed Account. (See "Other
Expenses Including Investment Advisory Fees," p.42.)
/2/ The Contingent Deferred Sales Charge is decreased based on the Policy year
in which the withdrawal is made, from 7% in the Policy year in which the
Premium payment was made to 0% in the eighth Policy Year after the Premium
payment was made.
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<PAGE>
/3/ During 1994 Endeavor Series Trust's investment manager ("Manager") waived
payment of a portion of its management fees and reimbursed other expenses
for certain of the Underlying Funds. Without the waiver, the actual
management fee and other expenses on an annualized basis were 1.83% of
average net assets of the U.S. Government Securities Portfolio. The Manager
has agreed, until terminated by the Manager, to assume expenses of the
Portfolios that exceed the following rates: Managed Asset Allocation--1.25%;
Money Market--0.99%; T. Rowe Price International Stock--1.53%; Quest for
Value Equity--1.30%; Quest for Value Small Cap--1.30%; U.S. Government
Securities--1.00%; T. Rowe Price Equity Income--1.30%; T. Rowe Price Growth
Stock--1.30%.
/4/ The Underlying Fund expenses for the T. Rowe Price Equity Income Portfolio,
and T. Rowe Price Growth Stock Portfolio are estimates for the first year of
operations.
Examples
An Owner would pay the following expenses on a $1,000 investment, assuming a
5% annual return on assets:
1. If the Policy is surrendered at the end of the applicable time period:*
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Managed Asset Allocation Portfolio.............. $94 $125 $158 $274
Money Market Portfolio.......................... $94 $123 $156 $269
T. Rowe Price International Stock Portfolio..... $97 $133 $171 $299
WRL Growth Portfolio............................ $94 $123 $155 $268
Quest for Value Equity Portfolio................ $96 $128 $164 $285
Quest for Value Small Cap Portfolio............. $96 $129 $165 $286
U.S. Government Securities Portfolio............ $93 $121 $151 $258
T. Rowe Price Equity Income Portfolio........... $98 $137 $179 $317
T. Rowe Price Growth Stock Portfolio............ $98 $137 $179 $317
2. If the Policy is annuitized at the end of the applicable time period:*
Managed Asset Allocation Portfolio.............. $24 $ 75 $128 $274
Money Market Portfolio.......................... $24 $ 73 $126 $269
T. Rowe Price International Stock Portfolio..... $27 $ 83 $141 $299
WRL Growth Portfolio............................ $24 $ 73 $125 $268
Quest for Value Equity Portfolio................ $26 $ 78 $134 $285
Quest for Value Small Cap Portfolio............. $26 $ 79 $135 $286
U.S. Government Securities Portfolio............ $23 $ 71 $121 $258
T. Rowe Price Equity Income Portfolio........... $28 $ 87 $149 $317
T. Rowe Price Growth Stock Portfolio............ $28 $ 87 $149 $317
</TABLE>
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<PAGE>
3. If the Policy is not surrendered or annuitized:
<TABLE>
<S> <C> <C> <C> <C>
Managed Asset Allocation Portfolio........................... $24 $ 75 $128 $274
Money Market Portfolio....................................... $24 $ 73 $126 $269
T. Rowe Price International Stock Portfolio.................. $27 $ 83 $141 $299
WRL Growth Portfolio......................................... $24 $ 73 $125 $268
Quest for Value Equity Portfolio............................. $26 $ 76 $134 $285
Quest for Value Small Cap Portfolio.......................... $26 $ 79 $135 $286
U.S. Government Securities Portfolio......................... $23 $ 71 $121 $258
T. Rowe Price Equity Income Portfolio........................ $28 $ 87 $149 $317
T. Rowe Price Growth Stock Portfolio......................... $28 $ 87 $149 $317
</TABLE>
The above tables are intended to assist the Owner in understanding the costs
and expenses that will be borne, directly or indirectly. These include the
expenses of the Underlying Funds. See "Charges and Deductions," p. 39, and the
Underlying Funds' prospectuses. In addition to the expenses listed above,
premium taxes may be applicable.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. The
figures and data for the Underlying Fund annual expenses have been provided by
Western Reserve Life Assurance Co. of Ohio and Endeavor Investment Advisers,
and while AUSA does not dispute these figures, AUSA does not guaranty their
accuracy.
In these examples, the $35 Annual Policy Fee is reflected as a charge of
0.0979% based on an average Policy Value of $35,742.
- ----------------------------------
* If the Policy is annuitized during the first five Policy Years, under a
period certain only payment option, with payments of less than five years,
then the expenses would be the same as if the Policy were surrendered.
DEATH BENEFIT
In the event that the Annuitant who is not the Owner dies prior to the
Annuity Commencement Date, the Owner will become the Annuitant unless the
Owner specifically requests on the application or in writing that the death
benefit be paid upon the Annuitant's death and AUSA agrees to such an
election. Upon receipt of proof that the Annuitant, who is the Owner, has died
before the Annuity Commencement Date, the Death Benefit is calculated and is
payable to the Beneficiary when we receive an election of the method of
settlement and return of the Policy. During the first seven policy years, the
Death Benefit will be the greater of (a) the Policy Value on the date proof of
death and election of the method of settlement are received; or (b) the total
Premiums paid less any Adjusted Partial Withdrawals (see page 37) taken. After
the seventh Policy Anniversary, the Death Benefit amount will be the greater
of (a), (b), or (c), where (a) and (b) are defined above and where (c) is the
Policy Value on the seventh Policy Anniversary plus all Premiums paid less any
Adjusted Partial Withdrawals (see page 37) taken since that Policy
Anniversary. This death benefit does not apply on the death of the Owner if
the Owner is not the Annuitant (see "Death
- 13 -
<PAGE>
of Owner," p. 38). These death benefit provisions may vary depending on which
state the Policy is issued and when it was issued. No Contingent Deferred
Sales Charge is imposed upon amounts received as a Death Benefit. The Death
Benefit may be paid as either a lump sum cash benefit or as an Annuity as
permitted by federal or state law. (See "Death Benefit," p. 37.)
RIGHT TO RETURN THE POLICY
The Policy Owner may, until the end of the period of time specified in the
Policy, examine the Policy and return it for a refund. The applicable period
will depend on the state in which the Policy is issued. In New York it is
twenty (20) days (in other states it may be ten (10) days) after the Policy is
delivered to the Policy Owner. The amount of refund will also depend on the
state in which the Policy is issued. Ordinarily, the amount of the refund will
be the sum of all Premium Payments made under the Policy and the accumulated
gains or losses in the Mutual Fund Account, if any. However, some states may
require a return of the premium(s) paid, or the greater of the premium(s) paid
or Cash Value. AUSA will pay the refund within seven (7) days after it
receives written notice of cancellation and the returned Policy.
FEDERAL INCOME TAX CONSEQUENCES OF INVESTMENT IN THE POLICY
With respect to Owners who are natural persons, there should be no federal
income tax on increases in the Policy Value until a distribution under the
Policy occurs (e.g., a surrender or Annuity Payment) or is deemed to occur
(e.g., a pledge or assignment of a Policy). Generally, all or a portion of any
distribution or deemed distribution will be taxable as ordinary income. The
taxable portion of certain distributions will be subject to withholding unless
the recipient elects otherwise. In addition, prior to age 59 1/2 a ten percent
penalty tax may apply to certain distributions or deemed distributions under
the Policy. (See "Certain Federal Income Tax Consequences," p. 42.)
INQUIRIES AND WRITTEN NOTICES AND REQUESTS
Any questions about procedures or the Policy, or any Written Notice or
Written Request required to be sent to AUSA, should be sent to AUSA's Service
Office, Financial Markets Division--Variable Annuity Dept., 4333 Edgewood
Road, N.E., Cedar Rapids, Iowa 52499. Inquiries may be made by calling 800-
525-6205. All inquiries, Notices and Requests should include the Policy
number, the Owner's name and the Annuitant's name.
* * *
Note: The foregoing summary is qualified in its entirety by the detailed
information in the remainder of this Prospectus and in the Statement of
Additional Information and in the prospectuses for the Underlying Funds and in
the Policy, all of which should be referred to for more detailed information.
This Prospectus generally describes only the Policy and the Mutual Fund
Account. Separate prospectuses describe the Underlying Funds. (There is no
prospectus for the Fixed Account since interests in the Fixed Account are not
securities. See "The Fixed Account," p. 25.)
- 14 -
<PAGE>
CONDENSED FINANCIAL INFORMATION
The Accumulation Unit Values and the number of Accumulation Units outstanding
for each Subaccount from the date of inception:
<TABLE>
<CAPTION>
MANAGED ASSET ALLOCATION SUBACCOUNT
--------------------------------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
*...... none none none
<CAPTION>
MONEY MARKET SUBACCOUNT
--------------------------------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
*...... none none none
<CAPTION>
T. ROWE PRICE INTERNATIONAL STOCK SUBACCOUNT**
--------------------------------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
*...... none none none
<CAPTION>
WRL GROWTH SUBACCOUNT
--------------------------------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
*...... none none none
<CAPTION>
QUEST FOR VALUE EQUITY SUBACCOUNT
--------------------------------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
*...... none none none
<CAPTION>
QUEST FOR VALUE SMALL CAP SUBACCOUNT
--------------------------------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
*...... none none none
<CAPTION>
U.S. GOVERNMENT SECURITIES SUBACCOUNT
--------------------------------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
*...... none none none
<CAPTION>
T. ROWE PRICE EQUITY INCOME SUBACCOUNT
--------------------------------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
*...... none none none
<CAPTION>
T. ROWE PRICE GROWTH STOCK SUBACCOUNT
--------------------------------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
*...... none none none
</TABLE>
- ----------------------------------
* Had not commenced business as of December 31, 1994.
**Prior to March 24, 1995, the T. Rowe Price International Stock Subaccount was
known as the Global Growth Subaccount.
- 15 -
<PAGE>
FINANCIAL STATEMENTS
The financial statements of AUSA and the independent auditors' report thereon
are in the Statement of Additional Information which is available free upon
request.
HISTORICAL PERFORMANCE DATA
STANDARDIZED PERFORMANCE DATA
From time to time, AUSA may advertise historical yields and total returns for
the Subaccounts of the Mutual Fund Account. In addition, AUSA may advertise the
effective yield of the Money Market Subaccount. These figures will be
calculated according to standardized methods prescribed by the Securities and
Exchange Commission ("SEC"). They will be based on historical earnings and are
not intended to indicate future performance.
The yield of the Money Market Subaccount for a Policy refers to the
annualized income generated by an investment under a Policy in the Subaccount
over a specified seven-day period. The yield is calculated by assuming that the
income generated for that seven-day period is generated each seven-day period
over a 52-week period and is shown as a percentage of the investment. The
effective yield is calculated similarly but, when annualized, the income earned
by an investment under a Policy in the Subaccount is assumed to be reinvested.
The effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
The yield of a Subaccount of the Mutual Fund Account (other than the Money
Market Subaccount) for a Policy refers to the annualized income generated by an
investment under a Policy in the Subaccount over a specified thirty-day period.
The yield is calculated by assuming that the income generated by the investment
during that thirty-day period is generated each thirty-day period over a 12-
month period and is shown as a percentage of the investment.
The total return of a Subaccount of the Mutual Fund Account refers to return
quotations assuming an investment under a Policy has been held in the
Subaccount for various periods of time including, but not limited to, a period
measured from the date the Subaccount commenced operations. When a Subaccount
has been in operation for one, five, and ten years, respectively, the total
return for these periods will be provided. The total return quotations for a
Subaccount will represent the average annual compounded rates of return that
equate an initial investment of $1,000 in the Subaccount to the redemption
value of that investment as of the first day of each of the periods for which
total return quotations are provided.
The yield and total return calculations for a Subaccount do not reflect the
effect of any premium taxes that may be applicable to a
- 16 -
<PAGE>
particular Policy. The yield calculations also do not reflect the effect of any
Contingent Deferred Sales Charge that may be applicable to a particular Policy.
To the extent that a premium tax and/or Contingent Deferred Sales Charge is
applicable to a particular Policy, the yield and/or total return of that Policy
will be reduced. For additional information regarding yields and total returns
calculated using the standard formats briefly summarized above, please refer to
the Statement of Additional Information, a copy of which may be obtained from
AUSA.
HYPOTHETICAL PERFORMANCE DATA OF SUBACCOUNTS
Prior to December 31, 1994, the Subaccounts had not yet commenced operations.
However, the following is standardized average annual total return information
based on the hypothetical assumption that the Subaccounts had been available to
the AUSA Endeavor Variable Annuity Account since inception of the corresponding
Portfolio:
<TABLE>
<CAPTION>
INCEPTION
1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR OF THE
PERIOD PERIOD PERIOD PERIOD PERIOD PORTFOLIO
ENDED ENDED ENDED ENDED ENDED 10/2/86 TO
SUBACCOUNT 12/31/94 12/31/94 12/31/94 12/31/94 12/31/94 12/31/94
---------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
WRL Growth.............. (15.12)% (6.19)% (3.82)% 9.41% 7.21% 12.70%
</TABLE>
<TABLE>
<CAPTION>
ONE YEAR INCEPTION OF
PERIOD ENDED THE SUBACCOUNT
12/31/94 TO 12/31/94
------------ --------------
<S> <C> <C>
Managed Asset Allocation/1/......................... (12.12)% 6.43%
Quest for Value Equity/2/........................... (2.83)% (0.55)%
Quest for Value Small Cap/3/........................ (8.63)% 1.06%
U.S. Government Securities/4/....................... N/A (11.79)%
</TABLE>
- ----------------------------------
/1/ Inception Date of corresponding Portfolio--April 8, 1991.
/2/ Inception Date of corresponding Portfolio--May 27, 1993.
/3/ Inception Date of corresponding Portfolio--May 4, 1993.
/4/ Inception Date of corresponding Portfolio--May 13, 1994.
T. ROWE PRICE EQUITY INCOME SUBACCOUNT AND T. ROWE PRICE GROWTH STOCK
SUBACCOUNT
The T. Rowe Price Equity Income Subaccount and the T. Rowe Price Growth Stock
Subaccount had not commenced operations as of December 31, 1994, so no
historical performance data exists for those Subaccounts. Similarly, the T.
Rowe Price Equity Income and T. Rowe Price Growth Stock Portfolios of Endeavor
Series Trust had not commenced operations as of December 31, 1994, so no
historical performance data exists for those Portfolios, which are the
Portfolios that the T. Rowe Price Equity Income and T. Rowe Price Growth Stock
Subaccounts will invest in.
T. Rowe Price Associates, Inc. is the investment adviser for the T. Rowe
Price Equity Income and T. Rowe Price Growth Stock Portfolios of
- 17 -
<PAGE>
Endeavor Series Trust and also manages the T. Rowe Price Equity Income Fund,
Inc. ("Equity Income Fund") and the T. Rowe Price Growth Stock Fund, Inc.
("Growth Stock Fund"), registered open-end investment companies. These
portfolios are not available for investment under the AUSA Endeavor Variable
Annuity. However, they have the same investment objectives, and use the same
investment strategies and techniques as contemplated for the T. Rowe Price
Equity Income and T. Rowe Price Growth Stock Portfolios that are available
under the AUSA Endeavor Variable Annuity. The following figures represent what
the investment performance of the T. Rowe Price Equity Income Subaccount and
the T. Rowe Price Growth Stock Subaccount would have been, IF those Subaccounts
had been in existence since 1983 and 1985, respectively, and invested in the
Equity Income Fund and Growth Stock Fund. Since these Subaccounts only
commenced operations in January, 1995, and since these Subaccounts do not
invest in the Equity Income Fund and Growth Stock Fund, THESE ARE NOT ACTUAL
PERFORMANCE FIGURES FOR THE T. ROWE PRICE EQUITY INCOME AND T. ROWE PRICE
GROWTH STOCK SUBACCOUNTS. These are hypothetical average annual total return
figures, which represent the performance of the Equity Income Fund and Growth
Stock Fund (which are not available under the Policy), adjusted for the charges
and deductions applicable to the AUSA Endeavor Variable Annuity Policy.
<TABLE>
<CAPTION>
TEN YEARS
ENDED
FIVE YEARS 12/31/94
YEAR ENDED ENDED OR
12/31/94 12/31/94 INCEPTION DATE*
---------- ---------- ---------------
<S> <C> <C> <C>
Equity Income............................. (2.38)% 8.02% 11.96%
Growth Stock.............................. (6.02)% 7.78% 12.05%
</TABLE>
- ----------------------------------
* Inception Date of T. Rowe Price Equity Income Fund: 10/31/85.
T. ROWE PRICE INTERNATIONAL STOCK SUBACCOUNT
Effective January 1, 1995, Rowe Price-Fleming International, Inc. became the
new Adviser to the Global Growth Portfolio. The Portfolio's name has been
changed to the T. Rowe Price International Stock Portfolio and the Portfolio's
shareholders have approved a change in investment objective from investments in
small capitalization companies on a global basis to investments in a broad
range of companies on an international basis (i.e., non-U.S. companies).
Rowe Price-Fleming International, Inc. is also the investment adviser of the
T. Rowe Price International Stock Fund, Inc. ("International Stock Fund"), a
registered open-end investment company. This portfolio is not available for
investment under the AUSA Endeavor Variable Annuity. However, it has the same
investment objectives and uses the same investment strategies and techniques as
contemplated for the T. Rowe Price International Stock Portfolio that is
available under the AUSA Endeavor Variable Annuity. The following figures
represent what the investment performance of the T. Rowe Price International
Stock Subaccount would have been, IF that Subaccount
- 18 -
<PAGE>
had been in existence since 1985 and invested in the International Stock Fund.
Since this Subaccount does not invest in the International Stock Fund, THESE
ARE NOT ACTUAL PERFORMANCE FIGURES FOR THE T. ROWE PRICE INTERNATIONAL STOCK
SUBACCOUNT. These are hypothetical average annual total return figures, which
represent the performance of the International Stock Fund (which are not
available under the Policy), adjusted for the charges and deductions applicable
to the AUSA Endeavor Variable Annuity Policy.
<TABLE>
<CAPTION>
FIVE YEARS TEN YEARS
YEAR ENDED ENDED ENDED
12/31/94 12/31/94 12/31/94
---------- ---------- ---------
<S> <C> <C> <C>
International Stock Fund........................ (7.67)% 5.38% 16.36%
</TABLE>
THESE FIGURES ARE NOT AN INDICATION OF THE PRESENT, PAST, OR FUTURE
PERFORMANCE OF THE T. ROWE PRICE INTERNATIONAL STOCK, T. ROWE PRICE EQUITY
INCOME OR T. ROWE PRICE GROWTH STOCK SUBACCOUNTS AVAILABLE UNDER THE AUSA
ENDEAVOR VARIABLE ANNUITY. The figures for the five year and from inception
periods for the Equity Income Fund reflect waiver of advisory fees and
reimbursement of other expenses. In the absence of such waivers, the average
annual total return figures above for the five year and from inception periods
would have been lower.
The performance data for periods prior to the date the Subaccounts commenced
operations is based on the performance of the corresponding Portfolio and the
assumption that the applicable Subaccount was in existence for the same period
as the corresponding Portfolio with a level of charges equal to those currently
assessed against the Subaccount or against Owners' contract values under the
Policies. The WRL Series Fund, Inc.'s Growth Portfolio, managed by Janus
Capital Corporation, commenced operations on October 2, 1986. For purposes of
the calculation of the performance data for the WRL Growth Subaccount prior to
July 1, 1992, the deductions for the mortality and expense risk charge and
administrative charge are made on a monthly basis, rather than a daily basis.
The monthly deduction is made at the beginning of each month and generally
approximates the performance which would have resulted if the Subaccount had
actually been in existence since the inception of the WRL Series Fund, Inc.
Performance data for periods of less than seven years reflect deduction of the
Contingent Deferred Sales Charge.
NON-STANDARDIZED PERFORMANCE DATA
AUSA may from time to time also advertise or disclose average annual total
return or other performance data in non-standard formats for a Subaccount of
the Mutual Fund Account. The non-standard performance data may assume that no
Contingent Deferred Sales Charge is applicable, and may also make other
assumptions.
All non-standard performance data will be advertised only if the standard
performance data is also disclosed. For additional information
- 19 -
<PAGE>
regarding the calculation of other performance data, please refer to the
Statement of Additional Information, a copy of which may be obtained from AUSA.
PUBLISHED RATINGS
AUSA may from time to time publish in advertisements, sales literature and
reports to Owners, the ratings and other information assigned to it by one or
more independent rating organizations such as A.M. Best Company, Standard &
Poor's, and Duff & Phelps. The purpose of the ratings is to reflect the
financial strength and/or claims-paying ability of AUSA and should not be
considered as bearing on the investment performance of assets held in the
Mutual Fund Account. Each year the A.M. Best Company reviews the financial
status of thousands of insurers, culminating in the assignment of Best's
ratings. These ratings reflect their current opinion of the relative financial
strength and operating performance of an insurance company in comparison to the
norms of the life/health insurance industry. In addition, the claims-paying
ability of AUSA as measured by Standard & Poor's Insurance Ratings Services or
Duff & Phelps may be referred to in advertisements or sales literature or in
reports to Owners. These ratings are opinions of an operating insurance
company's financial capacity to meet the obligations of its insurance policies
in accordance with their terms. Claims-paying ability ratings do not refer to
an insurer's ability to meet non-policy obligations (i.e., debt/commercial
paper). These ratings do not reflect the investment performance of the Mutual
Fund Account or Fixed Account or the degree of risk associated with an
investment in either account.
AUSA LIFE INSURANCE COMPANY, INC.
AUSA Life Insurance Company, Inc. ("AUSA"), 666 Fifth Avenue, New York, New
York 10103, is a stock life insurance company. It was incorporated under the
laws of the State of New York on October 3, 1947. It is principally engaged in
the sale of life insurance and annuity policies, and is licensed in the
District of Columbia, and in all states except Alabama, Arkansas, Hawaii,
Idaho, Montana and Oregon. As of December 31, 1994, AUSA had assets of $6.0
billion. AUSA is a wholly-owned indirect subsidiary of AEGON USA, Inc., which
conducts substantially all of its operations through subsidiary companies
engaged in the insurance business or in providing non-insurance financial
services. All of the stock of AEGON USA, Inc. is indirectly owned by AEGON n.v.
of the Netherlands. AEGON n.v., a holding company, conducts its business
through subsidiary companies engaged primarily in the insurance business.
- 20 -
<PAGE>
THE ENDEAVOR ACCOUNTS
Premiums paid under a Policy may be allocated to the Mutual Fund Account, to
the Fixed Account, or to a combination of these Accounts.
THE MUTUAL FUND ACCOUNT
The AUSA Endeavor Variable Annuity Account of AUSA Life Insurance Company,
Inc. (the "Mutual Fund Account") was established as a separate investment
account under the laws of the State of New York on September 27, 1994. The
Mutual Fund Account was created due to the assumption of certain policies of
AUSA's affiliate, International Life Investors Insurance Company ("ILI"). The
assumed policies have terms identical to those policies being issued by AUSA.
The ILI policies have been transferred to allow AUSA to succeed to the variable
annuity business of ILI. The Mutual Fund Account receives and invests the
Premiums under the Policies that are allocated to it for investment in shares
of the WRL Growth Portfolio of the WRL Series Fund, Inc. managed by Janus
Capital Corporation, and the Endeavor Series Trust.
The Mutual Fund Account currently is divided into nine Subaccounts.
Additional Subaccounts may be established in the future at the discretion of
AUSA. Each Subaccount invests exclusively in shares of one of the Portfolios of
the Underlying Funds. Under New York law, the assets of the Mutual Fund Account
are owned by AUSA, but they are held separately from the other assets of AUSA
and are not chargeable with liabilities incurred in any other business
operation of AUSA (except to the extent that assets in the Mutual Fund Account
exceed the reserves and other liabilities of the Mutual Fund Account). Income,
gains, and losses incurred on the assets in the Subaccounts of the Mutual Fund
Account, whether or not realized, are credited to or charged against that
Subaccount without regard to other income, gains or losses of any other Account
or Subaccount of AUSA. Therefore, the investment performance of any Subaccount
should be entirely independent of the investment performance of AUSA's general
account assets or any other Account or Subaccount maintained by AUSA.
The Mutual Fund Account is registered with the SEC under the Investment
Company Act of 1940 (the "1940 Act") as a unit investment trust and meets the
definition of a separate account under federal securities laws. However, the
SEC does not supervise the management or the investment practices or policies
of the Mutual Fund Account or AUSA.
Underlying Funds. The Mutual Fund Account will invest exclusively in shares
of Endeavor Series Trust and the WRL Growth Portfolio of the WRL Series Fund,
Inc. (collectively the "Underlying Funds"). The Endeavor Series Trust is a
series-type mutual fund registered with the SEC under the 1940 Act as an open-
end, diversified
- 21 -
<PAGE>
management investment company./5/ The Underlying Funds currently consist of
the following nine Portfolios: the WRL Growth Portfolio, managed by Janus
Capital Corporation, the Managed Asset Allocation Portfolio, the Money Market
Portfolio, the T. Rowe Price International Stock Portfolio (formerly known as
the Global Growth Portfolio), the Quest for Value Equity Portfolio, the Quest
for Value Small Cap Portfolio, the U.S. Government Securities Portfolio, the
T. Rowe Price Equity Income Portfolio, and the T. Rowe Price Growth Stock
Portfolio. The assets of each Portfolio are held separate from the assets of
the other Portfolios, and each Portfolio has its own distinct investment
objectives and policies. Each Portfolio operates as a separate investment
fund, and the income or losses of one Portfolio generally have no effect on
the investment performance of any other Portfolio.
Endeavor Investment Advisers (the "Manager"), an investment adviser
registered with the SEC under the Investment Advisers Act of 1940, is the
Endeavor Series Trust's manager. The Manager selects and contracts with
advisers for investment services for the Portfolios of Endeavor Series Trust,
reviews the advisers' activities, and otherwise performs administerial and
managerial functions for the Endeavor Series Trust. Five advisers, TCW Funds
Management, Inc. (a wholly-owned subsidiary of The TCW Group, Inc.) T. Rowe
Price Associates, Inc., Rowe Price-Fleming International, Inc. (a joint
venture between T. Rowe Price Associates, Inc. and Robert Fleming Holdings
Limited), Quest for Value Advisors, a subsidiary of Oppenheimer Capital and
The Boston Company Asset Management, Inc. (an indirect, wholly-owned
subsidiary of Mellon Bank Corporation) (the "Advisers"), each perform
investment advisory services for particular Portfolios of Endeavor Series
Trust. TCW Funds Management, Inc. is the Adviser for the Managed Asset
Allocation Portfolio and the Money Market Portfolio. T. Rowe Price Associates,
Inc. is the Adviser for the T. Rowe Price Equity Income Portfolio and the T.
Rowe Price Growth Stock Portfolio. Rowe Price-Fleming International, Inc. is
the Adviser for the T. Rowe Price International Stock Portfolio.
Quest for Value Advisors is the Adviser for the Quest for Value Equity
Portfolio and the Quest for Value Small Cap Portfolio. Western Reserve Life
Assurance Co. of Ohio, an affiliate of AUSA, is the Adviser for the WRL Series
Fund, Inc. and contracts with Janus Capital Corporation (also an "Adviser") as
a sub-adviser to the Growth Portfolio of the WRL Series Fund, Inc. The Boston
Company Asset Management, Inc. is the Adviser for the U.S. Government
Securities Portfolio. The Adviser of a Portfolio is responsible for selecting
the investments of the Portfolio consistent with the investment objectives and
policies of the Portfolio, and will conduct securities trading for the
Portfolio. All Advisers are investment advisers registered with the SEC under
the Investment Advisers Act of 1940.
- -----------
/5/ The registration of the Underlying Funds does not involve supervision of the
management or investment practices or policies of the Underlying Funds by
the SEC.
- 22 -
<PAGE>
The investment objectives of each Portfolio are summarized as follows:
Managed Asset Allocation Portfolio--seeks high total return through a managed
asset allocation portfolio of equity, fixed income and money market securities.
Money Market Portfolio--seeks current income, preservation of capital and
maintenance of liquidity through investment in short-term money market
securities. The Portfolio seeks to maintain a constant net asset value of $1.00
per share although no assurances can be given that such constant net asset
value will be maintained.
T. Rowe Price International Stock Portfolio--seeks long-term growth of
capital through investments primarily in common stocks of established non-U.S.
companies.
WRL Growth Portfolio, managed by Janus Capital Corporation--seeks growth of
capital. At most times, this portfolio will be invested primarily in equity
securities which are selected solely for their capital growth potential;
investment income is not a consideration.
Quest for Value Equity Portfolio--seeks long-term capital appreciation
through investment in securities (primarily equity securities) of companies
that are believed by the Portfolio's Adviser to be undervalued in the
marketplace in relation to factors such as the companies' assets or earnings.
Quest for Value Small Cap Portfolio--seeks capital appreciation through
investments in a diversified portfolio consisting primarily of equity
securities of companies with market capitalizations of under $1 billion.
U.S. Government Securities Portfolio--seeks as high a level of total return
as is consistent with prudent investment strategies by investing under normal
conditions at least 65% of its assets in debt obligations and mortgage-backed
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
T. Rowe Price Equity Income Portfolio--seeks to provide substantial dividend
income and also capital appreciation by investing primarily in dividend paying
stocks of established companies.
T. Rowe Price Growth Stock Portfolio--seeks long-term growth of capital and
to increase dividend income through investment primarily in common stocks of
well established growth companies.
THERE IS NO ASSURANCE THAT ANY PORTFOLIO WILL ACHIEVE ITS STATED OBJECTIVE.
MORE DETAILED INFORMATION, INCLUDING A DESCRIPTION OF EACH PORTFOLIO'S
INVESTMENT OBJECTIVE AND POLICIES AND A DESCRIPTION OF RISKS INVOLVED IN
INVESTING IN EACH OF THE PORTFOLIOS AND OF EACH PORTFOLIO'S FEES AND EXPENSES
IS
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CONTAINED IN THE PROSPECTUSES FOR THE UNDERLYING FUNDS, CURRENT COPIES OF
WHICH ARE ATTACHED TO THIS PROSPECTUS. INFORMATION CONTAINED IN THE UNDERLYING
FUNDS' PROSPECTUSES SHOULD BE READ CAREFULLY BEFORE INVESTING IN A SUBACCOUNT
OF THE MUTUAL FUND ACCOUNT.
An investment in the Mutual Fund Account, or in any Portfolio, including the
Money Market Portfolio, is not insured or guaranteed by the U.S. government.
Addition, Deletion, or Substitution of Investments. AUSA cannot and does not
guarantee that any of the Portfolios will always be available for Premium
Payments, allocations, or transfers. AUSA retains the right, subject to any
applicable law, to make changes in the Mutual Fund Account and its
investments. AUSA reserves the right to eliminate the shares of any Portfolio
held by a Subaccount and to substitute shares of another Portfolio of the
Underlying Funds, or of another registered open-end management investment
company for the shares of any Portfolio, if the shares of the Portfolio are no
longer available for investment or if, in AUSA's judgment, investment in any
Portfolio would be inappropriate in view of the purposes of the Mutual Fund
Account. To the extent required by the 1940 Act, substitutions of shares
attributable to an Owner's interest in a Subaccount will not be made without
prior notice to the Owner and the prior approval of the SEC. Nothing contained
herein shall prevent the Mutual Fund Account from purchasing other securities
for other series or classes of variable annuity policies, or from effecting an
exchange between series or classes of variable annuity policies on the basis
of requests made by Owners.
New Subaccounts may be established when, in the sole discretion of AUSA,
marketing, tax, investment or other conditions warrant. Any new Subaccounts
may be made available to existing Owners on a basis to be determined by AUSA.
Each additional Subaccount will purchase shares in a mutual fund portfolio or
other investment vehicle. AUSA may also eliminate one or more Subaccounts if,
in its sole discretion, marketing, tax, investment or other conditions warrant
such change.
In the event any Subaccount is eliminated, AUSA will notify Owners and
request a reallocation of the amounts invested in the eliminated Subaccount.
If no such reallocation is provided by the Owner, AUSA will reinvest the
amounts invested in the eliminated Subaccount in the Subaccount that invests
in the Money Market Portfolio (or in a similar portfolio of money market
instruments) or in another Subaccount, if appropriate.
In the event of any such substitution or change, AUSA may, by appropriate
endorsement, make such changes in the Policies as may be necessary or
appropriate to reflect such substitution or change. Furthermore, if deemed to
be in the best interests of persons having voting rights under the Policies,
the Mutual Fund Account may be (i) operated as a management company under the
1940 Act or any other
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form permitted by law, (ii) deregistered under the 1940 Act in the event such
registration is no longer required or (iii) combined with one or more other
separate accounts. To the extent permitted by applicable law, AUSA also may
transfer the assets of the Mutual Fund Account associated with the Policies to
another account or accounts.
THE FIXED ACCOUNT
This Prospectus is generally intended to serve as a disclosure document only
for the Policy and the Mutual Fund Account. For complete details regarding the
Fixed Account, see the Policy itself.
Premiums allocated and amounts transferred to the Fixed Account become part
of the general account of AUSA, which supports insurance and annuity
obligations. Interests in the general account have not been registered under
the Securities Act of 1933 (the "1933 Act"), nor is the general account
registered as an investment company under the Investment Company Act of 1940
(the "1940 Act"). Accordingly, neither the general account nor any interests
therein are generally subject to the provisions of the 1933 or 1940 Acts and
AUSA has been advised that the staff of the Securities and Exchange Commission
has not reviewed the disclosures in this Prospectus which relate to the fixed
portion.
The Fixed Account is made up of all the general assets of AUSA, other than
those in the Mutual Fund Account or in any other segregated asset account. The
Policy Owner may allocate Premium Payments to the Fixed Account at the time of
Premium Payment or by subsequent transfers from the Mutual Fund Account.
Instead of the Policy Owner bearing the investment risk as is the case for
Policy Value in the Mutual Fund Account, AUSA bears the full investment risk
for all Policy Value in the Fixed Account. AUSA has sole discretion to invest
the assets of its general account, including the Fixed Account, subject to
applicable law.
AUSA currently offers two interest rate guarantee periods in the Fixed
Account, a "One Year Option" and a "Three Year Option." The One Year Option is
only available if the premium paid on the amount transferred into it is set up
on Dollar Cost Averaging (see "Dollar Cost Averaging," p. 27), or will be set
up on Dollar Cost Averaging in the future. Except as otherwise provided in the
Contract, transfers out of the One Year Option, except through Dollar Cost
Averaging, are not allowed. The "One Year Option" guarantees the current
interest rate for one year from the payment or transfer date. At the end of the
one year period, AUSA will declare a renewal rate which will be guaranteed for
at least one year. AUSA also offers a "Three Year Option" which guarantees the
current interest rate for three years from the payment or transfer date. At the
end of the three year period, AUSA will declare a renewal rate which will be
guaranteed for at least one year.
AUSA guarantees that it will credit interest to amounts in the Fixed Account
at an effective annual rate of at least 4.0% per year. AUSA may, IN ITS SOLE
DISCRETION, credit amounts in the Fixed Account with interest
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at a Current Interest Rate in excess of 4.0%. Once declared, a Current
Interest Rate will be guaranteed for at least one year. Transfers out of the
Fixed Account are subject to restrictions on amount and timing. (See
"Transfers," p. 26, and "Surrenders," p. 30). For purposes of crediting
interest, the oldest payment or transfer into the Fixed Account, plus interest
allocable to that payment or transfer, is considered to be withdrawn or
transferred out first; the next oldest payment plus interest is considered to
be transferred out next, and so on (this is a "first-in, first-out"
procedure). The Owner bears the risk that AUSA will not credit interest in
excess of 4% per year.
AUSA guarantees that, at any time prior to the Annuity Commencement Date,
the amount in the Fixed Account allocable to a particular Policy will be not
less than the amount of the Premium Payments allocated or transferred to the
Fixed Account, plus interest at the rate of 4.0% per year, plus any excess
interest credited to amounts in the Fixed Account, less any applicable premium
or other taxes allocable to the Fixed Account, and less any amounts deducted
from the Fixed Account in connection with partial surrenders (including any
Contingent Deferred Sales Charges) or transfers to the Mutual Fund Account.
The Current Interest Rates will be determined by AUSA in its sole
discretion. The Policy Owner bears the risk that no interest will be credited
in excess of 4.0% per year.
TRANSFERS
An Owner can transfer Policy Value from one Investment Option to another
within certain limits.
Subject to the limitations and restrictions described below, transfers from
an Investment Option may be made, up to thirty days prior to the Annuity
Commencement Date, by sending Written Notice, signed by the Policy Owner, to
the Service Office. The minimum amount which may be transferred is the lesser
of $500 or the entire Account or Subaccount Value. If the Account or
Subaccount Value remaining after a transfer is less than $500, AUSA reserves
the right, at its discretion, either to deny the transfer request or to
include that amount as part of the transfer.
Transfers out of a Subaccount of the Mutual Fund Account currently may be
made as often as the Owner wishes, subject to the minimum amount specified
above (AUSA reserves the right to otherwise limit or restrict transfers in the
future).
Transfers out of the One Year Option Fixed Account, except through Dollar
Cost Averaging, are not allowed.
Transfers from the Three Year Option Fixed Account are subject to a yearly
limit equal to 25% of the current Three Year Option Fixed Account Value, or an
amount equal to the amount the Owner transferred out of the Three Year Option
Fixed Account during the prior year,
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whichever is greater. After the Annuity Commencement Date, transfers out of
the Fixed Account are not permitted. (See "Annuity Payment Options," page 33.)
A transfer charge may be imposed for any transfer in excess of 12 per Policy
Year; however, currently there is no charge for any transfers.
DOLLAR COST AVERAGING
Under the Dollar Cost Averaging program, the Policy Owner can instruct AUSA
to automatically transfer an amount specified by the Policy Owner from the
Money Market Subaccount, the One Year Option Fixed Account or the U.S.
Government Securities Subaccount to any other Subaccount or Subaccounts of the
Mutual Fund Account. The automatic transfers can occur monthly or quarterly
and will occur on the 28th day of the month. The first transfer will occur on
the 28th day of the month following AUSA's receipt of the Dollar Cost
Averaging request. The amount transferred each time must be at least $500. A
minimum of six monthly or four quarterly transfers are required. Dollar Cost
Averaging results in the purchase of more Units when the Unit Value is low,
and less units when the Unit Value is high. However, there is no guarantee
that the Dollar Cost Averaging program will result in higher Policy Values or
otherwise be successful.
The Policy Owner can request Dollar Cost Averaging when purchasing the
Policy or at a later date. The program will terminate when the amount in the
Money Market Subaccount, the One Year Option Fixed Account or the U.S.
Government Securities Subaccount is insufficient for the next transfer, at
which time the remaining balance is transferred.
The Owner can increase or decrease the amount of the transfers by sending
AUSA a new Dollar Cost Averaging form. The Owner can discontinue the program
by sending a Written Notice to the Service Office. There is no charge for this
program.
THE POLICY
The Endeavor Variable Annuity Policy is a Flexible Premium Variable Annuity
Policy. The rights and benefits under the Policy are summarized below;
however, the description of the Policy contained in this Prospectus is
qualified in its entirety by the Policy itself, a copy of which is available
upon request from AUSA. The Policy may be purchased on a non-tax qualified
basis ("Nonqualified Policy"). The Policy may also be purchased and used in
connection with retirement plans or individual retirement accounts that
qualify for favorable federal income tax treatment ("Qualified Policy").
POLICY APPLICATION AND ISSUANCE OF POLICIES
Before it will issue a Policy, AUSA must receive a completed Policy
application or transmittal form and a minimum initial Premium
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Payment of $5,000 for a Nonqualified Policy, $50 for a Policy purchased for use
in connection with a Tax Deferred 403(b) Annuity, or $1,000 for any other
Qualified Policy. A Policy ordinarily will be issued only in respect of
Annuitants Age 0 through 80. Acceptance or declination of an application shall
be based on AUSA's underwriting standards, and AUSA reserves the right to
reject any application or Premium Payment based on those underwriting
standards.
If the application can be accepted in the form received, the initial Premium
Payment will be credited to the Policy Value within two Business Days after the
later of receipt of the application or receipt of the initial Premium Payment.
If the initial Premium Payment cannot be credited because the application or
other issuing requirements are incomplete, the applicant will be contacted
within five Business Days and given an explanation for the delay and the
initial Premium Payment will be returned at that time unless the applicant
consents to AUSA's retaining the initial Premium Payment and crediting it as
soon as the necessary requirements are fulfilled.
The date on which the initial Premium Payment is credited to the Policy Value
is the Policy Date. The Policy Date is the date used to determine Policy Years
and Policy Anniversaries.
PREMIUM PAYMENTS
All initial Premium Payment checks or drafts should be made payable to AUSA
Life Insurance Company, Inc. and sent to the Administrative Office. Additional
premium payments should be sent to the Service Office. The Death Benefit will
not take effect until the check or draft for the Premium Payment is honored.
Initial Premium Payment. The minimum initial Premium Payment that AUSA
currently will accept under a Policy is $5,000 under a Nonqualified Policy, $50
under a Policy purchased for use in connection with a Tax Deferred 403(b)
Annuity, and $1,000 under any other Qualified Policy. AUSA reserves the right
to increase or decrease this amount for a class of Policies issued after some
future date. The initial Premium Payment is the only Premium Payment required
to be paid under a Policy.
Additional Premium Payments. While the Annuitant is living and prior to the
Annuity Commencement Date, the Owner may make additional Premium Payments at
any time, and in any frequency. The minimum additional Premium Payment under
both a Nonqualified Policy and a Qualified Policy is $500 with the exception of
Policies used in connection with Tax Deferred 403(b) Annuities, for which the
minimum additional Premium Payment is $50. Additional Premium Payments will be
credited to the Policy and added to the Policy Value as of the Business Day
when they are received.
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<PAGE>
Allocation of Premium Payments. An Owner must allocate Premium Payments to
one or more of the Investment Options. The Owner must specify the initial
allocation in the Policy application. This allocation will be used for
additional Premium Payments unless the Owner requests a change of allocation.
All allocations must be made in whole percentages and must total 100%. The
minimum amount that can be allocated to any Investment Option is $500 ($50 for
Policies used in connection with Tax Deferred Section 403(b) Annuities). If the
Owner fails to specify how Premium Payments are to be allocated, the Premium
Payment(s) cannot be accepted. All additional Premium Payments will be
allocated and credited to the Owner's Policy as of the Valuation Period during
which they are received.
The Owner may change the allocation instructions for future additional
Premium Payments by sending Written Notice, signed by the Owner, to AUSA's
Service Office. The allocation change will apply to payments received after the
date the Written Notice is received.
Payment Not Honored by Bank. Any payment due under the Policy which is
derived, all or in part, from any amount paid to AUSA by check or draft may be
postponed until such time as AUSA determines that such instrument has been
honored.
POLICY VALUE
On the Policy Date, the Policy Value equals the initial Premium Payment.
Thereafter, the Policy Value equals the sum of the values in the Mutual Fund
Account and the Fixed Account. The Policy Value will increase by (1) any
additional Premium Payments received by AUSA; and (2) any increases in the
Policy Value due to investment results of the selected Account(s). The Policy
Value will decrease by (1) any surrenders, including Contingent Deferred Sales
Charges; (2) any decreases in the Policy Value due to investment results of the
selected Accounts or Subaccounts; and (3) the charges imposed by AUSA.
The Policy Value is expected to change from Valuation Period to Valuation
Period, reflecting the investment experience of the selected Account(s) and/or
Subaccount(s), as well as the deductions for charges. A Valuation Period is the
period between successive Business Days. It begins at the close of business on
each Business Day and ends at the close of business on the next succeeding
Business Day. A Business Day is each day that both the New York Stock Exchange
and AUSA's Service Office are open for business. Holidays are generally not
Business Days.
The Mutual Fund Account Value. When a Premium is allocated or an amount is
transferred to a Subaccount of the Mutual Fund Account, it is credited to the
Policy Value in the form of Accumulation Units. Each Subaccount of the Mutual
Fund Account has a distinct Accumulation Unit value (the "Unit Value"). The
number of units credited is determined by dividing the Premium Payment or
amount transferred by the Unit Value of the Subaccount as of the end of the
Valuation Period
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<PAGE>
during which the allocation is made. When amounts are transferred out of, or
surrendered or withdrawn from an Account or Subaccount, units are canceled or
redeemed in a similar manner.
For each Subaccount, the Unit Value for a given Business Day is based on the
net asset value of a share of the corresponding Portfolio of the Underlying
Funds. Therefore, the Unit Values will fluctuate from day to day based on the
investment experience of the corresponding Portfolio. The determination of
Subaccount Unit Values is described in detail in the Statement of Additional
Information.
NON-PARTICIPATING POLICY
The Policy does not participate or share in the profits or surplus earnings
of AUSA. No dividends are payable on the Policy.
DISTRIBUTIONS UNDER THE POLICY
SURRENDERS
The Owner may surrender all or a portion of the Cash Value in exchange for a
cash withdrawal payment from AUSA. The Cash Value is the Policy Value less any
applicable Contingent Deferred Sales Charge and any applicable premium taxes.
(See "Annuity Payment Options," p. 33.)
The Owner may surrender Cash Value from the Mutual Fund Account at any time
during the life of the Annuitant and prior to the Annuity Commencement Date by
sending a Written Request to AUSA's Service Office. The minimum amount that can
be withdrawn from any Subaccount or Account is $500. After the Annuity
Commencement Date, the Policy can only be surrendered if Annuity Payment Option
4-V is in effect. (See "Annuity Payments," p. 32.)
Surrenders from the Fixed Account may be delayed for up to six months.
Currently, the only charge for surrenders is the Contingent Deferred Sales
Charge, if it applies. Premium taxes may also be deducted. Accordingly, the
amount available for surrender is the Cash Value, which is the Policy Value
less any applicable Contingent Deferred Sales Charge and premium taxes.
However, beginning in the second Policy Year, an Owner may surrender up to 10%
of the Policy Value without a Contingent Deferred Sales Charge if no withdrawal
has been made in the current Policy Year. Amounts withdrawn in excess of this
free withdrawal amount or withdrawn in the same Policy Year as a previous
withdrawal (and all surrenders in the first Policy Year) are subject to the
Contingent Deferred Sales Charge. In addition, a Contingent Deferred Sales
Charge will not be assessed if the withdrawal is necessary to meet the minimum
distribution requirements for that policy specified by the
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IRS for tax qualified plans or if the Policy Value is applied to provide an
Annuity under one of the Annuity Payment Options, unless the Policy Value is
applied, during the first five Policy Years, under Payment Option 2, 4, or 4-V
with payments for less than five years. The Owner must specify the Investment
Option from which surrendered amounts should be taken (otherwise, the
surrender request is incomplete and cannot be processed). For a discussion of
the Contingent Deferred Sales Charge, see "Contingent Deferred Sales Charge,"
p. 39.
Since the Owner assumes the investment risk with respect to Premium Payments
allocated to the Mutual Fund Account, and because withdrawals are subject to a
Contingent Deferred Sales Charge, and possibly premium taxes, the total amount
paid upon total surrender of the Cash Value (taking any prior surrenders into
account) may be more or less than the total Premium Payments made. Following a
surrender of the total Cash Value, or at any time the Policy Value is zero,
all rights of the Owner and Annuitant will terminate.
In addition to the Contingent Deferred Sales Charges and any applicable
premium taxes, surrenders may be subject to income taxes and, prior to age 59
1/2, a ten percent penalty tax. (See "Certain Federal Income Tax
Consequences", page 42.)
SYSTEMATIC WITHDRAWAL PLAN
Under the Systematic Withdrawal Plan Policy Owners can instruct AUSA to make
automatic payments to them monthly, quarterly, semi-annually or annually from
a specified Subaccount. Monthly and quarterly payments can only be sent by
electronic funds transfer directly to a checking or savings account. The
minimum monthly payment is $50, the minimum quarterly payment is $100, and the
minimum semi-annual or annual payment is $250. If the withdrawal is less than
the minimum then it can only be sent on an annual basis. The maximum payment
is 10% of the Policy Value divided by the number of payments made per year
(e.g. 12 for monthly). If this amount is below the minimum distribution
requirements for that policy specified by the IRS for tax qualified plans, the
maximum payment will be increased to this minimum required distribution
amount. The "Request for Systematic Withdrawal" form must specify a date for
the first payment, which must be at least 30 days but not more than one year
after the form is submitted.
The Contingent Deferred Sales Charge will be waived for Policy Owners under
age 59 1/2 of tax qualified policies if they take Systematic Withdrawals using
one of the payout methods described in I.R.S. Notice 89-25, Q & A-12 (the Life
Expectancy Recalculation Option, Amortization, or Annuity Factor) which
generally require payments for life or life expectancy. These payments must be
continued until the later of age 59 1/2 or five years from their commencement.
No additional withdrawals may be taken during this time. For tax qualified
policies, Policy Owners age 59 1/2 or older, the Contingent Deferred Sales
Charge will be waived if payments are made using the Life Expectancy
Recalculation Option.
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In addition, for either tax qualified or non-tax qualified Policies the
Contingent Deferred Sales Charge will not be imposed on Systematic Withdrawals
that do not exceed 10% of the Policy Value (that is, the Sales Charge will
apply as if the "annualized" payments were a single payment). For other
Systematic Withdrawals, the Contingent Deferred Sales Charge will apply in
accordance with its terms.
Systematic Withdrawals will not be available for Tax Deferred 403(b)
Annuities under age 59 1/2 or that have an outstanding loan, and AUSA will
terminate the option under such Policies if a loan is taken out.
Qualified Policies are subject to complex rules with respect to restrictions
on and taxation of distributions, including the applicability of penalty taxes.
In addition, the treatment of periodic withdrawals from Nonqualified Policies
is unclear, particularly with respect to avoiding the 10% penalty tax.
Therefore, a qualified tax adviser should be consulted before a Systematic
Withdrawal Plan is requested. In certain circumstances withdrawn amounts may be
included in the Policy Owner's gross income. (See "Certain Federal Income Tax
Consequences," Page 42.)
ANNUITY PAYMENTS
Annuity Commencement Date. Unless the Annuity Commencement Date is changed,
Annuity Payments under a Policy will begin on the Annuity Commencement Date
which is selected by the Policy Owner at the time the Policy is applied for.
The Annuity Commencement Date may be changed from time to time by the Policy
Owner by Written Notice to AUSA, provided that notice of each change is
received by AUSA at its Service Office at least thirty (30) days prior to the
then current Annuity Commencement Date. Except as otherwise permitted by AUSA,
a new Annuity Commencement Date must be a date which is: (1) after the
Annuitant attains age 40; (2) at least thirty (30) days after the date notice
of the change is received by AUSA; and (3) not later than the first day of the
first month following the Annuitant's 85th birthday.
The Annuity Commencement Date may also be changed by the Beneficiary's
election of the Annuity Option after the Annuitant's death.
Election of Payment Option. During the lifetime of the Annuitant and prior to
the Annuity Commencement Date, the Policy Owner may choose an Annuity Payment
Option or change the election, but Written Notice of any election or change of
election must be received by AUSA at its Service Office at least thirty (30)
days prior to the Annuity Commencement Date. If no election is made prior to
the Annuity Commencement Date, Annuity Payments will be made under Option 3-V,
life income with variable payments for 10 years certain. If the Annuity
Purchase Value on the Annuity Commencement Date is less than $2,000, AUSA
reserves the right to pay it in one lump sum in lieu of applying it under an
Annuity Payment Option.
Prior to the Annuity Commencement Date, the Beneficiary may elect to receive
the Death Benefit in a lump sum or under one of the
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Payment Options, to the extent allowed by law and subject to the terms of any
settlement agreement. (See "Death Benefit," p. 37.) Annuity Payments will be
made on either a fixed basis or a variable basis as selected by the Policy
Owner (or the Beneficiary, after the Annuitant's death).
The person who elects a Payment Option can also name one or more successor
payees to receive any unpaid amount AUSA has at the death of a payee. Naming
these payees cancels any prior choice of a successor payee.
A payee who did not elect the Payment Option does not have the right to
advance or assign payments, take the payments in one sum, or make any other
change. However, the payee may be given the right to do one or more of these
things if the person who elects the option tells AUSA in writing and AUSA
agrees.
Unless the Policy Owner specifies otherwise, the payee shall be the
Annuitant, or, after the Annuitant's death, the Beneficiary. AUSA may require
written proof of the age of any person who has an annuity purchased under
Option 3, 3-V, 5 or 5-V.
Premium Tax. AUSA may be required by state law to pay premium tax on the
amount applied to a payment option or upon withdrawal. If so, AUSA will deduct
the premium tax before applying or paying the proceeds.
Supplementary Policy. Once proceeds become payable and a choice has been
made, AUSA will issue a Supplementary Policy in settlement of the option
elected under the Policy setting forth the terms of the option elected. The
Supplementary Policy will name the payees and will describe the payment
schedule.
ANNUITY PAYMENT OPTIONS
The Policy provides five Payment Options which are described below. Three of
these are offered as either "Fixed Payment Options" or "Variable Payment
Options," and two are only available as Fixed Payment Options. The Policy Owner
may elect a Fixed Payment Option, a Variable Payment Option, or a combination
of both. If the Policy Owner elects a combination, he must specify what part of
the Annuity Purchase Value is to be applied to the Fixed and Variable Options.
NOTE CAREFULLY: Under Payment Options 3(1) and 5 (including 3-V(1) and 5-V),
it would be possible for only one Annuity Payment to be made if the
Annuitant(s) were to die before the due date of the second annuity payment;
only two Annuity Payments if the Annuitant(s) were to die before the due date
of the third annuity payment; and so forth.
On the Annuity Commencement Date, the Policy's Annuity Purchase Value will be
applied to provide for Annuity Payments under
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the selected Annuity Option as specified. The Annuity Purchase Value is the
Policy Value for the Valuation Period which ends immediately preceding the
Annuity Commencement Date, reduced by any applicable premium or similar taxes
and in some cases during the first five Policy Years, any applicable Contingent
Deferred Sales Charge.
The effect of choosing a Fixed Annuity Option is that the amount of each
payment will be set on the Annuity Commencement Date and will not change. If a
Fixed Annuity Option is selected, the Policy Value will be transferred to the
general account of AUSA, and the Annuity Payments will be fixed in amount by
the fixed annuity provisions selected and the age and sex (if consideration of
sex is allowed) of the Annuitant. For further information, contact AUSA at its
Service Office.
Guaranteed Values. There are five Fixed Annuity Options. Options 1, 2 and 4
are based on a guaranteed interest rate of 3%. Options 3 and 5 are based on a
guaranteed interest rate of 3% using the "1983 Table a" mortality table with
projection of improved mortality.
Option 1--Interest Payments. The policy proceeds may be left with AUSA for
any term agreed to. AUSA will pay the interest in equal payments or it may be
left to accumulate. Withdrawal rights will be agreed upon by the Owner and AUSA
when the option is elected.
Option 2--Income for a Specified Period. Level payments of the proceeds with
interest are made for the fixed period elected, at which time the funds are
exhausted.
Option 3--Life Income. An election may be made between:
1. "No Period Certain"--Level payments will be made during the
lifetime of the Annuitant.
2. "10 Years Certain"--Level Payments will be made for the longer of
the Annuitant's lifetime or ten years.
3. "Guaranteed Return of Policy Proceeds"--Level payments will be
made for the longer of the Annuitant's lifetime or the number of
payments which, when added together, equals the proceeds applied
to the income option.
Option 4--Income of a Specified Amount. Payments are made for any specified
amount until the proceeds with interest are exhausted.
Option 5--Joint and Survivor Annuity. Payments are made during the joint
lifetime of the payee and a joint payee of the Owner's selection. Payments will
be made as long as either person is living.
Other options may be arranged by agreement with AUSA. Certain options may not
be available in some states.
Current immediate annuity rates for the same class of annuities will be used
if higher than the guaranteed amount (guaranteed amounts are
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based upon the tables contained in the Policy). Current amounts may be obtained
from AUSA.
Variable Payment Options. The dollar amount of the first Variable Annuity
Payment will be determined in accordance with the annuity payment rates set
forth in the applicable table contained in the Policy. The tables are based on
the "1983 Table a" mortality table with a 5% effective annual Assumed Interest
Rate and assume a retirement date in the year 2000. The dollar amount of every
subsequent Variable Annuity Payment will vary based on the investment
performance of the Subaccount of the Mutual Fund Account selected by the
Annuitant or Beneficiary. If the actual investment performance exactly matched
the Assumed Interest Rate of 5% at all times, the amount of each Variable
Annuity Payment would remain equal. If actual investment performance exceeds
the Assumed Interest Rate, the amount of the payments would increase.
Conversely, if actual investment performance is worse than the Assumed Interest
Rate, the amount of the payments would decrease.
Determination of the First Variable Payment. The amount of the first variable
payment depends upon the sex (if consideration of sex is allowed) and adjusted
age of the Annuitant. The adjusted age is the Annuitant's actual age nearest
birthday, at the Annuity Commencement Date, adjusted as follows:
<TABLE>
<CAPTION>
ANNUITY COMMENCEMENT DATE ADJUSTED AGE
------------------------- ------------
<S> <C>
Before 2001 Actual Age
2001-2010 Actual Age minus 1
2011-2020 Actual Age minus 2
2021-2030 Actual Age minus 3
2031-2040 Actual Age minus 4
After 2040 As determined by AUSA
</TABLE>
This adjustment assumes an increase in life expectancy, and therefore it
results in lower payments than without such an adjustment.
The following Variable Payment Options generally are available:
Option 3-V--Life Income. An election may be made between:
1. "No Period Certain"--Payments will be made during the lifetime of
the Annuitant.
2. "10 Years Certain"--Payments will be made for the longer of the
Annuitant's lifetime or ten years.
Option 4-V--Income of a specified Amount. Payments are made for any specified
amount until the proceeds with accumulated gains or losses are exhausted. At
any time this option is in effect, the Annuitant can surrender the Policy for
the remaining value. Payments under this option are considered withdrawals for
federal income tax purposes.
Option 5-V--Joint and Survivor Annuity. Payments are made as long as either
the Annuitant or the joint Annuitant is living.
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Certain options may not be available in some states.
Determination of Subsequent Variable Payments. All Variable Annuity Payments
other than the first are calculated using "Annuity Units" which are credited to
the Policy. The number of Annuity Units to be credited in respect of a
particular Subaccount is determined by dividing that portion of the first
Variable Annuity Payment attributable to that Subaccount by the Annuity Unit
Value of that Subaccount for the Annuity Commencement Date. The number of
Annuity Units of each particular Subaccount credited to the Policy then remains
fixed. The dollar value of variable Annuity Units in the chosen Subaccount will
increase or decrease reflecting the investment experience of the chosen
Subaccount. The dollar amount of each Variable Annuity Payment after the first
may increase, decrease or remain constant, and is equal to the sum of the
amounts determined by multiplying the number of Annuity Units of each
particular Subaccount credited to the Policy by the Annuity Unit Value for the
particular Subaccount on the date the payment is made.
Unless restricted by a particular Account or Subaccount, a Policy Owner may
transfer the value of the Annuity Units from one Subaccount to another within
the Mutual Fund Account or to the Fixed Account. However, after the Annuity
Commencement Date no transfers may be made from the Fixed Account to the Mutual
Fund Account. The minimum amount which may be transferred is the lesser of $10
of monthly income or the entire monthly income of the variable Annuity Units in
the Subaccount from which the transfer is being made. The remaining Annuity
Units in the Subaccount must provide at least $10 of monthly income. If, after
a transfer, the monthly income of the remaining Annuity Units in a Subaccount
would be less than $10, AUSA reserves the right to include those Annuity Units
as part of the transfer. AUSA reserves the right to limit transfers between
Subaccounts or to the Fixed Account to once per Policy Year.
* * *
A portion or the entire amount of the Annuity Payments may be taxable as
ordinary income. If, at the time the Annuity Payments begin, the Policy Owner
has not provided AUSA with a written election not to have federal income taxes
withheld, AUSA must by law withhold such taxes from the taxable portion of such
annuity payments and remit that amount to the federal government. Withholding
is mandatory as to certain Qualified Policies. (See "Certain Federal Income Tax
Consequences," p. 42.)
Adjustment of Annuity Payments. Payments will be made at 1, 3, 6, or 12 month
intervals. If the individual payments provided for would be or become less than
$30, AUSA may change, at its discretion, the frequency of payments to such
intervals as will result in payments of at
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least $30. If the Annuity Purchase Value on the Annuity Commencement Date is
less than $2,000, AUSA may pay such value in one sum in lieu of the payments
otherwise provided for.
DEATH BENEFIT
Death of Annuitant Prior to Annuity Commencement Date. If the Annuitant who
is the Owner dies prior to the Annuity Commencement Date, a Death Benefit will
be payable to the Beneficiary. During the first seven policy years, the Death
Benefit will equal the larger of (a) the sum of the Premium Payments, less
Adjusted Partial Withdrawals taken, or (b) the Policy Value as of the date Due
Proof of Death and an election of a method of settlement and return of the
Policy are received by AUSA's Service Office. After the seventh Policy
Anniversary, the Death Benefit amount will be the greater of (a), (b), or (c),
where (a) and (b) are defined above and where (c) is the Policy Value on the
seventh Policy Anniversary plus all Premiums paid less any Adjusted Partial
Withdrawals taken since that Policy Anniversary. The Adjusted Partial
Withdrawal amount for each partial withdrawal is equal to the product of (a)
times (b), where:
(a) is the ratio of the amount of partial withdrawal taken to the Policy
Value on the date of, but prior to the partial withdrawal; and
(b) is the Death Benefit on the date of, but prior to the partial
withdrawal.
If a partial withdrawal is taken when the Death Benefit exceeds the Policy
Value, then the Adjusted Partial Withdrawal amount will exceed the amount of
the partial withdrawal. In that case, the total proceeds of a partial
withdrawal followed by a Death Benefit could be less than total Premium
Payments.
Note that the Death Benefit is payable on the death of the Annuitant who is
the Owner, not the death of the Owner, if different. If the Annuitant who is
not the Owner dies, the Owner will become the Annuitant unless the Owner
specifically requests on the application or in writing that the death benefit
be paid upon the Annuitant's death and AUSA agrees to such an election.
Due Proof of Death of the Annuitant is proof that the Annuitant who is the
Owner died prior to the commencement of Annuity Payments. Upon receipt of this
proof and an election of a method of settlement and return of the Policy, the
Death Benefit generally will be paid within seven days, or as soon thereafter
as AUSA has sufficient information about the Beneficiary to make the payment.
The Beneficiary may receive the amount payable in a lump sum cash benefit, or,
subject to any limitation under any state or federal law, rule, or regulation,
under one of the Annuity Payment Options described above, unless a settlement
agreement is effective at the death of the Annuitant preventing such election.
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If the Annuitant was the Policy Owner, and the Beneficiary was not the
Annuitant's spouse, then (1) the Death Benefit must be distributed within five
years of the Annuitant's death, or (2) payments under a Payment Option must
begin within one year of the Annuitant's death and must be made for the
Beneficiary's lifetime or for a period certain (so long as any certain period
does not exceed the Beneficiary's life expectancy). Death proceeds which are
not paid to or for the benefit of a natural person must be distributed within
five years of Annuitant's death. If the sole Beneficiary is the Annuitant's
surviving spouse, such spouse may elect to continue the Policy as the new
Annuitant and Policy Owner instead of receiving the Death Benefit. (See
"Federal Tax Matters" in the Statement of Additional Information.)
Death of Annuitant On or After Annuity Commencement Date. The death benefit
payable if the Annuitant dies on or after the Annuity Commencement Date depends
on the Payment Option selected. Upon the Annuitant's death, the remaining
portion of the entire interest in the Policy, if any, will be distributed at
least as rapidly as under the method of distribution being used as of the date
of the Annuitant's death.
Beneficiary. The Beneficiary designation in the application will remain in
effect until changed. The Policy Owner may change the designated Beneficiary by
sending Written Notice to AUSA. The Beneficiary's consent to such change is not
required unless the Beneficiary was irrevocably designated or consent is
required by law. (If an irrevocable Beneficiary dies, the Policy Owner may then
designate a new Beneficiary.) The change will take effect as of the date the
Policy Owner signs the Written Notice, whether or not the Policy Owner is
living when the Notice is received by AUSA. AUSA will not be liable for any
payment made before the Written Notice is received. If more than one
Beneficiary is designated, and the Policy Owner fails to specify their
interests, they will share equally.
DEATH OF OWNER
Federal tax law requires that if any Policy Owner (including any joint Owner
or any Successor Policy Owner who has become a current Owner) dies before the
Annuity Commencement Date, then the entire value of the Policy must generally
be distributed within five years of the date of death of such Policy Owner or
the Contingent Policy Owner. Certain rules apply where 1) the spouse of the
deceased Owner is the sole Beneficiary, 2) the Policy Owner is not a natural
person and the primary Annuitant dies or is changed, or 3) any Policy Owner
dies after the Annuity Commencement Date. See "Federal Tax Matters" in the
Statement of Additional Information for a detailed description of these rules.
Other rules may apply to Qualified Contracts.
RESTRICTIONS UNDER SECTION 403(B) PLANS
Section 403(b) of the Internal Revenue Code provides for tax-deferred
retirement savings plans for employees of certain non-profit and
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educational organizations. In accordance with the requirements of Section
403(b), any Policy used for a 403(b) plan will prohibit distributions of
elective contributions and earnings on elective contributions except upon death
of the employee, attainment of age 59 1/2, separation from service, disability,
or financial hardship. In addition, income attributable to elective
contributions may not be distributed in the case of hardship.
CHARGES AND DEDUCTIONS
No deductions are made from Premium Payments, so that the full amount of each
Premium Payment is invested in one or more of the Accounts. AUSA will make
certain charges and deductions in connection with the Policy in order to
compensate it for incurring expenses in distributing the Policy, bearing
mortality and expense risks under the Policy, and administering the Accounts
and the Policies. Charges may also be made for premium taxes, federal, state or
local taxes, or for certain transfers or other transactions. Charges and
expenses are also deducted from the Underlying Funds.
CONTINGENT DEFERRED SALES CHARGE
AUSA will incur expenses relating to the sale of Policies, including
commissions to registered representatives and other promotional expenses. AUSA
may apply a Contingent Deferred Sales Charge to any amount surrendered (i.e.,
withdrawn) in connection with a full or partial Policy surrender in order to
cover distribution expenses. A Contingent Deferred Sales Charge will not be
applied to withdrawal, after the first Policy Year, of up to 10% of the Policy
Value, if there have been no withdrawals in the current Policy Year. A
Contingent Deferred Sales Charge will also not be applied if the withdrawal is
necessary to meet the minimum distribution requirements for that policy
specified by the IRS for tax qualified plans or if the Policy Value is applied
to provide an Annuity under one of the Annuity Payment Options, unless the
Policy Value is applied, during the first five Policy Years, under Payment
Options 2, 4, or 4-V with payments for less than five years. The Contingent
Deferred Sales Charge is also waived upon certain Systematic Withdrawals (see
p. 31).
The amount of the Contingent Deferred Sales Charge is determined by
multiplying the amount of the premium withdrawn by the applicable Contingent
Deferred Sales Charge Percentage. The applicable Contingent Deferred Sales
Charge Percentage will depend upon the number of Policy Anniversaries that have
elapsed since the Premium Payment that is being withdrawn was made. For this
purpose, surrenders are allocated to Premium Payments on a "first in-first out"
basis, i.e., first to the oldest Premium Payment, then to the next oldest
Premium Payment, and so on. Premium Payments are deemed to be withdrawn before
earnings, and after all Premium Payments have been
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<PAGE>
withdrawn, the remaining Cash Value may be withdrawn without any Contingent
Deferred Sales Charge. The following is the table of Contingent Deferred Sales
Charge Percentages:
<TABLE>
<CAPTION>
NUMBER OF POLICY APPLICABLE CONTINGENT
YEARS SINCE DEFERRED SALES
PREMIUM PAYMENT CHARGE PERCENTAGE
---------------- ---------------------
<S> <C>
Less than 1 7%
At least 1 and less than 2 6%
At least 2 and less than 3 5%
At least 3 and less than 4 4%
At least 4 and less than 5 3%
At least 5 and less than 6 2%
At least 6 and less than 7 1%
</TABLE>
AUSA anticipates that the Contingent Deferred Sales Charge will not generate
sufficient funds to pay the cost of distributing the Policies. If this charge
is insufficient to cover the distribution expenses, the deficiency will be met
from AUSA's general funds, which will include amounts derived from the charge
for mortality and expense risks.
MORTALITY AND EXPENSE RISK CHARGE
AUSA imposes a daily charge as compensation for bearing certain mortality and
expense risks in connection with the Policies. This charge is equal to an
effective annual rate of 1.25% of the value of net assets in the Mutual Fund
Account. The Mortality and Expense Risk Charge is reflected in the Accumulation
or Annuity Unit Values for the Policy for each Subaccount.
Policy Values and Annuity Payments are not affected by changes in actual
mortality experience nor by actual expenses incurred by AUSA. The mortality
risks assumed by AUSA arise from its contractual obligations to make Annuity
Payments (determined in accordance with the Annuity tables and other provisions
contained in the Policy) and to pay Death Benefits prior to the Annuity
Commencement Date. Thus, Owners are assured that neither an Annuitant's own
longevity nor an unanticipated improvement in general life expectancy will
adversely affect the monthly Annuity payments that the Annuitant will receive
under the Policy.
AUSA also bears substantial risk in connection with the Death Benefit
Guarantee since AUSA will pay a Death Benefit equal to the Premium Payments,
less withdrawals, (or the Policy Value on the seventh Policy Anniversary as set
out in Death Benefits section, page 37) if that amount is higher than the
Policy Value.
The expense risk assumed by AUSA is the risk that AUSA's actual expenses in
administering the Policy and the Accounts will exceed the amount recovered
through the Administrative and Policy Maintenance Charges.
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<PAGE>
If the Mortality and Expense Risk Charge is insufficient to cover AUSA's
actual costs, AUSA will bear the loss; conversely, if the charge is more than
sufficient to cover costs, the excess will be profit to AUSA. AUSA expects a
profit from this charge. To the extent that the Contingent Deferred Sales
Charge is insufficient to cover the actual cost of Policy distribution, the
deficiency will be met from AUSA's general corporate assets, which may include
amounts, if any, derived from the Mortality and Expense Risk Charge. A
mortality and expense risk charge is assessed during the annuity phase for all
Variable Annuity Options including those that do not carry a life contingency.
ADMINISTRATIVE CHARGES
In order to cover the costs of administering the Policies and the Accounts,
AUSA deducts a Policy Maintenance Charge from the Policy Value of each Policy,
and also deducts a daily Administrative Expense Charge from the assets of each
Subaccount of the Mutual Fund Account.
The annual Policy Maintenance Charge is deducted from the Policy Value of
each Policy on each Policy Anniversary prior to the Annuity Commencement Date.
After the Annuity Commencement Date, the charge is not deducted. This annual
Policy Maintenance Charge generally is $35 and it will not be increased. It
will never exceed 2% of the Policy Value. For Policies issued on or after May
1, 1995, this charge is waived if the sum of the Premium Payments made less the
sum of all Partial Withdrawals is at least $50,000 on the Policy Anniversary.
AUSA does not anticipate realizing any profit from this charge. The Policy
Maintenance Charge will be deducted only from the Subaccounts in the Mutual
Fund Account, in the same proportion that the Policy Owner's interest in each
Subaccount bears to the Policy Value in the Mutual Fund Account.
AUSA also deducts a daily Administrative Expense Charge from the assets of
each Subaccount of the Mutual Fund Account. This charge currently is equal to
an effective annual rate of .15% of the net assets of each Subaccount of the
Mutual Fund Account. The Administrative Expense Charge may be increased in the
future (but it will never exceed .30%, and the combined total of this charge
and the Mortality and Expense Risk Charge will never exceed the current level
of 1.40%). AUSA does not anticipate realizing any profit from this charge.
PREMIUM TAXES
AUSA currently makes no deduction from the Premium Payments for any state
premium taxes AUSA pays in connection with Premium Payments under the Policies.
However, AUSA will deduct the aggregate premium taxes paid on behalf of a
particular Policy from the Policy Value on (i) the Annuity Commencement Date
(thus reducing the Annuity Purchase Value), (ii) the total surrender of a
Policy, or (iii) payment of the death proceeds of a Policy.
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<PAGE>
FEDERAL, STATE AND LOCAL TAXES
No charges are currently made for federal, state, or local taxes other than
premium taxes. However, AUSA reserves the right to deduct charges in the future
from the Accounts or Subaccounts for any taxes or other economic burden
resulting from the application of any tax laws that AUSA determines to be
attributable to the accounts or the policies.
TRANSFER CHARGE
There is no charge for the first 12 transfers between Investment Options in
each Policy Year. AUSA reserves the right to impose a $25 charge for the
thirteenth and each subsequent transfer request made by the Owner during a
single Policy Year. For the purpose of determining whether a transfer charge is
payable, initial Premium Payment allocations are not considered transfers. All
transfer requests made simultaneously will be treated as a single request. No
transfer charge will be imposed for any transfer which is not at the Owner's
request.
OTHER EXPENSES INCLUDING INVESTMENT ADVISORY FEES
Each of the Portfolios of the Underlying Funds is responsible for all of its
expenses. In addition, charges will be made against each of the Portfolios of
the Underlying Funds for investment advisory services provided to the
Portfolio. The net assets of each Portfolio of the Underlying Funds will
reflect deductions in connection with the investment advisory fee and other
expenses.
For more information concerning the investment advisory fee and other charges
against the Portfolios, see the prospectuses for the Underlying Funds, current
copies of which accompany this Prospectus.
EMPLOYEES AND AGENT PURCHASES
The Policy may be acquired by an employee or registered representative of any
broker/dealer authorized to sell the Policy or their spouse or minor children,
or by an officer, director, trustee or bona-fide full-time employee of AUSA or
its affiliated companies or their spouse or minor children. In such a case, a
bonus of 5% of each premium deposit may be credited to the Policy due to lower
acquisition costs AUSA experiences on those purchases. Compensation to the
registered representative and broker/dealer will be reduced by the amount of
such bonus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary does not constitute tax advice. It is a general
discussion of certain of the expected federal income tax consequences of
investment in and distributions with respect to a Policy, based on the Internal
Revenue Code of 1986, as amended (the "Code"), proposed and final Treasury
Regulations thereunder, judicial authority, and current
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<PAGE>
administrative rulings and practice. This summary discusses only certain
federal income tax consequences to "United States Persons," and does not
discuss state, local, or foreign tax consequences. United States Persons means
citizens or residents of the United States, domestic corporations, domestic
partnerships and trusts or estates that are subject to United States federal
income tax regardless of the source of their income.
At the time the initial Premium Payment is paid, a prospective purchaser must
specify whether he or she is purchasing a Nonqualified Policy or a Qualified
Policy. If the initial Premium Payment is derived from an exchange or surrender
of another annuity policy, AUSA may require that the prospective purchaser
provide information with regard to the federal income tax status of the
previous annuity policy. AUSA will require that persons purchase separate
Policies if they desire to invest monies qualifying for different annuity tax
treatment under the Code. Each such separate Policy would require the minimum
initial Premium Payment stated above. Additional Premium Payments under a
Policy must qualify for the same federal income tax treatment as the initial
Premium Payment under the Policy; AUSA will not accept an additional Premium
Payment under a Policy if the federal income tax treatment of such Premium
Payment would be different from that of the initial Premium Payment.
The Qualified Policies were designed for use by retirement plans and
individual retirement accounts that qualify for special federal income tax
treatment under Sections 401(a), 403(b), or 408(a) of the Code and individuals
purchasing individual retirement annuities that qualify for special federal
income tax treatment under Section 408(b) of the Code. Certain requirements
must be satisfied in purchasing a Qualified Policy in order for the plan,
account or annuity to retain its special tax treatment. This summary is not
intended to cover such requirements, and assumes that Qualified Policies are
purchased pursuant to retirement plans or individual retirement accounts, or
are individual retirement annuities, that qualify for such special tax
treatment. This summary was prepared by AUSA after consultation with tax
counsel, but no opinion of tax counsel has been obtained.
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL PURPOSES ONLY. EACH
POTENTIAL PURCHASER IS URGED TO CONSULT HIS/HER OWN TAX ADVISER AS TO THE
CONSEQUENCES OF INVESTMENT IN A POLICY UNDER FEDERAL AND APPLICABLE STATE,
LOCAL AND FOREIGN TAX LAWS.
TAX STATUS OF THE POLICY
The following discussion is based on the assumption that the Policy qualifies
as an annuity contract for federal income tax purposes. The Statement of
Additional Information discusses the tax requirements for qualifying as an
annuity contract.
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<PAGE>
TAXATION OF ANNUITIES
The discussion below applies only to those Policies owned by natural persons,
and that qualify as annuity contracts for federal income tax purposes. With
respect to Owners who are natural persons, the Policy should be treated as an
annuity contract for federal income tax purposes.
In General. Except as described below with respect to Owners who are not
natural persons, an Owner who holds a Policy satisfying the diversification and
distribution requirements described in the Statement of Additional Information
should not be taxed on increases in the Policy Value until an amount is
received or deemed received, e.g., upon a partial or full surrender or as
Annuity Payments under the Annuity Option selected. Generally, any amount
received or deemed received under a Nonqualified Annuity Contract prior to the
Annuity Commencement Date is deemed to come first from any "Income on the
Contract" and then from the "Investment in the Contract." The "Investment in
the Contract" generally equals total premium payments less amounts received
which were not includable in gross income. To the extent that the Policy Value
(ignoring any surrender charges except on a full surrender) exceeds the
"Investment in the Contract," such excess constitutes the "Income on the
Contract." As a result, any such amount received or deemed received (i) shall
be includable in gross income to the extent that such amount does not exceed
any such "Income on the Contract," and (ii) shall not be includable in gross
income to the extent that such amount does exceed any such "Income on the
Contract." For these purposes such "Income on the Contract" shall be computed
by reference to the aggregation rules described below, and the amount
includable in gross income will be taxable as ordinary income. If at the time
that any amount is received or deemed received there is no "Income on the
Contract" (e.g., because the gross Policy Value does not exceed the "Investment
in the Contract" and no aggregation rule applies), then such amount received or
deemed received will not be includable in gross income, and will simply reduce
the "Investment in the Contract."
For this purpose, the assignment, pledge or agreement to assign or pledge any
portion of the Policy Value (including assignment of Owner's right to receive
Annuity Payments prior to the Annuity Commencement Date) generally will be
treated as a distribution in the amount of such portion of the Policy Value.
Additionally, if an Owner designates a new Owner prior to the Annuity
Commencement Date without receiving full and adequate consideration, the old
Owner generally will be treated as receiving a distribution under the Policy in
an amount equal to the Policy Value. A transfer of ownership or an assignment
of a Policy, or designation of an Annuitant or Beneficiary who is not also the
Owner, may result in certain tax consequences to the Owner that are not
discussed herein. An Owner contemplating any such transfer, designation or
assignment of a Policy should contact a competent tax adviser with respect to
the potential tax effects of such a transaction.
Aggregation Rules. Generally all nonqualified deferred annuity contracts
issued by the same company (or an affiliated company) to the
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<PAGE>
same owner during any calendar year shall be treated as one annuity contract,
and "aggregated" for purposes of determining the amount includable in gross
income. In addition, for such purposes all individual retirement annuities and
accounts under Section 408 of the Code for an individual are aggregated, and
generally all distributions therefrom during a calendar year are treated as one
distribution made as of the end of such year.
Surrenders. In the case of a partial surrender (including systematic
withdrawals) under a Nonqualified Policy, the amount received generally will be
includable in gross income only up to the amount of the "Income on the
Contract." In the case of a partial surrender (including systematic
withdrawals) under a Qualified Policy, a ratable portion of the amount received
is taxable, generally based on the ratio of the "Investment in the Contract" to
the individual's total accrued benefit under the retirement plan. For a Policy
issued in connection with qualified plans, the "Investment in the Contract" can
be zero. Special tax rules may be available for certain distributions from a
Qualified Policy. In the case of a full surrender under a Nonqualified Policy
or a Qualified Policy, the amount received generally will be taxable only to
the extent it exceeds the "Investment in the Contract."
Annuity Payments. Although the tax consequences may vary depending on the
Annuity Payment Option elected under the Policy, in general, only the portion
of the Annuity Payments received after the Annuity Commencement Date that
represent the amount by which the Annuity Purchase Value exceeds the
"Investment in the Contract" will be includable in the gross income of the
recipient. After the "Investment in the Contract" is recovered, the full amount
of any additional Annuity Payments is includable in gross income.
For Variable Annuity Payments, the taxable portion is generally determined by
an equation that establishes a specific dollar amount of each payment that is
not taxed. The dollar amount is determined by dividing the "Investment in the
Contract" by the total number of expected periodic payments. However, the
entire distribution will be taxable once the recipient has recovered the dollar
amount of his or her "Investment in the Contract."
For Fixed Annuity Payments, in general there is no tax on the portion of each
payment which represents the same ratio that the "Investment in the Contract"
bears to the total expected value of the Annuity Payments for the term of the
payments; however, the remainder of each Annuity Payment is includable in gross
income. Once the "Investment in the Contract" has been fully recovered, the
full amount of any additional Annuity Payments is includable in gross income.
If, after the Annuity Commencement Date, Annuity Payments cease by reason of
the death of the Annuitant, the excess (if any) of the "Investment in the
Contract" as of the Annuity Commencement Date over the aggregate amount of
Annuity Payments received on or after the
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Annuity Commencement Date that was excluded from gross income is allowable as a
deduction for the last taxable year of the Annuitant.
Penalty Taxes. In the case of any amount received or deemed received from the
Policy, e.g., upon a surrender of a Policy or a deemed distribution under a
Policy resulting from a pledge, assignment or agreement to pledge or assign or
an Annuity Payment with respect to a Policy, there may be imposed on the
recipient a federal penalty tax equal to 10% of the amount includable in gross
income. The penalty tax generally will not apply to any distribution: (i) made
on or after the date on which the taxpayer attains age 59 1/2; (ii) made as a
result of the death of the holder (generally the Owner); (iii) attributable to
the disability of the taxpayer; or (iv) which is part of a series of
substantially equal periodic payments made (not less frequently than annually)
for the life (or life expectancy) of the taxpayer or the joint lives (or joint
life expectancies) of such taxpayer and his/her beneficiary. Other rules may
apply to Qualified Policies.
Withholding. The portion of any distribution under a Policy that is
includable in gross income will be subject to federal income tax withholding
unless the recipient of such distribution elects not to have federal income tax
withheld. Election forms will be provided at the time distributions are
requested or made. Effective January 1, 1993, certain distributions from
section 401(a), 403(a) and 403(b) are subject to mandatory withholding.
Qualified Policies. The Qualified Policy is designed for use with several
types of retirement plans. The tax rules applicable to participants and
beneficiaries in retirement plans vary according to the type of plan and the
terms and conditions of the plan. Special favorable tax treatment may be
available for certain types of contributions and distributions. Adverse tax
consequences may result from contributions in excess of specified limits;
distributions prior to age 59 1/2 (subject to certain exceptions);
distributions that do not conform to specified commencement and minimum
distribution rules; aggregate distributions in excess of a specified annual
amount; and in other specified circumstances.
AUSA makes no attempt to provide more than general information about use of
the Policy with the various types of retirement plans. Purchasers of Policies
for use with any retirement plan should consult their legal counsel and tax
adviser regarding the suitability of the Policy.
Individual Retirement Annuities. In order to qualify as an individual
retirement annuity under Section 408(b) of the Code, a Policy must contain
certain provisions: (i) the Owner must be the Annuitant; (ii) the Policy may
not be transferable by the Owner, e.g., the Owner may not designate a new
Owner, a Successor Owner or assign the Policy as collateral security; (iii) the
total Premium Payments for any calendar year may not exceed $2,000, unless the
portion of such Premium
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Payments in excess of $2,000 qualifies as a rollover amount or contribution
under Section 402(c) or 408(d)(3) of the Code; (iv) Annuity Payments or
withdrawals must begin no later than April 1 of the calendar year following the
calendar year in which the Annuitant attains age 70 1/2; (v) an Annuity Payment
Option with a Period Certain that will guarantee Annuity Payments beyond the
life expectancy of the Annuitant and the Beneficiary may not be selected; and
(vi) certain payments of Death Benefits must be made in the event the Annuitant
dies prior to the distribution of the Policy Value. Policies intended to
qualify as individual retirement annuities under Section 408(b) of the Code
contain such provisions. The Internal Revenue Service has not reviewed the
Policy for qualification as an IRA, and has not addressed in a ruling of
general applicability whether a death benefit provision such as the provision
in the Policy comports with IRA qualification requirements.
Section 408 of the Code also indicates that no part of the funds for an
individual retirement account or annuity should be invested in a life insurance
contract, but the regulations thereunder allow such funds to be invested in an
annuity contract that provides a death benefit that equals the greater of the
premiums paid or the cash value for the contract. The Policy provides an
enhanced death benefit that could exceed the amount of such a permissible death
benefit, but it is unclear to what extent such an enhanced death benefit could
disqualify the Policy under Section 408 of the Code.
Section 403(b) Plans. Under Section 403(b) of the Code, payments made by
public school systems and certain tax exempt organizations to purchase Policies
for their employees are excludable from the gross income of the employee,
subject to certain limitations. However, such payments may be subject to FICA
(Social Security) taxes. Additionally, in accordance with the requirements of
the Code, Section 403(b) annuities generally may not permit distribution of (i)
elective contributions made in years beginning after December 31, 1988, and
(ii) earnings on those contributions and (iii) earnings on amounts attributed
to elective contributions held as of the end of the last year beginning before
January 1, 1989. Distributions of such amounts will be allowed only upon the
death of the employee, on or after attainment of age 59 1/2, separation from
service, disability, or financial hardship, except that income attributable to
elective contributions may not be distributed in the case of hardship.
Corporate Pension and Profit-Sharing Plans and H.R. 10 Plans. Section 401(a)
and 403(a) of the Code permit corporate employers to establish various types of
retirement plans for employees and self-employed individuals to establish
qualified plans for themselves and their employees. Such retirement plans may
permit the purchase of the Policies to accumulate retirement savings. Adverse
tax consequences to the plan, the participant, or both may result if the Policy
is assigned or transferred to any individual as a means to provide benefit
payments.
- 47 -
<PAGE>
Deferred Compensation Plans. Section 457 of the Code, while not actually
providing for a qualified plan as that term is normally used, provides for
certain deferred compensation plans with respect to service for state
governments, local governments, political sub-divisions, agencies,
instrumentalities and certain affiliates of such entities and tax exempt
organizations which enjoy special treatment. The Policies can be used with such
plans. Under such plans a participant may specify the form of investment in
which his or her participation will be made. All such investments, however, are
owned by, and are subject to, the claims of the general creditors of the
sponsoring employer. Depending on the terms of the particular plan, the
employer may be entitled to draw on deferred amounts for purposes unrelated to
its Section 457 plan obligations. In general, all amounts required under a
Section 457 Plan are taxable and are subject to federal income tax withholding
as wages.
Non-natural Persons. Pursuant to Section 72(u) of the Code, an annuity
contract held by a taxpayer other than a natural person generally will not be
treated as an annuity contract under the Code; accordingly, an Owner who is not
a natural person will recognize as ordinary income for a taxable year the
excess of (i) the sum of the Cash Value as of the close of the taxable year and
all previous distributions under the Policy over (ii) the sum of the Premium
Payments paid for the taxable year and any prior taxable year and the amounts
includable in gross income for any prior taxable year with respect to the
Policy. Notwithstanding the preceding sentence, Section 72(u) of the Code does
not apply to (i) a Policy the nominal Owner of which is not a natural person
but the beneficial Owner of which is a natural person, (ii) a Policy acquired
by the estate of a decedent by reason of such decedent's death (iii) a
Qualified Policy or (iv) a single-payment annuity the Annuity Commencement Date
for which is no later than one year from the date of the single Premium
Payment; instead, such Policies are taxed as described above under the heading
"Taxation of Annuities."
Possible Changes in Taxation. In past years, legislation has been proposed in
the U.S. Congress that would have adversely modified the federal taxation of
certain annuities. For example, one such proposal would have changed the tax
treatment of non-qualified annuities that did not have "substantial life
contingencies" by taxing income as it is credited to the annuity. Although as
of the date of this Prospectus Congress was not actively considering any
legislation regarding the taxation of annuities, there is always the
possibility that the tax treatment of annuities could change by legislation or
other means (such as IRS regulations, revenue rulings, judicial decisions,
etc.). Moreover, it is also possible that any change could be retroactive (that
is, effective prior to the date of the change).
DISTRIBUTOR OF THE POLICIES
AEGON USA Securities, Inc., an affiliate of AUSA, is the principal
underwriter of the Policies. AEGON USA Securities, Inc. has entered or
- 48 -
<PAGE>
will enter into one or more contracts with various broker-dealers for the
distribution of the Policies. Commissions and expense allowances on Policy
sales are paid to dealers. Commissions and expense allowances payable to a
broker-dealer will be up to 4 1/2% of Premium Payments. In addition, certain
broker-dealers may receive additional commissions and certain expense
allowances based upon the attainment of specific sales volume targets and other
factors. These commissions and expense allowances are not deducted from Premium
Payments, they are paid by AUSA.
VOTING RIGHTS
To the extent required by law, AUSA will vote the Underlying Funds shares
held by the Mutual Fund Account at regular and special shareholder meetings of
the Underlying Funds in accordance with instructions received from persons
having voting interests in the portfolios. If, however, the 1940 Act or any
regulation thereunder should be amended or if the present interpretation
thereof should be amended or if the present interpretation thereof should
change, and as a result AUSA determines that it is permitted to vote the
Underlying Funds' shares in its own right, it may elect to do so.
Before the Annuity Commencement Date, the Policy Owner holds the voting
interest in the selected Portfolios. The number of votes that an Owner has the
right to instruct will be calculated separately for each Subaccount. The number
of votes that an Owner has the right to instruct for a particular Subaccount
will be determined by dividing his or her Policy Value in the Subaccount by the
net asset value per share of the corresponding Portfolio in which the
Subaccount invests. Fractional shares will be counted.
After the Annuity Commencement Date, the person receiving Annuity Payments
has the voting interest, and the number of votes decreases as Annuity Payments
are made and as the reserves for the Policy decrease. The person's number of
votes will be determined by dividing the reserve for the Policy allocated to
the applicable Subaccount by the net asset value per share of the corresponding
Portfolio. Fractional shares will be counted.
The number of votes that the Owner or person receiving income payments has
the right to instruct will be determined as of the date established by the
Underlying Funds for determining shareholders eligible to vote at the meeting
of the Underlying Funds. AUSA will solicit voting instructions by sending
Owners or other persons entitled to vote written requests for instructions
prior to that meeting in accordance with procedures established by the
Underlying Funds. Portfolio shares as to which no timely instructions are
received and shares held by AUSA in which Owners or other persons entitled to
vote have no beneficial interest will be voted in proportion to the voting
instructions that are
- 49 -
<PAGE>
received with respect to all Policies participating in the same Subaccount.
Each person having a voting interest in a Subaccount will receive proxy
material, reports, and other materials relating to the appropriate Portfolio.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Mutual Fund Account is a party or
to which the assets of the Account are subject. AUSA is not involved in any
litigation that is of material importance in relation to its total assets or
that relates to the Mutual Fund Account.
- 50 -
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information is available (at no cost) which
contains more details concerning the subjects discussed in this Prospectus. The
following is the Table of Contents for that Statement:
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Policy--General Provisions............................................. 3
Owner.................................................................... 3
Entire Policy............................................................ 3
Deferment of Payment and Transfers....................................... 3
Misstatement of Age or Sex............................................... 4
Reallocation of Policy Values After the Annuity Commencement Date........ 4
Assignment............................................................... 4
Evidence of Survival..................................................... 4
Amendments............................................................... 4
Federal Tax Matters........................................................ 5
Tax Status of the Policy................................................. 5
Taxation of AUSA......................................................... 5
Investment Experience...................................................... 6
State Regulation of AUSA................................................... 10
Records and Reports........................................................ 10
Distribution of the Policies............................................... 10
Custody of Assets.......................................................... 10
Historical Performance Data................................................ 10
Money Market Yields...................................................... 10
Other Subaccount Yields.................................................. 11
Total Returns............................................................ 12
Other Performance Data................................................... 13
Legal Matters.............................................................. 13
Independent Auditors....................................................... 13
Other Information.......................................................... 13
Financial Statements....................................................... 14
</TABLE>
- 51 -
<PAGE>
PROSPECTUS
ENDEAVOR SERIES TRUST
Endeavor Series Trust (the "Fund") is a diversified, open-end management
investment company, that offers a selection of managed investment portfolios,
each with its own investment objective designed to meet different investment
goals. There can be no assurance that these investment objectives will be
achieved.
This Prospectus describes the following eight portfolios currently offered by
the Fund (the "Portfolios").
. Money Market Portfolio
. Managed Asset Allocation Portfolio
. T. Rowe Price International Stock Portfolio
. Quest for ValueSM Equity Portfolio
. Quest for ValueSM Small Cap Portfolio
. U.S. Government Securities Portfolio
. T. Rowe Price Equity Income Portfolio
. T. Rowe Price Growth Stock Portfolio
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus sets forth concisely the information about the Fund and the
Portfolios that a prospective investor should know before investing. Please
read the Prospectus and retain it for future reference. Additional information
contained in a Statement of Additional Information also dated May 1, 1995, has
been filed with the Securities and Exchange Commission and is available upon
request without charge by writing or calling the Fund at the address or
telephone number set forth on the back cover of this Prospectus. The Statement
of Additional Information is incorporated by reference into this Prospectus.
Quest for ValueSM is a service mark of Oppenheimer Capital.
The date of this Prospectus is May 1, 1995.
<PAGE>
THE FUND
Endeavor Series Trust is a diversified, open-end management investment
company that offers a selection of managed investment portfolios. Each
portfolio constitutes a separate mutual fund with its own investment objective
and policies. The Fund currently issues shares of eight portfolios. The
Trustees of the Fund may establish additional portfolios at any time.
Shares of the Portfolios are issued and redeemed at their net asset value
without a sales load and are offered to various separate accounts of PFL Life
Insurance Company and certain of its affiliates ("PFL") to fund various
insurance contracts, including variable life insurance policies (whether
scheduled premium, flexible premium or single premium policies) or variable
annuity contracts. These insurance contracts are hereinafter referred to as the
"Contracts." The rights of PFL as the record holder for a separate account of
shares of the Portfolios are different from the rights of the owner of a
Contract. The terms "shareholder" or "shareholders" in this Prospectus refer to
PFL and not to any Contract owner.
The structure of the Fund permits Contract owners, within the limitations
described in the appropriate Contract, to allocate the amounts held by PFL
under the Contracts for investment in the various portfolios of the Fund. See
the prospectus and other material accompanying this Prospectus for a
description of the Contracts, which portfolios of the Fund are available to
Contract owners, and the relationship between increases or decreases in the net
asset value of shares of the portfolios (and any dividends and distributions on
such shares) and the benefits provided under the Contracts.
It is conceivable that in the future it may be disadvantageous for scheduled
premium variable life insurance separate accounts, flexible and single premium
variable life insurance separate accounts, and variable annuity separate
accounts to invest simultaneously in the Fund due to tax or other
considerations. The Trustees of the Fund intend to monitor events for the
existence of any material irreconcilable conflict between or among such
accounts, and PFL will take whatever remedial action may be necessary.
INVESTMENT OBJECTIVES
The Investment objectives of the Portfolios are as follows:
Money Market Portfolio--seeks current income, preservation of capital and
maintenance of liquidity through investment in short-term money market
securities. The Portfolio's shares are neither insured by nor guaranteed by the
U.S. government. The Portfolio seeks to maintain a constant net asset value of
$1.00 per share although no assurances can be given that such constant net
asset value will be maintained.
- 2 -
<PAGE>
Managed Asset Allocation Portfolio--seeks high total return through a
managed asset allocation portfolio of equity, fixed income and money market
securities.
T. Rowe Price International Stock Portfolio--seeks long-term growth of
capital through investments primarily in common stocks of established non-U.S.
companies.
Quest for ValueSM Equity Portfolio--seeks long term capital appreciation
through investment in a diversified portfolio of equity securities selected on
the basis of a value oriented approach to investing.
Quest for ValueSM Small Cap Portfolio--seeks capital appreciation through
investment in a diversified portfolio of equity securities of companies with
market capitalizations of under $1 billion.
U.S. Government Securities Portfolio--seeks as high a level of total return
as is consistent with prudent investment strategies by investing under normal
conditions at least 65% of its assets in U.S. government debt obligations and
mortgage-backed securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
T. Rowe Price Equity Income Portfolio--seeks to provide substantial dividend
income and also capital appreciation by investing primarily in dividend-paying
common stocks of established companies.
T. Rowe Price Growth Stock Portfolio--seeks long-term growth of capital and
to increase dividend income through investment primarily in common stocks of
well-established growth companies.
- 3 -
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables are based on a Portfolio share outstanding throughout
each period and should be read in conjunction with the financial statements
and related notes that also appear in the Fund's Annual Report dated December
31, 1994, which is incorporated by reference into the Statement of Additional
Information. The information contained in the Fund's Annual Report has been
audited by Ernst & Young LLP, independent auditors, whose report appears in
the Annual Report. Additional information concerning the performance of the
Fund is included in the Annual Report which may be obtained without charge by
writing the Fund at the address on the back cover of this Prospectus.
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
12/31/94 12/31/93 12/31/92 12/31/91*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Performance:
Net asset value, beginning of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Net investment income#................. 0.0337 0.0218 0.0287 0.0377
Dividends from net investment income... (0.0336) (0.0218) (0.0287) (0.0377)
Distributions from net realized capital
gains................................ (0.0001) -- -- --
-------- -------- -------- --------
Total distributions.................... (0.0337) (0.0218) (0.0287) (0.0377)
-------- -------- -------- --------
Net asset value, end of period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return++......................... 3.41% 2.19% 2.90% 3.84%
======== ======== ======== ========
Ratios to average net assets/
supplemental data:
Net assets, end of period
(in 000's)......................... $ 20,766 $ 12,836 $ 4,527 $ 1,907
Ratio of net investment
income to average net
assets............................. 3.58% 2.19% 2.84% 5.02%+
Ratio of operating expenses to
average net assets**............... 0.85% 0.99% 0.91% 0.00%+
</TABLE>
- -----------
* The Portfolio commenced operations on April 8, 1991.
** Annualized operating expense ratios before waiver of fees and/or
reimbursement of expenses by investment manager for the years ended
December 31, 1993, December 31, 1992 and the period ended December 31,
1991 were 1.23%, 2.37% and 8.48%, respectively.
+ Annualized.
++ Total return represents the aggregate total return for the periods
indicated. The total return of the Portfolio does not reflect the charges
against the separate accounts of PFL or the Contracts.
# Net investment income/(loss) before fees waived and/or reimbursement of
expenses by investment manager for the years ended December 31, 1993,
December 31, 1992 and the period ended December 31, 1991 were $0.0195,
$0.0140 and $(0.0259), respectively.
- 4 -
<PAGE>
MANAGED ASSET ALLOCATION PORTFOLIO
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
12/31/94+++ 12/31/93+++ 12/31/92+++ 12/31/91*
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Operating Performance:
Net asset value, beginning
of period.................... $ 14.30 $ 12.31 $ 11.37 $10.00
-------- ------- ------- ------
Net investment income#......... 0.28 0.23 0.24 0.10
Net realized and unrealized
gain/(loss) on
investments.................. (1.03) 1.84 0.77 1.27
-------- ------- ------- ------
Net increase/(decrease) in net
assets from investment
operations................... (0.75) 2.07 1.01 1.37
Dividends from net investment
income....................... (0.07) (0.08) (0.07) --
-------- ------- ------- ------
Net asset value, end of period... $ 13.48 $ 14.30 $ 12.31 $11.37
======== ======= ======= ======
Total return++................... (5.28)% 16.79% 9.01% 13.70%
======== ======= ======= ======
Ratios to average net
assets/supplemental data:
Net assets, end of period
(in 000's)................... $172,449 $96,657 $14,055 $4,247
Ratio of net investment income
to average net assets........ 2.03% 1.71% 2.11% 4.54%+
Ratio of operating
expenses to average
net assets**................. 0.90% 1.12% 1.18% 0.00%+
Portfolio turnover rate........ 67% 67% 50% 61%
</TABLE>
- -----------
* The Portfolio commenced operations on April 8, 1991.
** Annualized operating expense ratios before waiver of fees and/or
reimbursement of expense by investment manager for the year ended December
31, 1992 and the period ended December 31, 1991 were 1.73% and 5.18%,
respectively.
+ Annualized.
++ Total return represents aggregate total return for the periods indicated.
The total return of the Portfolio does not reflect the charges against the
separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for this
period since use of the undistributed method does not accord with results
of operations.
# Net investment income/(loss) before fees waived and/or reimbursement of
expenses by investment manager for the year ended December 31, 1992 and the
period ended December 31, 1991 were $0.18 and $(0.01), respectively.
- 5 -
<PAGE>
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO*
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED YEAR ENDED YEAR ENDED ENDED
12/31/94 12/31/93+++ 12/31/92+++ 12/31/91*
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Operating Performance:
Net asset value,
beginning of period............ $ 11.99 $ 10.12 $10.52 $10.00
------- ------- ------ ------
Net investment income/(loss)#.... (0.02) (0.04) 0.00*** 0.06
Net realized and unrealized
gain/(loss) on investments..... (0.66) 1.91 (0.38) 0.46
------- ------- ------ ------
Net increase/(decrease) in net
assets from investment
operations..................... (0.68) 1.87 (0.38) 0.52
Dividends from net investment
income......................... -- -- (0.02) --
------- ------- ------ ------
Net asset value, end of period... $ 11.31 $ 11.99 $10.12 $10.52
======= ======= ====== ======
Total return++................... (5.67)% 18.48% (3.61)% 5.20%
======= ======= ====== ======
Ratios to average net
assets/supplemental data:
Net assets, end of period (in
000's)......................... $84,102 $52,777 $6,305 $3,200
Ratio of net investment
income/(loss) to average net
assets......................... (0.16)% (0.31)% 0.01% 3.18%+
Ratio of operating expenses to
average net assets**........... 1.16% 1.52% 1.43% 0.00%+
Portfolio turnover rate.......... 88% 37% 34% 0%
</TABLE>
- -----------
* Effective March 24, 1995, the name of the Global Growth Portfolio was
changed to T. Rowe Price International Stock Portfolio and the investment
objective was changed from investment on a global basis to investment on an
international basis (i.e., in non-U.S. companies). The Portfolio commenced
operations on April 8, 1991.
** Annualized operating expense ratios before waiver of fees and/or
reimbursement of expenses by investment manager for the year ended December
31, 1992 and the period ended December 31, 1991 were 2.10% and 6.83%,
respectively.
*** Amount represents less than $0.01 per share.
+ Annualized.
++ Total return represents aggregate total return for the periods indicated.
The total return of the Portfolio does not reflect the charges against the
separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for this
period since use of the undistributed method does not accord with results
of operations.
# Net investment loss before fees waived and/or reimbursement of expenses by
investment manager for the year ended December 31, 1992 and the period ended
December 31, 1991 were $(0.07) and $(0.07), respectively.
- 6 -
<PAGE>
QUEST FOR VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
12/31/94 12/31/93*+++
-------- ------------
<S> <C> <C>
Operating Performance:
Net asset value, beginning of period................... $ 10.28 $ 10.00
------- -------
Net investment income#................................. 0.09 0.05
Net realized and unrealized gain/(loss)
on investments....................................... 0.33 0.23
------- -------
Net increase in net assets from
investment operations................................ 0.42 0.28
Dividends from net investment income................... (0.01) --
------- -------
Net asset value, end of period......................... $ 10.69 $ 10.28
======= =======
Total return++......................................... 4.09% 2.80%
======= =======
Ratios to average net
assets/supplemental data:
Net assets, end of period (in 000's)................... $32,776 $11,178
Ratio of net investment income to
average net assets................................... 1.31% 0.84%+
Ratio of operating expenses to average
net assets**......................................... 1.02% 1.30%+
Portfolio turnover rate................................ 56% 1%
</TABLE>
- -----------
* The Portfolio commenced operations on May 27, 1993.
** Annualized expense ratio before waiver of fees by investment manager for
the period ended December 31, 1993 was 2.10%.
+ Annualized.
++ Total return represents aggregate total return for the periods indicated.
The total return of the Portfolio does not reflect the charges against the
separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method which more appropriately presents the per share data for this period
since use of the undistributed method did not accord with results of
operations.
# Net investment income before fees waived by investment manager for the
period ended December 31, 1993 was $0.00.
- 7 -
<PAGE>
QUEST FOR VALUE SMALL CAP PORTFOLIO
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
12/31/94+++ 12/31/93*+++
----------- ------------
<S> <C> <C>
Operating Performance:
Net asset value, beginning of period................ $11.18 $10.00
------- -------
Net investment income#.............................. 0.10 0.22
Net realized and unrealized gain/(loss) on invest-
ments............................................. (0.30) 0.96
------- -------
Net increase/(decrease) in net assets from
investment operations............................. (0.20) 1.18
------- -------
Net asset value, end of period...................... $10.98 $11.18
======= =======
Total return++...................................... (1.79)% 11.80%
======= =======
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's)................ $35,966 $12,699
Ratio of net investment income to average net as-
sets.............................................. 0.89% 3.98%+
Ratio of operating expenses to average net assets**. 1.03% 1.30%+
Portfolio turnover rate............................. 77% 41%
</TABLE>
- -----------
* The Portfolio commenced operations on May 4, 1993.
** Annualized operating expense ratio before waiver of fees by investment
manager for the period ended December 31, 1993 was 2.10%.
+ Annualized.
++ Total return represents aggregate total return for the periods indicated.
The total return of the Portfolio does not reflect the charges against the
separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method which more appropriately presents the per share data for this period
since use of the undistributed method did not accord with results of
operations.
# Net investment income before fees waived by investment manager for the
period ended December 31, 1993 was $0.18.
- 8 -
<PAGE>
U.S. GOVERNMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
PERIOD
ENDED
12/31/94*+++
------------
<S> <C>
Operating Performance:
Net asset value,
beginning of period... $10.00
------
Net investment income#.. 0.24
Net realized and
unrealized loss on in-
vestments............. (0.28)
------
Net decrease in net
assets resulting from
investment operations. (0.04)
------
Net asset value, end of
period................ $ 9.96
======
Total return++.......... (0.40)%
======
Ratios to average net
assets/supplemental da-
ta:
Net assets, end of pe-
riod (in 000's)....... $3,505
Ratio of net investment
income to average net
assets................ 4.14%+
Ratio of operating
expenses to average
net assets**.......... 0.78%+
Portfolio turnover rate. 100%
</TABLE>
- -----------
* The Portfolio commenced operations on May 13, 1994.
** Annualized operating expense ratio before waiver of fees and reimbursement
of expenses by investment manager for the period ended December 31, 1994
was 1.83%.
+ Annualized.
++ Total return represents aggregate total return for the period indicated.
The total return of the Portfolio does not reflect the charges against the
separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for this
period since use of the undistributed method did not accord with results of
operations.
# Net investment income before fees waived and reimbursement of expenses by
investment manager for the period ended December 31, 1994 was $0.18.
----------------------
Endeavor Investment Advisers (the "Manager") has agreed, until terminated by
the Manager, to assume expenses of the Portfolios that exceed the rates stated
below. This has the effect of lowering each Portfolio's expense ratio and of
increasing returns otherwise available to investors at the time such amounts
are assumed. While this arrangement is in effect, the Manager pays all expenses
of the Portfolios to the extent they exceed the following percentages of a
Portfolio's average net assets: Money Market--.99%, Managed Asset Allocation--
1.25%, T. Rowe Price International Stock--1.53%, Quest for Value Equity--1.30%,
Quest for Value Small Cap--1.30%, U.S. Government Securities--1.00%, T. Rowe
Price Equity Income--1.30% and T. Rowe Price Growth Stock--1.30%.
The offering of shares of the T. Rowe Price Equity Income Portfolio and T.
Rowe Price Growth Stock Portfolio commenced on January 3, 1995. Accordingly, no
comparable financial data is available for shares of those Portfolios.
- 9 -
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following is a brief description of the investment objectives and
policies of the Portfolios. The investment objective and the policies of each
Portfolio other than those listed under the caption "Investment Restrictions"
in the Statement of Additional Information are not fundamental policies and may
be changed by the Trustees of the Fund without the approval of shareholders.
Certain portfolio investments and techniques discussed below are described in
greater detail in the Statement of Additional Information. Due to the
uncertainty inherent in all investments, there can be no assurance that the
Portfolios will be able to achieve their respective investment objectives.
MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to provide current
income, preservation of capital and liquidity through investment in short-term
money market securities.
The Portfolio seeks to maintain a constant net asset value of $1.00 per
share. If the Trustees believe that the extent of any deviation from a $1.00
price per share may result in material dilution or other unfair results to
shareholders, they will take such steps as they consider appropriate to
eliminate or reduce these consequences to the extent reasonably practicable.
This may include selling portfolio securities prior to maturity, shortening the
average maturity of the Portfolio, withholding or reducing dividends, redeeming
shares in kind, reducing the number of the Portfolio's outstanding shares
without monetary consideration, or utilizing a net asset value per share
determined by using available market quotations.
The Money Market Portfolio expects to invest in the following types of money
market securities:
. securities issued or guaranteed as to principal and interest by the U.S.
government or by its agencies or instrumentalities ("U.S. government
securities");
. certificates of deposit, bankers' acceptances and other obligations
issued or guaranteed by bank holding companies in the United States and
their subsidiaries;
. U.S. dollar denominated obligations ("Eurodollar obligations") of bank
holding companies in the United States, their subsidiaries and their
foreign branches or of the International Bank for Reconstruction and
Development (also known as the World Bank);
. commercial paper and other short-term obligations of, and variable
amount master demand notes and variable rate notes issued by U.S. and
foreign corporations; and
. repurchase agreements (see "Investment Strategies").
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Investment Criteria. With respect to investments in money market securities,
in accordance with applicable regulations of the Securities and Exchange
Commission, the Portfolio will:
. invest only in high quality money market instruments that present
minimal credit risks;
. invest only in money market instruments with remaining or implied
maturities of thirteen months or less; and
. maintain an average dollar weighted maturity of the Portfolio's
investments of 90 days or less.
The Portfolio will invest only in high quality money market instruments,
i.e., securities which have been assigned the highest quality ratings by
nationally recognized statistical rating organizations ("NRSROs") such as "A-1"
by Standard & Poor's Ratings Group ("Standard & Poor's") or "Prime-1" by
Moody's Investors Service, Inc. ("Moody's"), or if not rated, determined to be
of comparable quality; provided, that up to 5% of the Portfolio's total assets
may be invested in instruments assigned the second highest quality ratings such
as "A-2" or "Prime-2", or if not rated, determined to be of comparable quality.
For a description of the NRSROs and their ratings, see the Appendix attached to
the Statement of Additional Information.
The Portfolio may not invest in the securities of any one issuer if,
immediately after such investment, more than 5% of the total assets of the
Portfolio (taken at current value) would be invested in the securities of such
issuer; provided, that this limitation does not apply to U.S. government
securities or to repurchase agreements secured by such securities and that with
respect to 25% of the Portfolio's total assets more than 5% may be invested in
securities of any one issuer for three business days after the purchase thereof
if the securities have been assigned the highest quality ratings by NRSROs, or
if not rated, have been determined to be of comparable quality. With respect to
U.S. government securities, the Portfolio will not invest more than 55% of its
assets in securities issued or guaranteed by the U.S. Treasury or any single
U.S. government agency or instrumentality. See "Investment Restrictions" in the
Statement of Additional Information for a further description of the
Portfolio's investment criteria.
U.S. Government Securities. Securities issued or guaranteed as to principal
and interest by the U.S. government or its agencies and instrumentalities
include U.S. Treasury obligations, consisting of bills, notes and bonds, which
principally differ in their interest rates, maturities and times of issuance,
and obligations issued or guaranteed by agencies and instrumentalities which
are supported by (i) the full faith and credit of the U.S. Treasury (such as
securities of the Small Business Administration), (ii) the limited authority of
the issuer to borrow from the U.S. Treasury (such as securities of the Student
Loan Marketing Association) or (iii) the authority of the U.S. government to
purchase certain obligations of the issuer (such as securities of the
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Federal National Mortgage Association). No assurance can be given that the U.S.
government will provide financial support to U.S. government agencies or
instrumentalities as described in clauses (ii) or (iii) above in the future,
other than as set forth above, since it is not obligated to do so by law.
Other Money Market Securities. Other money market securities in which the
Portfolio may invest include U.S. dollar denominated instruments (such as
bankers' acceptances, commercial paper, certificates of deposit and Eurodollar
obligations) issued or guaranteed by bank holding companies in the United
States, their subsidiaries and their foreign branches. These bank obligations
may be general obligations of the parent bank holding company or may be limited
to the issuing entity by the terms of the specific obligation or by government
regulation.
Obligations of the International Bank for Reconstruction and Development
(also known as the World Bank) are supported by subscribed but unpaid
commitments of its member countries. There can be no assurance that these
commitments will be undertaken or complied with in the future.
The other money market securities in which the Portfolio may invest also
include certain variable and floating rate instruments and participations in
corporate loans to corporations in whose commercial paper or other short-term
obligations the Portfolio may invest. Because the bank issuing the
participations does not guarantee them in any way, they are subject to the
credit risks generally associated with the underlying corporate borrower. To
the extent that the Portfolio may be regarded as a creditor of the issuing bank
(rather than of the underlying corporate borrower under the terms of the loan
participation), the Portfolio may also be subject to credit risks associated
with the issuing bank. The secondary market, if any, for these loan
participations is extremely limited and any such participations purchased by
the Portfolio will be regarded as illiquid.
Other money market securities in which the Portfolio may invest also include
bonds and notes with remaining maturities of thirteen months or less, variable
rate notes and variable amount master demand notes. A variable amount master
demand note differs from ordinary commercial paper in that it is issued
pursuant to a written agreement between the issuer and the holder, its amount
may be increased from time to time by the holder (subject to an agreed maximum)
or decreased by the holder or the issuer, it is payable on demand, the rate of
interest payable on it varies with an agreed formula and it is typically not
rated by a rating agency. Transfer of such notes is usually restricted by the
issuer, and there is no secondary trading market for them. Any variable amount
master demand note purchased by the Portfolio will be regarded as an illiquid
security. See "Investment Restrictions" in the Statement of Additional
Information.
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The Portfolio's investment in illiquid securities, including loan
participations and variable amount master notes, is limited to 10% of its net
assets. See "Investment Restrictions" in the Statement of Additional
Information.
Foreign Securities. The Portfolio may invest up to 10% of its total assets in
the securities (payable in U.S. dollars) of foreign issuers in developed
countries and in the securities of foreign branches of U.S. banks such as
negotiable certificates of deposit (Eurodollars). Because the Portfolio may
invest in foreign securities, investment in the Portfolio involves investment
risks that are different in some respects from an investment in a fund which
invests only in debt obligations of U.S. domestic issuers. Such risks may
include adverse future political and economic developments, the possible
imposition of foreign withholding taxes on interest income payable on the
securities held in the Portfolio, possible seizure or nationalization of
foreign deposits, the possible establishment of exchange controls, or the
adoption of other foreign governmental restrictions which might adversely
affect the payment of principal and interest on securities in the Portfolio.
There may also be less publicly available information about a foreign issuer
than about a domestic issuer and foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic issuers.
The Portfolio may employ certain investment strategies which are described
under the caption "Investment Strategies" below and in the Statement of
Additional Information.
MANAGED ASSET ALLOCATION PORTFOLIO
The investment objective of the Managed Asset Allocation Portfolio is to
provide high total return through a managed asset allocation portfolio of
equity, fixed income and money market securities. The Portfolio seeks to
achieve its objective by investing primarily in securities issued by United
States companies.
The composition of the Portfolio's investments will be based on the
determination by the Portfolio's Adviser (as hereinafter defined) of the
appropriate weighting for each asset class and will be adjusted periodically.
In making adjustments to the asset allocation, the Portfolio's Adviser will use
its asset allocation model and will integrate its view of the expected returns
for each asset class, conditions in the stock, bond and money markets, interest
rate and corporate earnings growth trends, and economic conditions.
The asset class weightings may theoretically range from 0% to 100%, although
the Portfolio's Adviser expects these extremes to be reached rarely, if at all,
for any class. The Portfolio will be "rebalanced" or checked for possible
reallocation monthly or more often if market conditions demand. The Portfolio's
Adviser generally expects the number of asset shifts between asset classes to
occur approximately three or four times per year.
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The equity portion of the Portfolio will be invested in a diversified
selection of equity securities of established companies in sound financial
condition. The equity securities in which the Portfolio will be invested may
include common stocks, preferred stocks, securities convertible into or
exchangeable for common stocks and warrants. The Portfolio's Adviser will
strive to achieve total returns from dividends and capital gains in excess of
those from broadly-based stock market indices, but will not incur excessive
risk of loss to do so.
The fixed income portion of the Portfolio will be invested in taxable
securities including securities issued or guaranteed by the U.S. government and
its agencies or instrumentalities and high grade corporate and mortgage-backed
bonds with maturities typically ranging from 2 to 30 years. The weighted
average maturity of such investments will generally range from 3 to 10 years
and securities will, at time of purchase, have ratings within the four highest
rating categories established by Moody's, Standard & Poor's, or a similar
nationally recognized rating service or if not rated, be of comparable quality
as determined by the Portfolio's Adviser. The rating services' descriptions of
these bond ratings are set forth in the Appendix to the Statement of Additional
Information. Securities rated in the fourth highest category may have
speculative characteristics; changes in economic or business conditions are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade bonds. Like the three highest grades,
however, these securities are considered investment grade.
Mortgage-backed bonds have yield and maturity characteristics corresponding
to the underlying mortgage loans. Thus, for example, unlike other bonds, which
pay a fixed rate of interest until maturity when the entire principal amount
comes due, payments on mortgage-backed bonds include both interest and a
partial repayment of principal. Fluctuating prepayments of principal may result
from the refinancing or foreclosure of the underlying mortgage loans. Although
maturities of the underlying mortgage loans range up to 30 years, such
prepayments may shorten the effective maturities. Because of the prepayment
feature, mortgage-backed bonds may be less effective than other types of
securities as a means of "locking in" attractive long-term interest rates. This
is caused by the need to reinvest repayments of principal generally and the
possibility of significant unscheduled prepayments resulting from declines in
mortgage interest rates. As a result, mortgage-backed bonds may have less
potential for capital appreciation during periods of declining interest rates
than other investments of comparable maturities, while having a comparable risk
of decline during periods of rising interest rates.
Foreign Securities. The Portfolio may invest up to 10% of its total assets in
equity securities (payable in U.S. dollars) of foreign issuers in developed
countries. Because the Portfolio may invest in foreign securities, investment
in the Portfolio involves investment risks that are
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different in some respects from an investment in a fund which invests only in
securities of U.S. domestic issuers. Such risks may include adverse future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities held in the
Portfolio, possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls, or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on securities in the Portfolio. There may also be less publicly
available information about a foreign issuer than about a domestic issuer and
foreign issuers are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic issuers.
The cash portion of the Portfolio will be invested in the same portfolio
securities that are eligible for investment by the Money Market Portfolio
described above. The Portfolio may employ certain investment strategies which
are discussed under the caption "Investment Strategies" below and in the
Statement of Additional Information.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO
The T. Rowe Price International Stock Portfolio was formerly known as the
Global Growth Portfolio. Effective March 24, 1995, the name of the Global
Growth Portfolio was changed to T. Rowe Price International Stock Portfolio and
the Portfolio's investment objective was changed from seeking long-term capital
appreciation through a policy of investing in small capitalization common
stocks and their convertible equivalents on a global basis to the investment
objective and policies set forth below.
The investment objective of the T. Rowe Price International Stock Portfolio
is to seek long-term growth of capital through investments primarily in common
stocks of established non-U.S. companies
Over the last 30 years, many foreign economies have grown faster than the
United States' economy, and the return from equity investments in these
countries has often exceeded the return on similar investments in the United
States. Moreover, there has normally been a wide and largely unrelated
variation in performance between international equity markets over this period.
Although there can be no assurance that these conditions will continue, the
Portfolio's Adviser, within the framework of diversification, seeks to identify
and invest in companies participating in the faster growing foreign economies
and markets. The Adviser believes that investment in foreign securities offers
significant potential for long-term capital appreciation and an opportunity to
achieve investment diversification.
The Adviser intends to diversify investments broadly among countries and to
have at least five different countries represented in the Portfolio. The
Portfolio may invest in countries of the Far East and Europe as well as South
Africa, Australia, Canada, and other areas
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(including developing countries). Further, not more than 20% of the Portfolio's
net asset value will be invested in securities of issuers located in any one
country with the exception of issuers located in Australia, Canada, France,
Japan, the United Kingdom or Germany (where the investment limitation is 35%).
In addition, the Adviser will consider factors applicable to United States
investors in making investment decisions for the Portfolio.
In seeking its objective, the Portfolio invests primarily in common stocks of
established foreign companies which have, in the Adviser's opinion, the
potential for growth of capital. However, the Portfolio may also invest in a
variety of other equity related securities such as preferred stocks, warrants
and convertible securities, as well as corporate and governmental debt
securities, when considered consistent with the Portfolio's investment
objective and program. The Portfolio may also invest in investment funds which
have been authorized by the governments of certain countries specifically to
permit foreign investment in securities of companies listed and traded on the
stock exchanges in these respective countries. The Portfolio's investment in
these funds is subject to the provisions of the Investment Company Act of 1940
(the "1940 Act"). If the Portfolio invests in such investment funds, the
Portfolio's shareholders will bear not only their proportionate share of the
expenses of the Portfolio (including operating expenses and the fees of the
investment manager), but also will bear indirectly similar expenses of the
underlying investment funds. In addition, the securities of these investment
funds may trade at a premium of their net asset value. Under normal conditions,
the Portfolio's investments in securities other than common stocks is limited
to no more than 35% of its total assets.
In determining the appropriate distribution of investments among various
countries and geographic regions, the Portfolio's Adviser ordinarily considers
the following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
In analyzing companies for investment, the Adviser ordinarily looks for one
or more of the following characteristics: an above-average earnings growth per
share; high return on invested capital; healthy balance sheet; sound financial
and accounting policies and overall financial strength; strong competitive
advantages; effective research and product development and marketing; efficient
service; pricing flexibility; strength of management; and general operating
characteristics which will enable the companies to compete successfully in
their market place. While current dividend income is not a prerequisite in the
selection of portfolio companies, the companies in which the Portfolio invests
normally will have a record of paying dividends, and will generally be expected
to increase the amounts of such dividends in future years as
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earnings increase. It is expected that the Portfolio's investments will
ordinarily be traded on exchanges located at least in the respective countries
in which the various issuers of such securities are principally based.
In the event that future economic or financial conditions abroad adversely
affect equity securities, or stocks are considered overvalued, or the
Portfolio's Adviser believes that investing for defensive purposes is
appropriate, or in order to meet anticipated redemption requests, the Portfolio
may invest part or all of its assets in U.S. government securities, investment-
grade debt obligations of U.S. companies and high quality (within the two
highest rating categories assigned by an NRSRO) short-term debt securities
(with remaining maturities of one year or less) including certificates of
deposit, bankers' acceptances, commercial paper, short-term corporate
securities and repurchase agreements.
The international objectives of the Portfolio allow investors an opportunity
to achieve potentially higher returns, reflecting participation in countries
and economies with higher growth rates than those available domestically.
However, foreign investments involve certain risks that are not present in
domestic securities. Because the Portfolio intends to purchase securities
denominated in foreign currencies, a change in the value of any such currency
against the U.S. dollar will result in a change in the U.S. dollar value of the
Portfolio's assets and the Portfolio's income. In addition, although a portion
of the Portfolio's investment income may be received or realized in such
currencies, the Portfolio will be required to compute and distribute its income
in U.S. dollars. Therefore, if the exchange rate for any such currency declines
after the Portfolio's income has been earned and computed in U.S. dollars but
before conversion and payment, the Portfolio could be required to liquidate
portfolio securities to make such distributions.
The values of foreign investments and the investment income derived from them
may also be affected unfavorably by changes in currency exchange control
regulations. Although the Portfolio will invest only in securities denominated
in foreign currencies that are fully exchangeable into U.S. dollars without
legal restriction at the time of investment, there can be no assurance that
currency controls will not be imposed subsequently. In addition, the values of
foreign fixed income investments will fluctuate in response to changes in U.S.
and foreign interest rates.
There may be less information publicly available about a foreign issuer than
about a U.S. issuer, and foreign issuers are not generally subject to
accounting, auditing and financial reporting standards and practices comparable
to those in the United States. Foreign stock markets are generally not as
developed or efficient as, and may be more volatile than, those in the United
States. While growing in volume, they usually have substantially less volume
than U.S. markets and the Portfolio's investment securities may be less liquid
and subject to more
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rapid and erratic price movements than securities of comparable U.S. companies.
Equity securities may trade at price/earnings multiples higher than comparable
United States securities and such levels may not be sustainable. There is
generally less government supervision and regulation of foreign stock
exchanges, brokers and listed companies than in the United States. Moreover,
settlement practices for transactions in foreign markets may differ from those
in United States markets. Such differences may include delays beyond periods
customary in the United States and practices, such as delivery of securities
prior to receipt of payment, which increase the likelihood of a "failed
settlement." Failed settlements can result in losses to the Portfolio. In less
liquid and well developed stock markets, such as those in some Asian and Latin
American countries, volatility may be heightened by actions of a few major
investors. For example, substantial increases or decreases in cash flows of
mutual funds investing in these markets could significantly affect stock prices
and, therefore, share prices.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher than for securities traded in the United States. Consequently,
the overall expense ratios of international funds are usually somewhat higher
than those of typical domestic stock funds.
In addition, the economies, markets and political structures of a number of
the countries in which the Portfolio can invest do not compare favorably with
the United States and other mature economies in terms of wealth and stability.
Therefore, investments in these countries may be riskier, and will be subject
to erratic and abrupt price movements. Some economies are less well developed
and less diverse (for example, Latin America, Eastern Europe and certain Asian
countries), and more vulnerable to the ebb and flow of international trade,
trade barriers and other protectionist or retaliatory measures (for example,
Japan, southeast Asia and Latin America). Some countries, particularly in Latin
America, are grappling with severe inflation and high levels of national debt.
Investments in countries that have recently begun moving away from central
planning and state-owned industries toward free markets, such as the Eastern
European or Chinese economies, should be regarded as speculative.
Certain portfolio countries have histories of instability and upheaval (Latin
America) and internal politics that could cause their governments to act in a
detrimental or hostile manner toward private enterprise or foreign investment.
Any such actions, for example, nationalizing an industry or company, could have
a severe and adverse effect on security prices and impair the Portfolio's
ability to repatriate capital or income. The Portfolio's Adviser will not
invest the Portfolio's assets in countries where it believes such events are
likely to occur.
Income received by the Portfolio from sources within foreign countries may be
reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the
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United States may reduce or eliminate such taxes. The Portfolio's Adviser will
attempt to minimize such taxes by timing of transactions and other strategies,
but there can be no assurance that such efforts will be successful. Any such
taxes paid by the Portfolio will reduce its net income available for
distribution to shareholders.
The Portfolio may employ certain investment strategies which are discussed
under the caption "Investment Strategies" below and in the Statement of
Additional Information.
QUEST FOR VALUE EQUITY PORTFOLIO
The investment objective of the Quest for Value Equity Portfolio is long term
capital appreciation through investment in securities (primarily equity
securities) of companies that are believed by the Portfolio's Adviser to be
undervalued in the marketplace in relation to factors such as the companies'
assets or earnings.
It is the Portfolio Adviser's intention to invest in securities which in its
opinion possess one or more of the following characteristics: undervalued
assets, valuable consumer or commercial franchises, securities valuation below
peer companies, substantial and growing cash flow and/or a favorable price to
book value relationship.
Investment policies aimed at achieving the Portfolio's objective are set in a
flexible framework of securities selection which primarily includes equity
securities, such as common stocks, preferred stocks, convertible securities,
rights and warrants in proportions which vary from time to time. Under normal
circumstances at least 65% of the Portfolio's assets will be invested in common
stocks or securities convertible into common stocks. The Portfolio will invest
primarily in stocks listed on the New York Stock Exchange. In addition, it may
also purchase securities listed on other domestic securities exchanges or
traded in the domestic over-the-counter market and foreign securities that are
listed on a domestic or foreign securities exchange, traded in the domestic or
foreign over-the-counter markets or represented by American Depositary
Receipts.
In the event that future economic or financial conditions adversely affect
equity securities, or stocks are considered overvalued, or the Portfolio's
Adviser believes that investing for defensive purposes is appropriate, or in
order to meet anticipated redemption requests, the Portfolio may invest part or
all of its assets in U.S. government securities and high quality short-term
debt securities (with remaining maturities of one year or less) including
certificates of deposit, bankers' acceptances, commercial paper, short-term
corporate securities and repurchase agreements.
The Portfolio may invest in certain foreign securities which may represent a
greater degree of risk than investing in domestic securities. These risks are
discussed in the above section of this Prospectus describing the T. Rowe Price
International Stock Portfolio.
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It is the present intention of the Portfolio's Adviser to invest no more than
5% the Portfolio's net assets in bonds rated below Baa3 by Moody's or BBB by
Standard & Poor's (commonly known as "junk bonds"). In the event that the
Portfolio's Adviser intends in the future to invest more than 5% of the
Portfolio's net assets in junk bonds, appropriate disclosures will be made to
existing and prospective shareholders. For information about the possible risks
of investing in junk bonds see "Investment Objective and Policies--Lower Rated
Bonds" in the Statement of Additional Information.
The Portfolio may employ certain investment strategies which are discussed
under the caption "Investment Strategies" below and in the Statement of
Additional Information.
QUEST FOR VALUE SMALL CAP PORTFOLIO
The investment objective of the Quest for Value Small Cap Portfolio is to
seek capital appreciation through investments in a diversified portfolio
consisting primarily of equity securities of companies with market
capitalizations of under $1 billion.
Small-capitalization companies are often under-priced for the following
reasons: (i) institutional investors, which currently represent a majority of
the trading volume in the shares of publicly-traded companies, are often less
interested in such companies because in order to acquire an equity position
that is large enough to be meaningful to an institutional investor, such an
investor may be required to buy a large percentage of the company's outstanding
equity securities and (ii) such companies may not be regularly researched by
stock analysts, thereby resulting in greater discrepancies in valuation.
The Portfolio may also purchase securities in initial public offerings, or
shortly after such offerings have been completed, when the Portfolio's Adviser
believes that such securities have greater-than-average market appreciation
potential.
Under normal circumstances, at least 65% of the Portfolio's assets will be
invested in common stocks and securities convertible into common stocks.
Securities purchased by the Portfolio will be traded on the New York Stock
Exchange, the American Stock Exchange or in the over-the-counter market, and
will also include options, warrants, bonds, notes and debentures which are
convertible into or exchangeable for, or which grant a right to purchase or
sell, such securities. In addition, the Portfolio may purchase foreign
securities that are listed on a domestic or foreign securities exchange, traded
in domestic or foreign over-the-counter markets or represented by American
Depositary Receipts.
In the event that future economic or financial conditions adversely affect
equity securities, or stocks are considered overvalued, or the Portfolio's
Adviser believes that investing for defensive purposes is appropriate, or in
order to meet anticipated redemption requests, the
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Portfolio may invest part or all of its assets in U.S. government securities
and high quality short-term debt securities (with remaining maturities of one
year or less) including certificates of deposit, bankers' acceptances,
commercial paper, short-term corporate securities and repurchase agreements.
The Portfolio is expected to have greater risk exposure and reward potential
than a fund which invests primarily in larger-capitalization companies. The
trading volumes of securities of smaller-capitalization companies are normally
less than those of larger-capitalization companies. This often translates into
greater price swings, both upward and downward. Since trading volumes are
lower, new demand for the securities of such companies could result in
disproportionately large increases in the price of such securities. The waiting
period for the achievement of an investor's objectives might be longer since
these securities are not closely monitored by research analysts and, thus, it
takes more time for investors to become aware of fundamental changes or other
factors which have motivated the Portfolio's purchase. Small-capitalization
companies often achieve higher growth rates and experience higher failure rates
than do larger-capitalization companies.
The Portfolio may invest in certain foreign securities which may represent a
greater degree of risk than investing in domestic securities. These risks are
discussed in the above section of this Prospectus describing the T. Rowe Price
International Stock Portfolio.
It is the present intention of the Portfolio's Adviser to invest no more than
5% of the Portfolio's net assets in bonds rated below Baa3 by Moody's or BBB by
Standard & Poor's (commonly known as "junk bonds"). In the event that the
Portfolio's Adviser intends in the future to invest more than 5% of the
Portfolio's net assets in junk bonds, appropriate disclosures will be made to
existing and prospective shareholders. For information about the possible risks
of investing in junk bonds see "Investment Objectives and Policies--Lower Rated
Bonds" in the Statement of Additional Information.
The Portfolio may employ certain investment strategies which are discussed
under the caption "Investment Strategies" below and in the Statement of
Additional Information.
U.S. GOVERNMENT SECURITIES PORTFOLIO
The investment objective of the U.S. Government Securities Portfolio is to
seek as high a level of total return as is consistent with prudent investment
strategies by investing under normal conditions at least 65% of its assets in
U.S. government debt obligations and mortgage-backed securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities ("U.S.
Government Securities").
The Portfolio expects to invest in the following types of U.S. Government
Securities:
. U.S. Treasury obligations;
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. obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government which are backed by their own credit and may not be
backed by the full faith and credit of the U.S. government;
. mortgage-backed securities guaranteed by the Government National
Mortgage Association that are supported by the full faith and credit of
the U.S. government and which are the "modified pass-through" type of
mortgage-backed security ("GNMA Certificates"). Such securities entitle
the holder to receive all interest and principal payments due whether or
not payments are actually made on the underlying mortgages;
. mortgage-backed securities guaranteed by agencies or instrumentalities
of the U.S. government which are supported by their own credit but not
the full faith and credit of the U.S. government, such as the Federal
Home Loan Mortgage Corporation and the Federal National Mortgage
Association; and
. collateralized mortgage obligations issued by private issuers for which
the underlying mortgage-backed securities serving as collateral are
backed (i) by the credit alone of the U.S. government agency or
instrumentality which issues or guarantees the mortgage-backed
securities, or (ii) by the full faith and credit of the U.S. government.
Mortgage-Backed Securities. The mortgage-backed securities in which the
Portfolio invests represent participation interests in pools of residential
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
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of the maturities of the underlying instruments. The actual life of any
particular pool may be shortened by unscheduled or early payments of principal
and interest. The occurrence of prepayments is affected by a wide range of
economic, demographic and social factors and, accordingly, it is not possible
to accurately predict the average life of a particular pool. For pools of fixed
rate 30-year mortgages, it has been common practice to assume that prepayments
will result in a 12-year average life. The actual prepayment experience of a
pool of mortgage loans may cause the yield realized by the Portfolio to differ
from the yield calculated on the basis of the average life of the pool. In
addition, if any of these mortgage-backed securities are purchased at a
premium, the premium may be lost in the event of early prepayment which may
result in a loss to the Portfolio.
Prepayments tend to increase during periods of falling interest rates, while
during periods of rising interest rates prepayments will most likely decline.
Reinvestment by the Portfolio of scheduled principal payments and unscheduled
prepayments may occur at higher or lower rates than the original investment,
thus affecting the yield of the Portfolio. Monthly interest payments received
by the Portfolio have a compounding effect which will increase the yield to
shareholders as compared to debt obligations that pay interest semiannually.
Because of the reinvestment of prepayments of principal at current rates,
mortgage-backed securities may be less effective than Treasury bonds of similar
maturity at maintaining yields during periods of declining interest rates.
Also, although the value of debt securities may increase as interest rates
decline, the value of these pass-through type of securities may not increase as
much due to the prepayment feature.
Collateralized Mortgage Obligations. Collateralized mortgage obligations
("CMOs"), which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities, provide the holder with a specified interest
in the cash flow of a pool of underlying mortgages or other mortgage-backed
securities. Issuers of CMOs frequently elect to be taxed as a pass-through
entity known as real estate mortgage investment conduits. CMOs are issued in
multiple classes, each with a specified fixed or floating interest rate and a
final distribution date. The relative payment rights of the various CMO classes
may be structured in many ways. In most cases, however, payments of principal
are applied to the CMO classes in the order of their respective stated
maturities, so that no principal payments will be made on a CMO class until all
other classes having an earlier stated maturity date are paid in full. The
classes may include accrual certificates (also known as "Z-Bonds"), which only
accrue interest at a specified rate until other specified classes have been
retired and are converted thereafter to interest-paying securities. They may
also include planned amortization classes which generally require, within
certain limits, that specified amounts of principal be applied on each payment
date, and generally exhibit less yield and market volatility than other
classes.
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Stripped Mortgage-Backed Securities. The Portfolio may also invest a portion
of its assets in stripped mortgage-backed securities ("SMBS"), which are
derivative multi-class mortgage securities. SMBS are usually structured with
two classes that receive different proportions of the interest and principal
distributions from a pool of mortgage assets. The Portfolio will only invest in
SMBS whose mortgage assets are U.S. Government Securities.
A common type of SMBS will be structured so that one class receives some of
the interest and most of the principal from the mortgage assets, while the
other class receives most of the interest and the remainder of the principal.
In the most extreme case, one class will receive all of the interest (the
interest-only or "IO" class) while the other class will receive all of the
principal (the principal-only or "PO" class). The yield to maturity on an IO
class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Portfolio's yield
to maturity from these securities. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the Portfolio may fail to
fully recoup its initial investment in these securities even if the security is
in one of the highest rating categories. The Portfolio may invest not more than
5% of its total assets in CMOs deemed by its Adviser to be complex, such as
floating rate and inverse floating rate tranches and SMBS.
Non-Mortgage Asset Backed Securities. The Portfolio may invest in non-
mortgage backed securities including interests in pools of receivables, such as
motor vehicle installment purchase obligations and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets.
Non-mortgage backed securities are not issued or guaranteed by the U.S.
government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities. In addition, such securities generally will
have remaining estimated lives at the time of purchase of five years or less.
The purchase of non-mortgage backed securities raises considerations peculiar
to the financing of the instruments underlying such securities. For example,
most organizations that issue asset backed securities relating to motor vehicle
installment purchase obligations perfect their interests in their respective
obligations only by filing a financing statement and by having the servicer of
the obligations, which is usually the originator, take custody thereof. In such
circumstances, if the servicer were to sell the same obligations to another
party, in violation of its duty not to do so, there is a risk that such party
could
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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.
U.S. Treasury Obligations. U.S. Treasury obligations consist of bills, notes
and bonds which principally differ in their interest rates, maturities and
times of issuance. Obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government are supported by (i) the full faith
and credit of the U.S. Treasury (such as securities of the Small Business
Administration), (ii) the limited authority of the issuer to borrow from the
U.S. Treasury (such as securities of the Student Loan Marketing Association) or
(iii) the authority of the U.S. government to purchase certain obligations of
the issuer (such as securities of the Federal National Mortgage Association).
No assurance can be given that the U.S. government will provide financial
support to U.S. government agencies or instrumentalities as described in
clauses (ii) or (iii) above in the future, other than as set forth above, since
it is not obligated to do so by law. The Portfolio will not invest more than
55% of the value of its assets in GNMA Certificates or in securities issued or
guaranteed by any other single U.S. government agency or instrumentality.
Corporate and Other Obligations. In seeking to obtain its investment
objective, the Portfolio may also invest in a broad range of debt securities,
other than U.S. Government Securities, with varying maturities such as
corporate convertible and non-convertible debt obligations such as fixed and
variable rate bonds. The weighted average maturity of such investments will
generally range from 2 to 10 years. Debt securities may also include money
market securities, including bank certificates of deposit and time deposits,
bankers' acceptances, prime commercial paper, high-grade, short-term corporate
obligations, and repurchase agreements with respect to these instruments.
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Investment-grade debt securities are securities rated Baa or higher by
Moody's or BBB or higher by Standard & Poor's, and unrated securities that are
of equivalent quality in the opinion of the Portfolio's Adviser. The rating
services' descriptions of these bond ratings are set forth in the Appendix to
the Statement of Additional Information. Securities rated in the fourth highest
category may have speculative characteristics; changes in economic conditions
are more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade bonds. Like the three highest grades,
however, these securities are considered investment grade.
Lower-Rated Securities. The Portfolio may also invest a portion of its
assets, not to exceed 25%, in securities rated below Baa by Moody's or BBB by
Standard & Poor's (commonly known as "junk bonds"), so long as they are
consistent with the Portfolio's objective of seeking as high a level of total
return as is consistent with prudent investment strategies. Such securities may
include bonds rated as low as C by Moody's and by Standard & Poor's. See the
Appendix to the Statement of Additional Information. The Portfolio's Adviser
anticipates that a substantial portion of the Portfolio's lower-rated
securities will be in the higher end of these ratings.
Lower-rated and comparable unrated securities (collectively referred to in
this discussion as "lower-rated securities") will likely have some quality and
protective characteristics that, in the judgment of the rating organization,
are out-weighed by large uncertainties or major risk exposures to adverse
conditions; and are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of
the obligation.
While the market values of lower-rated securities tend to react less to
fluctuations in interest rate levels than the market values of higher-rated
securities, the market values of certain lower-rated securities also tend to be
more sensitive to individual corporate developments and changes in economic
conditions than higher-rated securities. In addition, lower-rated securities
generally present a higher degree of credit risk. Issuers of lower-rated
securities are often highly leveraged and may not have more traditional methods
of financing available to them so that their ability to service their debt
obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired. The risk of loss due to default by such issuers
is significantly greater because lower-rated securities generally are unsecured
and frequently are subordinated to the prior payment of senior indebtedness.
The Portfolio may incur additional expenses to the extent that it is required
to seek recovery upon a default in the payment of principal or interest on its
portfolio holdings. The existence of limited markets for lower-rated securities
may diminish the Portfolio's ability to obtain accurate market quotations for
purposes of valuing such securities and calculating its net asset value. For
additional information about the possible risks of investing in junk bonds, see
"Investment Objectives and
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<PAGE>
Policies--Lower-Rated Bonds" in the Statement of Additional Information.
Foreign Securities. The Portfolio may invest up to 15% of its total assets in
debt securities, including securities denominated in foreign currencies of
foreign issuers (including foreign governments) in developed countries and
emerging markets. Because the Portfolio may invest in foreign securities,
investment in the Portfolio involves investment risks that are different in
some respects from an investment in a fund which invests only in securities of
U.S. domestic issuers. Such risks may include adverse future political and
economic developments, the possible imposition of foreign withholding taxes on
interest income payable on the securities held in the Portfolio, possible
seizure or nationalization of foreign deposits, the possible establishment of
exchange controls, or the adoption of other foreign governmental restrictions
which might adversely affect the payment of principal and interest on
securities in the Portfolio. There may also be less publicly available
information about a foreign issuer than about a domestic issuer and foreign
issuers are not generally subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to domestic issuers.
The considerations described above generally are more of a concern in
developing countries inasmuch as their economic systems are generally smaller
and less diverse and mature and their political systems less stable than those
in developed countries. The Portfolio seeks to mitigate the risks associated
with these considerations through diversification and active portfolio
management.
The Portfolio may invest up to 35% of its assets in U.S. dollar-denominated
obligations issued by foreign branches of domestic banks ("Eurodollar"
obligations) and domestic branches of foreign banks ("Yankee dollar"
obligations).
The Portfolio may employ certain investment strategies which are discussed
under the caption "Investment Strategies" below and in the Statement of
Additional Information.
T. ROWE PRICE EQUITY INCOME PORTFOLIO
The investment objective of the T. Rowe Price Equity Income Portfolio is to
seek to provide substantial dividend income and also capital appreciation by
investing primarily in dividend-paying common stocks of established companies.
In pursuing its objective, the Portfolio emphasizes companies with favorable
prospects for increasing dividend income, and secondarily, capital
appreciation. Over time, the income component (dividends and interest earned)
of the Portfolio's investments is expected to be a significant contributor to
the Portfolio's total return. The Portfolio's income yield is expected to be
significantly above that of the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"). Total return will consist primarily of dividend income and
secondarily of capital appreciation (or depreciation).
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The investment program of the Portfolio is based on several premises. First,
the Portfolio's Adviser believes that, over time, dividend income can account
for a significant component of the total return from equity investments.
Second, dividends are normally a more stable and predictable source of return
than capital appreciation. While the price of a company's stock generally
increases or decreases in response to short-term earnings and market
fluctuations, its dividends are generally less volatible. Finally, the
Portfolio's Adviser believes that stocks which distribute a high level of
current income tend to have less price volatility than those which pay below
average dividends.
To achieve its objective, the Portfolio, under normal circumstances, will
invest at least 65% of its assets in income-producing common stocks, whose
prospects for dividend growth and capital appreciation are considered favorable
by its Adviser. To enhance capital appreciation potential, the Portfolio also
uses a value-oriented approach, which means it invests in stocks its Adviser
believes are currently undervalued in the marketplace. The Portfolio's
investments will generally be made in companies which share some of the
following characteristics:
. established operating histories;
. above-average current dividend yields relative to the S&P 500;
. low price/earnings ratios relative to the S&P 500;
. sound balance sheets and other financial characteristics; and
. low stock price relative to company's underlying value as measured by
assets, earnings, cash flow or business franchises.
The Portfolio also may invest its assets in fixed income securities
(corporate, government, and municipal bonds of various maturities). The
Portfolio will invest in municipal bonds when the expected total return from
such bonds appears to exceed the total returns obtainable from corporate or
government bonds of similar credit quality. Interest earned on municipal bonds
purchased by the Portfolio will not be exempt from taxation.
Although the Portfolio will invest primarily in U.S. common stocks, it may
also purchase other types of securities, for example, foreign securities,
preferred stocks, convertible securities and warrants, when considered
consistent with the Portfolio's investment objective and program.
In the event that future economic or financial conditions adversely affect
equity securities, or stocks are considered overvalued, or the Portfolio's
Adviser believes that investing for defensive purposes is appropriate, or in
order to meet anticipated redemption requests, the Portfolio may invest part or
all of its assets in U.S. government securities and high quality (within the
two highest rating categories assigned by an NRSRO) short-term debt securities
(with remaining maturities of one year or less) including certificates of
deposit, bankers' acceptances, commercial paper, short-term corporate
securities and repurchase agreements.
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<PAGE>
The Portfolio may invest up to 25% of its total assets in foreign securities.
These include non-dollar denominated securities traded outside the U.S. and
dollar denominated securities traded in the U.S. (such as American Depositary
Receipts). Such investments increase a portfolio's diversification and may
enhance return, but they may represent a greater degree of risk than investing
in domestic securities. These risks are discussed in the above section of this
Prospectus describing the T. Rowe Price International Stock Portfolio.
The Portfolio may invest in debt securities of any type without regard to
quality or rating. Such securities would be purchased in companies which meet
the investment criteria for the Portfolio. The price of a bond fluctuates with
changes in interest rates, rising when interest rates fall and falling when
interest rates rise. The Portfolio, however, will not invest more than 10% of
its total assets in securities rated below Baa by Moody's or BBB by Standard &
Poor's (commonly known as "junk bonds"). Such securities may include bonds
rated as low as C by Moody's and by Standard & Poor's. See the Appendix to the
Statement of Additional Information. Investments in non-investment grade
securities entail certain risks which are discussed in the above section of
this Prospectus describing the U.S. Government Securities Portfolio under the
heading "Lower-Rated Securities."
The Portfolio may invest up to 10% of its total assets in mortgage-backed
securities, collateralized mortgage obligations, stripped mortgage-backed
securities and non-mortgage asset-backed securities. A description of the
characteristics and risks of these securities is set forth above in the section
of this Prospectus that describes the U.S. Government Securities Portfolio.
The Portfolio may employ certain investment strategies which are discussed
under the caption "Investment Strategies" below and in the Statement of
Additional Information.
T. ROWE PRICE GROWTH STOCK PORTFOLIO
The investment objectives of the T. Rowe Price Growth Stock Portfolio are to
seek long-term growth of capital and to increase dividend income through
investment primarily in common stocks of well-established growth companies. A
growth company is defined as one which: (1) has demonstrated historical growth
of earnings faster than the growth of inflation and the economy in general; and
(2) has indications of being able to continue this growth pattern in the
future. Total return will consist primarily of capital appreciation or
depreciation and secondarily of dividend income.
More than fifty years ago, T. Rowe Price, the Portfolio's Adviser, pioneered
the Growth Stock Theory of Investing. It is based on the premise that inflation
represents a more serious, long-term threat to an investor's portfolio than
stock market fluctuations or recessionary periods. It is the Portfolio
Adviser's belief that stocks of established
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companies whose earnings are growing at above-average rates will promote
superior inflation-adjusted returns. When a company's earnings grow faster than
inflation and faster than the economy in general, eventually the market should
recognize this successful long-term record with a higher stock price. In
addition, the company should be able to raise its dividend in line with its
growth in earnings.
Although corporate earnings can be expected to be lower during periods of
recession, it is the Portfolio Adviser's opinion that, over the long term, the
earnings of well-established growth companies will not be affected adversely by
unfavorable economic conditions to the same extent as the earnings of more
cyclical companies. However, investors should be aware that the Portfolio's
share value may not always reflect the long-term earnings trend of growth
companies.
The Portfolio will invest primarily in the common stock of a diversified
group of well-established growth companies. While current dividend income is
not a prerequisite in the selection of a growth company, the companies in which
the Portfolio will invest normally have a record of paying dividends and are
generally expected to increase the amounts of such dividends in future years as
earnings increase.
Although the Portfolio will invest primarily in U.S. common stocks, it may
also purchase other types of securities, for example, foreign securities,
preferred stocks, convertible securities and warrants, when considered
consistent with the Portfolio's investment objectives and program.
In the event that future economic or financial conditions adversely affect
equity securities, or stocks are considered overvalued, or the Portfolio's
Adviser believes that investing for defensive purposes is appropriate, or in
order to meet anticipated redemption requests, the Portfolio may invest part or
all of its assets in U.S. government securities and high quality (within the
two highest rating categories assigned by an NRSRO) short-term debt securities
(with remaining maturities of one year or less) including certificates of
deposit, bankers' acceptances, commercial paper, short-term corporate
securities and repurchase agreements.
The Portfolio may invest up to 30% of its total assets in foreign securities.
These include non-dollar denominated securities traded outside the U.S. and
dollar denominated securities traded in the U.S. (such as American Depositary
Receipts). Such investments increase a portfolio's diversification and may
enhance return, but they may represent a greater degree of risk than investing
in domestic securities. These risks are discussed in the above section of this
Prospectus describing the T. Rowe Price International Stock Portfolio.
The Portfolio may employ certain investment strategies which are discussed
under the caption "Investment Strategies" below and in the Statement of
Additional Information.
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<PAGE>
INVESTMENT STRATEGIES
In addition to making investments directly in securities, the Portfolios
(other than the Money Market Portfolio) may write covered call and put options
and hedge their investments by purchasing options and engaging in transactions
in futures contracts and related options. The Adviser to the Managed Asset
Allocation Portfolio does not presently intend to utilize futures contracts and
related options but may do so in the future. The T. Rowe Price International
Stock, U.S. Government Securities, T. Rowe Price Equity Income and T. Rowe
Price Growth Stock Portfolios may engage in foreign currency exchange
transactions to protect against changes in future exchange rates. All
Portfolios except the Money Market Portfolio may invest in American Depositary
Receipts and European Depositary Receipts. All Portfolios may enter into
repurchase agreements, may make forward commitments to purchase securities,
lend their portfolio securities and borrow funds under certain limited
circumstances. The T. Rowe Price Equity Income, T. Rowe Price Growth Stock, T.
Rowe Price International Stock and U.S. Government Securities Portfolios may
invest in hybrid instruments. The investment strategies referred to above and
the risks related to them are summarized below and certain of these strategies
are described in more detail in the Statement of Additional Information.
Options and Futures Transactions. A Portfolio (other than the Money Market
Portfolio) may seek to increase the current return on its investments by
writing covered call or covered put options. In addition, a Portfolio (other
than the Money Market Portfolio) may at times seek to hedge against either a
decline in the value of its portfolio securities or an increase in the price of
securities which its Adviser plans to purchase through the writing and purchase
of options and the purchase and sale of futures contracts and related options.
The Adviser to the Managed Asset Allocation Portfolio has no present intention
to use this strategy, but may do so in the future.
The Adviser to the U.S. Government Securities Portfolio does not presently
intend to purchase or sell call or put options but may enter into interest rate
futures contracts and write and purchase put and call options on such futures
contracts. The Portfolio may purchase and sell interest rate futures contracts
as a hedge against changes in interest rates. A futures contract is an
agreement between two parties to buy and sell a security for a set price on a
future date. Futures contracts are traded on designated "contracts markets"
which, through their clearing corporations, guarantee performance of the
contracts. Currently, there are futures contracts based on securities such as
long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA Certificates and
three-month U.S. Treasury bills.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of securities has an effect similar to the actual sale of securities,
although the sale of the futures contracts might be
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accomplished more easily and quickly. For example, if the Portfolio holds long-
term U.S. Government Securities and the Adviser anticipates a rise in long-term
interest rates, it could, in lieu of disposing of its portfolio securities,
enter into futures contracts for the sale of similar long-term securities. If
interest rates increased and the value of the Portfolio's securities declined,
the value of the Portfolio's futures contracts would increase, thereby
protecting the Portfolio by preventing the net asset value from declining as
much as it otherwise would have. Similarly, entering into futures contracts for
the purchase of securities has an effect similar to the actual purchase of the
underlying securities, but permits the continued holding of securities other
than the underlying securities. For example, if the Adviser expects long-term
interest rates to decline, the Portfolio might enter into futures contracts for
the purchase of long-term securities, so that it could gain rapid market
exposure that may offset anticipated increases in the cost of securities it
intends to purchase, while continuing to hold higher-yielding short-term
securities or waiting for the long-term market to stabilize.
A Portfolio (other than the Money Market Portfolio) also may purchase and
sell listed put and call options on futures contracts. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put), at a specified exercise
price at any time during the option period. When an option on a futures
contract is exercised, delivery of the futures position is accompanied by cash
representing the difference between the current market price of the futures
contract and the exercise price of the option.
The U.S. Government Securities Portfolio may purchase put options on interest
rate futures contracts in lieu of, and for the same purpose as, sale of a
futures contract. It also may purchase such put options in order to hedge a
long position in the underlying futures contract in the same manner as it
purchases "protective puts" on securities. The purchase of call options on
interest rate futures contracts is intended to serve the same purpose as the
actual purchase of the futures contract, and the Portfolio will set aside cash
or cash equivalents sufficient to purchase the amount of portfolio securities
represented by the underlying futures contracts.
A Portfolio may not purchase futures contracts or related options if,
immediately thereafter, more than 33 1/3% (25% for the T. Rowe Price Equity
Income Portfolio, the T. Rowe Price Growth Stock Portfolio and the T. Rowe
Price International Stock Portfolio) of the Portfolio's total assets would be
so invested.
The Portfolios' Advisers generally expect that options and futures
transactions for the Portfolios will be conducted on securities and other
exchanges. In certain instances, however, a Portfolio may purchase and sell
options in the over-the-counter market. The staff of the Securities
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and Exchange Commission considers over-the-counter options to be illiquid. A
Portfolio's ability to terminate option positions established in the over-the-
counter market may be more limited than in the case of exchange traded options
and may also involve the risk that securities dealers participating in such
transactions would fail to meet their obligations to the Portfolio. There can
be no assurance that a Portfolio will be able to effect closing transactions at
any particular time or at an acceptable price. The use of options and futures
involves the risk of imperfect correlation between movements in options and
futures prices and movements in the prices of the securities that are being
hedged. Expenses and losses incurred as a result of these hedging strategies
will reduce the Portfolio's current return.
Foreign Currency Transactions. The U.S. Government Securities, T. Rowe Price
Equity Income, T. Rowe Price Growth Stock and T. Rowe Price International Stock
Portfolios may purchase foreign currency on a spot (or cash) basis, enter into
contracts to purchase or sell foreign currencies at a future date ("forward
contracts"), purchase and sell foreign currency futures contracts, and purchase
exchange traded and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. The Adviser to a Portfolio may
engage in these transactions to protect against uncertainty in the level of
future exchange rates in connection with the purchase and sale of portfolio
securities ("transaction hedging") and to protect the value of specific
portfolio positions ("position hedging").
Hedging transactions involve costs and may result in losses. The U.S.
Government Securities, T. Rowe Price Equity Income, T. Rowe Price Growth Stock
and T. Rowe Price International Stock Portfolios may write covered call options
on foreign currencies to offset some of the costs of hedging those currencies.
A Portfolio will engage in over-the-counter transactions only when appropriate
exchange traded transactions are unavailable and when, in the opinion of the
Portfolio's Adviser, the pricing mechanism and liquidity are satisfactory and
the participants are responsible parties likely to meet their contractual
obligations. A Portfolio's ability to engage in hedging and related option
transactions may be limited by tax considerations.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time. Additionally, although these techniques
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they tend to limit any potential gain which might result from the
increase in the value of such currency.
Interest Rate Transactions. In order to attempt to protect the value of its
portfolio from interest rate fluctuations, the U.S. Government Securities
Portfolio may enter into various hedging transactions, such as
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interest rate swaps and the purchase or sale of interest rate caps and floors.
Interest rate swaps involve the exchange by the Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate floor. The Adviser to the Portfolio expects to enter into these
transactions on behalf of the Portfolio primarily to preserve a return or
spread on a particular investment or portion of its portfolio or to protect
against any increase in the price of securities the Portfolio anticipates
purchasing at a later date. The Portfolio intends to use these transactions as
a hedge and not as a speculative investment. The Portfolio will not sell
interest rate caps or floors that it does not own.
The Portfolio may enter into interest rate swaps, caps and floors on either
an asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities, and will usually enter into interest rate swaps on a
net basis, i.e., the two payment streams are netted out, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these hedging transactions are entered into for good
faith hedging purposes, the Adviser to the Portfolio and the Fund believe such
obligations do not constitute senior securities and accordingly, will not treat
them as being subject to the Portfolio's borrowing restrictions. The net amount
of the excess, if any, of the Portfolio's obligations over its entitlement with
respect to each interest rate swap will be accrued on a daily basis and an
amount of cash or liquid securities having an aggregate net asset value at
least equal to the accrued excess will be maintained in a segregated account by
the Portfolio's custodian. The Portfolio will not enter into any interest rate
swap, cap or floor transactions unless the unsecured senior debt or the claims-
paying ability of the other party thereto is rated in the highest category of
at least one NRSRO at the time of entering into such transaction. If there is a
default by the other party to such a securities transaction, the Portfolio will
have contractual remedies pursuant to the agreements related to the
transactions. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps and floors are more recent
innovations for which standardized documentation has not yet been developed
and, accordingly, they are less liquid than swaps.
Dollar Roll Transactions. The U.S. Government Securities Portfolio may enter
into dollar roll transactions with selected banks and broker-dealers. Dollar
roll transactions are comprised of the sale by the
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Portfolio of mortgage-based securities, together with a commitment to purchase
similar, but not identical, securities at a future date. In addition, the
Portfolio is paid a fee as consideration for entering into the commitment to
purchase. Dollar rolls may be renewed after cash settlement and initially may
involve only a firm commitment agreement by the Portfolio to buy a security. If
the broker-dealer to whom the Portfolio sells the security becomes insolvent,
the Portfolio's right to purchase or repurchase the security may be restricted;
the value of the security may change adversely over the term of the dollar
roll; the security that the Portfolio is required to repurchase may be worth
less than the security that the Portfolio originally held, and the return
earned by the Portfolio with the proceeds of a dollar roll may not exceed
transaction costs. Dollar roll transactions are treated as borrowings for
purposes of the 1940 Act, and the aggregate of such transactions and all other
borrowings of the Portfolio (including reverse repurchase agreements) will be
subject to the requirement that the Portfolio maintain asset coverage of 300%
for all borrowings.
Borrowings. A Portfolio other than the U.S. Government Securities, T. Rowe
Price Equity Income, T. Rowe Price Growth Stock and T. Rowe Price International
Stock Portfolios may borrow money from banks for temporary purposes in amounts
up to 5% of its total assets. The U.S. Government Securities Portfolio may
borrow from banks and enter into reverse repurchase agreements or dollar rolls
transactions in an amount equal to up to 33 1/3% of the value of its net assets
(computed at the time the loan is made) to take advantage of investment
opportunities and for temporary, extraordinary or emergency purposes. The U.S.
Government Securities Portfolio may pledge up to 33 1/3% of its total assets to
secure these borrowings. If the Portfolio's asset coverage for borrowings falls
below 300%, the Portfolio will take prompt action to reduce its borrowings.
The T. Rowe Price Equity Income, T. Rowe Price Growth Stock and T. Rowe Price
International Stock Portfolios may borrow money from banks as a temporary
measure for emergency purposes, to facilitate redemption requests, or for other
purposes consistent with the Portfolio's investment objective and program in an
amount up to 33 1/3% of the Portfolio's net assets. Each Portfolio may pledge
up to 33 1/3% of its total assets to secure these borrowings. These Portfolios
may not purchase additional securities when borrowings exceed 5% of total
assets.
As a matter of operating policy, each of the U.S. Government Securities, T.
Rowe Price Equity Income, T. Rowe Price Growth Stock and T. Rowe Price
International Stock Portfolios will limit all borrowings to no more than 25% of
such Portfolio's net assets.
American and European Depositary Receipts. All Portfolios except the Money
Market Portfolio may purchase foreign securities in the form of American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") or other
securities convertible into securities of
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corporations in which the Portfolios are permitted to invest pursuant to their
respective investment objectives and policies. These securities may not
necessarily be denominated in the same currency into which they may be
converted. ADRs are receipts typically issued by a United States bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. EDRs are receipts issued in Europe by banks or depositories which
evidence a similar ownership arrangement. Generally, ADRs, in registered form,
are designed for use in United States securities markets and EDRs, in bearer
form, are designed for use in European securities markets.
Repurchase Agreements. All Portfolios may enter into repurchase agreements
with a bank, broker-dealer or other financial institution as a means of earning
a fixed rate of return on its cash reserves for periods as short as overnight.
A repurchase agreement is a contract pursuant to which a Portfolio, against
receipt of securities of at least equal value including accrued interest,
agrees to advance a specified sum to the financial institution which agrees to
reacquire the securities at a mutually agreed upon time (usually one day) and
price. Each repurchase agreement entered into by a Portfolio will provide that
the value of the collateral underlying the repurchase agreement will always be
at least equal to the repurchase price, including any accrued interest. The
Portfolio's right to liquidate such securities in the event of a default by the
seller could involve certain costs, losses or delays and, to the extent that
proceeds from any sale upon a default of the obligation to repurchase are less
than the repurchase price, the Portfolio could suffer a loss.
Forward Commitments. Each Portfolio may make contracts to purchase securities
for a fixed price at a future date beyond customary settlement time ("forward
commitments") if it holds, and maintains until the settlement date in a
segregated account, cash or high-grade debt obligations in an amount sufficient
to meet the purchase price, or if it enters into offsetting contracts for the
forward sale of other securities it owns. Forward commitments may be considered
securities in themselves and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is
in addition to the risk of decline in value of the Portfolio's other assets.
Where such purchases are made through dealers, the Portfolio relies on the
dealer to consummate the sale. The dealer's failure to do so may result in the
loss to the Portfolio of an advantageous yield or price.
Securities Loans. Each Portfolio may seek to obtain additional income by
making secured loans of its portfolio securities with a value up to 33 1/3% of
its total assets. All securities loans will be made pursuant to agreements
requiring the loans to be continuously secured by collateral in cash or high-
grade debt obligations at least equal at all times to the market value of the
loaned securities. The borrower pays to the Portfolio an amount equal to any
dividends or interest received on loaned securities. The Portfolio retains all
or a portion of the interest received
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on investment of cash collateral or receives a fee from the borrower. Lending
portfolio securities involves risks of delay in recovery of the loaned
securities or in some cases loss of rights in the collateral should the
borrower fail financially.
Hybrid Instruments. The T. Rowe Price Equity Income, T. Rowe Price Growth
Stock and T. Rowe Price International Stock Portfolios may invest up to 10% of
their total assets, and the U.S. Government Securities Portfolio may invest up
to 5% of its total assets, in hybrid instruments. Hybrid instruments have
recently been developed and combine the elements of futures contacts or options
with those of debt, preferred equity or a depository instrument. Often these
hybrid instruments are indexed to the price of a commodity, particular
currency, or a domestic or foreign debt or equity securities index. Hybrid
instruments may take a variety of forms, including, but not limited to, debt
instruments with interest or principal payments or redemption terms determined
by reference to the value of a currency or commodity or securities index at a
future point in time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity. Hybrid instruments may bear
interest or pay dividends at below market (or even relatively nominal) rates.
Under certain conditions, the redemption value of such an instrument could be
zero. Hybrid instruments can have volatile prices and limited liquidity and
their use by a Portfolio may not be successful.
MANAGEMENT OF THE FUND
The Trustees and officers of the Fund provide broad supervision over the
business and affairs of the Portfolios and the Fund.
THE MANAGER
The Fund is managed by Endeavor Investment Advisers ("the Manager") which,
subject to the supervision and direction of the Trustees of the Fund, has
overall responsibility for the general management and administration of the
Fund. The Manager is a general partnership of which Endeavor Management Co. is
the managing partner. Endeavor Management Co., by whose employees all
management services performed under the management agreement are rendered to
the Fund, holds a 50.01% interest in the Manager and AUSA Financial Markets,
Inc., an affiliate of PFL, holds the remaining 49.99% interest therein. Vincent
J. McGuinness, a Trustee of the Fund, together with his family members and
trusts for the benefit of his family members, own all of Endeavor Management
Co.'s outstanding common stock. Mr. McGuinness is Chairman, Chief Executive
Officer and President of Endeavor Management Co.
The Manager is responsible for providing investment management and
administrative services to the Fund and in the exercise of such
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responsibility selects the investment advisers for the Fund's Portfolios (the
"Advisers") and monitors the Advisers' investment programs and results, reviews
brokerage matters, oversees compliance by the Fund with various federal and
state statutes, and carries out the directives of the Trustees. The Manager is
responsible for providing the Fund with office space, office equipment, and
personnel necessary to operate and administer the Fund's business, and also
supervises the provision of services by third parties such as the Fund's
custodian and transfer agent. Pursuant to an administration agreement, The
Shareholder Services Group, Inc., a subsidiary of First Data Corp. ("TSSG"),
will assist 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 annual rate of .50% of the average daily net assets of the Money Market
Portfolio, .75% of the average daily net assets of the Managed Asset Allocation
Portfolio, .90% of the average daily net assets of the T. Rowe Price
International Stock Portfolio, .80% of the average daily net assets of the
Quest for Value Equity Portfolio, .80% of the average daily net assets of the
Quest for Value Small Cap Portfolio, .65% of the average daily net assets of
the U.S. Government Securities Portfolio, .80% of the average daily net assets
of the T. Rowe Price Equity Income Portfolio and .80% of the average daily net
assets of the T. Rowe Price Growth Stock Portfolio. The management fees paid by
the Portfolios (other than the Money Market Portfolio), although higher than
the fees paid by most other investment companies in general, are comparable to
management fees paid for similar services by many investment companies with
similar investment objectives and policies. From the management fees, the
Manager pays the expenses of providing investment advisory services to the
Portfolios, including the fees of the Adviser of each Portfolio and the fees
and expenses of TSSG pursuant to the administration agreement.
In addition to the management fees, the Fund pays all expenses not assumed by
the Manager, including, without limitation, expenses for legal, accounting and
auditing services, interest, taxes, costs of printing and distributing reports
to shareholders, proxy materials and prospectuses, charges of its custodian,
transfer agent and dividend disbursing agent, registration fees, fees and
expenses of the Trustees who are not interested persons of the Fund, insurance,
brokerage costs, litigation, and other extraordinary or nonrecurring expenses.
All general Fund expenses are allocated among and charged to the assets of the
Portfolios of the Fund on a basis that the Trustees deem fair and equitable,
which may be on the basis of relative net assets of each Portfolio or the
nature of the services performed and relative applicability to each Portfolio.
THE ADVISERS
Pursuant to an Investment Advisory Agreement with the Manager, the Adviser to
a Portfolio furnishes continuously an investment program
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for the Portfolio, makes investment decisions on behalf of the Portfolio,
places all orders for the purchase and sale of investments for the Portfolio's
account with brokers or dealers selected by such Adviser and may perform
certain limited related administrative functions in connection therewith. For
its services, the Manager pays the Adviser a fee based on a percentage of the
average daily net assets of the Portfolio. An Adviser may place portfolio
securities transactions with broker-dealers who furnish it with certain
services of value in advising the Portfolio and other clients. In so doing, an
Adviser may cause a Portfolio to pay greater brokerage commissions than it
might otherwise pay. In seeking the most favorable price and execution
available, an Adviser may, if permitted by law, consider sales of the Contracts
as a factor in the selection of broker-dealers. Quest for Value Advisors may
select, under certain circumstances, Oppenheimer & Co., Inc., one of its
affiliates, to execute transactions for the Quest for Value Equity and Quest
for Value Small Cap Portfolios. T. Rowe Price Associates, Inc. and Rowe Price-
Fleming International, Inc. may utilize certain brokers indirectly related to
them in the capacity as broker in connection with the execution of transactions
for the T. Rowe Price Equity Income, T. Rowe Price Growth Stock and T. Rowe
Price International Stock Portfolios. See the Statement of Additional
Information for a further discussion of Portfolio trading.
TCW Funds Management, Inc. ("TCW") is the Adviser to the Money Market
Portfolio and the Managed Asset Allocation Portfolio. As compensation for its
services as investment adviser, the Manager pays TCW a monthly fee at the
annual rate of .25% of the average daily net assets of the Money Market
Portfolio (subject to reduction in certain circumstances) and .375% of the
average daily net assets of the Managed Asset Allocation Portfolio (subject to
reduction in certain circumstances). TCW is a wholly owned subsidiary of The
TCW Group, Inc., whose subsidiaries, including Trust Company of the West and
TCW Asset Management Company, provide a variety of trust, investment management
and investment advisory services. TCW and its affiliates, which as of December
31, 1994 had approximately $50 billion under management or committed for
management, provide investment advisory services to a number of open-end and
closed-end investment companies.
James M. Goldberg, a Managing Director and Chairman of the Fixed Income
Policy Committee of TCW, is the portfolio manager for the Money Market
Portfolio. Mr. Goldberg has been with TCW since 1984. Investment decisions for
the equity portion of the Managed Asset Allocation Portfolio are made by Norman
Ridley in consultation with Stefan D. Abrams. Mr. Ridley is a Vice President of
TCW and has been with the firm since 1985. Since 1992 Mr. Abrams has been a
Managing Director of TCW and is Director of Equity Strategy and Asset
Allocation. Investment decisions for the fixed income portion of the Managed
Asset Allocation Portfolio are made by Mr. Goldberg.
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Quest for Value Advisors ("Quest") is the Adviser to the Quest for Value
Equity Portfolio and the Quest for Value Small Cap Portfolio. As compensation
for its services as investment adviser, the Manager pays Quest a monthly fee
at the annual rate of .40% of the average daily net assets of each of the
Quest for Value Equity and Quest for Value Small Cap Portfolios.
Quest is a subsidiary of Oppenheimer Capital ("OpCap"), a general
partnership which is registered as an investment adviser under the Investment
Advisers Act of 1940. The employees of OpCap render all investment management
services performed under the Investment Advisory Agreement to the Portfolios.
Oppenheimer Financial Corp. holds a 35% interest in OpCap. Oppenheimer
Capital, L.P., a Delaware limited partnership of which Oppenheimer Financial
Corp. is the sole general partner, owns the remaining 65% interest of OpCap.
The units of Oppenheimer Capital, L.P. are traded on the New York Stock
Exchange. Quest and its affiliates have operated as investment advisers to
both mutual funds and other clients since 1968, and had approximately $28.5
billion under management as of December 31, 1994.
Jenny B. Jones, Senior Vice President of OpCap, is the co-portfolio manager
for the Quest for Value Small Cap Portfolio. Ms. Jones has been with OpCap
since 1990. Timothy J. McCormack is the co-portfolio manager for the Quest for
Value Small Cap Portfolio. Mr. McCormack has been with OpCap since August,
1994. From March, 1993 to July, 1994 Mr. McCormack was an analyst at U.S.
Trust Company and from July, 1991 to March, 1993 Mr. McCormack was with
Gabelli & Company. Eileen Rominger, Managing Director of OpCap, is the
portfolio manager for the Quest for Value Equity Portfolio. Ms. Rominger has
been with OpCap since 1987.
The Boston Company Asset Management, Inc. ("Boston Company") is the Adviser
to the U.S. Government Securities Portfolio. As compensation for its services
as investment adviser, the Manager pays Boston Company a monthly fee at the
annual rate of .15% of the average daily net assets of the U.S. Government
Securities Portfolio. Boston Company is a registered investment adviser and is
a wholly owned subsidiary of The Boston Company, Inc., a financial services
holding company, which is an indirect wholly owned subsidiary of Mellon Bank
Corporation ("Mellon"). Mellon is a publicly-owned multibank holding company
registered under the Federal Bank Holding Company Act of 1956 and through its
subsidiaries Mellon provides a comprehensive range of financial products and
services in domestic and selected international markets. Boston Company
provides investment management services for tax exempt public, corporate,
multi-employer, endowment and foundation clients having total assets as of
December 31, 1994, in excess of $17 billion.
Arthur McBride, Chairman of the Fixed Income Strategy Committee of The
Boston Company, Inc., and Senior Vice President of Boston Company, is the
portfolio manager for the U.S. Government Securities Portfolio. Mr. McBride
has been with The Boston Company, Inc. since 1987.
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T. Rowe Price Associates, Inc. ("T. Rowe Price") is the Adviser to the T.
Rowe Price Equity Income Portfolio and the T. Rowe Price Growth Stock
Portfolio. As compensation for its services as investment adviser, the Manager
pays T. Rowe Price a monthly fee at the annual rate of .40% of the daily net
assets of each of the T. Rowe Price Equity Income and T. Rowe Price Growth
Stock Portfolios. T. Rowe Price serves as investment manager to a variety of
individual and institutional investors, including limited and real estate
partnerships and other mutual funds.
Investment decisions with respect to the T. Rowe Price Equity Income
Portfolio are made by an Investment Advisory Committee composed of the
following members: Brian C. Rogers, Chairman, Thomas H. Broadus, Jr., Richard
P. Howard, and William J. Stromberg. The Committee Chairman has day-to-day
responsibility for managing the Portfolio and works with the Committee in
developing and executing the Portfolio's investment program. Mr. Rogers has
been Chairman of the Committee since 1993. He joined T. Rowe Price in 1982 and
has been managing investments since 1983.
Investment decisions with respect to the T. Rowe Price Growth Stock Portfolio
are made by an Investment Advisory Committee composed of the following members:
John D. Gillespie, Chairman, James A.C. Kennedy and Brian C. Rogers. The
Committee Chairman has day-to-day responsibility for managing the Portfolio and
works with the Committee in developing and executing the Portfolio's investment
program. Mr. Gillespie has been Chairman of the Committee since 1994. He joined
T. Rowe Price in 1986 and has been managing investments since 1989.
Effective January 1, 1995, Rowe Price-Fleming International, Inc. ("Price-
Fleming") is the Adviser to the T. Rowe Price International Stock Portfolio
(formerly the Global Growth Portfolio). As compensation for its services as
investment adviser, the Manager pays Price-Fleming a monthly fee at an annual
rate based on the Portfolio's average daily net assets as follows: .75% up to
$20 million; .60% in excess of $20 million up to $50 million; and .50% of
assets in excess of $50 million. At such time as the net assets of the
Portfolio exceed $200 million, the fee shall be .50% of total average daily net
assets.
Prior to January 1, 1995, Ivory & Sime International, Inc. ("I&S") and Ivory
& Sime plc acted as adviser and sub-adviser, respectively, for the Global
Growth Portfolio. As compensation for its services as investment adviser, the
Manager paid ISI a monthly fee at the annual rate of .45% of the average daily
net assets of the Portfolio up to $400 million and .30% of average daily net
assets in excess of $400 million. As compensation for its services, Ivory &
Sime plc received from ISI 78% of the gross monthly fees paid by the Manager to
ISI.
Price-Fleming was incorporated in Maryland in 1979 as a joint venture between
T. Rowe Price and Robert Fleming Holdings Limited ("Flemings"). Flemings is a
diversified investment organization which participates in a global network of
regional investment offices in New
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York, London, Zurich, Geneva, Tokyo, Hong Kong, Manila, Kuala Lampur, South
Korea and Taiwan.
T. Rowe Price was incorporated in Maryland in 1947 as successor to the
investment counseling business founded by the late Thomas Rowe Price, Jr., in
1937. Flemings was incorporated in 1974 in the United Kingdom as successor to
the business founded by Robert Fleming in 1873. As of December 31, 1994, T.
Rowe Price and its affiliates managed more than $60 billion of assets and
Price-Fleming managed the U.S. equivalent of approximately $18 billion.
The common stock of Price-Fleming is 50% owned by a wholly-owned subsidiary
of T. Rowe Price, 25% by a subsidiary of Fleming and 25% by Jardine Fleming
Group Limited ("Jardine Fleming"). (Half of Jardine Fleming is owned by
Flemings and half by Jardine Matheson Holdings Limited.) T. Rowe Price has the
right to elect a majority of the board of directors of Price-Fleming, and
Flemings has the right to elect the remaining directors, one of whom will be
nominated by Jardine Fleming.
Investment decisions with respect to the T. Rowe Price International Stock
Portfolio are made by an investment advisory group composed of the following
members: Martin G. Wade, Christopher D. Alderson, Peter B. Askew, Richard J.
Bruce, Mark J. T. Edwards, John R. Ford, Robert C. Howe, James B. M. Seddon,
Benedict R. F. Thomas and David J. L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 25 years of experience with
the Fleming Group in research, client service and investment management.
(Fleming Group includes Flemings and/or Jardine Fleming). Christopher Alderson
jointed Price-Fleming in 1988 and has eight years of experience with the
Fleming Group in research and portfolio management. Peter Askew joined Price-
Fleming in 1988 and has 19 years of experience managing multi-currency fixed
income portfolios. Richard Bruce joined Price-Fleming in 1991 and has six years
of experience in investment management with the Fleming Group in Tokyo. Mark
Edwards joined Price-Fleming in 1986 and has 13 years of experience in
financial analysis. John Ford joined Price-Fleming in 1982 and has 14 years of
experience with Fleming Group in research and portfolio management. Robert Howe
joined Price-Fleming in 1986 and has 13 years of experience in economic
research, company research and portfolio management. James Seddon joined Price-
Fleming in 1987 and has seven years of experience in investment management.
Benedict Thomas joined Price-Fleming in 1988 and has five years of portfolio
management experience. David Warren joined Price-Fleming in 1984 and has 14
years of experience in equity research, fixed income research and portfolio
management.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Portfolio intends to qualify as a "regulated investment company" under
the Internal Revenue Code. By so qualifying, a Portfolio
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will not be subject to federal income taxes to the extent that its net
investment income and net realized capital gains are distributed to
shareholders.
It is the intention of each Portfolio to distribute substantially all its net
investment income. By the end of each calendar year, substantially all the
ordinary income and capital gains of each Portfolio must be distributed to
avoid the imposition of an excise tax on certain undistributed amounts. See
"Taxes" in the Statement of Additional Information. Dividends from investment
income of each Portfolio are expected to be declared annually (except with
respect to the Money Market Portfolio where dividends will be declared daily
and paid monthly) and will be distributed in the form of additional full and
fractional shares of the Portfolio and not in cash. However, the Trustees of
the Fund may decide to declare dividends at other intervals.
All net realized long- or short-term capital gains of each Portfolio, if any,
will be declared and distributed at least annually either during or after the
close of the Portfolio's fiscal year and will be reinvested in additional full
and fractional shares of the Portfolio. In certain foreign countries, interest
and dividends are subject to a tax which is withheld by the issuer. U.S. income
tax treaties with certain countries reduce the rates of these withholding
taxes. The Fund intends to provide the documentation necessary to achieve the
lower treaty rate of withholding whenever applicable or to seek refund of
amounts withheld in excess of the treaty rate.
For a discussion of the impact on Contract owners of income taxes PFL may owe
as a result of (i) its ownership of shares of the Portfolios, (ii) its receipt
of dividends and distributions thereon, and (iii) its gains from the purchase
and sale thereof, reference should be made to the prospectus for the Contracts
accompanying this Prospectus.
SALE AND REDEMPTION OF SHARES
The Fund offers shares of each Portfolio continuously to separate accounts of
PFL and may at any time offer shares to any other insurer approved by the
Trustees.
AEGON USA Securities, Inc. ("AEGON Securities"), an affiliate of PFL, is the
principal underwriter and distributor of the Contracts. AEGON Securities places
orders for the purchase or redemption of shares of each Portfolio based on,
among other things, the amount of net Contract premiums or purchase payments
transferred to the separate accounts, transfers to or from a separate account
investment division, policy loans, loan repayments, and benefit payments to be
effected on a given date pursuant to the terms of the Contracts. Such orders
are effected, without sales charge, at the net asset value per share for each
Portfolio determined as of the close of regular trading on the New York
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Stock Exchange (currently 4:00 p.m., New York City time), on that same date.
The net asset value of the shares of each Portfolio for the purpose of
pricing orders for the purchase and redemption of shares is determined as of
the close of the New York Stock Exchange, Monday through Friday, exclusive of
national business holidays. Net asset value per share is computed by dividing
the value of all assets of a Portfolio (including accrued interest and
dividends), less all liabilities of the Portfolio (including accrued expenses
and dividends payable), by the number of outstanding shares of the Portfolio.
The assets of the Money Market Portfolio are valued at amortized cost and the
assets of the other Portfolios are valued on the basis of their market values
or, in the absence of a market value with respect to any portfolio securities,
at fair value as determined by or under the direction of the Fund's Board of
Trustees including the employment of an independent pricing service, as
described in the Statement of Additional Information.
Shares of the Portfolios may be redeemed on any day on which the Fund is open
for business.
PERFORMANCE INFORMATION
From time to time, the Fund may advertise the "average annual or cumulative
total return" of the Managed Asset Allocation, Quest for Value Equity, Quest
for Value Small Cap, U.S. Government Securities, T. Rowe Price Equity Income,
T. Rowe Price Growth Stock and T. Rowe Price International Stock Portfolios or
the "yield" and "effective yield" of the Money Market and U.S. Government
Securities Portfolios and may compare the performance of the Portfolios with
that of other mutual funds with similar investment objectives as listed in
rankings prepared by Lipper Analytical Services, Inc., or similar independent
services monitoring mutual fund performance, and with appropriate securities or
other relevant indices. The "average annual total return" of a Portfolio refers
to the average annual compounded rate of return over the stated period that
would equate an initial investment in that Portfolio at the beginning of the
period to its ending redeemable value, assuming reinvestment of all dividends
and distributions and deduction of all recurring charges. Figures will be given
for the recent one, five and ten year periods and for the life of the Portfolio
if it has not been in existence for any such periods. When considering "average
annual total return" figures for periods longer than one year, it is important
to note that a Portfolio's annual total return for any given year might have
been greater or less than its average for the entire period. "Cumulative total
return" represents the total change in value of an investment in a Portfolio
for a specified period (again reflecting changes in Portfolio share prices and
assuming reinvestment of Portfolio distributions). The Money Market Portfolio's
"yield" refers to the income generated by an investment in the Portfolio over a
seven-day period (which period will be
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stated in the advertisement). This income is then "annualized." That is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Portfolio is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment. The U.S.
Government Securities Portfolio may advertise its 30-day yield. Such yield
refers to the income that is generated over a stated 30-day (or one month)
period (which period will be stated in the advertisement), divided by the net
asset value per share on the last day of the period. The income is annualized
by assuming that the income during the 30-day period remains the same each
month over one year and compounded semi-annually. The methods used to calculate
"average annual and cumulative total return" and "yield" are described further
in the Statement of Additional Information.
The performance of each Portfolio will vary from time to time in response to
fluctuations in market conditions, interest rates, the composition of the
Portfolio's investments and expenses. Consequently, a Portfolio's performance
figures are historical and should not be considered representative of the
performance of the Portfolio for any future period.
T. Rowe Price is the investment adviser of the T. Rowe Price Growth Stock
Fund, Inc. ("Growth Stock Fund") and T. Rowe Price Equity Income Fund, Inc.
("Equity Income Fund"), registered open-end investment companies. These funds
have the same investment objectives as the T. Rowe Price Growth Stock and T.
Rowe Price Equity Income Portfolios, respectively, and are managed using the
same investment strategies and techniques as contemplated for the T. Rowe Price
Growth Stock and the T. Rowe Price Equity Income Portfolios. See "Investment
Objectives and Policies."
At December 31, 1994, the Fund's T. Rowe Price Growth Stock and T. Rowe Price
Equity Income Portfolios had not commenced operations. Set forth below is
certain performance information regarding the Growth Stock Fund and Equity
Income Fund which has been obtained from T. Rowe Price and is set forth in the
current prospectus and statement of additional information of each fund.
Investors should not rely on the following financial information as an
indication of the future performance of either the T. Rowe Price Growth Stock
Portfolio or the T. Rowe Price Equity Income Portfolio.
Effective January 1, 1995, Price-Fleming became the new Adviser to the Global
Growth Portfolio. The Portfolio's name has been changed to the T. Rowe Price
International Stock Portfolio and the Portfolio's shareholders have approved a
change in investment objective from investment in small capitalization
companies on a global basis to
- 45 -
<PAGE>
investments in a broad range of companies on an international basis (i.e., non-
U.S. companies).
Price-Fleming is the investment adviser of the T. Rowe Price International
Stock Fund, Inc. ("International Stock Fund"), a registered open-end investment
company. This fund has the same investment objective as the T. Rowe Price
International Stock Portfolio and is managed using the same investment strategy
and techniques.
Although the T. Rowe Price International Stock Portfolio commenced operations
in April, 1991 (as the Global Growth Portfolio), Price-Fleming has been the
Portfolio's Adviser since January 1, 1995. In order to provide investors with
information which may be useful in evaluating the Adviser's ability to manage
the Portfolio, set forth below is certain performance information regarding the
International Stock Fund which has been obtained from Price-Fleming and is set
forth in the current prospectus and statement of additional information for the
International Stock Fund. Information regarding the historical per share income
and capital changes for the T. Rowe Price International Stock Portfolio is set
forth in "Financial Highlights." Average annual total return information for
the year ended December 31, 1994 is set forth in the Fund's Annual Report and
is otherwise available from the Fund by written request. Investors should not
rely on the following financial information as an indication of the future
performance of the T. Rowe Price International Stock Portfolio.
AVERAGE ANNUAL TOTAL RETURN OF COMPARABLE PORTFOLIOS
<TABLE>
<CAPTION>
FOR THE FOR THE FIVE FOR THE PERIOD
YEAR ENDED YEARS ENDED FROM INCEPTION TO
DECEMBER 31, 1994 DECEMBER 31, 1994 DECEMBER 31, 1994(1)(2)
----------------- ----------------- -----------------------
<S> <C> <C> <C>
Equity Income Fund. 4.53% 9.85% 14.11%
</TABLE>
<TABLE>
<CAPTION>
FOR THE FOR THE FIVE FOR THE TEN
YEAR ENDED YEARS ENDED YEARS ENDED
DECEMBER 31, 1994 DECEMBER 31, 1994 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Growth Stock
Fund.................. 0.89% 9.61% 13.66%
International Stock
Fund.................. (0.76)% 7.22% 18.00%
</TABLE>
- -----------
(1) Reflects waiver of advisory fees and reimbursement of other expenses.
Without such waivers and reimbursements, the average annual total return
during the period would have been lower.
(2) The Equity Income Fund commenced operations on October 31, 1985.
- 46 -
<PAGE>
TOTAL CUMULATIVE RETURN OF COMPARABLE PORTFOLIOS
<TABLE>
<CAPTION>
FOR THE FOR THE FIVE FOR THE PERIOD
YEAR ENDED YEARS ENDED FROM INCEPTION TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1994 1994(1)
------------ ------------ -----------------
<S> <C> <C> <C>
Equity Income Fund.................. 4.53% 52.00% 123.68%(2)
<CAPTION>
FOR THE FOR THE FIVE FOR THE TEN
YEAR ENDED YEARS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1994 1994
------------ ------------ -----------------
<S> <C> <C> <C>
Growth Stock Fund .................. 0.89% 51.94% 144.35%
International Stock Fund............ (0.76)% 42.84% 199.07%
</TABLE>
- -----------
(1) The Equity Income Fund commenced operations on October 31, 1985.
(2) Reflects waiver of advisory fees and reimbursement of other expenses.
Without such waivers and reimbursements, the average annual total return
during the period would have been lower.
----------------------
The calculations of total return assume the reinvestment of all dividends and
capital gains distributions on the reinvestment dates during the period and the
deduction of all recurring expenses that were charged to shareholder accounts.
The above tables do not reflect charges and deductions which are, or may be,
imposed under the Contracts.
ORGANIZATION AND CAPITALIZATION OF THE FUND
The Fund was established in November 1988 as a business trust under
Massachusetts law. The Fund has authorized an unlimited number of shares of
beneficial interest which may, without shareholder approval, be divided into an
unlimited number of series. Shares of the Fund are presently divided into eight
series of shares, one for each of the Fund's eight Portfolios. Shares are
freely transferable, are entitled to dividends as declared by the Trustees, and
in liquidation are entitled to receive the net assets of their respective
Portfolios, but not the net assets of the other Portfolios.
Fund shares are entitled to vote at any meeting of shareholders. The Fund
does not generally hold annual meetings of shareholders and will do so only
when required by law. Matters submitted to a shareholder vote must be approved
by each portfolio of the Fund separately except (i) when required by the 1940
Act, shares will be voted together as a single class and (ii) when the Trustees
have determined that the matter does not affect all portfolios, then only
shareholders of the affected portfolio will be entitled to vote on the matter.
Owners of the Contracts have certain voting interests in respect of shares of
the Portfolios. See "Voting Rights" in the prospectus for the Contracts
accompanying this Prospectus for a description of the rights granted Contract
owners to instruct voting of shares.
- 47 -
<PAGE>
ADDITIONAL INFORMATION
TRANSFER AGENT AND CUSTODIAN
All cash and securities of the Fund are held by Boston Safe Deposit and Trust
Company as custodian. TSSG, located at One Exchange Place, Boston,
Massachusetts 02109, serves as transfer agent for the Fund.
INDEPENDENT AUDITORS
Ernst & Young LLP, located at 200 Clarendon Street, Boston, Massachusetts,
02116, serves as the Fund's independent auditors.
----------------------
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement of which this Prospectus forms a part,
each such statement being qualified in all respects by such reference.
- 48 -
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund................................................................... 2
Financial Highlights....................................................... 4
Investment Objectives and Policies......................................... 10
Money Market Portfolio.................................................... 10
Managed Asset Allocation Portfolio........................................ 13
T. Rowe Price International Stock Portfolio............................... 15
Quest for Value Equity Portfolio.......................................... 19
Quest for Value Small Cap Portfolio....................................... 20
U.S. Government Securities Portfolio...................................... 21
T. Rowe Price Equity Income Portfolio..................................... 27
T. Rowe Price Growth Stock Portfolio...................................... 29
Investment Strategies..................................................... 31
Management of the Fund..................................................... 37
The Manager............................................................... 37
The Advisers.............................................................. 38
Dividends, Distributions and Taxes......................................... 42
Sale and Redemption of Shares.............................................. 43
Performance Information.................................................... 44
Organization and Capitalization of the Fund................................ 47
Additional Information..................................................... 48
Transfer Agent and Custodian.............................................. 48
Independent Auditors...................................................... 48
</TABLE>
---------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFOR-
MATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES OTHER THAN
THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
STATE OR JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE SUCH OFFER
WOULD BE UNLAWFUL.
ENDEAVOR SERIES TRUST
1100 Newport Center Drive, Suite 200
Newport Beach, California 92660
(714) 760-0505
Manager
Endeavor Investment Advisers
1100 Newport Center Drive, Suite 200
Newport Beach, California 92660
Investment Advisers
TCW Funds Management, Inc.
865 S. Figueroa Street
Los Angeles, California 90071
Quest for Value Advisors
One World Financial Center
New York, New York 10281
The Boston Company Asset Management, Inc.
One Boston Place
Boston, Massachusetts 02108
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Rowe Price-Fleming International, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Custodian
Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
<PAGE>
PROSPECTUS
- ----------
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
201 HIGHLAND AVENUE
LARGO, FLORIDA 34640
TELEPHONE (319) 398-8511
WRL Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company consisting of separate series or investment portfolios. This
Prospectus pertains only to the Growth Portfolio of the Fund (the "Portfolio").
The investment objective of the Growth Portfolio is growth of capital. There
can be, of course, no assurance that the Portfolio will achieve its objective.
Shares of the Fund are sold only to insurance company separate accounts (the
"Separate Accounts") of Western Reserve Life Assurance Co. of Ohio ("WRL"), PFL
Life Insurance Company ("PFL"), and AUSA Life Insurance Company, Inc. ("AUSA")
(WRL, PFL, and AUSA together, the "Life Companies") to fund the benefits under
certain variable life insurance policies (the "Policies") and variable annuity
contracts (the "Annuity Contracts"). The Life Companies are affiliates. The
Separate Accounts, which may or may not be registered with the Securities and
Exchange Commission, invest in shares of one or more of the portfolios in
accordance with the allocation instructions received from holders of the
Policies and the Annuity Contracts (collectively, the "Policyholders"). Such
allocation rights are further described in the prospectuses or plan documents
for the Policies and the Annuity Contracts.
WRL and Janus Capital Corporation serve as the investment adviser
("Investment Adviser") and the sub-adviser ("Sub-Adviser") respectively, to the
Portfolio (collectively, "Advisers"). See "The Investment Adviser" and "The
Sub-Adviser."
This Prospectus sets forth concisely the information about the Portfolio that
prospective investors ought to know before investing. Investors should read
this Prospectus and retain it for future reference.
Additional information about the Fund, the Portfolio and other portfolios of
the Fund has been filed with the Securities and Exchange Commission and is
available upon request without charge by calling or writing the Fund. The
Statement of Additional Information pertaining to the Portfolio bears the same
date as this Prospectus and is incorporated by reference into this Prospectus
in its entirety.
----------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, A BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY,
AND INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------
PROSPECTUS DATED MAY 1, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Highlights........................................................ 3
The Growth Portfolio and the Fund........................................... 4
Management of the Fund...................................................... 11
Dividends and Distributions................................................. 13
Taxes....................................................................... 13
Purchase and Redemption of Shares........................................... 14
Valuation of Shares......................................................... 15
The Fund and Its Shares..................................................... 15
Performance Information..................................................... 16
General Information......................................................... 17
</TABLE>
2
<PAGE>
FINANCIAL HIGHLIGHTS
PER SHARE INCOME AND CAPITAL CHANGES
The information contained in the table below for a share of capital stock
outstanding for the years ended December 31, 1994, 1993, 1992, 1991, 1990,
1989, 1988 and 1987 and for the period October 2, 1986 through December 31,
1986 is based on the Fund's audited financial statements incorporated by
reference in the Statement of Additional Information. The per share data and
ratios for the period October 2, 1986 through December 31, 1986 are not
annualized amounts or percentages. The Fund's Annual Report contains
additional performance information for the Portfolio. A copy of the Annual
Report may be obtained without charge upon request.
GROWTH PORTFOLIO
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
PERIOD
FROM
10/2/86 TO
1994 1993 1992 1991 1990 1989 1988 1997 12/31/86
-------- -------- -------- -------- -------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 26.25 $ 25.83 $ 26.26 $ 17.48 $ 17.85 $ 12.97 $ 11.14 $ 10.14 $10.00
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income.. .22 .28 .36 .27 .30 .19 .31 .21 .00
Net Gains or Losses on
Securities (both
realized and
unrealized)........... (2.41) .79 .52 10.75 (.33) 6.29 1.83 1.00 .14
-------- -------- -------- -------- -------- ------- ------- ------- ------
Total From Investment
Operations........... (2.19) 1.07 .88 11.02 (.03) 6.48 2.14 1.21 .14
-------- -------- -------- -------- -------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends (from net
investment income).... (.22) (.28) (.36) (.27) (.30) (.19) (.31) (.21) .00
Distributions (from
capital gains)........ (.00) (.37) (.95) (1.97) (.04) (1.41) .00 .00 .00
Distributions in excess
of capital gains...... (.03) .00 .00 .00 .00 .00 .00 .00 .00
-------- -------- -------- -------- -------- ------- ------- ------- ------
Total Distributions... (.25) (.65) (1.31) (2.24) (.34) (1.60) (.31) (.21) .00
-------- -------- -------- -------- -------- ------- ------- ------- ------
Net Asset Value,
End of Period.......... $ 23.81 $ 26.25 $ 25.83 $ 26.26 $ 17.48 $ 17.85 $ 12.97 $ 11.14 $10.14
======== ======== ======== ======== ======== ======= ======= ======= ======
Total Return*........... (8.31%) 3.97% 2.35% 59.79% (.22%) 47.04% 18.62% 10.90% 5.84%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (000 omitted)... $814,383 $934,810 $711,422 $393,511 $129,057 $74,680 $28,497 $15,815 $716
Ratio of Expenses to
Average Net Assets**... .84% .87% .86% .90% 1.00% 1.00% 1.00% 1.00% .19%
Ratio of Net Income to
Average Net Assets..... .88% 1.07% 1.44% 1.21% 2.06% 1.18% 2.50% 1.84% .03%
Portfolio Turnover Rate
....................... 107.33% 77.91% 77.70% 7.27% 157.07% 123.80% 76.27% 222.13% 8.55%
</TABLE>
- -----------
*The total return shown for 1986 is for the three month period ended December
31, 1986 and is not annualized. The total return of the Portfolio reflects
the advisory fee and all other Portfolio expenses and includes reinvestment
of dividends and capital gains; it does not reflect the charges against the
corresponding sub-accounts or the charges and deductions under the applicable
Policy or Annuity Contract.
**Ratio is not annualized and is net of advisory fee waiver for the periods
ended December 31, 1986, 1987, 1988 and 1989 for which the annualized ratio
of expenses to average net assets would be 6.76%, 1.90%, 1.49% and 1.13%,
respectively, without the advisory fee waived by WRL (See "Management of the
Fund--Investment Adviser", p.11.)
3
<PAGE>
THE GROWTH PORTFOLIO AND THE FUND
The Fund is a diversified, open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"). The
Growth Portfolio is a series of the Fund. The Fund consists of several series,
or separate investment portfolios, which offer shares for investment by the
Separate Accounts. This Prospectus describes only the Growth Portfolio.
INVESTMENT OBJECTIVE OF THE PORTFOLIO
The Portfolio's investment objective and, unless otherwise noted, its
investment policies and techniques, may be changed by the Board of Directors of
the Fund without shareholder or Owner approval. A change in the investment
objective or policies of the Portfolio may result in the Portfolio having an
investment objective or policies different from that which an Owner deemed
appropriate at the time of investment.
GROWTH PORTFOLIO
The investment objective of the Portfolio is growth of capital.
The Portfolio will invest substantially all of its assets in common stocks
when the portfolio manager believes that the relevant market environment favors
profitable investing in those securities. Common stock investments are selected
in industries and companies that the portfolio manager believes are
experiencing favorable demand for their products and services, and which
operate in a favorable competitive environment and regulatory climate. The Sub-
Adviser's analysis and selection process focuses on stocks issued by companies
with earnings growth potential. In particular, the Portfolio intends to buy
stocks with earnings growth potential that may not be recognized by the market.
Securities are selected solely for their growth potential; investment income is
not a consideration.
The Portfolio may invest up to 25% of its assets in foreign securities, as
described below and in the Statement of Additional Information. (See "Foreign
Investments and Special Risks", p. 8.)
Although the Portfolio's assets will be invested primarily in common stocks
at most times, the Portfolio may increase its cash position when the Sub-
Adviser is unable to locate investment opportunities with desirable risk/reward
characteristics. The Portfolio may invest in government securities, high grade
commercial paper, corporate bonds and debentures, warrants, preferred stocks or
certificates of deposit of commercial banks or other debt securities when the
Sub-Adviser perceives an opportunity for capital growth from such securities,
or so that the Portfolio may receive a return on its uninvested cash. See the
Statement of Additional Information for further descriptions of such
securities. In the latter case, investment income may increase and may
constitute a larger portion of the return on the Portfolio's investments
4
<PAGE>
than if the Portfolio were fully invested in common stocks. The Portfolio may
invest up to 25% of its assets in securities of issuers in a single industry.
The Portfolio does not currently hold or intend to invest more than 5% of its
assets in non-investment grade securities. See the Statement of Additional
Information for further information concerning such securities and bond
ratings.
The Portfolio may also invest in repurchase agreements and reverse repurchase
agreements. See "Certain Portfolio Policies and Techniques--Repurchase and Re-
verse Repurchase Agreements", p.6.
CERTAIN PORTFOLIO POLICIES AND TECHNIQUES
FUTURES CONTRACTS, RELATED OPTIONS AND OTHER DERIVATIVE INSTRUMENTS. Subject
to certain limitations, the Portfolio may engage in hedging strategies
involving futures contracts and related options, forward currency contracts,
and interest rate swaps, caps and floors. A put option gives the holder the
right, upon payment of a premium, to deliver a specified amount of a security
to the writer of the option on or before a fixed date at a predetermined price.
A call option gives the holder the right, upon payment of a premium, to call
upon the writer to deliver a specified amount of a security on or before a
fixed date at a predetermined price. The Portfolio may engage in hedging
strategies to attempt to reduce the overall level of investment risk that
normally would be expected to be associated with the Portfolio's securities,
and to attempt to protect the Portfolio against market movements that might
adversely affect the value of the Portfolio's securities or the price of
securities that the Portfolio is considering purchasing. There can be no
assurance, however, that the use of these instruments by the Portfolio will
assist it in achieving its investment objective. Generally, the use of hedging
strategies involves investment risks and transaction costs to which the
Portfolio would not be subject absent the use of these strategies. If the Sub-
Adviser engages in a hedging transaction intended to protect the Portfolio
against potential adverse movements in the securities, foreign currency or
interest rate markets using these instruments, and such markets do not move in
a direction adverse to the Portfolio, the Portfolio could be left in a less
favorable position than if such hedging strategy had not been used. The use of
hedging strategies involves special risks, which include: 1) the risk that
interest rates, securities prices and currency markets will not move in the
directions anticipated; 2) imperfect correlation between the price of the
hedging instruments and movements in the prices of the securities or currencies
underlying the hedging transaction; 3) the fact that skills needed to use these
strategies are different from those needed to select portfolio securities; 4)
the possible absence of a liquid secondary market for any particular instrument
at any time; and 5) the possible need to defer closing out certain hedged
positions to avoid adverse tax consequences. The loss from investing in futures
is potentially unlimited. Further information on these instruments, hedging
strategies and risk considerations relating to them is set forth in the
Statement of Additional Information.
5
<PAGE>
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. The Portfolio may invest in
repurchase and reverse repurchase agreements. A repurchase agreement involves
the purchase of a security by the Portfolio and a simultaneous agreement
(generally by a bank or dealer) to repurchase that security back from the
Portfolio at a specified price and date or upon demand. This technique offers a
method of earning income on idle cash. The repurchase agreement is effectively
secured by the value of the underlying security. A risk associated with
repurchase agreements is the failure of the seller to repurchase the securities
as agreed, which may cause the Portfolio to suffer a loss if the market value
of such securities declines before they can be liquidated on the open market.
In the event of bankruptcy or insolvency of the seller, the Portfolio may
encounter delays and incur costs in liquidating the underlying security.
Repurchase agreements not terminable within seven days are considered illiquid
securities and are subject to the limit stated below.
When the Portfolio invests in a reverse repurchase agreement, it sells a
portfolio security to another party, such as a bank or broker-dealer, in return
for cash, and agrees to buy the security back at a future date and price.
Reverse repurchase agreements may be used to provide cash to satisfy unusually
heavy redemption requests or for other temporary or emergency purposes without
the necessity of selling portfolio securities or to earn additional income on
portfolio securities, such as Treasury bills and notes. Reverse repurchase
agreements may expose the Portfolio to greater fluctuations in the value of its
assets.
ILLIQUID SECURITIES. The Portfolio may invest up to 15% of its net assets in
securities that are considered illiquid because of the absence of a readily
available market or due to legal or contractual restrictions. on resale.
However, certain restricted securities that are not registered for sale to the
general public but that can be resold to institutional investors ("Rule 144A
Securities") may not be considered illiquid, provided that a dealer or
institutional trading market exists. The institutional trading market is
relatively new and liquidity of the Portfolio's investments could be impaired
if such trading does not further develop or declines. The Sub-Adviser will
determine the liquidity of Rule 144A Securities under guidelines approved by
the Board of Directors of the Fund.
WHEN-ISSUED SECURITIES. The Portfolio may purchase new issues of U.S.
Government securities on a "when-issued" basis. However, the Portfolio does not
intend to invest more than 20% of its assets in when-issued securities. Because
actual payment for and delivery of when-issued securities generally take place
15 to 45 days after the purchase date, the Portfolio that purchases when-issued
securities bears the risk that interest rates and the security's value at the
time of delivery may have changed prior to delivery of the when-issued
security.
ZERO COUPON SECURITIES. The Portfolio may invest in zero coupon bonds or
"strips." However, the Portfolio does not presently intend to do so. Zero
coupon bonds do not make regular interest payments; rather,
6
<PAGE>
they are sold at a discount from face value. Principal and accreted discount
(representing interest accrued but not paid) are paid at maturity. "Strips" are
debt securities that are stripped of their interest after the securities are
issued, but otherwise are comparable to zero coupon bonds. The market value of
"strips" and zero coupon bonds generally fluctuates in response to changes in
interest rates to a greater degree than interest-paying securities of
comparable term and quality. For a description of these securities, see "Zero
Coupon Securities" in the Statement of Additional Information.
SPECIAL SITUATIONS. The Portfolio may invest in "special situations" from
time to time. A special situation arises when, in the opinion of the portfolio
manager, the securities of a particular issuer will be recognized and
appreciate in value due to a specific development with respect to that issuer.
Developments creating a special situation might include, among others, a new
product or process, a management change, a technological breakthrough, or other
extraordinary corporate event, or differences in market supply of and demand
for the security. Investment in special situations may carry an additional risk
of loss in the event that the anticipated development does not occur or does
not attract the expected attention. The impact of this strategy on the
Portfolio will depend on the Portfolio's size and the extent of the holdings of
the special situation issuer relative to its total assets.
LENDING AND BORROWING. The Portfolio may lend its portfolio securities to
qualified institutional buyers for the purpose of realizing additional income.
Such loans must be continuously secured by liquid assets at least equal to the
market value of the securities loaned and may not together with any other
outstanding loans exceed 25% of the Portfolio's total assets. Securities
lending may involve some credit risk to the Portfolio if the borrower defaults
and the Portfolio is delayed or prevented from recovering the collateral or is
otherwise required to cover a transaction in the security loaned. The Portfolio
does not presently intend to lend securities or make any other loans valued at
more than 5% of its total assets. To secure borrowings, the Portfolio may not
mortgage or pledge its securities in amounts that exceed 15% of its net assets,
at the time the loan or borrowing is made. If portfolio securities are loaned,
collateral values will be continuously maintained at no less than 100% by
marking to market daily. If a material event is to be voted upon affecting the
Portfolio's investment in securities which are on loan, the Portfolio will take
such action as may be appropriate in order to vote its shares.
The Portfolio may borrow money from or lend money to other funds that permit
such transactions and are also advised by the Sub-Adviser and if the Portfolio
seeks and obtains permission to do so from the Securities and Exchange
Commission ("SEC"). There is no assurance that such permission would be
granted. The Portfolio may also borrow money from banks. Any such loans or
borrowings are expected to be short-term in nature and used for temporary or
emergency purposes, such as to
7
<PAGE>
provide cash for redemptions, and will not exceed 25% of the Portfolio's net
assets at the time the loan or borrowing is made.
FOREIGN INVESTMENTS AND SPECIAL RISKS. The Portfolio may invest up to 25% of
net assets at the time of purchase in the securities of foreign issuers and
obligors. Investments may be made in both domestic and foreign companies. In
selecting investments in foreign securities for the Portfolio, the Sub-Adviser
considers a variety of factors which may include the political and economic
conditions in a country, the prospect for changes in the value of its currency
and the liquidity of the investment in that country's securities markets. If
appropriate and available, the Sub-Adviser may purchase foreign securities
through dollar-denominated American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and other
types of receipts or shares evidencing ownership of the underlying foreign
securities. While ADRs are dollar-denominated receipts that are issued by
domestic banks and traded in the United States, EDRs are typically issued by
European banks, and GDRs may be issued by either domestic or foreign banks. In
addition, the Portfolio may invest indirectly in foreign securities through
foreign investment funds or trusts (including passive foreign investment
companies).
Investing in foreign securities involves opportunities and risks that differ
from those involved with investing solely in U.S. markets. The Sub-Adviser
believes that there is substantial opportunity from a professionally managed
portfolio of securities selected from the U.S. and foreign markets. This
investment framework seeks to take advantage of the investment opportunities
created by the global economy. Accordingly, an investor may benefit from
worldwide access to investment opportunities, without being constrained by the
location of a company's headquarters or the trading market for its shares.
At the same time, these opportunities involve considerations and risks that
may not be encountered in U.S. investments. For example, changes in currency
exchange rates and exchange rate controls may affect the value of foreign
securities and the value of their dividend or interest payments, and therefore
the Portfolio's share prices and returns. Foreign companies generally are
subject to tax laws and accounting, auditing, and financial reporting
standards, practices and requirements that differ from those applicable to U.S.
companies. There is generally less publicly available information about foreign
companies and less securities and other governmental regulation and supervision
of foreign companies, stock exchanges and securities brokers and dealers. The
Portfolio may encounter difficulties in enforcing obligations in foreign
countries and negotiating favorable brokerage commission rates. Securities of
some foreign companies are less liquid, and their prices more volatile, than
securities of comparable U.S. companies. Security trading practices abroad may
offer less protection to investors such as the Portfolio than the practices of
domestic securities trading. Custody charges are generally higher for foreign
securities than for domestic securities.
8
<PAGE>
The considerations noted above may be intensified in the case of investments
in developing countries or countries with limited or developing capital
markets. In particular, developing countries may have relatively unstable
governments, economies based on only a few industries and securities markets
that trade a small number of securities. Securities of issuers located in
developing countries may have limited marketability and may be subject to more
abrupt or erratic price fluctuations.
At times, securities held by the Portfolio may be listed on foreign exchanges
or traded in foreign markets which are open on days (such as Saturday) when the
Portfolio does not compute its price or accept orders for the purchase,
redemption or exchange of its shares. As a result, the net asset value of the
Portfolio may be significantly affected by trading on days when shareholders
cannot make transactions.
In addition, with respect to some foreign countries, there is the possibility
of expropriation or confiscatory taxation; limitations on the removal of
securities, property or other assets of the Portfolio; political or social
instability or war; or diplomatic developments which could affect U.S.
investments in those countries. These latter considerations generally are more
of a concern in developing countries. Developing countries may also have
economies that are based on only a few industries. Although investments in
companies domiciled in developing countries may be subject to potentially
greater risk than investments in developed countries, the Portfolio will not
invest in any securities of issuers located in developing countries if the Sub-
Adviser determines these securities to be speculative.
To the extent the Portfolio invests in international foreign securities
markets, changes in the Portfolio's share price may have a reduced correlation
with movements in the U.S. markets. The Portfolio's share price reflects the
movements of both the prices of securities in which the Portfolio is invested
and the currencies in which the investments are denominated. Because the
foreign securities in which the Portfolio may invest include those that are
denominated in foreign currencies, or that otherwise have values that depend on
the performance of foreign currencies relative to the U.S. dollar, the relative
strength of the U.S. dollar may be, to that extent, an important factor in the
performance of the Portfolio. In an effort to manage exchange rate risks, the
Portfolio may enter into foreign currency exchange contracts (agreements to
exchange one currency for another at a future date). The Portfolio may exchange
foreign currencies for U.S. dollars and for other foreign currencies in the
normal course of business, and may purchase and sell currencies through
currency exchange contracts in order to fix a price for securities they have
agreed to buy or sell. The Sub-Adviser may also seek to hedge some or all of
the Portfolio's investments denominated in foreign currency against a decline
in the value of that currency relative to U.S. dollars, by entering into
contracts to exchange that currency for U.S. dollars (not exceeding the value
of the Portfolio's assets
9
<PAGE>
denominated in that currency), or by participating in options or futures
contracts with respect to such currency. This type of hedge may minimize the
effect of currency appreciation as well as depreciation, but does not protect
against a decline in the security's value relative to other securities
denominated in that currency.
The Portfolio may also enter into foreign currency exchange contracts to
shift exposure to currency exchange rate changes from one foreign currency to
another. This technique is known as cross-hedging. For example, if the Sub-
Adviser believed that a particular currency may decline relative to the U.S.
dollar, the Portfolio could enter into a contract to sell that currency (up to
the value of the Portfolio's assets denominated in that currency) in exchange
for another currency that the Sub-Adviser expects to remain stable or to
appreciate relative to the U.S. dollar. As a non-fundamental operating policy,
the Portfolio will not enter into currency exchange contracts if, as a result,
more than 10% of its assets would be committed to the consummation of cross-
hedge contracts, and will instruct its custodian bank to set aside high-grade,
liquid assets to cover the Portfolio's purchase obligations under this type of
contract.
Generally, the use of hedging strategies involves investment risks and
transaction costs to which a Portfolio would not be subject absent the use of
these strategies. If the Sub-Adviser engages in a hedging transaction intended
to protect a Portfolio against potential adverse movements in the securities,
foreign currency or interest rate markets using these hedging instruments, and
such markets do not move in a direction adverse to the Portfolio, the Portfolio
could be left in a less favorable position than if such hedging strategy has
not been used. The use of hedging strategies involves special risks, which
include: 1) the risk that interest rates, securities prices and currency
markets will not move in the directions anticipated; 2) imperfect correlation
between the price of the hedging instruments and movements in the prices of the
securities or currencies underlying the hedging transaction; 3) the fact that
the skills needed to use these strategies are different from those needed to
select portfolio securities; 4) the possible absence of a liquid secondary
market for any particular instrument at any time; and 5) the possible need to
defer closing out certain hedged positions to avoid adverse tax consequences.
See the Statement of Additional Information for further information concerning
these risks.
OTHER INVESTMENT POLICIES AND RESTRICTIONS
The Portfolio is subject to certain other investment policies and
restrictions which are described in the Statement of Additional Information,
some of which are fundamental policies of the Portfolio and as such may not be
changed without the approval of the shareholders of the Portfolio.
10
<PAGE>
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities (excluding certain
short-term securities) for a year and dividing it by the monthly average of the
market value of such securities during the year. See "Financial Highlights" for
the Portfolio on page 3 for more information on historical turnover rates. The
Portfolio may engage frequently in short-term trading. High turnover and short-
term trading involve correspondingly greater commission expenses and
transaction costs for the Portfolio. See "Portfolio Transactions and Brokerage"
in the Statement of Additional Information.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests with
the Fund's Board of Directors. There are currently five Directors, three of
whom are not "interested persons" of the Fund within the meaning of that term
under the 1940 Act. The Board meets regularly four times each year and at other
times as necessary. By virtue of the functions performed by WRL as Investment
Adviser and Janus Capital Corporation as Sub-Adviser, the Fund requires no
employees other than its executive officers, none of whom devotes full time to
the affairs of the Fund. These officers are employees of WRL and receive no
compensation from the Fund. The Statement of Additional Information contains
the names of and general background information regarding each Director and
executive officer of the Fund.
INVESTMENT ADVISER
WRL, a life insurance company located at 201 Highland Avenue, Largo, Florida
34640, serves as the Fund's Investment Adviser. The Investment Adviser is a
wholly-owned subsidiary of First AUSA Life Insurance Company ("First AUSA"), a
stock life insurance company which is wholly-owned by AEGON USA, Inc.
("AEGON"). AEGON is a financial services holding company whose primary emphasis
is on life and health insurance and annuity and investment products. AEGON is a
wholly-owned indirect subsidiary of AEGON nv, a Netherlands corporation, which
is a publicly traded international insurance group. The Investment Adviser has
served as the investment adviser to the Fund since its inception in 1986.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Adviser is responsible for managing the Portfolio in accordance
with the Portfolio's stated investment objective and policies. As compensation
for its services to the Portfolio, the Investment Adviser receives monthly
compensation at the annual rate of 0.80% of the average daily net assets of the
Portfolio. For the fiscal year ended December 31, 1994, the Fund paid WRL an
advisory fee of 0.80% of the average daily net assets of the Portfolio.
11
<PAGE>
The Investment Adviser is responsible for providing investment advisory
services and furnishes or makes available to the Portfolio the services of
executive and management personnel to supervise the performance of all
administrative, recordkeeping, regulatory reporting and compliance services,
including the supervision of the Portfolio's custodian. The Investment Adviser
also assists the Portfolio in maintaining communications and relations with the
shareholders of the Portfolio, including assisting in the preparation of
reports to shareholders. The Investment Adviser may incur and will pay certain
additional expenses, including legal and accounting fees, in connection with
the formation and maintenance of the Portfolio, including the preparation and
filing, when appropriate, of all documents, including registration statements,
post-effective amendments and any qualification under state securities laws
required in connection with the Portfolio's offering of shares. The Investment
Adviser will also pay all reasonable compensation and related expenses of the
officers and Directors of the Fund, except for such Directors who are not
interested persons (as that term is defined in the 1940 Act) of the Investment
Adviser, and the rental of offices. The Portfolio pays all other expenses
incurred in their operations, including general administrative expenses.
Accounting services are provided for the Portfolio by the Investment Adviser.
The Investment Adviser has voluntarily undertaken, until at least April 30,
1996, to pay expenses on behalf of the Portfolio to the extent normal operating
expenses (including investment advisory fees but excluding interest, taxes,
brokerage fees, commissions and extraordinary charges) exceed, as a percentage
of the Portfolio's average daily net assets, 1.00%. For the fiscal year ended
December 31, 1994, the expenses of the Portfolio, as a percentage of the
Portfolio's average daily net assets, were 0.84%.
THE SUB-ADVISER
Janus Capital Corporation, located at 100 Fillmore Street, Suite 300, Denver,
Colorado 80206, serves as the Sub-Adviser to the Portfolio. Thomas H. Bailey is
the President of Janus Capital Corporation. Kansas City Southern Industries,
Inc. ("KCSI") owns 83% of the Sub-Adviser. The Sub-Adviser provides investment
management and related services to other mutual funds, and individual,
corporate, charitable and retirement accounts. See "Management of the Fund--The
Sub-Adviser" in the Statement of Additional Information for a more detailed
description of the previous experience of Janus Capital Corporation as an
investment adviser.
Thomas F. Marsico has served as portfolio manager for the Portfolio since its
inception. Mr. Marsico also serves as portfolio manager of other mutual funds.
Mr. Marsico is an Executive Vice President of Janus Investment Fund and has
been a Vice President of the Sub-Adviser since 1986.
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for the Portfolio.
12
<PAGE>
Subject to review and supervision by the Investment Adviser and the Board of
Directors of the Fund, the Sub-Adviser is responsible for the actual management
of the Portfolio and for making decisions to buy, sell or hold any particular
security, and it places orders to buy or sell securities on behalf of the
Portfolio. The Sub-Adviser bears all of its expenses in connection with the
performance of its services, such as compensating and furnishing office space
for its officers and employees connected with investment and economic research,
trading and investment management of the Portfolio.
For its services, the Sub-Adviser receives monthly compensation from the
Investment Adviser at the annual rate of 0.40% of the average daily net assets
of the Portfolio.
The Sub-Adviser is also responsible for selecting the broker-dealers who
execute the portfolio transactions for the Portfolio. The Sub-Adviser is
authorized to consider sales of the Policies or Annuity Contracts described in
the accompanying prospectus by a broker-dealer as a factor in the selection of
broker-dealers to execute portfolio transactions. In placing portfolio business
with all dealers, the Sub-Adviser seeks best execution of each transaction and
all brokerage placement must be consistent with the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. In addition, the Sub-
Adviser may occasionally place portfolio business with broker-dealers
affiliated with the Investment Adviser or the Sub-Adviser; in such event, the
Sub-Adviser always will seek best execution.
DIVIDENDS AND DISTRIBUTIONS
The Portfolio intends to distribute substantially all of the net investment
income, if any. Dividends from investment income, if any, of the Portfolio
normally are declared and paid semi-annually in additional shares of the
Portfolio at net asset value. Distributions of net realized capital gains from
security transactions and net gains from foreign currency transactions, if any,
normally are declared and paid in additional shares of the Portfolio at the end
of the fiscal year.
TAXES
The Portfolio has qualified and expects to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended ("Code"). As such, the Portfolio is not subject to Federal income tax
on that part of its investment company taxable income (consisting generally of
net investment income, net gains from certain foreign currency transactions,
and net short-term capital gain, if any) and any net capital gain (the excess
of net long-term capital gain over net short-term capital loss) that it
distributes to its shareholders. It is the Portfolio's intention to distribute
all such income and gains.
Shares of the Portfolio are offered only to the Separate Accounts (which are
insurance company separate accounts that fund the Contract).
13
<PAGE>
Under the Code, no tax is imposed on an insurance company with respect to
income of a qualifying separate account properly allocable to the value of
eligible variable annuity or variable life insurance contracts. For a
discussion of the taxation of life insurance companies and the Separate
Account, as well as the tax treatment of the Contract and the holders thereof,
see "Certain Federal Income Tax Consequences" included in the prospectus for
the Contract.
The Portfolio intends to comply with the diversification requirements imposed
by section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on the
Portfolio by Subchapter M and the 1940 Act. These requirements place certain
limitations on the assets of each separate account that may be invested in
securities of a single issuer, and, because section 817(h) and the regulations
thereunder treat the Portfolio's assets as assets of the related Separate
Accounts, these limitations also apply to the Portfolio's assets that may be
invested in securities of a single issuer. Specifically, the regulations
provide that, except as permitted by the "safe harbor" described below, as of
the end of each calendar quarter or within 30 days thereafter no more than 55%
of the Portfolio's total assets may be represented by any one investment, no
more than 70% by any two investments, no more than 80% by any three
investments, and no more than 90% by any four investments.
Section 817(h) provides, as a safe harbor, that a separate account will be
treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities, and
securities of other regulated investment companies. For purposes of section
817(h), all securities of the same issuer, all interests in the same real
property project, and all interests in the same commodity are treated as a
single investment. In addition, each U.S. Government agency or instrumentality
is treated as a separate issuer, while a particular foreign government and its
agencies, instrumentalities, and political subdivisions will be considered the
same issuer. Failure of the Portfolio to satisfy the section 817(h)
requirements would result in taxation of the Separate Accounts, the insurance
companies, the Contract, and tax consequences to the holders thereof, other
than as described in the prospectus for the Contract.
The foregoing is only a summary of some of the important Federal income tax
considerations generally affecting the Portfolio and its shareholders; see the
Statement of Additional Information for a more detailed discussion. Prospective
investors are urged to consult their tax advisors.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolio are sold and redeemed at their net asset value next
determined after receipt of a purchase order or notice of redemption
14
<PAGE>
in proper form. Shares are sold and redeemed without the imposition of any
sales commission or redemption charge. However, certain sales and other charges
may apply to the Contract. Such charges are described in the prospectus for the
Contract.
VALUATION OF SHARES
The Portfolio's net asset value per share is ordinarily determined, once
daily, as of the close of the regular session of business on the New York Stock
Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day the
Exchange is open, and at such other times as the Fund may determine.
Net asset value of a Portfolio share is computed by dividing the value of the
net assets of the Portfolio by the total number of shares outstanding in the
Portfolio.
THE FUND AND ITS SHARES
The Fund was incorporated under the laws of the State of Maryland on August
21, 1985 and is registered with the SEC as a diversified, open-end, management
investment company.
The Portfolio offers its shares only for purchase by the Separate Accounts of
the Life Companies to fund benefits under variable life insurance or variable
annuity contracts issued by the Life Companies. Because the Portfolio's shares
are sold to the Separate Accounts established to receive and invest premiums
received under variable life insurance policies and purchase payments received
under the variable annuity contracts, it is conceivable that, in the future, it
may become disadvantageous for variable life insurance Separate Accounts and
variable annuity Separate Accounts to invest in the Portfolio simultaneously.
Neither the Life Companies nor the Fund currently foresees any such
disadvantages or conflicts, either to variable life insurance policyowners or
to variable annuity contractowners. After being notified by one or more of the
Life Companies of a potential or existing conflict, the Fund's Board of
Directors will determine if a material conflict exists and what action, if any,
should be taken in response thereto. Such action could include the sale of
Portfolio shares by one or more of the Separate Accounts, which could have
adverse consequences. Material conflicts could result from, for example, (1)
changes in state insurance laws, (2) changes in Federal income tax laws, or (3)
differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contractowners. If
the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity separate accounts, the
affected Life Companies will bear the attendant expenses, but variable life
insurance policyowners and variable annuity contractowners would no longer have
the economies of scale typically resulting from a larger combined fund.
15
<PAGE>
The Fund offers a separate class of common stock for each portfolio. All
shares of the Portfolio and of each of the other portfolios of the Fund have
equal voting rights, except that only shares of a particular portfolio will be
entitled to vote on matters concerning only that portfolio. Each issued and
outstanding share of the Portfolio is entitled to one vote and to participate
equally in dividends and distributions declared by the Portfolio and, upon any
liquidation or dissolution, to participate equally in the net assets of the
Portfolio remaining after satisfaction of outstanding liabilities. The shares
of the Portfolio, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and will be
freely transferable. Shares do not have cumulative voting rights and the
holders of more than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they choose to do so,
and in such event holders of the remaining shares would not be able to elect
any directors.
Only the Separate Accounts of the Life Companies may hold shares of the
Portfolio and are entitled to exercise the rights directly as described above.
If and to the extent required by law, Life Companies will vote the Portfolio's
shares held in the Separate Accounts, including the Portfolio's shares which
are not attributable to Owners, at meetings of the Fund in accordance with
instructions received from Owners having voting interests in the corresponding
sub-accounts of the Separate Accounts. Except as required by the 1940 Act, the
Fund does not hold regular or special shareholder meetings. If the 1940 Act or
any regulation thereunder should be amended, or if present interpretation
thereof should change, and as a result it is determined that the Life Companies
are permitted to vote the Portfolio's shares in their own right, they may elect
to do so. The rights of Owners are described in more detail in the prospectuses
or plan documents for the Contracts.
PERFORMANCE INFORMATION
The Fund may, from time to time, include quotations of the Portfolio's total
return or yield in connection with the total return for the Separate Account in
advertisements, sales literature or reports to Owners or to prospective
investors. Total return and yield quotations for the Portfolio reflect only the
performance of a hypothetical investment in the Portfolio during the particular
time period shown as calculated based on the historical performance of the
Portfolio during that period. Such quotations do not in any way indicate or
---------------------------------------------
project future performance. Quotations of total return and yield will not
- ---------------------------
reflect charges or deductions against the Separate Account or charges and
deductions against the Contract. Where relevant, the prospectus for the
Contract contains additional performance information.
The total return of the Portfolio refers to the average annual percentage
change in value of an investment in the Portfolio held for various periods of
time, including, but not limited to, one year, five years,
16
<PAGE>
ten years and since the Portfolio began operations, as of a stated ending date.
When the Portfolio has been in operation for these periods, the total return
for such periods will be provided if performance information is quoted. Total
return quotations for the Portfolio are expressed as average annual compound
rates of return for each of the periods quoted, reflect the deduction of a
proportionate share of the Portfolio's investment advisory fees and Portfolio
expenses, and assume that all dividends and capital gains distributions during
the period are reinvested in the Portfolio when made.
The Portfolio may, from time to time, disclose in advertisements, sales
literature and reports to Owners or to prospective investors, total returns for
the Portfolio for periods in addition to those required to be presented, or
disclose other nonstandardized data such as cumulative total returns, actual
year-by-year returns, or any combination thereof.
The Portfolio may also, from time to time, compare performance information
for the Portfolio in advertisements, sales literature and reports to Owners or
to prospective investors to: (1) the Standard & Poor's Index of 500 Common
Stocks, the Dow Jones Industrial Average or other widely recognized indices;
(2) other mutual funds whose performance is reported by Lipper Analytical
Services, Inc., ("Lipper"), Variable Annuity Research & Data Service ("VARDS")
and Morningstar, Inc. ("Morningstar") or reported by other services, companies,
individuals or other industry or financial publications of general interest,
such as Forbes, Money, The Wall Street Journal, Business Week, Barron's,
------ ----- ----------------------- ------------- --------
Changing Times and Fortune, which rank and/or rate mutual funds by overall
- -------------- -------
performance or other criteria; and (3) the Consumer Price Index. Lipper, VARDS
and Morningstar are widely quoted independent research firms which rank mutual
funds according to overall performance, investment objective, and assets.
Unmanaged indices may assume the reinvestment of dividends but usually do not
reflect any "deduction" for the expense of operating or managing a fund. In
connection with a ranking, the Portfolio will also provide additional
information with respect to the ranking, including the particular category to
which it relates, the number of funds in the category, the period and criteria
on which the ranking is based, and the effect of fee waivers and/or expense
reimbursements.
(See the Statement of Additional Information for more information about the
Portfolio's performance.)
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The fiscal year of the Portfolio ends on December 31 of each year. The Fund
will send to the Portfolio's Owners, at least semiannually, reports showing the
Portfolio's composition and other information. An annual report, containing
financial statements, audited by the Fund's independent accountants, will be
sent to Owners each year.
17
<PAGE>
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company ("IBT"), 89 South Street, Boston,
Massachusetts 02111, acts as Custodian and Dividend Disbursing Agent of the
Portfolio's assets.
ADDITIONAL INFORMATION
The telephone number or the address of the Fund appearing on the first page
of this Prospectus should be used for requests for additional information.
18
<PAGE>
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
201 HIGHLAND AVENUE
LARGO, FLORIDA 34640
TELEPHONE (319) 398-8511
INVESTMENT ADVISER:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, FL 34640
SUB-ADVISER:
Janus Capital Corporation
Suite 300 100 Fillmore Street
Denver, CO 80206
CUSTODIAN:
Investors Bank & Trust Company
89 South Street
Boston, MA 02111
INDEPENDENT ACCOUNTANTS:
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
- -------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED. THIS PROSPEC-
TUS DOES NOT CONSTITUTE AN OFFERING OF
ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES OR AN OF-
FER TO ANY PERSON IN ANY STATE OR JURIS-
DICTION OF THE UNITED STATES OR ANY COUN-
TRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
- -------------------------------------------
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE ENDEAVOR VARIABLE ANNUITY
Issued through
AUSA ENDEAVOR VARIABLE
ANNUITY ACCOUNT
Offered by
AUSA LIFE INSURANCE COMPANY, INC.
666 Fifth Avenue
New York, New York 10103
----------------
This Statement of Additional information expands upon subjects discussed in
the current Prospectus for the Endeavor Variable Annuity Policy (the "Policy")
offered by AUSA Life Insurance Company, Inc. You may obtain a copy of the
Prospectus dated May 1, 1995 by calling 1-800-525-6205, or by writing to the
Service Office, Financial Markets Division--Variable Annuity Dept., 4333
Edgewood Road, N.E., Cedar Rapids, Iowa 52499. Terms used in the current
Prospectus for the Policy are incorporated in this Statement.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUSES FOR THE POLICY, ENDEAVOR SERIES
TRUST AND THE WRL GROWTH PORTFOLIO OF THE WRL SERIES FUND, INC.
Dated: May 1, 1995
- 1 -
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Policy-General Provisions............................................ 3
Owner.................................................................. 3
Entire Policy.......................................................... 3
Deferment of Payment and Transfers..................................... 3
Misstatement of Age or Sex............................................. 4
Reallocation of Policy Values After the Annuity Commencement Date...... 4
Assignment............................................................. 4
Evidence of Survival................................................... 4
Amendments............................................................. 4
Federal Tax Matters (42)................................................. 5
Tax Status of the Policy............................................... 5
Taxation of AUSA....................................................... 5
Investment Experience.................................................... 6
State Regulation of AUSA................................................. 10
Records and Reports...................................................... 10
Distribution of the Policies (48)........................................ 10
Custody of Assets........................................................ 10
Historical Performance Data (16)......................................... 10
Money Market Yields.................................................... 10
Other Subaccount Yields................................................ 11
Total Returns.......................................................... 12
Other Performance Data................................................. 13
Legal Matters............................................................ 13
Independent Auditors..................................................... 13
Other Information........................................................ 13
Financial Statements (16)................................................ 14
</TABLE>
(Numbers in parenthesis indicate corresponding sections of the Prospectus).
- 2 -
<PAGE>
In order to supplement the description in the Prospectus, the following
provides additional information about AUSA and the Policy which may be of
interest to an Owner.
THE POLICY--GENERAL PROVISIONS
OWNER
The Policy shall belong to the Policy Owner upon issuance of the Policy after
completion of an application and delivery of the initial Premium Payment. While
the Annuitant is living, the Owner may: (1) assign the Policy; (2) surrender
the Policy; (3) amend or modify the Policy with AUSA's consent; (4) receive
annuity payments or name a Payee to receive the payments; and (5) exercise,
receive and enjoy every other right and benefit contained in the Policy. The
exercise of these rights may be subject to the consent of any assignee or
irrevocable Beneficiary.
A Successor Owner can be named in the Policy application or in a Written
Notice. The Successor Owner will become the new Owner upon the Owner's death,
if the Owner predeceases the Annuitant. If no Successor Owner survives the
Owner and the Owner predeceases the Annuitant, the Owner's estate will become
the Owner.
The Owner may change the ownership of the Policy in a Written Notice. When
this change takes effect, all rights of ownership in the Policy will pass to
the new Owner.
When there is a change of Owner or Successor Owner, the change will take
effect as of the date the Owner signs the Written Notice, subject to any
payment AUSA has made or action AUSA has taken before recording the change.
Changing the Owner or naming a new Successor Owner cancels any prior choice of
Successor Owner, but does not change the designation of the Beneficiary or the
Annuitant.
If ownership is transferred (except to the Owner's spouse) because the Owner
dies before the Annuitant, the Cash Value generally must be distributed to the
Successor Owner within five years of the Owner's death, or payments must be
made for a period certain or for the Successor Owner's lifetime so long as any
period certain does not exceed that Successor Owner's life expectancy, if the
first payment begins within one year of the Owner's death.
ENTIRE POLICY
The Policy and any endorsements thereon and the Policy application constitute
the entire contract between AUSA and the Owner. All statements in the
application are representations and not warranties. No statement will cause the
Policy to be void or to be used in defense of a claim unless contained in the
application.
DEFERMENT OF PAYMENT AND TRANSFERS
Payment of any amount due from the Mutual Fund Account in respect of a
surrender, the Death Benefit or the death of the Owner of a Nonqualified Policy
generally will occur within seven business days from the date the Written
Notice (and any other required documentation or information) is received,
except that AUSA may be permitted to defer such payment from the Mutual Fund
Account if: (1) the New York Stock Exchange is closed for other than usual
weekends or holidays or trading on the Exchange is otherwise restricted; or (2)
an emergency exists as defined by the SEC or the SEC requires that trading be
restricted; or (3) the SEC permits a delay for the protection of Owners. In
addition, transfers of amounts from the Subaccounts may be deferred under these
circumstances.
- 3 -
<PAGE>
Certain delays and restrictions apply to transfers of amounts out of the
Fixed Account. See page 24 of the Policy Prospectus.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Annuitant has been misstated, AUSA will change the
annuity benefit payable to that which the Premium Payments would have purchased
for the correct age or sex. The dollar amount of any underpayment made by AUSA
shall be paid in full with the next payment due such person or the Beneficiary.
The dollar amount of any overpayment made by AUSA due to any misstatement shall
be deducted from payments subsequently accruing to such person or Beneficiary.
Any underpayment or overpayment will include interest at 5% per year, from the
date of the wrong payment to the date of the adjustment. The age of the
Annuitant may be established at any time by the submission of proof
satisfactory to AUSA.
REALLOCATION OF POLICY VALUES AFTER THE ANNUITY COMMENCEMENT DATE
After the Annuity Commencement Date, the Policy Owner may reallocate the
value of a designated number of Annuity Units of a Subaccount of the Mutual
Fund Account then credited to a Policy into an equal value of Annuity Units of
one or more other Subaccounts of the Mutual Fund Account, or the Fixed Account.
The reallocation shall be based on the relative value of the Annuity Units of
the Account(s) or Subaccount(s) at the end of the Business Day on the next
payment date. The minimum amount which may be reallocated is the lesser of (1)
$10 of monthly income or (2) the entire monthly income of the Annuity Units in
the Account or Subaccount from which the transfer is being made. If the monthly
income of the Annuity Units remaining in an Account or Subaccount after a
reallocation is less than $10, AUSA reserves the right to include the value of
those Annuity Units as part of the transfer. The request must be in writing to
AUSA's Service Office. There is no charge assessed in connection with such
reallocation. AUSA reserves the right to limit the number of times a
reallocation of Policy Value may be made in any given Policy Year.
ASSIGNMENT
During the lifetime of the Annuitant the Policy Owner may assign any rights
or benefits provided by the Policy. An assignment will not be binding on AUSA
until a copy has been filed at its Service Office. The rights and benefits of
the Policy Owner and Beneficiary are subject to the rights of the assignee.
AUSA assumes no responsibility for the validity or effect of any assignment.
Any claim made under an assignment shall be subject to proof of interest and
the extent of the assignment. An assignment may have tax consequences.
Unless the Policy Owner so directs by filing written notice with AUSA, no
Beneficiary may assign any payments under the Policy before they are due. To
the extent permitted by law, no payments will be subject to the claims of any
Beneficiary's creditors.
EVIDENCE OF SURVIVAL
AUSA reserves the right to require satisfactory evidence that a person is
alive if a payment is based on that person being alive. No payment will be made
until AUSA receives such evidence.
AMENDMENTS
No change in the Policy is valid unless made in writing by AUSA and approved
by one of AUSA's officers. No Registered Representative has authority to change
or waive any provision of the Policy.
- 4 -
<PAGE>
AUSA reserves the right to amend the Policies to meet the requirements of the
Internal Revenue Code, regulations or published rulings. A Policy Owner can
refuse such a change by giving Written Notice, but a refusal may result in
adverse tax consequences.
FEDERAL TAX MATTERS
TAX STATUS OF THE POLICY
Diversification Requirements. Section 817(h) of the Code provides that in
order for a variable contract which is based on a segregated asset account to
qualify as an annuity contract under the Code, the investments made by such
account must be "adequately diversified" in accordance with Treasury
regulations. The Treasury regulations issued under Section 817(h) (Treas. Reg.
(S) 1.817-5) apply a diversification requirement to each of the Subaccounts of
the Mutual Fund Account. The Mutual Fund Account, through the Underlying Funds
and their Portfolios, intend to comply with the diversification requirements of
the Treasury. AUSA has entered into agreements regarding participation in the
Endeavor Series Trust and WRL Series Fund, Inc. that require the Underlying
Funds and their Portfolios to be operated in compliance with the Treasury
regulations.
Owner Control. In connection with the issuance of temporary regulations on
diversification requirements, the Treasury also announced that such regulations
do not provide guidance concerning the extent to which Owners may direct their
investments to the Subaccounts of the Mutual Fund Account. It is not clear
whether additional guidance in this regard will be provided nor whether, if
provided, it will be prospective only. It is possible that any such guidance
could treat an Owner as the owner of the assets of the Mutual Fund Account if a
Subaccount is too narrow in its investment strategy (e.g., a fund that invests
only in gold or stock of gold mining companies) or if Owners have too many
subaccount options to select, even though it technically meets the
diversification requirements. It is possible that if any guidance is provided
then the Mutual Fund Account may not be in compliance. AUSA can provide no
assurances that any such guidance will not adversely affect the tax treatment
of existing Policies. For these reasons, AUSA reserves the right to modify the
Policy as necessary to prevent the Owner from being considered the owner of the
assets of the Mutual Fund Account or otherwise to qualify the Policy for
favorable tax treatment.
Distribution Requirements. The Code also requires that Nonqualified Policies
contain specific provisions for distribution of Policy proceeds upon the death
of the Owner. In order to be treated as an annuity contract for federal income
tax purposes, the Code requires that such Policies provide that if any Owner
dies on or after the Annuity Commencement Date and before the entire interest
in the Policy has been distributed, the remaining portion must be distributed
at least as rapidly as under the method in effect on such Owner's death. If any
Owner dies before the Annuity Commencement Date, the entire interest in the
Policy must generally be distributed within 5 years after such Owner's date of
death or be used to purchase an immediate annuity under which payments will
begin within one year of such Owner's death and will be made for the life of
the Beneficiary or for a period not extending beyond the life expectancy of the
Beneficiary. However, if upon such Owner's death prior to the Annuity
Commencement Date, such Owner's surviving spouse becomes the sole new Owner
under the Policy, then the Policy may be continued with the surviving spouse as
the new Owner. If any Owner is not a natural person, then for purposes of these
distribution requirements, the primary Annuitant shall be treated as the Owner,
and any death or change of such primary Annuitant shall be treated as the death
of the Owner. The Policy contains provisions intended to comply with these
requirements of the Code. No regulations interpreting these requirements of the
Code have yet been issued and thus no assurance can be given that the
provisions contained in the Policies satisfy all such Code requirements. The
provisions contained in the Policies will be reviewed and modified if necessary
to assure that they comply with the Code requirements when clarified by
regulation or otherwise.
- 5 -
<PAGE>
TAXATION OF AUSA
AUSA at present is taxed as a life insurance company under part I of
Subchapter L of the Code. The Mutual Fund Account is treated as part of AUSA
and, accordingly, will not be taxed separately as a "regulated investment
company" under Subchapter M of the Code. AUSA does not expect to incur any
federal income tax liability with respect to investment income and net capital
gains arising from the activities of the Mutual Fund Account retained as part
of the reserves under the Policy. Based on this expectation, it is anticipated
that no charges will be made against the Mutual Fund Account for federal income
taxes. If, in future years, any federal income taxes are incurred by AUSA with
respect to the Mutual Fund Account, AUSA may make a charge to the Mutual Fund
Account.
INVESTMENT EXPERIENCE
An "Investment Experience Factor" is used to determine the value of
Accumulation Units and Annuity Units, and to determine annuity payment rates.
ACCUMULATION UNITS
Upon allocation to the selected Subaccount, Premium Payments are converted
into Accumulation Units of the Subaccount. The number of Accumulation Units to
be credited is determined by dividing the dollar amount allocated to each
Subaccount by the value of an Accumulation Unit for that Subaccount as next
determined after the Premium Payment is received at the Service Office or, in
the case of the initial Premium Payment, when the Policy application is
completed, whichever is later. The value of an Accumulation Unit was
arbitrarily established at $1 (except the WRL Growth Subaccount which was
established at $10) at the inception of each Subaccount. Thereafter, the value
of an Accumulation Unit is determined as of the close of trading on each day
the New York Stock Exchange and AUSA's Service Office are open for business.
An index (the "Investment Experience Factor") which measures the investment
performance of a Subaccount during a Valuation Period is used to determine the
value of an Accumulation Unit for the next subsequent Valuation Period. The
Investment Experience Factor may be greater or less than or equal to one;
therefore, the value of an Accumulation Unit may increase, decrease or remain
the same from one Valuation Period to the next. The Policy Owner bears this
investment risk. The Net Investment Performance of a Subaccount and deduction
of certain charges affects the Accumulation Unit Value.
The Investment Experience Factor for any Subaccount for any Valuation Period
is determined by dividing (a) by (b) and subtracting (c) from the result,
where:
(a) is the net result of:
(1) the net asset value per share of the shares held in the
Subaccount determined at the end of the current Valuation Period, plus
(2) The per share amount of any dividend or capital gain distribution
made with respect to the shares held in the Subaccount if the ex-
dividend date occurs during the current Valuation Period, plus or minus
(3) a per share charge or credit for any taxes determined by AUSA to
have resulted from the investment operations of the Subaccount and for
which it has created a reserve;
(b) is the net result of:
(1) the net asset value per share of the shares held in the
Subaccount determined as of the end of the immediately preceding
Valuation Period, plus or minus
(2) the per share charge or credit for taxes pertaining to the
immediately preceding Valuation Period for which AUSA has created a
reserve; and
- 6 -
<PAGE>
(c) is the charge for mortality and expense risk during the Valuation
Period equal on an annual basis to 1.25% of the daily net asset value of
the Subaccount, plus the .15% administrative charge.
ILLUSTRATION OF ACCUMULATION UNIT VALUE CALCULATIONS
FORMULA AND ILLUSTRATION FOR DETERMINING
THE INVESTMENT EXPERIENCE FACTOR
Investment Experience Factor = A + B -- C -- F
----------
D -- E
Where: A = The Net Asset Value of an Underlying Fund share as of the end of
the current
Valuation Period.
Assume..........................................A = $11.57
B = The per share amount of any dividend or capital gains distribution
since the end of
the immediately preceding Valuation Period.
Assume...............................................B = 0
C = The per share charge or credit for any taxes reserved for at the
end of the current
Valuation Period.
Assume...............................................C = 0
D = The Net Asset Value of an Underlying Fund share at the end of the
immediately
preceding Valuation Period.
Assume..........................................D = $11.40
E = The per share amount of any taxes reserved for at the end of the
immediately
preceding Valuation Period.
Assume...............................................E = 0
F = The daily deduction for mortality and expense risk and
administrative
charges, which totals 1.40% on an annual basis.
On a daily basis............................ = .0000380909
<TABLE>
<S> <C>
Then, the Investment Experience Factor = 11.57 -- 0 -- 0 -- .0000380909 = Z = 1.0148741898
---------------
11.40 -- 0
</TABLE>
FORMULA AND ILLUSTRATION FOR DETERMINING ACCUMULATION UNIT VALUE
Accumulation Unit Value = A x B
Where: A = The Accumulation Unit Value for the immediately preceding
Valuation Period.
Assume.............................................. = $ X
B = The Net Investment Factor for the current Valuation Period.
Assume................................................ = Y
Then, the Accumulation Unit Value = $ X x Y = $ Z
- 7 -
<PAGE>
ANNUITY UNIT VALUE AND ANNUITY PAYMENT RATES
The amount of Variable Annuity Payments will vary with Annuity Unit Values.
Annuity Unit Values rise if the net investment performance of the Subaccount
exceeds the assumed interest rate of 5% annually. Conversely, Annuity Unit
Values fall if the net investment performance of the Subaccount is less than
the assumed rate. The value of a Variable Annuity Unit in each Subaccount was
established at $1.00 on the date operations began for that Subaccount. The
value of a Variable Annuity Unit on any subsequent Business Day is equal to (a)
multiplied by (b) multiplied by (c), where:
(a) is the variable Annuity Unit Value on the immediately preceding
Business Day;
(b) is the net investment factor of the valuation period; and
(c) is the investment result adjustment factor for the valuation period.
The investment result adjustment factor for the valuation period is the
product of discount factors of .99986634 per day to recognize the 5% effective
annual Assumed Investment Return. The valuation period is the period from the
close of the immediately preceding Business Day to the close of the current
Business Day.
The net investment factor for the Policy used to calculate the value of a
variable Annuity Unit in each Subaccount for the valuation period is determined
by dividing (i) by (ii) and subtracting (iii) from the result, where:
(i) is the result of:
(1) the net asset value of a fund share held in the Mutual Fund
Account for that Subaccount determined at the end of the current
valuation period; plus
(2) the per share amount of any dividend or capital gain
distributions made by the fund for shares held in the Mutual Fund
Account for that Subaccount if the ex-dividend date occurs during the
valuation period.
(ii) is the net asset value of a fund share held in the Mutual Fund
Account for that Subaccount determined as of the end of the immediately
preceding valuation period.
(iii) is a factor representing the mortality and expense risk fee and
administrative charge. This factor is equal, on an annual basis, to 1.40%
of the daily net asset value of a fund share held in the Mutual Fund
Account for that Subaccount.
The dollar amount of subsequent Variable Annuity Payments will depend upon
changes in applicable Annuity Unit Values.
The annuity payment rates vary according to the Annuity Option elected and
the sex and adjusted age of the Annuitant at the Annuity Commencement Date. The
Policy also contains a table for determining the adjusted age of the Annuitant.
- 8 -
<PAGE>
ILLUSTRATION OF CALCULATIONS FOR ANNUITY UNIT VALUE
AND VARIABLE ANNUITY PAYMENTS
FORMULA AND ILLUSTRATION FOR DETERMINING ANNUITY UNIT VALUE
Annuity Unit Value = A x B x C
Where: A = Annuity Unit Value for the immediately preceding Valuation Period.
Assume.............................................. = $ X
B = Investment Experience Factor for the Valuation Period for which
the Annuity Unit
value is being calculated.
Assume................................................ = Y
C = A factor to neutralize the assumed interest rate of 5% built into
the Annuity Tables
used.
Assume................................................ = Z
Then, the Annuity Unit Value is:
$ X x Y x Z = $ Q
FORMULA AND ILLUSTRATION FOR DETERMINING AMOUNT OF FIRST MONTHLY VARIABLE
ANNUITY PAYMENT
First Monthly Variable Annuity Payment = A x B
-------
$1,000
Where: A = The Policy Value as of the Annuity Commencement Date.
Assume.............................................. = $ X
B = The Annuity purchase rate per $1,000 based upon the option
selected, the sex and
adjusted age of the Annuitant according to the tables contained in
the Policy.
Assume.............................................. = $ Y
Then, the first Monthly Variable Annuity
Payment = $ X x $ Y = $ Z
-----
1,000
FORMULA AND ILLUSTRATION FOR DETERMINING THE NUMBER OF ANNUITY UNITS
REPRESENTED BY EACH MONTHLY VARIABLE ANNUITY PAYMENT
Number of Annuity Units = A
-
B
Where: A = The dollar amount of the first monthly Variable Annuity Payment.
Assume.............................................. = $ X
B = The Annuity Unit Value for the Valuation Date on which the first
monthly payment is due.
Assume.............................................. = $ Y
Then, the number of Annuity Units = $ X = Z
-----
$ Y
- 9 -
<PAGE>
STATE REGULATION OF AUSA
AUSA is subject to the laws of New York governing insurance companies and to
regulation by the New York Department of Insurance. An annual statement in a
prescribed form is filed with the Department of Insurance each year covering
the operation of AUSA for the preceding year and its financial condition as of
the end of such year. Regulation by the Department of Insurance includes
periodic examination to determine AUSA's contract liabilities and reserves so
that the Department may determine the items are correct. AUSA's books and
accounts are subject to review by the Department of Insurance at all times and
a full examination of its operations is conducted periodically by the National
Association of Insurance Commissioners. In addition, AUSA is subject to
regulation under the insurance laws of other jurisdictions in which it may
operate.
RECORDS AND REPORTS
All records and accounts relating to the Mutual Fund Account will be
maintained by AUSA. As presently required by the Investment Company Act of 1940
and regulations promulgated thereunder, AUSA will mail to all Policy Owners at
their last known address of record, at least annually, reports containing such
information as may be required under that Act or by any other applicable law or
regulation. Policy Owners will also receive confirmation of each financial
transaction and any other reports required by law or regulation.
DISTRIBUTION OF THE POLICIES
The Policies are offered to the public through brokers licensed under the
federal securities laws and state insurance laws. The offering of the Policies
is continuous and AUSA does not anticipate discontinuing the offering of the
Policies. However, AUSA reserves the right to discontinue the offering of the
Policies.
AEGON USA Securities, Inc., an affiliate of AUSA, will be the principal
underwriter of the Policies. AEGON USA Securities, Inc. has entered into
agreements with broker-dealers for the distribution of the Policies. No
Policies had been issued as of the date of this Statement of Additional
Information, therefore no fees had been paid to AEGON USA Securities, Inc.
and/or the broker/dealers for their services.
CUSTODY OF ASSETS
The assets of each of the Subaccounts of the Mutual Fund Account are held by
AUSA. The assets of each of the Subaccounts of the Mutual Fund Account are
segregated and held separate and apart from the assets of the other Subaccounts
and from AUSA's general account assets. AUSA maintains records of all purchases
and redemptions of shares of the Underlying Funds held by each of the
Subaccounts. Additional protection for the assets of the Mutual Fund Account is
afforded by AUSA's fidelity bond, presently in the amount of $5,000,000,
covering the acts of officers and employees of AUSA.
HISTORICAL PERFORMANCE DATA
MONEY MARKET YIELDS
AUSA may from time to time disclose the current annualized yield of the Money
Market Subaccount, which invests in the Money Market Portfolio, for a 7-day
period in a manner which
- 10 -
<PAGE>
does not take into consideration any realized or unrealized gains or losses on
shares of the Money Market Portfolio or on its portfolio securities. This
current annualized yield is computed by determining the net change (exclusive
of realized gains and losses on the sale of securities and unrealized
appreciation and depreciation) at the end of the 7-day period in the value of a
hypothetical account; having a balance of 1 unit of the Money Market Subaccount
at the beginning of the 7-day period, dividing such net change in account value
by the value of the account at the beginning of the period to determine the
base period return, and annualizing this quotient on a 365-day basis. The net
change in account value reflects (i) net income from the Portfolio attributable
to the hypothetical account; and (ii) charges and deductions imposed under a
Policy that are attributable to the hypothetical account. The charges and
deductions include the per unit charges for the hypothetical account for (i)
the Administrative Charges; and (ii) the Mortality and Expense Risk Charge.
Current Yield will be calculated according to the following formula:
Current Yield = ((NCS -- ES)/UV) x (365/7)
Where:
<TABLE>
<C> <S>
NCS= The net change in the value of the Portfolio (exclusive of realized gains
and losses on the sale of securities and unrealized appreciation and
depreciation) for the 7-day period attributable to a hypothetical account
having a balance of 1 Subaccount unit.
ES= Per unit expenses of the Subaccount for the 7-day period.
UV= The unit value on the first day of the 7-day period.
</TABLE>
Because of the charges and deductions imposed under a Policy, the yield for
the Money Market Subaccount will be lower than the yield for the Money Market
Portfolio. The yield calculations do not reflect the effect of any premium
taxes or Contingent Deferred Sales Charges that may be applicable to a
particular Policy. Contingent Deferred Sales Charges range from 7% to 0% of the
amount of premium withdrawn based on the Policy Year since payment of the
premium.
AUSA may also disclose the effective yield of the Money Market Subaccount for
the same 7-day period, determined on a compounded basis. The effective yield is
calculated by compounding the base period return according to the following
formula:
Effective Yield = (1 + ((NCS -- ES)/UV))/365/7/ -- 1
Where:
<TABLE>
<C> <S>
NCS= The net change in the value of the Portfolio (exclusive of realized gains
and losses on the sale of securities and unrealized appreciation and
depreciation) for the 7-day period attributable to a hypothetical account
having a balance of 1 Subaccount unit.
ES= Per unit expenses of the Subaccount for the 7-day period.
UV= The unit value on the first day of the 7-day period.
</TABLE>
The yield on amounts held in the Money Market Subaccount normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The Money Market Subaccount's actual yield is affected by changes in
interest rates on money market securities, average portfolio maturity of the
Money Market Portfolio, the types and quality of portfolio securities held by
the Money Market Portfolio and its operating expenses.
OTHER SUBACCOUNT YIELDS
AUSA may from time to time advertise or disclose the current annualized yield
of one or more of the Subaccounts of the Mutual Fund Account (except the Money
Market Subaccount) for 30-day
- 11 -
<PAGE>
periods. The annualized yield of a Subaccount refers to income generated by the
Subaccount over a specific 30-day period. Because the yield is annualized, the
yield generated by a Subaccount during the 30-day period is assumed to be
generated each 30-day period over a 12-month period. The yield is computed by:
(i) dividing the net investment income of the Subaccount less Subaccount
expenses for the period, by (ii) the maximum offering price per unit on the
last day of the period times the daily average number of units outstanding for
the period, (iii) compounding that yield for a 6-month period, and (iv)
multiplying that result by 2. Expenses attributable to the Subaccount include
(i) the Administrative Charge and (ii) the Mortality and Expense Risk Charge.
The 30-day yield is calculated according to the following formula:
Yield = 2 x ((((NI -- ES)/(U x UV)) + 1)/6/ -- 1)
Where:
<TABLE>
<C> <S>
NI= Net investment income of the Subaccount for the 30-day period attributable
to the Subaccount's unit.
ES= Expenses of the Subaccount for the 30-day period.
U= The average number of units outstanding.
UV= The unit value at the close (highest) of the last day in the 30-day
period.
</TABLE>
Because of the charges and deductions imposed by the Mutual Fund Account, the
yield for a Subaccount of the Mutual Fund Account will be lower than the yield
for its corresponding Portfolio. The yield calculations do not reflect the
effect of any premium taxes that may be applicable to a particular Policy.
Contingent Deferred Sales Charges range from 7% to 0% of the amount of premium
withdrawn based on the Policy Year since payment of the premium.
The yield on amounts held in the Subaccounts of the Mutual Fund Account
normally will fluctuate over time. Therefore, the disclosed yield for any given
past period is not an indication or representation of future yields or rates of
return. A Subaccount's actual yield is affected by the types and quality of its
investments and its operating expenses.
TOTAL RETURNS
AUSA may from time to time also advertise or disclose total returns for one
or more of the Subaccounts of the Mutual Fund Account for various periods of
time. One of the periods of time will include the period measured from the date
the Subaccount commenced operations. When a Subaccount has been in operation
for 1, 5 and 10 years, respectively, the total return for these periods will be
provided. Total returns for other periods of time may from time to time also be
disclosed. Total returns represent the average annual compounded rates of
return that would equate an initial investment of $1,000 to the redemption
value of that investment as of the last day of each of the periods. The ending
date for each period for which total return quotations are provided will be for
the most recent month end practicable, considering the type and media of the
communication and will be stated in the communication.
Total returns will be calculated using Subaccount Unit Values which AUSA
calculates on each Business Day based on the performance of the Subaccount's
underlying Portfolio, and the deductions for the Mortality and Expense Risk
Charge and the Administrative Charges. Total return calculations will reflect
the effect of Contingent Deferred Sales Charges that may be applicable to a
particular period. The total return will then be calculated according to the
following formula:
P(1 + T)/n/ = ERV
- 12 -
<PAGE>
Where:
<TABLE>
<C> <S>
T= The average annual total return net of Subaccount recurring charges.
ERV= The ending redeemable value of the hypothetical account at the end of the
period.
P= A hypothetical initial payment of $1,000.
N= The number of years in the period.
</TABLE>
OTHER PERFORMANCE DATA
AUSA may from time to time also disclose average annual total returns in a
non-standard format in conjunction with the standard format described above.
The non-standard format will be identical to the standard format except that
the Contingent Deferred Sales Charge percentage will be assumed to be 0%.
AUSA may from time to time also disclose cumulative total returns in
conjunction with the standard format described above. The cumulative returns
will be calculated using the following formula assuming that the Contingent
Deferred Sales Charge percentage will be 0%.
CTR = (ERV/P) -- 1
Where:
<TABLE>
<C> <S>
CTR= The cumulative total return net of Subaccount recurring charges for the
period.
ERV= The ending redeemable value of the hypothetical investment at the end of
the period.
P= A hypothetical initial payment of $1,000.
</TABLE>
All non-standard performance data will only be advertised if the standard
performance data for the same period, as well as for the required period, is
also disclosed.
LEGAL MATTERS
Legal advice relating to certain matters under the federal securities laws
applicable to the issue and sale of the Policies has been provided to AUSA by
Sutherland, Asbill & Brennan, of Washington D.C.
INDEPENDENT AUDITORS
The financial statements of AUSA at December 31, 1994 and 1993 included in
this Statement of Additional Information have been audited by Ernst & Young
LLP, Independent Auditors, Des Moines, Iowa. The Mutual Fund Account had not
commenced operations, had no assets or liabilities and had incurred no expenses
as of December 31, 1994, therefore there are no financial statements for the
AUSA Endeavor Variable Annuity Account.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
Policies discussed in this Statement of Additional Information. Not all of the
information set forth in the Registration Statement, amendments and exhibits
thereto has been included in the Prospectus or this Statement of Additional
Information. Statements contained in the Prospectus and this Statement of
Additional Information concerning the content of the Policies and other legal
instruments are intended to be
- 13 -
<PAGE>
summaries. For a complete statement of the terms of these documents, reference
should be made to the instruments filed with the Securities and Exchange
Commission.
FINANCIAL STATEMENTS
The values of the interest of Policy Owners in the Mutual Fund Account will
be affected solely by the investment results of the selected Subaccount(s). No
Policies had been issued as of December 31, 1994, therefore there are no
financial statements for the AUSA Endeavor Variable Annuity Account. The
Financial Statements of AUSA, which are included in this Statement of
Additional Information, should be considered only as bearing on the ability of
AUSA to meet its obligations under the Policies. They should not be considered
as bearing on the investment performance of the assets held in the Mutual Fund
Account.
- 14 -
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
AUSA Life Insurance Company, Inc.
We have audited the accompanying statutory-basis balance sheets of AUSA Life
Insurance Company, Inc. as of December 31, 1994 and 1993, and the statutory-
basis statements of operations, capital and surplus and cash flows for the year
ended December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The Company presents its financial statements in conformity with accounting
practices prescribed or permitted by the Department of Insurance of the State
of New York. The variances between such practices and generally accepted
accounting principles are described in Note 1. The effects of these variances
have not been determined but we believe they are material.
In our opinion, because of the materiality of the effects of the variances
between generally accepted accounting principles and the accounting practices
referred to in the preceding paragraph, the financial statements referred to
above are not intended to and do not present fairly, in conformity with
generally accepted accounting principles, the financial position of AUSA Life
Insurance Company, Inc. at December 31, 1994 and 1993, or the results of its
operations or its cash flows for the year ended December 31, 1994.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities, and capital
and surplus of AUSA Life Insurance Company, Inc. at December 31, 1994 and 1993,
and the results of its operations and its cash flows for the year ended
December 31, 1994 in conformity with accounting practices prescribed or
permitted by the Department of Insurance of the State of New York.
Ernst & Young LLP
Des Moines, Iowa
February 17, 1995
- 15 -
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
BALANCE SHEETS--STATUTORY BASIS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1994 1993
---------- ----------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments...................... $ 89,532 $ 402,519
Bonds (Note 2)....................................... 2,099,349 1,507,035
Stocks (Note 2):
Preferred.......................................... 236 236
Common, at market (cost: 1994--$141; 1993--$2,135). 274 2,303
Mortgage loans on real estate (Note 2)............... 862,352 1,045,011
Real estate acquired in satisfaction of debt (Note
2).................................................. 10,485 --
Policy loans......................................... 24 18
---------- ----------
Total cash and invested assets....................... 3,062,252 2,957,122
========== ==========
Accrued investment income.............................. 48,845 40,984
Federal income taxes recoverable (Note 4).............. 12 --
Other assets........................................... 2 2
Separate account assets................................ 2,907,674 --
---------- ----------
Total admitted assets................................ $6,018,785 $2,998,108
========== ==========
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life............................................... $ 199 $ 200
Annuity............................................ 7,572 4,850
Policy and contract claim reserves................... 3 3
Other policyholders' funds........................... 2,761,658 2,727,364
Remittances and items not allocated.................. 16,763 6,423
Federal income taxes payable (Note 4)................ -- 49
Asset valuation reserve (Note 1)..................... 25,552 12,743
Interest maintenance reserve (Note 1)................ 1,314 151
Payable to affiliates (Note 6)....................... 7,858 65
Short-term note payable to affiliate (Note 6)........ 5,200 --
Other liabilities.................................... 116,860 37,907
Separate account liabilities......................... 2,891,976 --
---------- ----------
Total liabilities.................................... 5,834,955 2,789,755
Commitments and contingencies (Notes 3 and 7)
Capital and surplus (Note 5):
Common stock, $125 par value, 20 shares authorized,
issued and outstanding.............................. 2,500 2,500
Paid-in surplus...................................... 210,150 210,150
Unassigned surplus (deficit)......................... (28,820) (4,297)
---------- ----------
Total capital and surplus............................ 183,830 208,353
---------- ----------
Total liabilities and capital and surplus............ $6,018,785 $2,998,108
========== ==========
</TABLE>
See accompanying notes.
- 16 -
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
STATEMENT OF OPERATIONS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
Revenues:
Premiums and other considerations, net of reinsurance:
Life..................................................... $ 10
Annuity.................................................. 426,329
Net investment income (Note 2)............................. 254,539
Amortization of interest maintenance reserve (Note 1)...... 158
Commissions and expense allowances on reinsurance ceded.... 11,921
---------
692,957
Benefits and expenses:
Death, surrender and other life insurance and annuity bene-
fits...................................................... 454,677
Increase (decrease) in aggregate reserves for policies and
contracts:
Life..................................................... (1)
Annuity.................................................. 2,722
Increase in liability for premium and other deposit type
funds..................................................... 34,294
Commissions................................................ 91,312
General insurance expenses................................. 57,207
Taxes, licenses and fees................................... 131
Transfers to separate accounts............................. 63,209
---------
703,551
---------
Loss from operations before federal income taxes and net re-
alized capital losses on investments........................ (10,594)
Federal income tax expense (Note 4).......................... --
---------
Loss from operations before net realized capital losses on
investments................................................. (10,594)
Net realized capital losses on investments (net of related
federal income tax expense and amounts transferred to
interest maintenance reserve) (Note 2)...................... (928)
---------
Net loss..................................................... $ (11,522)
=========
</TABLE>
See accompanying notes.
- 17 -
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
STATEMENT OF CAPITAL AND SURPLUS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
Common stock, at beginning and end of year.................... $ 2,500
Paid-in surplus at beginning and end of year.................. 210,150
Unassigned surplus (deficit):
Beginning of year........................................... (4,297)
Net loss.................................................... (11,522)
Net change in unrealized capital gains (losses)............. (35)
Change in asset valuation reserve........................... (12,809)
Change in non-admitted assets............................... (855)
Seed money contributed to separate account (Note 6)......... (15,000)
Change in surplus in separate account....................... 15,698
--------
End of year................................................... (28,820)
--------
Total capital and surplus..................................... $183,830
========
</TABLE>
See accompanying notes.
- 18 -
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
STATEMENT OF CASH FLOWS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
SOURCES OF CASH
Net cash provided by operations:
Premiums and other considerations, net of reinsurance....... $ 438,260
Net investment income....................................... 246,801
----------
685,061
Life and accident and health claims......................... 8
Surrender benefits and other fund withdrawals............... 453,799
Other benefits to policyholders............................. 868
Commissions, other expenses and other taxes................. 63,919
Net transfers to separate accounts.......................... 63,211
Federal income taxes, excluding tax on capital gains........ 62
Net increase in policy loans................................ 6
----------
581,873
----------
Net cash provided by operations............................... 103,188
Proceeds from investments sold, matured or repaid:
Bonds....................................................... 421,275
Common stocks............................................... 2,022
Mortgage loans.............................................. 189,421
Other....................................................... (48)
----------
612,670
Other sources................................................. 25,035
Short-term note payable to affiliate (Note 6)................. 5,200
----------
Total sources of cash......................................... 746,093
USES OF CASH
Cost of investments acquired:
Bonds and preferred stocks.................................. 1,038,312
Common stocks............................................... 27
Mortgage loans.............................................. 1,544
Real estate................................................. (32)
----------
1,039,851
----------
Seed money contributed to separate accounts (Note 6).......... 15,000
Other uses.................................................... 4,229
----------
Total uses of cash............................................ 1,059,080
----------
Net change in cash and short-term investments................. (312,987)
Cash and short-term investments at beginning of year.......... 402,519
----------
Cash and short-term investments at end of year................ $ 89,532
==========
</TABLE>
See accompanying notes.
- 19 -
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Effective September 24, 1993, First AUSA Life Insurance Company, a wholly-
owned subsidiary of AEGON USA, Inc., purchased from The Dreyfus Corporation
("Dreyfus"), its entire interest in Dreyfus Life Insurance Company, a stock
life insurance company. At the time of purchase, the Company had total assets
and capital and surplus of approximately $17 million and $11 million,
respectively. Effective September 27, 1993, Dreyfus Life Insurance Company
changed its name to AUSA Life Insurance Company, Inc. (the Company).
On December 31, 1993, the Company entered into an indemnity reinsurance
agreement with Mutual Life Insurance Company of New York (MONY) to transfer
certain group pension business of MONY to the Company. Assets and liabilities
were transferred in connection with the agreement, as follows:
<TABLE>
<S> <C>
Cash and short-term investments.................................. $ 199,899
Bonds............................................................ 1,486,230
Mortgage loans on real estate.................................... 1,045,011
Accrued investment income........................................ 40,550
Other assets..................................................... 2,864
----------
Total assets..................................................... $2,774,554
==========
Contract liabilities............................................. $2,727,364
Deferred interest on assets purchased............................ 24,889
Other liabilities................................................ 22,301
----------
Total liabilities................................................ $2,774,554
==========
</TABLE>
In addition, pursuant to the same agreement, approximately $2.9 billion of
separate account assets and liabilities were transferred in 1994.
The agreement with MONY provides for the indemnity reinsurance, on a 100%
coinsurance basis, of this business. The Company and MONY also entered into an
assumption reinsurance agreement pursuant to which approximately 80% of the
general account liabilities were novated to the Company from MONY as state
approvals were received. The majority of the remaining general account
liabilities are expected to be novated during 1995.
In accordance with the agreement, MONY will receive payments relating to the
performance of the assets and liabilities that exist at the date of closing for
a period of nine years. These payments will be reduced for certain
administrative expenses as defined in the agreement. The Company will recognize
operating gains and losses on renewal premiums received after December 31, 1993
of the business in-force at December 31, 1993, and on all new business written
after that date. At the end of nine years, the Company will purchase from MONY
the remaining transferred business inforce based upon a formula described in
the agreement. At December 31, 1994, the Company owed MONY approximately $84.7
million which represents the amount earned by MONY under the gain sharing
calculation for the year ended December 31, 1994 discussed above.
- 20 -
<PAGE>
In connection with the transaction, MONY purchased $150 million and $50
million in Series A and Series B notes, respectively, of AEGON USA, Inc. The
proceeds were used to enhance the surplus of the Company. Both the Series A and
Series B notes bear a market rate of interest and mature in nine years.
In accordance with the agreement, MONY will continue to provide investment
management services for assets supporting policy liabilities existing at
December 31, 1993 while the Company will provide investment and general
administrative services and investment management services on new business
received after December 31, 1993. The agreement specifies prescribed rates for
expenses to administer the business up to certain levels.
In accordance with an agreement between AEGON USA, Inc. and the Company,
AEGON USA, Inc. will ensure the maintenance of certain minimum tangible net
worth, operating leverage and liquidity levels of the Company, as defined in
the agreement, through the contribution of additional capital by the Company's
parent as needed.
The accompanying financial statements present the condition of the Company at
December 31, 1994 and 1993 and the results of its operations for the year ended
December 31, 1994. Results of operations for prior periods are not included, as
the Company believes such data would not provide a meaningful comparison with
respect to financial results after the date of the acquisition.
Basis of Presentation
The accompanying statutory-basis financial statements have been prepared in
accordance with accounting practices prescribed or permitted by the Department
of Insurance of the State of New York, which are designed primarily to reflect
the Company's ability to meet obligations to policyholders. Statutory insurance
accounting principles differ in many respects from generally accepted
accounting principles (GAAP) followed by other business enterprises in
determining financial position and results of operations. Accordingly, the
accompanying statutory-basis financial statements are not intended to present
financial position, results of operations and cash flows in conformity with
GAAP. Pursuant to statutory requirements: (a) bonds are generally carried at
amortized cost rather than segregating the portfolio into held-to-maturity
(carried at amortized cost), available-for-sale (carried at fair value), and
trading (carried at fair value) classifications; (b) premium income on life
policies is recognized over the premium paying period of the policies, whereas
the related acquisition costs such as commissions and other costs related to
acquiring new business are charged to current operations as incurred; (c)
aggregate policy reserves are based on statutory mortality, morbidity and
interest requirements without consideration of withdrawals, which may differ
from reserves determined using estimates of mortality, morbidity, interest and
withdrawals; (d) deferred federal income taxes are not provided for temporary
differences between the financial statements and the tax returns; (e) certain
assets designated as "non-admitted assets" have been excluded from the balance
sheet by a charge to surplus; (f) the asset valuation reserve, which is in the
nature of a contingency reserve for possible losses on investments, is recorded
as a liability through a charge to surplus; (g) net realized capital gains and
losses attributable to changes in the level of market interest rates are
deferred and amortized over the remaining life of the bonds and mortgage loans
disposed of rather than being recognized in the statement of operations in the
year of disposition; (h) gross premiums for all insurance products are
considered revenues rather than reporting only various policy charges and fees
for certain long-duration contracts; (i) pension expense is recorded as amounts
are paid; and (j) reinsurance reserve credits are recorded as a reduction to
aggregate policy reserves rather than being recorded as reinsurance recoverable
assets. All pertinent financial statement disclosures otherwise required under
generally accepted accounting principles are presented herein using the
corresponding statutory-basis amounts.
- 21 -
<PAGE>
The National Association of Insurance Commissioners (NAIC) currently is in
the process of recodifying statutory accounting practices, the result of which
is expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in
1996, will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
Fair Values of Financial Instruments
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments", requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparisons to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents, short-term investments: The carrying amounts
reported in the balance sheet for these instruments approximate their fair
values.
Investment securities: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing
services or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
The fair values for equity securities are based on quoted market prices and
are recognized in the balance sheet.
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans are assumed to equal their carrying
value.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
- 22 -
<PAGE>
The following sets forth a comparison of the fair values and carrying values
of the Company's financial instruments subject to the provisions of Statement
of Financial Accounting Standards No. 107 at December 31, 1994:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1994 1993
--------------------- ---------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds (Note 2).................. $2,099,349 $1,976,667 $1,507,035 $1,507,750
Preferred stocks (Note 2)....... 236 162 236 200
Common stock.................... 274 274 2,303 2,303
Mortgage loans on real estate... 862,352 851,352 1,045,011 1,045,011
Policy loans.................... 24 24 18 18
Cash and short-term investments. 89,532 89,532 402,519 402,519
Separate account assets......... 2,907,674 2,907,674 -- --
LIABILITIES
Investment contract liabilities
(including separate accounts).. 5,658,537 5,526,576 2,732,214 2,670,435
</TABLE>
Cash and Short-Term Investments
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with remaining maturity of one year or less when purchased
to be short-term investments. Short-term investments are recorded at amortized
cost, which approximates market.
Investments
Bonds and mortgage loans on real estate are carried at amortized costs.
Amortized costs for bonds and mortgage loans on real estate that were acquired
through the reinsurance agreement, described earlier, were initially recorded
at market value, consistent with the aforementioned agreement and as prescribed
by the Department of Insurance of the State of New York. Any resulting premium
or discount as well as the deferred interest on assets purchased will be
amortized using the effective interest method. Policy loans are recorded at
unpaid balances. Preferred stocks are valued primarily at cost. Common stocks,
which may include shares of mutual funds (money market and other), are valued
at market. Realized gains and losses on the sale of securities are recognized
using the specific identification method.
Aggregate Policy Reserves
Life and annuity benefit reserves are developed by actuarial methods and are
determined based on published tables using statutorily specified interest rates
and valuation methods that will provide, in the aggregate, reserves that are
greater than or equal to the minimum required by law.
The aggregate policy reserves for life insurance policies are based
principally upon the 1941 and 1958 Commissioners' Standard Ordinary Mortality
and American Experience Mortality Tables. The reserves are calculated using
interest rates ranging from 2.50 to 4.00 percent and are computed principally
on the Net Level Valuation and the Commissioners' Reserve Valuation Methods.
Deferred annuity and other policyholders' funds reserves are calculated
according to the Commissioners' Annuity Reserve Valuation Method including
excess interest reserves to cover situations where the future interest
guarantees plus the decrease in surrender charges are in excess of the maximum
valuation rates of interest. Reserves for immediate annuities and
- 23 -
<PAGE>
supplementary contracts with and without life contingencies are equal to the
present value of future payments assuming interest rates ranging from 5.50 to
7.50 percent and mortality rates, where appropriate, from a variety of tables.
Policy and Contract Claim Reserves
Claim reserves represent the estimated accrued liability for claims reported
to the Company and claims incurred but not yet reported through the statement
date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
Asset Valuation Reserve and Interest Maintenance Reserve
As prescribed by the NAIC, the Company is required to record an Asset
Valuation Reserve (AVR). The AVR is computed in accordance with a prescribed
formula and represents a provision for possible fluctuations in the value of
bonds, equity securities, mortgage loans, real estate, and other invested
assets. Changes to the AVR are charged or credited directly to unassigned
surplus.
The Company reports an Interest Maintenance Reserve (IMR) that represents the
net accumulated unamortized realized capital gains and losses attributable to
changes in the general level of interest rates on sales of fixed income
investments, principally bonds and mortgage loans. During 1994, net realized
capital gains of $1,321 were credited to the IMR rather than being recognized
in the statement of operations. Such gains or losses are amortized into income
on a straight-line basis over the remaining period to maturity based on
groupings of individual securities sold in five-year bands; amortization of
these net gains aggregated $158 for the year ended December 31, 1994.
Reclassifications
Certain reclassifications have been made to the 1993 financial statements to
conform to the 1994 presentation.
- 24 -
<PAGE>
2. INVESTMENTS
The carrying value and estimated market value of investments in debt
securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
Bonds:
United States Government and
agencies..................... $ 101,024 $ 247 $ 7,604 $ 93,667
State, municipal and other
government................... 23,270 -- 1,903 21,367
Public utilities.............. 162,527 15 14,017 148,525
Industrial and miscellaneous.. 1,448,647 3,569 82,144 1,370,072
Mortgage-backed securities.... 363,881 377 21,222 343,036
---------- ------ -------- ----------
2,099,349 4,208 126,890 1,976,667
Preferred stocks................ 236 -- 74 162
---------- ------ -------- ----------
$2,099,585 $4,208 $126,964 $1,976,829
========== ====== ======== ==========
DECEMBER 31, 1993
Bonds:
United States Government and
agencies..................... $ 91,141 $ 453 $ 14 $ 91,580
State, municipal and other
government................... 20,829 -- -- 20,829
Public utilities.............. 198,753 209 -- 198,962
Industrial and miscellaneous.. 1,127,594 67 -- 1,127,661
Mortgage-backed securities.... 68,718 -- -- 68,718
---------- ------ -------- ----------
1,507,035 729 14 1,507,750
Preferred stocks................ 236 15 51 200
---------- ------ -------- ----------
$1,507,271 $ 744 $ 65 $1,507,950
========== ====== ======== ==========
</TABLE>
The carrying value of bonds and preferred stocks at December 31, 1994 and
1993 required no writedowns to estimated fair value.
The carrying value and estimated market value of bonds at December 31, 1994,
by contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
Due in one year or less............................... $ 161,357 $ 158,387
Due after one year through five years................. 553,494 523,785
Due after five years through ten years................ 879,813 824,948
Due after ten years................................... 140,804 126,511
---------- ----------
1,735,468 1,633,631
Mortgage-backed securities............................ 363,881 343,036
---------- ----------
$2,099,349 $1,976,667
========== ==========
</TABLE>
- 25 -
<PAGE>
A detail of net investment income for the year ended December 31, 1994 is
presented below:
<TABLE>
<S> <C>
Interest on bonds.................................................. $145,612
Dividends on equity investments.................................... 51
Interest on policy loans........................................... 1
Mortgage loans..................................................... 117,859
Real estate........................................................ 322
Other investment loss.............................................. (2,458)
--------
Gross investment income............................................ 261,387
Investment expenses................................................ 6,848
--------
Net investment income.............................................. $254,539
========
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses for the year ended December 31, 1994 were as follows:
<TABLE>
<S> <C>
Proceeds........................................................... $421,275
========
Gross realized gains............................................... $ 7,643
Gross realized losses.............................................. 13,681
--------
Net realized losses................................................ $ (6,038)
========
</TABLE>
At December 31, 1994, investments with an aggregate carrying value of $2,114
were on deposit with regulatory authorities or were restrictively held in bank
custodial accounts for the benefit of such regulatory authorities as required
by statute.
Realized investment gains (losses) and changes in unrealized gains (losses)
for investments for the year ended December 31, 1994 are summarized below:
<TABLE>
<S> <C>
Realized:
Debt securities.................................................. $(6,038)
Short-term investments........................................... (48)
Mortgage loans on real estate.................................... 1,067
Other invested assets............................................ 5,412
-------
393
Transfer to interest maintenance reserve......................... (1,321)
-------
Total realized losses............................................ $ (928)
=======
Unrealized:
Equity securities................................................ $ (35)
=======
</TABLE>
Gross unrealized gains and gross unrealized losses on common stocks at
December 31, 1994 were as follows:
<TABLE>
<S> <C>
Unrealized gains........................................................ $133
Unrealized losses....................................................... --
----
Net unrealized gains.................................................... $133
====
</TABLE>
During 1994 and 1993, there were $10,587 and $0, respectively, in foreclosed
mortgage loans that were transferred to real estate.
- 26 -
<PAGE>
At December 31, 1994, the mortgage loan portfolio (all of which are
commercial loans) is diversified by geographic region and specific collateral
property type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
-----------------------
<S> <C>
Pacific................. 23%
South Atlantic.......... 21
Middle Atlantic......... 19
Mountain................ 10
E. North Central........ 10
W. South Central........ 7
E. South Central........ 5
New England............. 4
W. North Central........ 1
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPE DISTRIBUTION
- --------------------------
<S> <C>
Office.................... 51%
Apartment................. 23
Retail.................... 16
Warehouse................. 7
Hotel/Motel............... 3
</TABLE>
At December 31, 1994, the Company had the following investments, excluding U.
S. Government guaranteed or insured issues, which individually represented more
than ten percent of capital and surplus and the asset valuation reserve:
<TABLE>
<CAPTION>
CARRYING
DESCRIPTION OF SECURITY VALUE
----------------------- --------
<S> <C>
Bonds:
Falcon Telecable.................................................. $43,848
Conn National Bank................................................ 39,573
PSEG Capital...................................................... 34,500
Comast Cablevision................................................ 29,302
Natl. Gdn. Soc. Svc............................................... 26,737
Jaco Trust........................................................ 26,182
Triax USA......................................................... 25,052
Chemical Banking.................................................. 23,110
Triax Association................................................. 21,603
Pacificorp........................................................ 20,381
</TABLE>
3. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to
meet its obligation under the reinsurance treaty. During 1994, there were
direct premiums of $295,678, reinsurance assumed premiums of $130,665 and
reinsurance ceded premiums totaled $4.
4. INCOME TAXES
The Company filed a short period federal income tax return for the period
September 24, 1993 through December 31, 1993. Prior to 1993, taxable income or
loss of the Company was included in a consolidated return with Dreyfus. Dreyfus
intends to include the taxable income of the Company through September 23, 1993
in its consolidated federal income tax return. Also, in conjunction with the
acquisition of the Company, Dreyfus has indemnified the Company for any tax
deficiencies prior to September 24, 1993.
- 27 -
<PAGE>
The following is a reconciliation of the expected federal tax on income
before realized capital gains on investments, based on statutory rates, to the
actual tax expense for the year ended December 31, 1994:
<TABLE>
<S> <C>
Computed expected tax benefit...................................... $(3,708)
Tax reserve adjustment............................................. 121
Deferred acquisition cost--tax basis............................... 6
Carryforward of current year operating loss........................ 3,460
Other items--net................................................... 121
-------
Actual tax expense................................................. $ --
=======
</TABLE>
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($800 at December 31, 1994). To the extent dividends are paid from the
amount accumulated in the policyholders' surplus account, net earnings would be
reduced by the amount of tax required to be paid. Should the entire amount in
the policyholders' surplus account become taxable, the tax thereon computed at
current rates would amount to approximately $280.
5. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities. The Company is not entitled to pay out any dividends in 1995
without prior approval.
6. RELATED PARTY TRANSACTIONS
The Company is allocated administrative and benefit expenses from the parent
for employee related costs, as all employees are considered employees of the
parent, not employees of the Company.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.90% at December 31, 1994. During 1994,
the Company paid interest of $43 to affiliates.
During 1994, the Company contributed seed money of $15,000 in cash to the
Company-sponsored separate account.
At December 31, 1994, the Company has a $5,200 short-term note payable to an
affiliate. Interest on this note is payable at 6.08%.
During 1993, the Company received capital contributions of $209,000 in cash
from its parent.
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. In accordance with the purchase agreement,
assessments related to periods prior to the purchase of the Company will be
paid by Dreyfus. Assessments attributable to business reinsured from MONY for
premiums received prior to the date of the transaction will be paid by MONY.
The Company will be responsible for assessments, if any, attributable to
premium income after the date of purchase.
- 28 -
<PAGE>
SCHEDULE I
AUSA LIFE INSURANCE COMPANY, INC.
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST(1) VALUE BALANCE SHEET
------------------ ---------- ---------- ---------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and government
agencies and authorities.............. $ 354,845 $ 330,786 $ 353,852
States, municipalities and political
subdivisions.......................... 3,000 2,929 3,000
Foreign governments.................... 20,538 18,437 20,269
Public utilities....................... 164,270 148,525 162,527
All other corporate bonds.............. 1,573,162 1,475,990 1,559,701
Redeemable preferred stock............... 236 162 236
---------- ---------- ----------
Total fixed maturities................... 2,116,051 1,976,829 2,099,585
EQUITY SECURITIES
Common stocks--industrial, miscellaneous
and all other........................... 141 274 274
Mortgage loans on real estate............ 862,352 862,352
Real estate.............................. -- --
Real estate acquired in satisfaction of
debt.................................... 10,485 10,485
Policy loans............................. 24 24
Cash and short-term investments.......... 89,532 89,532
---------- ----------
Total investments........................ $3,078,585 $3,062,252
========== ==========
</TABLE>
- --------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
- 29 -
<PAGE>
SCHEDULE V
AUSA LIFE INSURANCE COMPANY, INC.
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
------------- -------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Individual life.............................. $ 197 $-- $ 3
Individual health............................ -- -- --
Group life and health........................ 2 -- --
Annuity...................................... 7,572 -- --
------ ---- ----
$7,771 $-- $ 3
====== ==== ====
DECEMBER 31, 1993
Individual life.............................. $ 197 $-- $ 3
Individual health............................ -- -- --
Group life and health........................ 3 -- --
Annuity...................................... 4,850 -- --
------ ---- ----
$5,050 $-- $ 3
====== ==== ====
</TABLE>
- 30 -
<PAGE>
SCHEDULE V
AUSA LIFE INSURANCE COMPANY, INC.
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NET BENEFITS, CLAIMS OTHER
PREMIUM INVESTMENT LOSSES AND OPERATING PREMIUMS
REVENUE INCOME SETTLEMENT EXPENSES EXPENSES WRITTEN
-------- ---------- ------------------- --------- --------
<S> <C> <C> <C> <C>
$ 10 $ 19 $ 5 $ 2 $ --
-- -- -- -- --
-- -- -- -- --
426,329 254,520 491,686 211,857 426,329
-------- -------- -------- -------- --------
$426,339 $254,539 $491,691 $211,859 $426,329
======== ======== ======== ======== ========
</TABLE>
- 31 -
<PAGE>
SCHEDULE VI
AUSA LIFE INSURANCE COMPANY, INC.
REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Life insurance in force....... $ 681 $150 $ -- $ 531 --
======== ==== ======== ======== ===
Premiums:
Individual life............. $ 14 $ 4 $ -- $ 10 --
Individual health........... -- -- -- -- --
Group life and health....... -- -- -- -- --
Annuity..................... 295,664 -- 130,665 426,329 31
-------- ---- -------- -------- ---
$295,678 $ 4 $130,665 $426,339 31%
======== ==== ======== ======== ===
</TABLE>
- 32 -
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
ENDEAVOR SERIES TRUST
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus for the Money Market Portfolio, the
Managed Asset Allocation Portfolio, the T. Rowe Price International Stock
Portfolio (formerly, the Global Growth Portfolio), the Quest for Value Equity
Portfolio, the Quest for Value Small Cap Portfolio, the U.S. Government
Securities Portfolio, the T. Rowe Price Equity Income Portfolio and the T. Rowe
Price Growth Stock Portfolio of Endeavor Series Trust (the "Fund"), dated May
1, 1995, which may be obtained by writing the Fund at 1100 Newport Center
Drive, Suite 200, Newport Beach, California 92660 or by telephoning (714) 760-
0505. The Fund's Annual Report for the fiscal year ended December 31, 1994
accompanies this Statement of Additional Information, and each Portfolio's
financial statements and related notes contained therein are incorporated by
reference into this Statement of Additional Information. Unless otherwise
defined herein, capitalized terms have the meanings given to them in the
Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies......................................... 2
Options and Futures Strategies........................................... 2
Foreign Currency Transactions............................................ 5
Repurchase Agreements.................................................... 8
Forward Commitments...................................................... 8
Securities Loans......................................................... 9
Lower Rated Bonds........................................................ 9
Interest Rate Transactions............................................... 9
Dollar Roll Transactions................................................. 10
Portfolio Turnover....................................................... 11
Investment Restrictions.................................................... 11
Other Policies........................................................... 13
Performance Information.................................................... 14
Total Return............................................................. 14
Yield.................................................................... 15
Non-Standardized Performance............................................. 16
Portfolio Transactions..................................................... 16
Management of the Fund..................................................... 18
Trustees and Officers.................................................... 18
The Manager.............................................................. 21
The Advisers............................................................. 22
Redemption of Shares....................................................... 23
Net Asset Value............................................................ 24
Taxes...................................................................... 25
Federal Income Taxes..................................................... 25
Organization and Capitalization of the Fund................................ 26
Legal Matters.............................................................. 27
Custodian.................................................................. 27
Appendix................................................................... A-1
</TABLE>
----------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR IN
THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS STATEMENT OF ADDITIONAL
INFORMATION DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
STATE OR OTHER JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE SUCH
OFFER WOULD BE UNLAWFUL.
The date of this Statement of Additional Information is May 1, 1995.
Quest for Value/SM/ is a service mark of Oppenheimer Capital.
- 1 -
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the investment
objectives and policies of the Portfolios in the Prospectus of the Fund. The
Fund is managed by Endeavor Investment Advisers. The Manager has selected TCW
Funds Management, Inc. as investment adviser for the Money Market Portfolio and
the Managed Asset Allocation Portfolio, Rowe Price-Fleming International, Inc.
as investment adviser for the T. Rowe Price International Stock Portfolio
(formerly the Global Growth Portfolio), Quest for Value Advisors as investment
adviser for the Quest for Value Equity Portfolio and the Quest for Value Small
Cap Portfolio, The Boston Company Asset Management, Inc. as investment adviser
for the U.S. Government Securities Portfolio and T. Rowe Price Associates, Inc.
as investment adviser for the T. Rowe Price Equity Income Portfolio and T. Rowe
Price Growth Stock Portfolio.
OPTIONS AND FUTURES STRATEGIES (All Portfolios except Money Market Portfolio)
A Portfolio may seek to increase the current return on its investments by
writing covered call or covered put options. In addition, a Portfolio may at
times seek to hedge against either a decline in the value of its portfolio
securities or an increase in the price of securities which its Adviser plans to
purchase through the writing and purchase of options including options on stock
indices and the purchase and sale of futures contracts and related options. A
Portfolio may utilize options or futures contracts and related options for
other than hedging purposes to the extent that the aggregate initial margins
and premiums do not exceed 5% of the Portfolio's net asset value. The Adviser
to the Managed Asset Allocation Portfolio does not presently intend to utilize
options or futures contracts and related options but may do so in the future.
Expenses and losses incurred as a result of such hedging strategies will reduce
a Portfolio's current return.
The ability of a Portfolio to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to stock indices and
U.S. government securities are relatively new and still developing. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures. Therefore no assurance can be given that a
Portfolio will be able to utilize these instruments effectively for the
purposes stated below.
Writing Covered Options on Securities. A Portfolio may write covered call
options and covered put options on optionable securities of the types in which
it is permitted to invest from time to time as its Adviser determines is
appropriate in seeking to attain the Portfolio's investment objective. Call
options written by a Portfolio give the holder the right to buy the underlying
security from the Portfolio at a stated exercise price; put options give the
holder the right to sell the underlying security to the Portfolio at a stated
price.
A Portfolio may only write call options on a covered basis or for cross-
hedging purposes and will only write covered put options. A put option would be
considered "covered" if the Portfolio owns an option to sell the underlying
security subject to the option having an exercise price equal to or greater
than the exercise price of the "covered" option at all times while the put
option is outstanding. A call option is covered if the Portfolio owns or has
the right to acquire the underlying securities subject to the call option (or
comparable securities satisfying the cover requirements of securities
exchanges) at all times during the option period. A call option is for cross-
hedging purposes if it is not covered, but is designed to provide a hedge
against another security which the Portfolio owns or has the right to acquire.
In the case of a call written for cross-hedging purposes or a put option, the
Portfolio will maintain in a segregated account at the Fund's custodian bank
cash or short-term U.S. government securities with a value equal to or greater
than the Portfolio's obligation under the option. A Portfolio may also write
combinations of covered puts and covered calls on the same underlying security.
- 2 -
<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 in the future
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 in the future 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 in
the future 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
- 3 -
<PAGE>
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike options on specific
securities, all settlements of options on stock indices are in cash and gain or
loss depends on general movements in the stocks included in the index rather
than price movements in particular stocks. Currently options traded include the
Standard & Poor's 500 Composite Stock Price Index, the NYSE Composite Index,
the AMEX Market Value Index, the National Over-The-Counter Index, the Nikkei
225 Stock Average Index, the Financial Times Stock Exchange 100 Index and other
standard broadly based stock market indices. Options are also traded in certain
industry or market segment indices such as the Pharmaceutical Index.
A stock index futures contract is an agreement in which one party agrees to
deliver to the other an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
No physical delivery of securities is made.
If a Portfolio's Adviser expects general stock market prices to rise, it
might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
it wants ultimately to buy for the Portfolio. If in fact the stock index does
rise, the price of the particular equity securities intended to be purchased
may also increase, but that increase would be offset in part by the increase in
the value of the Portfolio's index option or futures contract resulting from
the increase in the index. If, on the other hand, the Portfolio's Adviser
expects general stock market prices to decline, it might purchase a put option
or sell a futures contract on the index. If that index does in fact decline,
the value of some or all of the equity securities held by the Portfolio may
also be expected to decline, but that decrease would be offset in part by the
increase in the value of the Portfolio's position in such put option or futures
contract.
Purchase and Sale of Interest Rate Futures. A Portfolio may in the future
purchase and sell interest rate futures contracts on U.S. Treasury bills, notes
and bonds and Government National Mortgage Association ("GNMA") certificates
either for the purpose of hedging its portfolio securities against the adverse
effects of anticipated movements in interest rates or for other investment
purposes.
A Portfolio may sell interest rate futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the securities held by a Portfolio will fall, thus
reducing the net asset value of the Portfolio. This interest rate risk can be
reduced without employing futures as a hedge by selling such securities and
either reinvesting the proceeds in securities with shorter maturities or by
holding assets in cash. However, this strategy entails increased transaction
costs in the form of dealer spreads and brokerage commissions and would
typically reduce the Portfolio's average yield as a result of the shortening of
maturities.
The sale of interest rate futures contracts provides a means of hedging
against rising interest rates. As rates increase, the value of a Portfolio's
short position in the futures contracts will also tend to increase thus
offsetting all or a portion of the depreciation in the market value of the
Portfolio's investments that are being hedged. While the Portfolio will incur
commission expenses in selling and closing out futures positions (which is done
by taking an opposite position in the futures contract), commissions on futures
transactions are lower than transaction costs incurred in the purchase and sale
of portfolio securities.
A Portfolio may purchase interest rate futures contracts in anticipation of a
decline in interest rates when it is not fully invested. As such purchases are
made, it is expected that an equivalent amount of futures contracts will be
closed out.
A Portfolio will enter into futures contracts which are traded on national or
foreign futures exchanges, and are standardized as to maturity date and the
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange
- 4 -
<PAGE>
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 in the future 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 unless the transaction meets certain "bona fide hedging" criteria.
Risks of Options and Futures Strategies. The effective use of options and
futures strategies depends, among other things, on a Portfolio's ability to
terminate options and futures positions at times when its Adviser deems it
desirable to do so. Although a Portfolio will not enter into an option or
futures position unless its Adviser believes that a liquid market exists for
such option or future, there can be no assurance that a Portfolio will be able
to effect closing transactions at any particular time or at an acceptable
price. The Advisers generally expect that options and futures transactions for
the Portfolios will be conducted on recognized exchanges. In certain instances,
however, a Portfolio may purchase and sell options in the over-the-counter
market. The staff of the Securities and Exchange Commission considers over-the-
counter options to be illiquid. A Portfolio's ability to terminate option
positions established in the over-the-counter market may be more limited than
in the case of exchange traded options and may also involve the risk that
securities dealers participating in such transactions would fail to meet their
obligations to the Portfolio.
The use of options and futures involves the risk of imperfect correlation
between movements in options and futures prices and movements in the price of
the securities that are the subject of the hedge. The successful use of these
strategies also depends on the ability of a Portfolio's Adviser to forecast
correctly interest rate movements and general stock market price movements.
This risk increases as the composition of the securities held by the Portfolio
diverges from the composition of the relevant option or futures contract.
FOREIGN CURRENCY TRANSACTIONS (U.S. Government Securities, T. Rowe Price Equity
Income, T. Rowe Price Growth Stock and T. Rowe Price International Stock
Portfolios)
Foreign Currency Exchange Transactions. The U.S. Government Securities, T.
Rowe Price Equity Income, T. Rowe Price Growth Stock and T. Rowe Price
International Stock Portfolios may
- 5 -
<PAGE>
engage in foreign currency exchange transactions to protect against uncertainty
in the level of future exchange rates. The Adviser to a Portfolio may engage in
foreign currency exchange transactions in connection with the purchase and sale
of portfolio securities ("transaction hedging"), and to protect the value of
specific portfolio positions ("position hedging").
A Portfolio may engage in "transaction hedging" to protect against a change
in the foreign currency exchange rate between the date on which the Portfolio
contracts to purchase or sell the security and the settlement date, or to "lock
in" the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. For that purpose, a Portfolio may purchase or sell a foreign currency
on a spot (or cash) basis at the prevailing spot rate in connection with the
settlement of transactions in portfolio securities denominated in that foreign
currency.
If conditions warrant, a Portfolio may also enter into contracts to purchase
or sell foreign currencies at a future date ("forward contracts") and purchase
and sell foreign currency futures contracts as a hedge against changes in
foreign currency exchange rates between the trade and settlement dates on
particular transactions and not for speculation. A foreign currency forward
contract is a negotiated agreement to exchange currency at a future time at a
rate or rates that may be higher or lower than the spot rate. Foreign currency
futures contracts are standardized exchange-traded contracts and have margin
requirements.
For transaction hedging purposes, a Portfolio may also purchase exchange-
listed and over-the-counter call and put options on foreign currency futures
contracts and on foreign currencies. A put option on a futures contract gives a
Portfolio the right to assume a short position in the futures contract until
expiration of the option. A put option on currency gives a Portfolio the right
to sell a currency at an exercise price until the expiration of the option. A
call option on a futures contract gives a Portfolio the right to assume a long
position in the futures contract until the expiration of the option. A call
option on currency gives a Portfolio the right to purchase a currency at the
exercise price until the expiration of the option.
A Portfolio may engage in "position hedging" to protect against a decline in
the value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of currency
for securities which the Portfolio intends to buy, when it holds cash reserves
and short-term investments). For position hedging purposes, a Portfolio may
purchase or sell foreign currency futures contracts and foreign currency
forward contracts, and may purchase put or call options on foreign currency
futures contracts and on foreign currencies on exchanges or over-the-counter
markets. In connection with position hedging, a Portfolio may also purchase or
sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange transactions
and the value of the portfolio securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the dates the currency exchange transactions are entered into and the
dates they mature.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for a Portfolio to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security or securities being hedged is less than the amount
of foreign currency the Portfolio is obligated to deliver and if a decision is
made to sell the security or securities and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of
the foreign currency received upon the sale of the portfolio security or
securities if the market value of such security or securities exceeds the
amount of foreign currency the Portfolio is obligated to deliver.
- 6 -
<PAGE>
Hedging transactions involve costs and may result in losses. A Portfolio may
write covered call options on foreign currencies to offset some of the costs of
hedging those currencies. A Portfolio will engage in over-the-counter
transactions only when appropriate exchange-traded transactions are unavailable
and when, in the opinion of the Portfolio's Adviser, the pricing mechanism and
liquidity are satisfactory and the participants are responsible parties likely
to meet their contractual obligations. A Portfolio's ability to engage in
hedging and related option transactions may be limited by tax considerations.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can
achieve at some future point in time. Additionally, although these techniques
tend to minimize the risk of loss due to a decline in the 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 cancellable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. A foreign currency futures contract is a
standardized contract for the future delivery of a specified amount of a
foreign currency at a future date at a price set at the time of the contract.
Foreign currency futures contracts traded in the United States are designed by
and traded on exchanges regulated by the CFTC, such as the New York Mercantile
Exchange. A Portfolio would enter into foreign currency futures contracts
solely for hedging or other appropriate investment purposes as defined in CFTC
regulations.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in any given
month. Forward contracts may be in any amounts agreed upon by the parties
rather than predetermined amounts. Also, forward foreign exchange contracts are
traded directly between currency traders so that no intermediary is required. A
forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, a Portfolio may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market in such contracts.
Although a Portfolio intends to purchase or sell foreign currency futures
contracts only on exchanges or boards of trade where there appears to be an
active secondary market, there can be no assurance that a secondary market on
an exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, a Portfolio would
continue to be required to make daily cash payments of variation margin.
- 7 -
<PAGE>
Foreign Currency Options. Options on foreign currencies operate similarly to
options on securities, and are traded primarily in the over-the-counter market,
although options on foreign currencies have recently been listed on several
exchanges. Such options will be purchased or written only when a Portfolio's
Adviser believes that a liquid secondary market exists for such options. There
can be no assurance that a liquid secondary market will exist for a particular
option at any specific time. Options on foreign currencies are affected by all
of those factors which influence foreign exchange rates and investments
generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (less than $1 million) where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock
market. To the extent that the U.S. options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the options markets.
Foreign Currency Conversion. Although foreign exchange dealers do not charge
a fee for currency conversion, they do realize a profit based on the difference
(the "spread") between prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio
at one rate, while offering a lesser rate of exchange should a Portfolio desire
to resell that currency to the dealer.
REPURCHASE AGREEMENTS (All Portfolios)
Each of the Portfolios may enter into repurchase agreements with a bank,
broker-dealer, or other financial institution but no Portfolio may invest more
than 10% (15% with respect to each of the T. Rowe Price Equity Income, T. Rowe
Price Growth Stock and T. Rowe Price International Stock Portfolios) of its net
assets in repurchase agreements having maturities of greater than seven days. A
Portfolio may enter into repurchase agreements, provided the Fund's custodian
always has possession of securities serving as collateral whose market value at
least equals the amount of the repurchase obligation. To minimize the risk of
loss a Portfolio will enter into repurchase agreements only with financial
institutions which are considered by its Adviser to be creditworthy under
guidelines adopted by the Trustees of the Fund. If an institution enters an
insolvency proceeding, the resulting delay in liquidation of the securities
serving as collateral could cause a Portfolio some loss, as well as legal
expense, if the value of the securities declines prior to liquidation.
FORWARD COMMITMENTS (All Portfolios)
Each of the Portfolios may enter into forward commitments to purchase
securities. An amount of cash or short-term U.S. government securities equal to
the Portfolio's commitment will be deposited in a segregated account at the
Fund's custodian bank to secure the Portfolio's obligation. Although a
Portfolio will generally enter into forward commitments to purchase securities
with the intention of actually acquiring the securities for its portfolio (or
for delivery pursuant to options
- 8 -
<PAGE>
contracts it has entered into), the Portfolio may dispose of a security prior
to settlement if its Adviser deems it advisable to do so. The Portfolio may
realize short-term gains or losses in connection with such sales.
SECURITIES LOANS (All Portfolios)
Each of the Portfolios may pay reasonable finders', administrative and
custodial fees in connection with loans of its portfolio securities. Although
voting rights or the right to consent accompanying loaned securities pass to
the borrower, a Portfolio retains the right to call the loan at any time on
reasonable notice, and will do so in order that the securities may be voted by
the Portfolio with respect to matters materially affecting the investment. A
Portfolio may also call a loan in order to sell the securities involved. Loans
of portfolio securities will only be made to borrowers considered by a
Portfolio's Adviser to be creditworthy under guidelines adopted by the Trustees
of the Fund.
LOWER RATED BONDS (Quest for Value Equity, Quest for Value Small Cap, U.S.
Government Securities and T. Rowe Price Equity Income Portfolios)
Each of the Quest for Value Equity Portfolio and the Quest for Value Small
Cap Portfolio may invest up to 5% of its assets, the T. Rowe Price Equity
Income Portfolio may invest up to 10% of its assets and the U.S. Government
Securities Portfolio may invest up to 25% of its assets in bonds rated below
Baa3 by Moody's Investors Service Inc. ("Moody's") or BBB by Standard & Poor's
Ratings Group ("Standard & Poor's") (commonly known as "junk bonds").
Securities rated less than Baa by Moody's or BBB by Standard & Poor's are
classified as non-investment grade securities and are considered speculative by
those rating agencies. It is the Portfolio Adviser's policy not to rely
exclusively on ratings issued by credit rating agencies but to supplement such
ratings with the Adviser's own independent and ongoing review of credit
quality. Junk bonds may be issued as a consequence of corporate restructurings,
such as leveraged buyouts, mergers, acquisitions, debt recapitalizations, or
similar events or by smaller or highly leveraged companies. When economic
conditions appear to be deteriorating, junk bonds may decline in market value
due to investors' heightened concern over credit quality, regardless of
prevailing interest rates. Although the growth of the high yield securities
market in the 1980s had paralleled a long economic expansion, recently many
issuers have been affected by adverse economic and market conditions. It should
be recognized that an economic downturn or increase in interest rates is likely
to have a negative effect on (i) the high yield bond market, (ii) the value of
high yield securities and (iii) the ability of the securities' issuers to
service their principal and interest payment obligations, to meet their
projected business goals or to obtain additional financing. The market for junk
bonds, especially during periods of deteriorating economic conditions, may be
less liquid than the market for investment grade bonds. In periods of reduced
market liquidity, junk bond prices may become more volatile and may experience
sudden and substantial price declines. Also, there may be significant
disparities in the prices quoted for junk bonds by various dealers. Under such
conditions, a Portfolio may find it difficult to value its junk bonds
accurately. Under such conditions, a Portfolio may have to use subjective
rather than objective criteria to value its junk bond investments accurately
and rely more heavily on the judgment of the Fund's Board of Trustees. Prices
for junk bonds also may be affected by legislative and regulatory developments.
For example, new federal rules require that savings and loans gradually reduce
their holdings of high-yield securities. Also, from time to time, Congress has
considered legislation to restrict or eliminate the corporate tax deduction for
interest payments or to regulate corporate restructurings such as takeovers,
mergers or leveraged buyouts. Such legislation, if enacted, could depress the
prices of outstanding junk bonds.
INTEREST RATE TRANSACTIONS (U.S. Government Securities Portfolio)
Among the strategic transactions into which the U.S. Government Securities
Portfolio may enter are interest rate swaps and the purchase or sale of related
caps and floors. The Portfolio
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<PAGE>
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 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
payments streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps and floors are entered into for good faith hedging purposes, the
Adviser to the Portfolio and the Fund believe such obligations do not
constitute senior securities under the Investment Company Act of 1940 (the
"1940 Act") and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Portfolio will not enter into any swap, cap and
floor transactions unless, at the time of entering into such transaction, the
unsecured long-term debt of the counterparty, combined with any credit
enhancements, is rated at least "A" by Standard & Poor's or Moody's or has an
equivalent rating from a nationally recognized statistical rating organization
("NRSRO") or is determined to be of equivalent credit quality by the Adviser.
For a description of the NRSROs and their ratings, see the Appendix. If there
is a default by the counterparty, the Portfolio may have contractual remedies
pursuant to the 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 (U.S. Government Securities Portfolio)
The U.S. Government Securities Portfolio may enter into "dollar roll"
transactions, which consist of the sale by the Portfolio to a bank or broker-
dealer (the "counterparty") of GNMA certificates or other mortgage-backed
securities together with a commitment to purchase from the counterparty
similar, but not identical, securities at a future date. The counterparty
receives all principal and interest payments, including prepayments, made on
the security while it is the holder. The Portfolio receives a fee from the
counterparty as consideration for entering into the commitment to purchase.
Dollar rolls may be renewed over a period of several months with a different
repurchase price and a cash settlement made at each renewal without physical
delivery of securities. Moreover, the transactions may be preceded by a firm
commitment agreement pursuant to which the Portfolio agrees to buy a security
on a future date.
The Portfolio will not use such transactions for leveraging purposes and,
accordingly, will segregate cash, U.S. government securities or other high
grade debt obligations in an amount
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<PAGE>
sufficient to meet its purchase obligations under the transactions. The
Portfolio will also maintain asset coverage of at least 300% for all
outstanding firm commitments, dollar rolls and other borrowings.
Dollar rolls are treated for purposes of the 1940 Act, as borrowings of the
Portfolio because they involve the sale of a security coupled with an agreement
to repurchase. Like all borrowings, a dollar roll involves costs to the
Portfolio. For example, while the Portfolio receives a fee as consideration for
agreeing to repurchase the security, the Portfolio forgoes the right to receive
all principal and interest payments while the counterparty holds the security.
These payments to the counterparty may exceed the fee received by the
Portfolio, thereby effectively charging the Portfolio interest on its
borrowing. Further, although the Portfolio can estimate the amount of expected
principal prepayment over the term of the dollar roll, a variation in the
actual amount of prepayment could increase or decrease the cost of the
Portfolio's borrowing.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Portfolio's right to
purchase from the counterparty might be restricted. Additionally, the value of
such securities may change adversely before the Portfolio is able to purchase
them. Similarly, the Portfolio may be required to purchase securities in
connection with a dollar roll at a higher price than may otherwise be available
on the open market. Since, as noted above, the counterparty is required to
deliver a similar, but not identical, security to the Portfolio, the security
that the Portfolio is required to buy under the dollar roll may be worth less
than an identical security. Finally, there can be no assurance that the
Portfolio's use of the cash that it receives from a dollar roll will provide a
return that exceeds borrowing costs.
PORTFOLIO TURNOVER
While it is impossible to predict portfolio turnover rates, the Advisers to
the Portfolios other than the U.S. Government Securities Portfolio and the
Money Market Portfolio anticipate that portfolio turnover will generally not
exceed 100% per year. The Adviser to the U.S. Government Securities Portfolio
anticipates that portfolio turnover will generally not exceed 100% per year,
exclusive of dollar roll transactions. With respect to the Money Market
Portfolio, although the Portfolio intends normally to hold its investments to
maturity, the short maturities of these investments are expected by the
Portfolio's Adviser to result in a relatively high rate of portfolio turnover.
INVESTMENT RESTRICTIONS
Except for restriction numbers 2, 3, 4, 11 and 12 with respect to the T. Rowe
Price Equity Income and T. Rowe Price Growth Stock Portfolios and restriction
number 11 with respect to the T. Rowe Price International Stock Portfolio
(which restrictions are not fundamental policies), the following investment
restrictions (numbers 1 through 12) are fundamental policies, which may not be
changed without the approval of a majority of the outstanding shares of the
Portfolio, and apply to each of the Portfolios except as otherwise indicated.
As provided in the 1940 Act, a vote of a majority of the outstanding shares
necessary to amend a fundamental policy means the affirmative vote of the
lesser of (1) 67% or more of the shares present at a meeting, if the holders of
more than 50% of the outstanding shares of the Portfolio are present or
represented by proxy, or (2) more than 50% of the outstanding shares of the
Portfolio.
A Portfolio may not:
1. Borrow money or issue senior securities (as defined in the 1940 Act),
provided that a Portfolio may borrow amounts not exceeding 5% of the value of
its total assets (not including the amount borrowed) for temporary purposes,
except that the U.S. Government Securities Portfolio
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<PAGE>
may borrow from banks or through reverse repurchase agreements or dollar roll
transactions in an amount equal to up to 33 1/3% of the value of its total
assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes and to take advantage of investment opportunities and may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings, and except that the T. Rowe Price Equity Income Portfolio, the T.
Rowe Price Growth Stock Portfolio and T. Rowe Price International Stock
Portfolio may (i) borrow for non-leveraging, temporary or emergency purposes
and (ii) engage in reverse repurchase agreements and make other investments or
engage in other transactions, which may involve a borrowing, in a manner
consistent with each Portfolio's investment objective and program, provided
that the combination of (i) and (ii) shall not exceed 33 1/3% of the value of
each Portfolio's total assets (including the amount borrowed) less liabilities
(other than borrowings) and may pledge up to 33 1/3% of the value of its total
assets to secure those borrowings.
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 the all
Portfolios other than the Money Market Portfolio may purchase or sell financial
futures contracts and related options. For purposes of this restriction,
currency contracts or hybrid instruments shall not be considered commodities.
8. Make loans, except by purchase of debt obligations in which the Portfolio
may invest consistently with its investment policies, by entering into
repurchase agreements or through the lending of its portfolio securities.
9. Invest in the securities of any issuer if, immediately after such
investment, more than 5% of the total assets of the Portfolio (taken at current
value) would be invested in the securities of such issuer or acquire more than
10% of the outstanding voting securities of any issuer, provided that this
limitation does not apply to obligations issued or guaranteed as to principal
and interest by the U.S. government or its agencies and instrumentalities or to
repurchase agreements secured by such obligations and that up to 25% of the
Portfolio's total assets (taken at current value) may be invested without
regard to this limitation.
10. Invest more than 25% of the value of its total assets in any one
industry, provided that this limitation does not apply to obligations issued or
guaranteed as to interest and principal by the U.S. government, its agencies
and instrumentalities, and repurchase agreements secured by such obligations,
and in the case of the Money Market Portfolio obligations of domestic branches
of United States banks.
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<PAGE>
11. Invest more than 10% (15% with respect to the T. Rowe Price Equity Income
Portfolio, the T. Rowe Price Growth Stock Portfolio and the T. Rowe Price
International Stock Portfolio) of its assets (taken at current value at the
time of each purchase) in illiquid securities including repurchase agreements
maturing in more than seven days.
12. Purchase securities of any issuer for the purpose of exercising control
or management.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess
or deficiency occurs or exists immediately after and as a result of such
investment.
OTHER POLICIES
The Money Market Portfolio may not invest in the securities of any one issuer
if, immediately after such investment, more than 5% of the total assets of the
Portfolio (taken at current value) would be invested in the securities of such
issuer, provided that this limitation does not apply to obligations issued or
guaranteed as to principal and interest by the U.S. government or its agencies
and instrumentalities or to repurchase agreements secured by such obligations
and that with respect to 25% of the Portfolio's total assets more than 5% may
be invested in securities of any one issuer for three business days after the
purchase thereof if the securities have been assigned the highest quality
rating by NRSROs, or if not rated, have been determined to be of comparable
quality. These limitations apply to time deposits, including certificates of
deposit, bankers' acceptances, letters of credit and similar instruments; they
do not apply to demand deposit accounts. For a description of the NRSROs'
ratings, see the Appendix.
In addition, the Money Market Portfolio may not purchase any security that
matures more than thirteen months (397 days) from the date of purchase or which
has an implied maturity of more than thirteen months (397 days) except as
provided in (1) below. For the purposes of satisfying this requirement, the
maturity of a portfolio instrument shall be deemed to be the period remaining
until the date noted on the face of the instrument as the date on which the
principal amount must be paid, or in the case of an instrument called for
redemption, the date on which the redemption payment must be made, except that:
1. An instrument that is issued or guaranteed by the U.S. government or any
agency thereof which has a variable rate of interest readjusted no less
frequently than every 25 months (762 days) may be deemed to have a maturity
equal to the period remaining until the next readjustment of the interest rate.
2. A variable rate instrument, the principal amount of which is scheduled on
the face of the instrument to be paid in thirteen months (397 days) or less,
may be deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
3. A variable rate instrument that is subject to a demand feature may be
deemed to have a maturity equal to the longer of the period remaining until the
next readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
4. A floating rate instrument that is subject to a demand feature may be
deemed to have a maturity equal to the period remaining until the principal
amount can be recovered through demand.
5. A repurchase agreement may be deemed to have a maturity equal to the
period remaining until the date on which the repurchase of the underlying
securities is scheduled to occur, or where no date is specified, but the
agreement is subject to demand, the notice period applicable to a demand for
the repurchase of the securities.
6. A portfolio lending agreement may be treated as having a maturity equal to
the period remaining until the date on which the loaned securities are
scheduled to be returned, or where no date is specified, but the agreement is
subject to demand, the notice period applicable to a demand for the return of
the loaned securities.
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<PAGE>
Each of the Quest for Value Equity and Quest for Value Small Cap Portfolios
may not invest more than 5% of the value of its total assets in warrants not
listed on either the New York or American Stock Exchange. Each of the T. Rowe
Price Equity Income, T. Rowe Price Growth Stock and T. Rowe Price International
Stock Portfolios will not invest in warrants if, as a result thereof, more than
2% of the value of the total assets of the Portfolio would be invested in
warrants which are not listed on the New York Stock Exchange, the American
Stock Exchange, or a recognized foreign exchange, or more than 5% of the value
of the total assets of the Portfolio would be invested in warrants whether or
not so listed. However, the acquisition of warrants attached to other
securities is not subject to this restriction.
PERFORMANCE INFORMATION
Total return and yield will be computed as described below.
TOTAL RETURN
Each Portfolio's "average annual total return" figures described and shown in
the Prospectus are computed according to a formula prescribed by the Securities
and Exchange Commission. The formula can be expressed as follows:
P(1+T)/n/ = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1000 payment made
at the beginning of the 1, 5, or 10 years (or other) periods
at the end of the 1, 5, or 10 years (or other) periods (or
fractional portion thereof)
The table below shows the average annual total return for the Managed Asset
Allocation, Quest for Value Equity, Quest for Value Small Cap and U.S.
Government Securities Portfolios for the specific periods. The T. Rowe Price
Equity Income and T. Rowe Price Growth Stock Portfolios commenced operations in
January, 1995 and, therefore, information for the year ended December 31, 1994
is not presented.
With respect to the T. Rowe Price International Stock Portfolio which
commenced operation April 8, 1991, effective January 1, 1995, the Portfolio's
Adviser was changed to Rowe Price-Fleming International, Inc. ("Price-
Fleming"). Prior to March 24, 1995, the Portfolio was known as the Global
Growth Portfolio. Subsequent to such time, the Portfolio's investment objective
was changed from investments in small capitalization companies on a global
basis to investments in a broad range of established companies on an
international basis (i.e., non-U.S. companies). Because of the change of the
Portfolio's Adviser, performance information for the year ended December 31,
1994 is not presented. Such information is not reflective of Price-Fleming's
ability to manage the Portfolio. Information with respect to the Portfolio's
per share income and capital changes from inception through December 31, 1994
is set forth in the Prospectus. Average annual total return information for the
year ended December 31, 1994 and for the period from inception to December 31,
1994 is set forth in the Fund's Annual Report and is otherwise available upon
written request to the Fund.
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<PAGE>
<TABLE>
<CAPTION>
FOR PERIOD FROM
INCEPTION TO
FOR THE YEAR ENDED DECEMBER 31,
DECEMBER 31, 1994 1994
------------------ ----------------
<S> <C> <C>
Managed Asset Allocation(1)................. (5.28)%/(5.28)%* 8.82%/8.36%*
Quest for Value Equity(2)................... 4.09%/4.09%* 4.33%/4.01%*
Quest for Value Small Cap(3)................ (1.79)%/(1.79)%* 5.79%/5.55%*
U.S. Government Securities(4)............... N/A (0.40)%/(0.77)%*
</TABLE>
- --------
* The figure shows what the Portfolio's performance would have been in the
absence of fee waivers and/or reimbursement of other expenses.
(1) The Portfolio commenced operations on April 8, 1991.
(2) The Portfolio commenced operations on May 27, 1993.
(3) The Portfolio commenced operations on May 4, 1993.
(4) The Portfolio commenced operations on May 13, 1994.
----------------
The calculations of total return assume the reinvestment of all dividends and
capital gains distributions on the reinvestment dates during the period and the
deduction of all recurring expenses that were charged to shareholders accounts.
The above table does not reflect charges and deductions which are, or may be,
imposed under the Contracts.
The performance of each Portfolio will vary from time to time in response to
fluctuations in market conditions, interest rates, the composition of the
Portfolio's investments and expenses. Consequently, a Portfolio's performance
figures are historical and should not be considered representative of the
performance of the Portfolio for any future period.
YIELD
From time to time, the Fund may quote the Money Market Portfolio's and the
U.S. Government Securities Portfolio's yield and effective yield in
advertisements or in reports or other communications to shareholders. Yield
quotations are expressed in annualized terms and may be quoted on a compounded
basis.
The annualized current yield for the Money Market Portfolio is computed by:
(a) determining the net change in the value of a hypothetical pre-existing
account in the Portfolio having a balance of one share at the beginning of a
seven calendar day period for which yield is to be quoted; (b) dividing the net
change by the value of the account at the beginning of the period to obtain the
base period return; and (c) annualizing the results (i.e., multiplying the base
period return by 365/7). The net change in the value of the account reflects
the value of additional shares purchased with dividends declared on the
original share and any such additional shares, but does not include realized
gains and losses or unrealized appreciation and depreciation. In addition, the
Money Market Portfolio may calculate a compound effective annualized yield by
adding 1 to the base period return (calculated as described above), raising the
sum to a power equal to 365/7 and subtracting 1.
The U.S. Government Securities Portfolio's 30-day yield will be calculated
according to a formula prescribed by the Securities and Exchange Commission.
The formula can be expressed as follows:
a-b
YIELD = 2 [ --- + 1)/6/ - 1 ]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the net asset value per share on the last day of the period
- 15 -
<PAGE>
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by the Portfolio at a discount
or premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Yield information is useful in reviewing a Portfolio's performance, but
because yields fluctuate, such information cannot necessarily be used to
compare an investment in a Portfolio's shares with bank deposits, savings
accounts and similar investment alternatives which often provide an agreed or
guaranteed fixed yield for a stated period of time. Shareholders should
remember that yield is a function of the kind and quality of the instruments in
the Portfolios' investment portfolios, portfolio maturity, operating expenses
and market conditions.
It should be recognized that in periods of declining interest rates the
yields will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yields will tend to be somewhat lower.
Also, when interest rates are falling, the inflow of net new money to a
Portfolio from the continuous sale of its shares will likely be invested in
instruments producing lower yields than the balance of the Portfolio's
investments, thereby reducing the current yield of the Portfolio. In periods of
rising interest rates, the opposite can be expected to occur.
NON-STANDARDIZED PERFORMANCE
In addition to the performance information described above, the Fund may
provide total return information with respect to the Portfolios for designated
periods, such as for the most recent six months or most recent twelve months.
This total return information is computed as described under "Total Return"
above except that no annualization is made.
PORTFOLIO TRANSACTIONS
Subject to the supervision and control of the Manager and the Trustees of the
Fund, each Portfolio's Adviser is responsible for decisions to buy and sell
securities for its account and for the placement of its portfolio business and
the negotiation of commissions, if any, paid on such transactions. Brokerage
commissions are paid on transactions in equity securities traded on a
securities exchange and on options, futures contracts and options thereon.
Fixed income securities and certain equity securities in which the Portfolios
invest are traded in the over-the-counter market. These securities are
generally traded on a net basis with dealers acting as principal for their own
account without a stated commission, although prices of such securities usually
include a profit to the dealer. In over-the-counter transactions, orders are
placed directly with a principal market maker unless a better price and
execution can be obtained by using a broker. In underwritten offerings,
securities are usually purchased at a fixed price which includes an amount of
compensation to the underwriter generally referred to as the underwriter's
concession or discount. Certain money market securities may be purchased
directly from an issuer, in which case no commissions or discounts are paid.
U.S. government securities are generally purchased from underwriters or
dealers, although certain newly-issued U.S. government securities may be
purchased directly from the U.S. Treasury or from the issuing agency or
instrumentality. Each Portfolio's Adviser is responsible for effecting its
portfolio transactions and will do so in a manner deemed fair and reasonable to
the Portfolio and not according to any formula. The primary consideration in
all portfolio transactions will be prompt execution of orders in an efficient
manner at a favorable price. In selecting broker-dealers and negotiating
commissions, an Adviser considers the firm's reliability, the quality of its
execution services on a continuing basis and its financial condition. When more
than one firm is believed to meet these criteria, preference may be given to
brokers that provide the Portfolios or their Advisers with brokerage and
research services within the meaning of Section 28(e) of the Securities
Exchange Act of 1934. Each Portfolio's Adviser is of
- 16 -
<PAGE>
the opinion that, because this material must be analyzed and reviewed, its
receipt and use does not tend to reduce expenses but may benefit the Portfolio
by supplementing the Adviser's research. In seeking the most favorable price
and execution available, an Adviser may, if permitted by law, consider sales of
the Contracts as described in the Prospectus a factor in the selection of
broker-dealers.
An Adviser may effect portfolio transactions for other investment companies
and advisory accounts. Research services furnished by broker-dealers through
which a Portfolio effects its securities transactions may be used by the
Portfolio's Adviser in servicing all of its accounts; not all such services may
be used in connection with the Portfolio. In the opinion of each Adviser, it is
not possible to measure separately the benefits from research services to each
of its accounts, including a Portfolio. Whenever concurrent decisions are made
to purchase or sell securities by a Portfolio and another account, the
Portfolio's Adviser will attempt to allocate equitably portfolio transactions
among the Portfolio and other accounts. In making such allocations between the
Portfolio and other accounts, the main factors to be considered are the
respective investment objectives, the relative size of portfolio holdings of
the same or comparable securities, the availability of cash for investment, the
size of investment commitments generally held, and the opinions of the persons
responsible for recommending investments to the Portfolio and the other
accounts. In some cases this procedure could have an adverse effect on a
Portfolio. In the opinion of each Adviser, however, the results of such
procedures will, on the whole, be in the best interest of each of the accounts.
The Adviser to the Quest for Value Equity and Quest for Value Small Cap
Portfolios may execute brokerage transactions through Oppenheimer & Co. Inc.
("Opco"), an affiliated broker-dealer of the Adviser, acting as agent in
accordance with procedures established by the Fund's Board of Trustees, but
will not purchase any securities from or sell any securities to Opco acting as
principal for its own account.
The Adviser to the T. Rowe Price International Stock, T. Rowe Price Equity
Income and T. Rowe Price Growth Stock Portfolios may execute portfolio
transactions through certain affiliates of Robert Fleming Holdings Limited and
Jardine Fleming Group Limited, persons indirectly related to the Adviser,
acting as agent in accordance with procedures established by the Fund's Board
of Trustees, but will not purchase any securities from or sell any securities
to any such affiliate acting as principal for its own account.
For the year ended December 31, 1992, the Money Market Portfolio did not pay
any brokerage commissions, while the Managed Asset Allocation Portfolio and T.
Rowe Price International Stock Portfolio (formerly, the Global Growth
Portfolio) paid $11,226 and $28,831, respectively, in brokerage commissions.
For the year ended December 31, 1993, the Money Market Portfolio did not pay
any brokerage commissions, while the Managed Asset Allocation Portfolio and T.
Rowe Price International Stock Portfolio paid $84,401 and $199,921,
respectively in brokerage commissions. For the fiscal period ended December 31,
1993, the Quest for Value Equity Portfolio and Quest for Value Small Cap
Portfolio paid $11,051 and $23,537, respectively in brokerage commissions, of
which $7,758 (70%) with respect to the Quest for Value Equity Portfolio and
$17,401 (74%) with respect to the Quest for Value Small Cap Portfolio was paid
to Opco. For the year ended December 31, 1994, the Money Market Portfolio did
not pay any brokerage commissions, while the Managed Asset Allocation Portfolio
and T. Rowe Price International Stock Portfolio paid $175,548 and $554,048,
respectively, in brokerage commissions. For the year ended December 31, 1994,
the Quest for Value Equity Portfolio and Quest for Value Small Cap Portfolio
paid $58,472 and $100,262, respectively, in brokerage commissions, of which
$32,796 (78.29%) with respect to the Quest for Value Equity Portfolio and
$58,028 (72.78%) with respect to the Quest for Value Small Cap Portfolio was
paid to Opco. For the fiscal period ended December 31, 1994, the U.S.
Government Securities Portfolio paid no brokerage commissions.
- 17 -
<PAGE>
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust, their ages and their
principal occupations during the past five years are set forth below. Unless
otherwise indicated, the business address of each is 1100 Newport Center Drive,
Suite 200, Newport Beach, California 92660.
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION(S)
POSITION(S) HELD DURING PAST
NAME, AGE AND ADDRESS WITH REGISTRANT 5 YEARS
--------------------- ---------------- -------------
<S> <C> <C>
James A. Shepherdson President Vice Chairman, Chief Operating
III (42) Officer, and until January, 1989
Chief Financial Officer of
McGuinness & Associates (insurance
marketing), V. J. McGuinness Co.
(broker-dealer), VJM Corporation
(oil and gas), AMCAP Brokerage
Network (insurance marketing), and
until January, 1994 Swift Energy
Marketing Company (broker-dealer)
and since September, 1988 Endeavor
Management Co.; Director of V. J.
McGuinness Co., VJM Corporation,
American Capital Network Corp.,
Endeavor Management Co. and since
January, 1994, Swift Energy
Marketing Company.
*Vincent J. McGuinness Trustee Chairman, Chief Executive Officer,
(60) and Director of McGuinness &
Associates, V.J. McGuinness Co., VJM
Corporation, AMCAP Brokerage Network
and until January 1994, Swift Energy
Marketing Company and since
September, 1988 Endeavor Management
Co.; President of VJM Corporation
and Endeavor Management Co.
Timothy A. Devine (60) Trustee Prior to September, 1993, President
19652 Descartes and Chief Executive Officer, Devine
Foothill Ranch, California Properties, Inc. Since September,
92610 1993, Vice President, Plant Control,
Inc. (landscape contracting and
maintenance).
Thomas J. Hawekotte (60) Trustee President, Thomas J. Hawekotte, P.C.
1200 Lake Shore Drive (law practice).
Chicago, Illinois 60610
</TABLE>
- 18 -
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION(S)
POSITION(S) HELD DURING PAST
NAME AND ADDRESS WITH REGISTRANT 5 YEARS
---------------- ---------------- -------------
<S> <C> <C>
Steven L. Klosterman (43) Trustee Investment Counselor, Robert J.
4225 Executive Square Metcalf & Associates, Inc.
Suite 1100 (investment adviser) since August,
La Jolla, California 92037 1990; National Sales Manager,
Raisins Co., Inc. (clothing
manufacturer) March, 1988 to March,
1990.
Halbert D. Lindquist (48) Trustee President, Lindquist Enterprises,
1650 E. Fort Lowell Road Inc. (financial services) and since
Tucson, Arizona 85719-2324 December, 1987 Tucson Asset
Management, Inc. (financial
services), and since November, 1987,
Presidio Government Securities,
Incorporated (broker-dealer).
R. Daniel Olmstead, Jr. Trustee Rancher since December, 1989.
(63)
2885 N. River Road
St. Anthony, Idaho 83445
Norman Ridley (49) Vice President Since 1985, Vice President, TCW
865 S. Figueroa Street Asset Management, Inc.
Suite 1800
Los Angeles, California
90017
Ronald E. Robison (56) Vice President Since November, 1987, Managing
865 S. Figueroa Street Director and Chief Operating
Suite 1800 Officer, TCW Funds Management, Inc.;
Los Angeles, California since March, 1990, Managing
90017 Director, Trust Company of the West
and TCW Asset Management Company.
James M. Goldberg (49) Vice President Since June, 1984, Managing Director,
865 S. Figueroa Street TCW Asset Management Company and
Suite 1800 Trust Company of the West and since
Los Angeles, California January, 1987, Managing Director,
90017 TCW Funds Management, Inc.
Jenny B. Jones (36) Vice President Since May, 1994, Senior Vice
One World Financial Center President, Oppenheimer Capital and
New York, New York 10281 from September, 1990 through May,
1994, Vice President, Oppenheimer
Capital; Vice President and Co-
Portfolio Manager, Quest for Value
Family of Funds and Quest for Value
Accumulation Trust, open-end
investment companies; from
September, 1983 to September, 1990
Portfolio Manager and Second Vice
President, Mutual of America Life
Insurance Company.
</TABLE>
- 19 -
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION(S)
POSITION(S) HELD DURING PAST
NAME AND ADDRESS WITH REGISTRANT 5 YEARS
- ---------------- ---------------- -------------
<S> <C> <C>
Eileen Rominger (40) Vice President Since May, 1994, Managing Director,
One World Financial Center Oppenheimer Capital, prior thereto
New York, New York 10281 Senior Vice President, Oppenheimer
Capital; Vice President and
Portfolio Manager, Quest for Value
Fund, Inc. and Quest for Value
Accumulation Trust, open-end
investment companies.
Alan J. Schryer (37) Chief Financial Officer Since August, 1994, Controller and
(Treasurer) since November, 1994 Chief Financial
Officer of McGuinness & Associates,
V.J. McGuinness Co., VJM
Corporation, AMCAP Brokerage Network
and Endeavor Management Co. and
Director, Endeavor Management Co.;
from February, 1992 to August, 1994,
Sole Proprietor, A.J. Schryer
Companies (real estate finance); and
from August, 1987 to January, 1992,
Controller and Vice President of IDM
Securities Corporation (broker-
dealer).
Ronna Rowe (46) Secretary Since March, 1984, Executive
Secretary to Vice Chairman of the
Board and Chief Operating Officer
of, and since July, 1992, Secretary
of McGuinness & Associates, V.J.
McGuinness Co., VJM Corporation,
AMCAP Brokerage Network, Endeavor
Management Co. and Swift Energy
Marketing Company until January,
1994.
</TABLE>
- --------
* An "interested person" of the Fund as defined in the 1940 Act.
No remuneration will be paid by the Fund to any Trustee or officer of the
Fund who is affiliated with the Manager or the Advisers. Each Trustee who is
not an interested person of the Fund will be reimbursed for out-of-pocket
expenses and receives an annual fee of $2,500 and $500 for attendance at each
regularly scheduled Trustees' meeting. Set forth below for each of the Trustees
of the Fund is the aggregate compensation paid to such Trustees for the fiscal
year ended December 31, 1994.
- 20 -
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT ESTIMATED COMPENSATION
BENEFITS ANNUAL FROM FUND
AGGREGATE ACCRUED AS BENEFITS AND FUND
NAME OF COMPENSATION PART OF FUND UPON COMPLEX
PERSON FROM FUND EXPENSES RETIREMENT PAID TO TRUSTEES
------- ------------ ------------ ---------- ----------------
<S> <C> <C> <C> <C>
Vincent J. McGuinness..... -- -- -- --
Timothy A. Devine......... 4,500 -- -- 4,500
Thomas J. Hawekotte....... 4,000 -- -- 4,000
Steven L. Klosterman...... 4,500 -- -- 4,500
Halbert D. Lindquist...... 4,500 -- -- 4,500
R. Daniel Olmstead........ 4,500 -- -- 4,500
</TABLE>
The Agreement and Declaration of Trust of the Fund provides that the Fund
will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Fund, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good
faith in the reasonable belief that their actions were in the best interests of
the Fund or that such indemnification would relieve any officer or Trustee of
any liability to the Fund or its shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of his duties. The Fund, at
its expense, provides liability insurance for the benefit of its Trustees and
officers.
As of the date of this Statement of Additional Information, the officers and
Trustees of the Fund as a group owned less than 1% of the outstanding shares of
the Fund.
THE MANAGER
The Management Agreement between the Fund and the Manager with respect to the
Money Market, Managed Asset Allocation and T. Rowe Price International Stock
(formerly, the Global Growth Portfolio) Portfolios was approved by the Trustees
of the Fund (including all of the Trustees who are not "interested persons" of
the Manager) on July 20, 1992, and by the shareholders of the Fund on November
23, 1992. With respect to the Quest for Value Equity and Quest for Value Small
Cap Portfolios, the Management Agreement was approved by the Trustees of the
Fund (including all of the Trustees who are not "interested persons" of the
Manager) on April 19, 1993 and by PFL Life Insurance Company, the sole
shareholder of the Quest for Value Equity and Quest for Value Small Cap
Portfolios, on April 19, 1993. With respect to the U.S. Government Securities
Portfolio, the Management Agreement was approved by the Trustees of the Fund
(including all of the Trustees who are not "interested persons" of the Manager)
on January 24, 1994 and by PFL Life Insurance Company, the sole shareholder of
the U.S. Government Securities Portfolio, on March 7, 1994. With respect to the
T. Rowe Price Equity Income and T. Rowe Price Growth Stock Portfolios, the
Management Agreement was approved by the Trustees of the Fund (including all of
the Trustees who are not "interested persons" of the Manager) on October 24,
1994 and by PFL Life Insurance Company, the sole shareholder of the T. Rowe
Price Equity Income and T. Rowe Price Growth Stock Portfolios, on November 1,
1994. See "Organization and Capitalization of the Fund." The Management
Agreement will continue in force for two years from its date, November 23, 1992
with respect to the Money Market, Managed Asset Allocation and T. Rowe Price
International Stock Portfolios, April 19, 1993 with respect to the Quest for
Value Equity and Quest for Value Small Cap Portfolios, March 25, 1994 with
respect to the U.S. Government Securities Portfolio and December 28, 1994 with
respect to the T. Rowe Price Equity Income and T. Rowe Price Growth Stock
Portfolios, and from year to year thereafter, but only so long as its
continuation as to each Portfolio is specifically approved at least annually
(i) by the Trustees or by the vote of a majority of
- 21 -
<PAGE>
the outstanding voting securities (as defined in the 1940 Act) of the
Portfolio, and (ii) by the vote of a majority of the Trustees who are not
parties to the Management Agreement or interested persons (as defined in the
1940 Act) of any such party, by votes cast in person at a meeting called for
the purpose of voting on such approval. The Management Agreement provides that
it shall terminate automatically if assigned, and that it may be terminated as
to any Portfolio without penalty by the Trustees of the Fund or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio upon 60 days' prior written notice to the Manager, or by the
Manager upon 90 days' prior written notice to the Fund, or upon such shorter
notice as may be mutually agreed upon. In the event the Manager ceases to be
the Manager of the Fund, the right of the Fund to use the identifying name of
"Endeavor" may be withdrawn.
THE ADVISERS
The respective Investment Advisory Agreements between the Manager and TCW
Funds Management, Inc. and Ivory & Sime International, Inc. as well as the Sub-
Investment Advisory Agreement between Ivory & Sime International, Inc. and
Ivory & Sime plc (which, prior to January 1, 1995, were the Adviser and sub-
adviser, respectively, of the Global Growth Portfolio (currently known as the
T. Rowe Price International Stock Portfolio)) were approved by the Trustees of
the Fund (including all the Trustees who are not "interested persons" of the
Manager or of the Advisers) on July 20, 1992, and by the shareholders of the
Fund on November 23, 1992. The Investment Advisory Agreements between the
Manager and Quest for Value Advisors were approved by the Trustees of the Fund
(including all of the Trustees who are not "interested persons" of the Manager
or of the Adviser) on April 19, 1993 and by PFL Life Insurance Company as sole
shareholder of the Quest for Value Equity and Quest for Value Small Cap
Portfolios on April 19, 1993. The Investment Advisory Agreement between the
Manager and The Boston Company Asset Management, Inc. was approved by the
Trustees of the Fund (including all of the Trustees who are not "interested
persons" of the Manager or of the Adviser) on January 24, 1994 and by PFL Life
Insurance Company as sole shareholder of the U.S. Government Securities
Portfolio on March 7, 1994. The Investment Advisory Agreements between the
Manager and T. Rowe Price Associates, Inc. were approved by the Trustees of the
Fund (including all of the Trustees who are not "interested persons" of the
Manager or of the Adviser) on October 24, 1994 and by PFL Life Insurance
Company as sole shareholder of the T. Rowe Price Equity Income and T. Rowe
Price Growth Stock Portfolios on November 1, 1994. Effective January 1, 1995
the Manager terminated the Investment Advisory Agreement and Sub-Investment
Advisory Agreement with Ivory & Sime International, Inc. and Ivory & Sime plc,
respectively. A new Investment Advisory Agreement with Price-Fleming for the T.
Rowe Price International Stock Portfolio was approved by the Trustees of the
Fund (including all the Trustees who are not "interested persons" of the
Manager or of the Adviser) on December 19, 1994 and by shareholders of the
Portfolio on March 24, 1995. See "Organization and Capitalization of the Fund."
Each agreement will continue in force for two years from its date, November
23, 1992 with respect to the Money Market and Managed Asset Allocation
Portfolios, April 19, 1993 with respect to the Quest for Value Equity and Quest
for Value Small Cap Portfolios, March 25, 1994 with respect to the U.S.
Government Securities Portfolio, December 28, 1994 with respect to the T. Rowe
Price Equity Income and T. Rowe Price Growth Stock Portfolios and January 1,
1995 with respect to the T. Rowe Price International Stock Portfolio, and from
year to year thereafter, but only so long as its continuation as to a Portfolio
is specifically approved at least annually (i) by the Trustees or by the vote
of a majority of the outstanding voting securities (as defined in the 1940 Act)
of the Portfolio, and (ii) by the vote of a majority of the Trustees who are
not parties to the agreement or interested persons (as defined in the 1940 Act)
of any such party, by votes cast in person at a meeting called for the purpose
of voting on such approval. Each Investment Advisory Agreement provides that it
shall terminate automatically if assigned or if the Management Agreement with
respect to the related Portfolio terminates, and that it may be terminated as
to a Portfolio without
- 22 -
<PAGE>
penalty by the Manager, by the Trustees of the Fund or by vote of a majority of
the outstanding voting securities (as defined in the 1940 Act) of the Portfolio
on not less than 60 days' prior written notice to the Adviser or by the Adviser
on not less than 150 days' prior written notice to the Manager, or upon such
shorter notice as may be mutually agreed upon.
The following table shows the fees paid by each of the Portfolios and any fee
waivers or reimbursements during the years ended December 31, 1992, December
31, 1993 and December 31, 1994.
<TABLE>
<CAPTION>
1994
--------------------------------
INVESTMENT INVESTMENT
MANAGEMENT MANAGEMENT OTHER
FEE FEE EXPENSES
PAID WAIVED REIMBURSED
---------- ---------- ----------
<S> <C> <C> <C>
Money Market Portfolio......................... $ 111,100 $ -- $ --
Managed Asset Allocation Portfolio............. 1,151,688 -- --
T. Rowe Price International Stock Portfolio.... 696,732 -- --
Quest for Value Equity Portfolio............... 191,316 -- --
Quest for Value Small Cap Portfolio............ 214,198 -- --
U.S. Government Securities Portfolio*.......... 8,087 8,087 4,955
</TABLE>
<TABLE>
<CAPTION>
1993**
--------------------------------
INVESTMENT INVESTMENT
MANAGEMENT MANAGEMENT OTHER
FEE FEE EXPENSES
PAID WAIVED REIMBURSED
---------- ---------- ----------
<S> <C> <C> <C>
Money Market Portfolio......................... $ 23,471 $21,640 --
Managed Asset Allocation Portfolio............. 305,989 -- --
T. Rowe Price International Stock Portfolio.... 211,211 -- --
Quest for Value Equity Portfolio............... -- 18,606 --
Quest for Value Small Cap Portfolio............ -- 17,970 --
</TABLE>
<TABLE>
<CAPTION>
1992
--------------------------------
INVESTMENT INVESTMENT
MANAGEMENT MANAGEMENT OTHER
FEE FEE EXPENSES
PAID WAIVED REIMBURSED
---------- ---------- ----------
<S> <C> <C> <C>
Money Market Portfolio......................... -- $15,291 $29,246
Managed Asset Allocation Portfolio............. $16,608 44,733 --
T. Rowe Price International Stock Portfolio.... 12,605 36,608 --
</TABLE>
- --------
* The information with respect to the U.S. Government Securities Portfolio is
for the period May 13, 1994 (commencement of operations) ended December 31,
1994.
** The information presented with respect to the Quest for Value Equity
Portfolio is for the period May 27, 1993 (commencement of operations) ended
December 31, 1993 and with respect to the Quest for Value Small Cap
Portfolio, is for the period May 4, 1993 (commencement of operations) ended
December 31, 1993.
Each Investment Advisory Agreement provides that the Adviser shall not be
subject to any liability to the Fund or the Manager for any act or omission in
the course of or connected with rendering services thereunder in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties on the part of the Adviser.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment on
shares of the Portfolios for more than seven days during any period (1) when
the New York Stock Exchange is closed or trading on the Exchange is restricted
as determined by the Securities and Exchange
- 23 -
<PAGE>
Commission, (2) when an emergency exists, as defined by the Securities and
Exchange Commission, which makes it not reasonably practicable for a Portfolio
to dispose of securities owned by it or fairly to determine the value of its
assets, or (3) as the Securities and Exchange Commission may otherwise permit.
The value of the shares on redemption may be more or less than the
shareholder's cost, depending upon the market value of the portfolio securities
at the time of redemption.
NET ASSET VALUE
The net asset value per share of each Portfolio is determined as of the close
of regular trading of the New York Stock Exchange (currently 4:00 p.m., New
York City time), Monday through Friday, exclusive of national business
holidays. The Fund will be closed on the following national business holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas. 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.
The Money Market Portfolio's investment policies and method of securities
valuation are intended to permit the Portfolio generally to maintain a constant
net asset value of $1.00 per share by computing the net asset value per share
to the nearest $.01 per share. The Portfolio is permitted to use the amortized
cost method of valuation for its portfolio securities pursuant to regulations
of the Securities and Exchange Commission. This method may result in periods
during which value, as determined by amortized cost, is higher or lower than
the price the Portfolio would receive if it
- 24 -
<PAGE>
sold the instrument. The net asset value per share would be subject to
fluctuation upon any significant changes in the value of the Portfolio's
securities. The value of debt securities, such as those in the Portfolio,
usually reflects yields generally available on securities of similar yield,
quality and duration. When such yields decline, the value of a portfolio
holding such securities can be expected to decline. Although the Portfolio
seeks to maintain the net asset value per share of the Portfolio at $1.00,
there can be no assurance that net asset value will not vary.
The Trustees of the Fund have undertaken to establish procedures reasonably
designed, taking into account current market conditions and the Portfolio's
investment objective, to stabilize the net asset value per share for purposes
of sales and redemptions at $1.00. These procedures include the determination,
at such intervals as the Trustees deem appropriate, of the extent, if any, to
which the net asset value per share calculated by using available market
quotations deviates from $1.00 per share. In the event such deviation exceeds
one half of one percent, the Trustees are required to promptly consider what
action, if any, should be initiated.
With respect to the Managed Asset Allocation Portfolio, the Quest for Value
Equity Portfolio, the Quest for Value Small Cap Portfolio, the U.S. Government
Securities Portfolio, the T. Rowe Price International Stock Portfolio, the T.
Rowe Price Equity Income Portfolio and the T. Rowe Price Growth Stock
Portfolio, foreign securities traded outside the United States are generally
valued as of the time their trading is complete, which is usually different
from the close of the New York Stock Exchange. Occasionally, events affecting
the value of such securities may occur between such times and the close of the
New York Stock Exchange that will not be reflected in the computation of the
Portfolios' net asset value. If events materially affecting the value of such
securities occur during such period, these securities will be valued at their
fair value according to procedures decided upon in good faith by the Fund's
Board of Trustees. All securities and other assets of the Portfolios initially
expressed in foreign currencies will be converted to U.S. dollar values at the
mean of the bid and offer prices of such currencies against U.S. dollars last
quoted on a valuation date by any recognized dealer.
TAXES
FEDERAL INCOME TAXES
Each Portfolio intends to qualify each year as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). By
so qualifying, a Portfolio will not be subject to federal income taxes to the
extent that its net investment income and net realized capital gains are
distributed.
In order to so qualify, a Portfolio must, among other things, (1) derive at
least 90% of its gross income in each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stocks or securities or foreign currencies, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stocks or securities;
(2) derive less than 30% of its gross income in each taxable year from the sale
or other disposition of stocks or securities held less than three months (the
Portfolio's transactions in future transactions, straddles and options may be
restricted in order to comply with this requirement); and (3) diversify its
holdings so that, at the end of each quarter of the Portfolio's taxable year,
(a) at least 50% of the market value of the Portfolio's assets is represented
by cash, government securities and other securities limited in respect of any
one issuer to 5% of the value of the Portfolio's assets and to not more than
10% of the voting securities of such issuer, and (b) not more than 25% of the
value of its assets is invested in securities of any one issuer (other than
government securities).
- 25 -
<PAGE>
As a regulated investment company, a Portfolio will not be subject to
federal income tax on net investment income and capital gains (short- and
long-term), if any, that it distributes to its shareholders if at least 90% of
its net investment income and net short-term capital gains for the taxable
year are distributed, but will be subject to tax at regular corporate rates on
any income or gains that are not distributed. In general, dividends will be
treated as paid when actually distributed, except that dividends declared in
October, November or December and made payable to shareholders of record in
such a month will be treated as having been paid by the Portfolio (and
received by shareholders) on December 31, provided the dividend is paid in the
following January. Each Portfolio intends to satisfy the distribution
requirement in each taxable year.
The Code imposes a 4% nondeductible excise tax on a Portfolio to the extent
it does not distribute by the end of any calendar year an amount equal to the
sum of at least 98% of its net investment income for that year, 98% of the net
amount of its capital gains (both long- and short-term) for the one-year
period ending on October 31 of that year and 100% of any undistributed amounts
from the prior year. For this purpose, however, any income or gain retained by
a Portfolio that is subject to corporate income tax will be considered to have
been distributed by year-end.
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 ("variable insurance
contracts") and the general account of PFL Life Insurance Company which
provided the initial capital for the Portfolios of the Fund. See the
prospectus or other material for the Contracts for additional discussion of
the taxation of segregated asset accounts and of the owner of the particular
Contract described therein.
Section 817(h) of the Code and Treasury Department regulations thereunder
impose certain diversification requirements on the segregated asset accounts
investing in the Portfolios of the Fund. These requirements, which are in
addition to the diversification requirements applicable to the Fund under the
1940 Act and under the regulated investment company provisions of the Code,
may limit the types and amounts of securities in which the Portfolios may
invest. Failure to meet the requirements of section 817(h) could result in
current taxation of the owner of the Contract on the income of the Contract.
The Fund may therefore find it necessary to take action to ensure that a
Contract continues to qualify as a Contract under federal tax laws. The Fund,
for example, may be required to alter the investment objectives of a Portfolio
or substitute the shares of one Portfolio for those of another. No such change
of investment objectives or substitution of securities will take place without
notice to the shareholders of the affected Portfolio and the approval of a
majority of such shareholders and without prior approval of the Securities and
Exchange Commission, to the extent legally required.
ORGANIZATION AND CAPITALIZATION OF THE FUND
The Fund is a Massachusetts business trust organized on November 18, 1988. A
copy of the Fund's Agreement and Declaration of Trust, as amended, which is
governed by Massachusetts law, is on file with the Secretary of State of The
Commonwealth of Massachusetts.
The Trustees of the Fund have authority to issue an unlimited number of
shares of beneficial interest without par value of one or more series.
Currently, the Trustees have established and designated eight 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
- 26 -
<PAGE>
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 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.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Fund. However, the Agreement
and Declaration of Trust disclaims shareholder liability for acts and
obligations of the Fund and requires that notice of such disclaimer be given
in each agreement, obligation or instrument entered into or executed by the
Fund or the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of Fund property for all loss and expense of any
shareholders held personally liable for obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to
meet its obligations. The likelihood of such circumstances is remote.
LEGAL MATTERS
Certain legal matters are passed on for the Fund by Sullivan & Worcester of
Washington, D.C.
CUSTODIAN
Boston Safe Deposit and Trust Company, located at One Boston Place, Boston,
Massachusetts 02108, serves as the custodian of the Trust. Under the Custody
Agreement, Boston Safe holds the Portfolios' securities and keeps all
necessary records and documents.
- 27 -
<PAGE>
APPENDIX
SECURITIES RATINGS
STANDARD & POOR'S BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong. Debt rated "AA" has a
very strong capacity to pay interest and to repay principal and differs from
the highest rated issues only in small degree. Debt rated "A" has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt of a higher rated category. Debt rated "BBB" is regarded
as having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
interest and to repay principal for debt in this category than for higher rated
categories. Bonds rated "BB", "B", "CCC" and "CC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "CC" the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. The ratings from "AA" to "B" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
MOODY'S BOND RATINGS
Bonds rated "Aaa" by Moody's are judged to be of the best quality and to
carry the smallest degree of investment risk. Bonds rated "Aa" are judged to be
of high quality by all standards. Bonds rated "A" possess many favorable
investment attributes and are to be considered as higher medium grade
obligations. Bonds rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured and have speculative
characteristics as well. Bonds are rated "Ba", "B", "Caa", "Ca", "C" when
protection of interest and principal payments is questionable. A "Ba" rating
indicates some speculative elements while "Ca" represents a high degree of
speculation and "C" represents the lowest rated class of bonds. "Caa", "Ca" and
"C" bonds may be in default. Moody's applies numerical modifiers "1", "2" and
"3" in each generic rating classification from "Aa" to "B" in its corporate
bond rating system. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a mid-
range ranking; and the modifier "3" indicates that the issue ranks at the lower
end of its generic rating category.
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
"A" is the highest commercial paper rating category utilized by Standard &
Poor's, which uses the numbers "1+", "1", "2" and "3" to denote relative
strength within its "A" classification. Commercial paper issuers rated "A" by
Standard & Poor's have the following characteristics. Liquidity ratios are
better than industry average. Long-term debt rating is "A" or better. The
issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow are in an upward trend. Typically, the issuer is a
strong company in a well-established industry and has superior management.
Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or short-
term adversities. The rating "C" is assigned to short-term debt obligations
with a doubtful capacity for repayment. An issue rated "D" is either in default
or is expected to be in default upon maturity.
A-1
<PAGE>
MOODY'S COMMERCIAL PAPER RATINGS
"Prime-1" is the highest commercial paper rating assigned by Moody's, which
uses the numbers "1", "2" and "3" to denote relative strength within its
highest classification of Prime. Commercial paper issuers rated Prime by
Moody's have the following characteristics. Their short-term debt obligations
carry the smallest degree of investment risk. Margins of support for current
indebtedness are large or stable with cash flow and asset protection well
assured. Current liquidity provides ample coverage of near-term liabilities and
unused alternative financing arrangements are generally available. While
protective elements may change over the intermediate or longer terms, such
changes are most unlikely to impair the fundamentally strong position of short-
term obligations.
IBCA LIMITED/IBCA INC. COMMERCIAL PAPER RATINGS. Short-term obligations,
including commercial paper, rated A-1+ by IBCA Limited or its affiliate IBCA
Inc., are obligations supported by the highest capacity for timely repayment.
Obligations rated A-1 have a very strong capacity for timely repayment.
Obligations rated A-2 have a strong capacity for timely repayment, although
such capacity may be susceptible to adverse changes in business, economic or
financial conditions.
FITCH INVESTORS SERVICES, INC. COMMERCIAL PAPER RATINGS. Fitch Investors
Services, Inc. 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 S&P's rating of
A-1+ and A-1 as being in S&P's highest rating category.
A-2
<PAGE>
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but supplements
and should be read in conjunction with the Prospectus for the Growth Portfolio
of the WRL Series Fund, Inc. (the "Fund"). A copy of the Prospectus may be
obtained by writing PFL Life Insurance Company, Administrative and Service
Office, Financial Markets Division--Variable Annuity Dept., 4333 Edgewood Road,
N.E., Cedar Rapids, Iowa 52499 or by calling (800) 525-6205.
-------------------------------------------------
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Investment Adviser
JANUS CAPITAL CORPORATION
Sub-Adviser
-------------------------------------------------
The date of the Prospectus to which this Statement of Additional Information
relates and the date of this Statement of Additional Information is May 1,
1995.
- 1 -
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THIS STATEMENT OF CROSS-REFERENCE TO
ADDITIONAL INFORMATION PAGE IN PROSPECTUS
------------------------- ------------------
<S> <C> <C>
Investment Objective and Poli-
cies............................ 3 4
Investment Restrictions........ 3 10
Repurchase and Reverse Repur-
chase
Agreements.................... 5 6
Lending of Portfolio Securi-
ties.......................... 5 7
Foreign Securities............. 6 8
Non-Investment Grade Debt Secu-
rities........................ 6 5
Zero Coupon Securities......... 7 6
Investments in Futures, Options
and Other
Derivative Instruments........ 7 5
Management of the Fund........... 19 11
Directors and Officers......... 19 11
The Investment Adviser......... 21 11
The Sub-Adviser................ 22 12
Portfolio Transactions and Bro-
kerage.......................... 23 13
Portfolio Turnover............. 23 11
Placement of Portfolio Broker-
age........................... 24 12
Purchase and Redemption of
Shares.......................... 26 14
Offering of the Shares and De-
termination
of Offering Price............. 26 15
Portfolio Net Asset Valuation.. 26 15
Investment Experience Informa-
tion............................ 26 15
Calculation of Performance Re-
lated Information............... 27 16
Total Return................... 27 16
Taxes............................ 28 13
Capital Stock of the Fund........ 29 14
Registration Statement........... 30 N/A
Financial Statements............. 30 17
Appendix A--Description of Port-
folio Securities................ A-1 10
Appendix B--Description of Se-
lected Corporate Bond and Com-
mercial Paper Ratings........... B-1 5
</TABLE>
- 2 -
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Growth Portfolio (the "Portfolio") of the
Fund is described in the Portfolio's Prospectus. Shares of the Portfolio are
sold only to the insurance company separate accounts of Western Reserve Life
Assurance Co. of Ohio ("WRL") and to separate accounts of certain of its
affiliated life insurance companies (collectively, the "Separate Accounts") to
fund benefits under certain variable life insurance policies (the "Policies")
and variable annuity contracts (the "Annuity Contracts").
As indicated in the Prospectus, the Portfolio's investment objective and,
unless otherwise noted, its investment policies and techniques, may be changed
by the Board of Directors of the Fund without approval of shareholders or
holders of the Contract, the Policies or the Annuity Contracts (collectively,
"Policyholders"). A change in the investment objective or policies of the
Portfolio may result in the Portfolio's having an investment objective or
policies different from those which an Owner deemed appropriate at the time of
investment.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Portfolio is subject to certain
fundamental policies and restrictions which may not be changed without the
approval of the holders of a majority of the outstanding voting shares of the
Portfolio. "Majority" for this purpose and under the Investment Company Act of
1940, as amended (the "1940 Act") means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares of
the Portfolio are represented or (ii) more than 50% of the outstanding shares
of the Portfolio. A complete statement of all such fundamental policies is set
forth below.
The Portfolio may not, as a matter of fundamental policy:
1. With respect to 75% of the Portfolio's total assets, purchase the
securities of any one issuer (other than cash items and "Government securities"
as defined in the 1940 Act) if immediately after and as a result of such
purchase (a) the value of the holdings of the Portfolio in the securities of
such issuer exceeds 5% of the value of the Portfolio's total assets, or (b) the
Portfolio owns more than 10% of the outstanding voting securities of any one
class of securities of such issuer;
2. Invest more than 25% of the value of the Portfolio's assets in any
particular industry (other than Government securities);
3. Purchase or sell physical commodities other than foreign currencies unless
acquired as a result of ownership of securities (but this restriction shall not
prevent the Portfolio from purchasing or selling options, futures contracts,
caps, floors and other derivative instruments, engaging in swap transactions or
investing in securities or other instruments backed by physical commodities);
4. Invest directly in real estate or interests in real estate, including
limited partnership interests; however, the Portfolio may own debt or equity
securities issued by companies engaged in those businesses;
5. Act as underwriter of securities issued by others, except to the extent
that it may be deemed an underwriter in connection with the disposition of
portfolio securities of the Portfolio; and
- 3 -
<PAGE>
6. Lend any security or make any other loan if, as a result, more than 25% of
its total assets would be lent to other parties (but this limitation does not
apply to purchases of commercial paper, debt securities or to repurchase
agreements).
Furthermore, the Portfolio has adopted the following non-fundamental
investment restrictions which may be changed by the Board of Directors of the
Fund without shareholder or Owner approval:
(A) The Portfolio may not, as a matter of non-fundamental policy: (i) enter
into any futures contracts or options on futures contracts for purposes other
than bona fide hedging transactions within the meaning of Commodity Futures
Trading Commission regulations if the aggregate initial margin deposits and
premiums required to establish positions in futures contracts and related
options that do not fall within the definition of bona fide hedging
transactions would exceed 5% of the fair market value of the Portfolio's net
assets, after taking into account unrealized profits and losses on such
contracts it has entered into and (ii) enter into any futures contracts or
options on futures contracts if the aggregate amount of the Portfolio's
commitments under outstanding futures contracts positions and options on
futures contracts would exceed the market value of its total assets;
(B) The Portfolio may not mortgage or pledge any securities owned or held by
the Portfolio in amounts that exceed, in the aggregate, 15% of the Portfolio's
net assets, provided that this limitation does not apply to reverse repurchase
agreements or in the case of assets deposited to provide margin or guarantee
positions in options, futures contracts, swaps, forward contracts or other
derivative instruments or segregation of assets in connection with such
transactions;
(C) The Portfolio may not sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to the securities sold
short, and provided that transactions in options, futures contracts, swaps,
forward contracts and other derivative instruments are not deemed to constitute
selling securities short;
(D) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the clearance
of transactions, and provided that margin payments and other deposits made in
connection with transactions in options, futures contracts, swaps, forward
contracts, and other derivative instruments shall not be deemed to constitute
purchasing securities on margin;
(E) The Portfolio may borrow money only for temporary or emergency purposes
(not for leveraging or investment) in an amount not exceeding 25% of the value
of the Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that exceed 25% of the
value of the Portfolio's total assets by reason of a decline in net assets will
be reduced within three business days to the extent necessary to comply with
the 25% limitation. This policy shall not prohibit reverse repurchase
agreements or deposits of assets to provide margin or guarantee positions in
connection with transactions in options, futures contracts, swaps, forward
contracts, or other derivative instruments or the segregation of assets in
connection with such transactions;
(F) The Portfolio may not invest more than 15% of its assets in illiquid
securities. This does not include securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933 or any securities for which the
Board of Directors or the Sub-Adviser, as appropriate, has made a determination
of liquidity, as permitted under the 1940 Act;
(G) The Portfolio may not (i) purchase securities of other investment
companies, except in the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Restrictions (i) and (ii) do not
- 4 -
<PAGE>
apply to money market funds or to securities received as dividends, through
offers to exchange, or as a result of reorganization, consolidation, or merger.
If the Portfolio invests in a money market fund, the Investment Adviser will
reduce its advisory fee by the amount of any investment advisory or
administrative service fees paid to the investment manager of the money market
fund;
(H) The Portfolio may not invest directly in oil, gas or other mineral
development or exploration programs or leases; however, the Portfolio may own
debt or equity securities of companies engaged in those businesses;
(I) The Portfolio may not invest more than 25% of its net assets at the time
of purchase in the securities of foreign issuers and obligors;
(J) The Portfolio may not invest in companies for the purpose of exercising
control or management; and
(K) The Portfolio may not issue senior securities, except as permitted by the
1940 Act.
Except with respect to borrowing money, if a percentage limitation set forth
above is complied with at the time of the investment, a subsequent change in
the percentage resulting from any change in value or of the Portfolio's net
assets will not result in a violation of such restriction. Additional
limitations on borrowing that are imposed by state law and regulations may
apply.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
In a repurchase agreement, the Portfolio purchases a security and
simultaneously commits to resell that security to the seller at an agreed upon
price on an agreed upon date within a number of days (usually not more than
seven) from the date of purchase. The resale price reflects the purchase price
plus an agreed upon incremental amount that is unrelated to the coupon rate or
maturity of the purchased security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is in
effect secured by the value (at least equal to the amount of the agreed upon
resale price and marked-to-market daily) of the underlying security. The
Portfolio may engage in a repurchase agreement with respect to any security in
which it is authorized to invest. While it does not presently appear possible
to eliminate all risks from these transactions (particularly the possibility of
a decline in the market value of the underlying securities, as well as delays
and costs to the Portfolio in connection with bankruptcy proceedings), it is
the policy of the Portfolio to limit repurchase agreements to those parties
whose creditworthiness has been reviewed and found satisfactory by the Sub-
Adviser.
In a reverse repurchase agreement, the Portfolio sells a portfolio security
to another party, such as a bank or broker-dealer, in return for cash and
agrees to repurchase the instrument at a particular price and time. While a
reverse repurchase agreement is outstanding, the Portfolio will maintain cash
and appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. The Portfolio will enter into reverse
repurchase agreements only with parties that the Sub-Adviser deems
creditworthy.
LENDING OF PORTFOLIO SECURITIES
The Portfolio may lend its portfolio securities subject to the restrictions
stated in this Statement of Additional Information. Under applicable regulatory
requirements (which are subject to change), the following conditions apply to
securities loans: (a) the loan must be continuously secured by liquid assets
maintained on a current basis in an amount at least equal to the market value
of the securities loaned; (b) the Portfolio must receive any dividends or
interest paid by the issuer on such securities; (c) the Portfolio must have the
right to call the loan and obtain the securities loaned at any time upon notice
of not more than five business days, including the right to call the loan to
permit voting of the securities; and (d) the Portfolio must receive either
interest
- 5 -
<PAGE>
from the investment of collateral or a fixed fee from the borrower. Securities
loaned by the Portfolio remain subject to fluctuations in market value. The
Portfolio may pay reasonable finders, custodian and administrative fees in
connection with a loan. Securities lending, as with other extensions of credit,
involves the risk that the borrower may default. Although securities loans will
be fully collateralized at all times, the Portfolio may experience delays in,
or be prevented from, recovering the collateral. During the period that the
Portfolio seeks to enforce its rights against the borrower, the collateral and
the securities loaned remain subject to fluctuations in market value. The
Portfolio may also incur expenses in enforcing its rights. If the Portfolio has
sold a loaned security, it may not be able to settle the sale of the security
and may incur potential liability to the buyer of the security on loan for its
costs to cover the purchase.
FOREIGN SECURITIES
Subject to the limitations set forth above, the Portfolio may purchase
certain foreign securities. Investments in foreign securities, particularly
those of non-governmental issuers, involve considerations which are not
ordinarily associated with investing in domestic issuers. These considerations
include changes in currency rates, currency exchange control regulations, the
possibility of expropriation, the unavailability of financial information or
the difficulty of interpreting financial information prepared under foreign
accounting standards, less liquidity and more volatility in foreign securities
markets, the impact of political, social or diplomatic developments, and the
difficulty of assessing economic trends in foreign countries. It is possible
that market quotations for foreign securities will not be readily available. In
such event, these securities shall be valued at fair market value as determined
in good faith by the Sub-Adviser under the supervision of the Board of
Directors. If it should become necessary, the Portfolio could encounter greater
difficulties in invoking legal processes abroad than would be the case in the
United States. Transaction costs with respect to foreign securities may be
higher. The Investment Adviser and the Sub-Adviser will consider these and
other factors before investing in foreign securities. The Portfolio will not
concentrate its investments in any particular foreign country. For a more
detailed explanation regarding the special risks of investing in foreign
securities, see "Foreign Investments and Special Risks" in the Prospectus.
NON-INVESTMENT GRADE DEBT SECURITIES
The Portfolio may, but does not currently invest, or intend to invest, in
debt securities below the four highest grades ("lower grade debt securities")
as determined by Moody's Investors Service, Inc. ("Moody's") (Baa) or Standard
& Poor's (BBB). The Portfolio does not currently intend to invest more than 5%
of its assets in non-investment grade securities. Before investing in any
lower-grade debt securities, the Sub-Adviser will determine that such
investments meet the Portfolio's investment objectives and that the lower-grade
debt securities' ratings are supported by an internal credit review, which the
Sub-Adviser will conduct in each such instance. Lower-grade debt securities
usually have moderate to poor protection of principal and interest payments,
have certain speculative characteristics (see Appendix B for a description of
the ratings), and involve greater risk of default or price declines due to
changes in the issuer's creditworthiness than investment-grade debt securities.
Because the market for lower-grade debt securities may be thinner and less
active than for investment grade debt securities, there may be market price
volatility for these securities and limited liquidity in the resale market.
Market prices for lower-grade debt securities may decline significantly in
periods of general economic difficulty or rising interest rates. Through
portfolio diversification and credit analysis, investment risk can be reduced,
although there can be no assurance that losses will not occur.
The quality limitation set forth in the Portfolio's investment policies is
determined immediately after the Portfolio's acquisition of a given security.
Accordingly, any later change in ratings will not be considered when
determining whether an investment complies with the Portfolio's investment
policies.
- 6 -
<PAGE>
ZERO COUPON SECURITIES
The Portfolio may invest in zero coupon securities. Zero-coupon bonds are
issued and traded at a discount from their face amounts. They do not entitle
the holder to any periodic payment of interest prior to a specified date when
the securities begin paying current interest. The discount from the face amount
or par value depends on the time remaining until cash payments begin,
prevailing interest rates, liquidity of the security and the perceived credit
quality of the issuer.
Current Federal income tax law requires holders of zero coupon securities to
report the portion of the original issue discount on such securities that
accrues that year as interest income, even though the holders receive no cash
payments of interest during the year. In order to qualify as a "regulated
investment company" under the Internal Revenue Code, the Portfolio must
distribute its investment company taxable income, including the original issue
discount accrued on zero coupon bonds. Because the Portfolio will not receive
cash payments on a current basis in respect of accrued original-issue discount
on zero-coupon bonds during the periods before interest payments begin, in some
years the Portfolio may have to distribute cash obtained from other sources in
order to satisfy the distribution requirements under the Code. The Portfolio
might obtain such cash from selling other portfolio holdings. These actions are
likely to reduce the assets to which the Portfolio's expenses could be
allocated and to reduce the rate of return for the Portfolio. In some
circumstances, such sales might be necessary in order to satisfy cash
distribution requirements even though investment considerations might otherwise
make it undesirable for the Portfolio to sell the securities at the time.
Generally, the market prices of zero coupon securities are more volatile than
the prices of securities that pay interest periodically and in cash and are
likely to respond to changes in interest rates to a greater degree than other
types of debt securities having similar maturities and credit quality.
INVESTMENTS IN FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
Futures Contracts. The Portfolio may enter into contracts for the purchase or
sale for future delivery of fixed-income securities, foreign currencies or
contracts based on financial indices including interest rates or indices of
U.S. Government or foreign government securities or equity or fixed-income
securities ("futures contracts"). U.S. futures contracts are traded on
exchanges that have been designated "contract markets" by the Commodity Futures
Trading Commission ("CFTC") and must be executed through a futures commission
merchant ("FCM"), or brokerage firm, which is a member of the relevant contract
market. Through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
Since all transactions in the futures market are made through a member of, and
are offset or fulfilled through a clearinghouse associated with, the exchange
on which the contracts are traded, the Portfolio will incur brokerage fees when
it buys or sells futures contracts.
When the Portfolio buys or sells a futures contract, it incurs a contractual
obligation to receive or deliver the underlying instrument (or a cash payment
based on the difference between the underlying instrument's closing price and
the price at which the contract was entered into) at a specified price on a
specified date. Transactions in futures contracts will not be made for
speculation and will not be made other than to seek to hedge against potential
changes in interest or currency exchange rates or the price of a security or a
securities index which might correlate with or otherwise adversely affect
either the value of the Portfolio's securities or the prices of securities
which the Portfolio is considering buying at a later date.
The buyer or seller of a futures contract is not required to deliver or pay
for the underlying instrument unless the contract is held until the delivery
date. However, both the buyer and seller are required to deposit "initial
margin" for the benefit of an FCM when the contract is entered into. Initial
margin deposits are equal to a percentage of the contract's value, as set by
the exchange
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on which the contract is traded, and may be maintained in cash or certain high-
grade liquid assets. If the value of either party's position declines, that
party will be required to make additional "variation margin" payments with an
FCM to settle the change in value on a daily basis. The party that has a gain
may be entitled to receive all or a portion of this amount. Initial and
variation margin payments are similar to good faith deposits or performance
bonds, unlike margin extended by a securities broker, and initial and variation
margin payments do not constitute purchasing securities on margin for purposes
of the Portfolio's investment limitations. In the event of the bankruptcy of an
FCM that holds margin on behalf of the Portfolio, the Portfolio may be entitled
to return of margin owed to the Portfolio only in proportion to the amount
received by the FCM's other customers. The Sub-Adviser will attempt to minimize
the risk by careful monitoring of the creditworthiness of the FCM's with which
the Portfolio does business and by depositing margin payments in a segregated
account with the custodian when practical or otherwise required by law.
Although the Portfolio would hold cash and liquid assets in a segregated
account with a value sufficient to cover the Portfolio's open futures
obligations, the segregated assets would be available to the Portfolio
immediately upon closing out the futures position, while settlement of
securities transactions could take several days. However, because the
Portfolio's cash that may otherwise be invested would be held uninvested or
invested in high-grade liquid assets so long as the futures position remains
open, the Portfolio's return could be diminished due to the opportunity cost of
foregoing other potential investments.
The acquisition or sale of a futures contract may occur, for example, when
the Portfolio holds or is considering purchasing equity securities and seeks to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, the Portfolio
might sell equity index futures contracts, thereby hoping to offset a potential
decline in the value of equity securities in the Portfolio by a corresponding
increase in the value of the futures contract position held by the Portfolio
and thereby preventing the Portfolio's net asset value from declining as much
as it otherwise would have. The Portfolio also could seek to protect against
potential price declines by selling portfolio securities and investing in money
market instruments. However, since the futures market is more liquid than the
cash market, the use of futures contracts as an investment technique allows the
Portfolio to maintain a defensive position without having to sell portfolio
securities.
Similarly, when prices of equity securities are expected to increase, futures
contracts may be bought to attempt to hedge against the possibility of having
to buy equity securities at higher prices. This technique is sometimes known as
an anticipatory hedge. Since the fluctuations in the value of futures contracts
should be similar to those of equity securities, the Portfolio could take
advantage of the potential rise in the value of equity securities without
buying them until the market has stabilized. At that time, the futures
contracts could be liquidated and the Portfolio could buy equity securities on
the cash market. To the extent the Portfolio enters into futures contracts for
this purpose, the assets in the segregated asset account maintained to cover
the Portfolio's obligations with respect to futures contracts will consist of
high-grade liquid assets from its portfolio in an amount equal to the
difference between the contract price and the aggregate value of the initial
and variation margin payments made by the Portfolio with respect to the futures
contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial margin and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal price relationship between the cash
and futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced and prices in the futures
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market distorted. Third, from the point of view of speculators, the margin
deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price distortions. Due to
the possibility of the foregoing distortions, a correct forecast of general
price trends by the Sub-Adviser still may not result in a successful use of
futures contracts.
Futures contracts entail risks. Although the Sub-Adviser believes that use of
such contracts can benefit the Portfolio, if the Sub-Adviser's investment
judgment is incorrect, the Portfolio's overall performance could be worse than
if the Portfolio had not entered into futures contracts. For example, if the
Portfolio has attempted to hedge against the effects of a possible decrease in
prices of securities held by the Portfolio and prices increase instead, the
Portfolio may lose part or all of the benefit of the increased value of these
securities because of offsetting losses in the Portfolio's futures positions.
In addition, if the Portfolio has insufficient cash, it may have to sell
securities from its portfolio to meet daily variation margin requirements.
Those sales may, but will not necessarily, be at increased prices which reflect
the rising market and may occur at a time when the sales are disadvantageous to
the Portfolio.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of futures
contracts, it is possible that the standardized futures contracts available to
the Portfolio will not match exactly the Portfolio's current or potential
investments. The Portfolio may buy and sell futures contracts based on
underlying instruments with different characteristics from the securities in
which it typically invests--for example, by hedging investments in portfolio
securities with a futures contract based on a broad index of securities--which
involves a risk that the futures position will not correlate precisely with the
performance of the Portfolio's investments.
Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments correlate with the Portfolio's
investments. Futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the underlying
instruments, and the time remaining until expiration of the contract. Those
factors may affect securities prices differently from futures prices. Imperfect
correlations between the Portfolio's investments and its futures positions may
also result from differing levels of demand in the futures markets and the
securities markets, from structural differences in how futures and securities
are traded, and from imposition of daily price fluctuation limits for futures
contracts. The Portfolio may buy or sell futures contracts with a greater or
lesser value than the securities it wishes to hedge or is considering
purchasing in order to attempt to compensate for differences in historical
volatility between the futures contract and the securities, although this may
not be successful in all cases. If price changes in the Portfolio's futures
positions are poorly correlated with its other investments, its futures
positions may fail to produce desired gains or result in losses that are not
offset by the gains in the Portfolio's other investments.
Because futures contracts are generally settled within a day from the date
they are closed out, compared with a settlement period of seven days for some
types of securities, the futures markets can provide superior liquidity to the
securities markets. Nevertheless, there is no assurance a liquid secondary
market will exist for any particular futures contract at any particular time.
In addition, futures exchanges may establish daily price fluctuation limits for
futures contracts and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached, it may be impossible for the Portfolio to
enter into new positions or close out existing positions. If the secondary
market for a futures contract is not liquid because of price fluctuation limits
or otherwise, the Portfolio may not be able to promptly liquidate unfavorable
positions and potentially be required to continue to hold a futures position
until the delivery date, regardless of changes in its value. As a result, the
Portfolio's access to other assets held to cover its futures positions also
could be impaired.
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Although futures contracts by their terms call for the delivery or
acquisition of the underlying commodities or a cash payment based on the value
of the underlying commodities, in most cases the contractual obligation is
offset before the delivery date of the contract by buying, in the case of a
contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange.
Such a transaction cancels the obligation to make or take delivery of the
commodities.
The Portfolio intends to comply with guidelines of eligibility for exclusion
from the definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets.
Such guidelines presently require that to the extent that the Portfolio enters
into futures contracts or options on a futures position that are not for bona
fide hedging purposes (as defined by the CFTC), the aggregate initial margin
and premiums on these positions (excluding the amount by which options are "in-
the-money") may not exceed 5% of the Portfolio's net assets.
Options on Futures Contracts. The Portfolio may buy and write options on
futures contracts for only hedging purposes. An option on a futures contract
gives the Portfolio the right (but not the obligation) to buy or sell a futures
contract at a specified price on or before a specified date. The purchase and
writing of options on futures contracts is similar in some respects to the
purchase and writing of options on individual securities. See "Options on
Securities" below. Transactions in options on futures contracts will not be
made for speculation and will not be made other than to attempt to hedge
against potential changes in interest rates or currency exchange rates or the
price of a security or a securities index which might correlate with or
otherwise adversely affect either the value of the Portfolio's securities or
the prices of securities which the Portfolio is considering buying at a later
date.
The purchase of a call option on a futures contract may or may not be less
risky than ownership of the futures contract or the underlying instrument,
depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying
instrument. As with the purchase of futures contracts, when the Portfolio is
not fully invested it may buy a call option on a futures contract to attempt to
hedge against a market advance.
The writing of a call option on a futures contract may constitute a partial
hedge against declining prices of the security or foreign currency which is
deliverable under, or of the index comprising, the futures contract. If the
futures price at the expiration of the option is below the exercise price, the
Portfolio will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the Portfolio's
holdings. The writing of a put option on a futures contract may constitute a
partial hedge against increasing prices of the security or foreign currency
which is deliverable under, or of the index comprising, the futures contract.
If the futures price at expiration of the option is higher than the exercise
price, the Portfolio will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of securities which
the Portfolio is considering buying. If a call or put option the Portfolio has
written is exercised, the Portfolio will incur loss which will be reduced by
the amount of the premium it received. Depending on the degree of correlation
between change in the value of its portfolio securities and changes in the
value of the futures positions, the Portfolio's losses from existing options on
futures may to some extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some respect
to the purchase of protective put options on portfolio securities. For example,
the Portfolio may buy a put option on a futures contract to attempt to hedge
the Portfolio's securities against the risk of falling prices.
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The amount of risk the Portfolio assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
Forward Contracts. The Portfolio may enter into forward foreign currency
exchange contracts ("forward currency contracts") to attempt to minimize the
risk to the Portfolio from adverse changes in the relationship between the U.S.
dollar and other currencies. A forward currency contract is an obligation to
buy or sell an amount of a specified currency for an agreed price (which may be
in U.S. dollars or a foreign currency) at a future date which is individually
negotiated between currency traders and their customers. The Portfolio may
invest in forward currency contracts with stated contract values of up to the
value of the Portfolio's assets.
The Portfolio may exchange foreign currencies for U.S. dollars and for other
foreign currencies in the normal course of business and may buy and sell
currencies through forward currency contracts in order to fix a price for
securities it has agreed to buy or sell. The Portfolio may enter into a forward
currency contract, for example, when it enters into a contract to buy or sell a
security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security ("transaction hedge").
Additionally, when the Sub-Adviser believes that a foreign currency in which
portfolio securities are denominated may suffer a substantial decline against
the U.S. dollar, the Portfolio may enter into a forward currency contract to
sell an amount of that foreign currency (or a proxy currency whose performance
is expected to replicate the performance of that currency) for U.S. dollars
approximating the value of some or all of the portfolio securities denominated
in that currency (not exceeding the value of the Portfolio's assets denominated
in that currency) or by participating in options or futures contracts with
respect to the currency, or, when the Sub-Adviser believes that the U.S. dollar
may suffer a substantial decline against a foreign currency, the Portfolio may
enter into a forward currency contract to buy that foreign currency for a fixed
U.S. dollar amount ("position hedge"). This type of hedge seeks to minimize the
effect of currency appreciation as well as depreciation, but does not protect
against a decline in the security's value relative to other securities
denominated in the foreign currency.
The Portfolio also may enter into a forward currency contract with respect to
a currency where the Portfolio is considering the purchase of investments
denominated in that currency but has not yet done so ("anticipatory hedge").
In any of the above circumstances the Portfolio may, alternatively, enter
into a forward currency contract with respect to a different foreign currency
when the Sub-Adviser believes that the U.S. dollar value of that currency will
correlate with the U.S. dollar value of the currency in which portfolio
securities of, or being considered for purchase by, the Portfolio are
denominated ("cross-hedge"). For example, if the Sub-Adviser believes that a
particular foreign currency may decline relative to the U.S. dollar, the
Portfolio could enter into a contract to sell that currency or a proxy currency
(up to the value of the Portfolio's assets denominated in that currency) in
exchange for another currency that the Sub-Adviser expects to remain stable or
to appreciate relative to the U.S. dollar. Shifting the Portfolio's currency
exposure from one foreign currency to another removes the Portfolio's
opportunity to profit from increases in the value of the original currency and
involves a risk of increased losses to the Portfolio if the Sub-Adviser's
projection of future exchange rates is inaccurate.
The Portfolio also may enter into forward contracts to buy or sell at a later
date instruments in which the Portfolio may invest directly or on financial
indices based on those instruments. The market for those types of forward
contracts is developing and it is not currently possible to identify
instruments on which forward contracts might be created in the future.
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Forward contracts are currently considered illiquid. Accordingly, the Fund's
custodian will place cash or high-grade liquid assets in a segregated account
of the Portfolio having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in the
segregated account declines, additional cash or high-grade liquid assets will
be placed in the account on a daily basis so that the value of the account will
be equal to the amount of the Portfolio's commitments with respect to such
contracts. As an alternative to maintaining all or part of the segregated
account, the Portfolio may buy call options permitting the Portfolio to buy the
amount of foreign currency subject to the hedging transaction by a forward sale
contract or the Portfolio may buy put options permitting the Portfolio to sell
the amount of foreign currency subject to a forward buy contract.
While forward contracts are not currently regulated by the CFTC, the CFTC may
in the future assert authority to regulate forward contracts. In such event the
Portfolio's ability to utilize forward contracts in the manner set forth in the
Prospectus may be restricted. Forward contracts will reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unforeseen changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such contracts.
The use of foreign currency forward contracts will not eliminate fluctuations
in the underlying U.S. dollar equivalent value of the proceeds of or rates of
return on the Portfolio's foreign currency denominated portfolio securities.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset
that is the subject of the hedging transaction generally will not be precise.
In addition, the Portfolio may not always be able to enter into forward
contracts at attractive prices and accordingly may be limited in its ability to
use these contracts in seeking to hedge the Portfolio's assets.
Also, with regard to the Portfolio's use of cross-hedging transactions, there
can be no assurance that historical correlations between the movement of
certain foreign currencies relative to the U.S. dollar will continue. Thus, at
any time poor correlation may exist between movements in the exchange rates of
the foreign currencies underlying the Portfolio's cross-hedges and the
movements in the exchange rates of the foreign currencies in which the
Portfolio's assets that are subject of the cross-hedging transaction are
denominated.
Options on Foreign Currencies. The Portfolio may buy put and call options and
may write covered put and call options on foreign currencies for hedging
purposes in a manner similar to that in which futures contracts or forward
contracts on foreign currencies may be utilized. For example, a decline in the
U.S. dollar value of a foreign currency in which portfolio securities are
denominated will reduce the U.S. dollar value of such securities, even if their
value in the foreign currency remains constant. In order to protect against
such diminutions in the value of portfolio securities, the Portfolio may buy
put options on the foreign currency. If the value of the currency declines, the
Portfolio will have the right to sell such currency for a fixed amount in U.S.
dollars and will thereby offset, in whole or in part, the adverse effect on its
portfolio which otherwise would have resulted.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Portfolio may buy call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. The purchase of an option on a foreign
currency may constitute an effective hedge against fluctuations in exchange
rates, although, in the event of exchange rate movements adverse to the
Portfolio's option position, the Portfolio could sustain losses on transactions
in foreign currency options which would require that the Portfolio lose a
portion or all of the benefits of advantageous changes in those rates. In
addition, in the case of other types of options, the benefit to the Portfolio
from purchases of foreign currency options will be reduced by the amount of the
premium and related transaction costs.
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The Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, in attempting to hedge against a potential
decline in the U.S. dollar value of foreign currency denominated securities due
to adverse fluctuations in exchange rates, the Portfolio could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised and the
diminution in value of portfolio securities will be offset by the amount of the
premium received.
Similarly, instead of purchasing a call option to attempt to hedge against a
potential increase in the U.S. dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the Portfolio
to hedge the increased cost up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium received, and
only if exchange rates move in the expected direction. If that does not occur,
the option may be exercised and the Portfolio would be required to buy or sell
the underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Portfolio
also may lose all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates.
The Portfolio may write covered call options on foreign currencies. A call
option written on a foreign currency by the Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Portfolio has a call on the same foreign currency and in the same principal
amount as the call written if the exercise price of the call held (i) is equal
to or less than the exercise price of the call written or (ii) is greater than
the exercise price of the call written, and if the difference is maintained by
the Portfolio in cash or high-grade liquid assets in a segregated account with
the Fund's custodian.
The Portfolio may also write call options on foreign currencies for cross-
hedging purposes that may not be deemed to be covered. A call option on a
foreign currency is for cross-hedging purposes if it is not covered but is
designed to provide a hedge against a decline due to an adverse change in the
exchange rate in the U.S. dollar value of a security which the Portfolio owns
or has the right to acquire and which is denominated in the currency underlying
the option. In such circumstances, the Portfolio collateralizes the option by
maintaining, in a segregated account with the Fund's custodian, cash or high-
grade liquid assets in an amount not less than the value of the underlying
foreign currency in U.S. dollars marked-to-market daily.
The Portfolio may buy or write options in privately negotiated transactions
on the types of securities and indices based on the types of securities in
which the Portfolio is permitted to invest directly. The Portfolio will effect
such transactions only with investment dealers and other financial institutions
(such as commercial banks or savings and loan institutions) deemed
creditworthy, and only pursuant to procedures adopted by the Sub-Adviser for
monitoring the creditworthiness of those entities. To the extent that an option
bought or written by the Portfolio in a negotiated transaction is illiquid, the
value of an option bought or the amount of the Portfolio's obligations under an
option written by the Portfolio, as the case may be, will be subject to the
Portfolio's limitation on illiquid investments. In the case of illiquid
options, it may not be possible for the Portfolio to effect an offsetting
transaction at the time when the Sub-Adviser believes it would be advantageous
for the Portfolio to do so.
Options on Securities. In an effort to reduce fluctuations in net asset
value, the Portfolio may write covered put and call options and may buy put and
call options and warrants on securities that are traded on United States and
foreign securities exchanges and over-the-counter. The
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Portfolio also may write call options that are not covered for cross-hedging
purposes. The Portfolio may write and buy options on the same types of
securities that the Portfolio could buy directly and may buy options on
financial indices as described above with respect to futures contracts. There
are no specific limitations on the Portfolio's writing and buying options on
securities.
A put option gives the holder the right, upon payment of a premium, to
deliver a specified amount of a security to the writer of the option on or
before a fixed date at a predetermined price. A call option gives the holder
the right, upon payment of a premium, to call upon the writer to deliver a
specified amount of a security on or before a fixed date at a predetermined
price.
A put option written by the Portfolio is "covered" if the Portfolio (i)
maintains cash not available for investment or high-grade liquid assets with a
value equal to the exercise price in a segregated account with its custodian or
(ii) holds a put on the same security and in the same principal amount as the
put written and the exercise price of the put held is equal to or greater than
the exercise price of the put written. The premium paid by the buyer of an
option will reflect, among other things, the relationship of the exercise price
to the market price and the volatility of the underlying security, the
remaining term of the option, supply and demand and interest rates.
A call option written by the Portfolio is "covered" if the Portfolio owns the
underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or has
segregated additional cash consideration with its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
deemed to be covered if the Portfolio holds a call on the same security and in
the same principal amount as the call written and the exercise price of the
call held (i) is equal to or less than the exercise price of the call written
or (ii) is greater than the exercise price of the call written if the
difference is maintained by the Portfolio in cash and high-grade liquid assets
in a segregated account with its custodian.
The Portfolio collateralizes its obligation under a written call option for
cross-hedging purposes by maintaining in a segregated account with its
custodian cash or high-grade liquid assets in an amount not less than the
market value of the underlying security, marked-to-market daily. The Portfolio
would write a call option for cross-hedging purposes, instead of writing a
covered call option, when the premium to be received from the cross-hedge
transaction would exceed that which would be received from writing a covered
call option and the Sub-Adviser believes that writing the option would achieve
the desired hedge.
If a put or call option written by the Portfolio was exercised, the Portfolio
would be obligated to buy or sell the underlying security at the exercise
price. Writing a put option involves the risk of a decrease in the market value
of the underlying security, in which case the option could be exercised and the
underlying security would then be sold by the option holder to the Portfolio at
a higher price than its current market value. Writing a call option involves
the risk of an increase in the market value of the underlying security, in
which case the option could be exercised and the underlying security would then
be sold by the Portfolio to the option holder at a lower price than its current
market value. Those risks could be reduced by entering into an offsetting
transaction. The Portfolio retains the premium received from writing a put or
call option whether or not the option is exercised.
The writer of an option may have no control when the underlying security must
be sold, in the case of a call option, or bought, in the case of a put option,
since with regard to certain options, the writer may be assigned an exercise
notice at any time prior to the termination of the obligation. Whether or not
an option expires unexercised, the writer retains the amount of the premium.
This amount, of course, may, in the case of a covered call option, be offset by
a decline in the market value of the underlying security during the option
period. If a call option is exercised, the writer experiences a profit or loss
from the sale of the underlying security. If a put option is exercised, the
writer must fulfill the obligation to buy the underlying security.
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The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction". This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction". This is accomplished by selling an option of the same series as
the option previously bought. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the Portfolio to write another call option on the underlying security
with either a different exercise price or expiration date or both or, in the
case of a written put option, will permit the Portfolio to write another put
option to the extent that the exercise price thereof is secured by deposited
high-grade liquid assets. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other portfolio investments. If the Portfolio desires to
sell a particular security on which the Portfolio has written a call option,
the Portfolio will effect a closing transaction prior to or concurrent with the
sale of the security.
The Portfolio may realize a profit from a closing transaction if the price of
the purchase transaction is less than the premium received from writing the
option or the price received from a sale transaction is more than the premium
paid to buy the option; the Portfolio may realize a loss from a closing
transaction if the price of the purchase transaction is more than the premium
received from writing the option or the price received from a sale transaction
is less than the premium paid to buy 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 is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Portfolio.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not exist,
it might not be possible to effect closing transactions in particular options
with the result that the Portfolio would have to exercise the options in order
to realize any profit. If the Portfolio is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or the Portfolio delivers the underlying
security upon exercise. Reasons for the absence of a liquid secondary market
may include the following: (i) there may be insufficient trading interest in
certain options, (ii) restrictions may be imposed by a national securities
exchange on which the option is traded ("Exchange") on opening or closing
transactions or both, (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options or
underlying securities, (iv) unusual or unforeseen circumstances may interrupt
normal operations on an Exchange, (v) the facilities of an Exchange or the
Options Clearing Corporation ("OCC") may not at all times be adequate to handle
current trading volume, or (vi) one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the OCC as a result of trades on that Exchange would continue to
be exercisable in accordance with their terms.
The Portfolio may write options in connection with buy-and-write
transactions; that is, the Portfolio may buy a security and then write a call
option against that security. The exercise price of the call the Portfolio
determines to write will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be below ("in-the-
money"), equal to ("at-the-money") or above ("out-of-the-money") the current
value of the underlying security at the time the option is written. Buy-and-
write transactions using in-the-money call options may be used when it is
expected that the price of the underlying security will remain flat or decline
moderately
- 15 -
<PAGE>
during the option period. Buy-and-write transactions using at-the-money call
options may be used when it is expected that the price of the underlying
security will remain fixed or advance moderately during the option period. Buy-
and-write transactions using out-of-the-money call options may be used when it
is expected that the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call options are exercised in such transactions, the
Portfolio's maximum gain will be the premium received by it for writing the
option, adjusted upwards or downwards by the difference between the Portfolio's
purchase price of the security and the exercise price. If the options are not
exercised and the price of the underlying security declines, the amount of such
decline will be offset by the amount of premium received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Portfolio's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Portfolio may elect to close the
position or take delivery of the security at the exercise price and the
Portfolio's return will be the premium received from the put option minus the
amount by which the market price of the security is below the exercise price.
The Portfolio may buy put options to attempt to hedge against a decline in
the value of its securities. By using put options in this way, the Portfolio
will reduce any profit it might otherwise have realized in the underlying
security by the amount of the premium paid for the put option and by
transaction costs.
The Portfolio may buy call options to attempt to hedge against an increase in
the price of securities that the Portfolio may buy in the future. The premium
paid for the call option plus any transaction costs will reduce the benefit, if
any, realized by the Portfolio upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option may expire
worthless to the Portfolio.
In purchasing an option, the Portfolio would be in a position to realize a
gain if, during the option period, the price of the underlying security
increased (in the case of a call) or decreased (in the case of a put) by an
amount in excess of the premium paid and would realize a loss if the price of
the underlying security did not increase (in the case of a call) or decrease
(in the case of a put) during the period by more than the amount of the
premium. If a put or call option bought by the Portfolio were permitted to
expire without being sold or exercised, the Portfolio would lose the amount of
the premium.
Although they entitle the holder to buy equity securities, warrants on and
options to purchase equity securities do not entitle the holder to dividends or
voting rights with respect to the underlying securities, nor do they represent
any rights in the assets of the issuer of those securities.
Interest Rate Swaps and Swap-Related Products. In order to attempt to protect
the value of the Portfolio's investments from interest rate or currency
exchange rate fluctuations, the Portfolio may enter into interest rate swaps,
and may buy or sell interest rate caps and floors. The Portfolio expects to
enter into these transactions primarily to attempt to preserve a return or
spread on a particular investment or portion of its portfolio. The Portfolio
also may enter into these transactions to attempt to protect against any
increase in the price of securities the Portfolio may consider buying at a
later date. The Portfolio does not intend to use these transactions as a
speculative investment. Interest rate swaps involve the exchange by the
Portfolio with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments.
The exchange commitments can involve payments to be made in the same currency
or in different currencies. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive
- 16 -
<PAGE>
payments of interest on a contractually based principal amount from the party
selling the interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually based
principal amount from the party selling the interest rate floor.
Swap and swap-related products are specialized over-the-counter instruments
and their use involves risks specific to the markets in which they are entered
into. The Portfolio will usually enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. The net
amount of the excess, if any, of the Portfolio's obligations over its
entitlements with respect to each interest rate swap will be calculated on a
daily basis and an amount of cash or high-grade liquid assets having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. If the Portfolio
enters into an interest rate swap on other than a net basis, the Portfolio
would maintain a segregated account in the full amount accrued on a daily basis
of the Portfolio's obligations with respect to the swap. The Portfolio will not
enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto
is rated in one of the three highest rating categories of at least one
nationally recognized statistical rating organization at the time of entering
into such transaction. The Sub-Adviser will monitor the creditworthiness of all
counterparties on an ongoing basis. If there is a default by the other party to
such a transaction, the Portfolio will 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. The Sub-Adviser has determined that,
as a result, the swap market has become relatively liquid. Caps and floors are
more recent innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps. To the extent the
Portfolio sells (i.e., writes) caps and floors, it will maintain in a
segregated account cash or high-grade liquid assets having an aggregate net
asset value at least equal to the full amount, accrued on a daily basis, of the
Portfolio's obligations with respect to any caps or floors.
There is no limit on the amount of interest rate swap transactions that may
be entered into by the Portfolio; although the Portfolio does not presently
intend to engage in such transactions in excess of 5% of its total assets.
These transactions may in some instances involve the delivery of securities or
other underlying assets by the Portfolio or its counterparty to collateralize
obligations under the swap. Under the documentation currently used in those
markets, the risk of loss with respect to interest rate swaps is limited to the
net amount of the interest payments that the Portfolio is contractually
obligated to make. If the other party to an interest rate swap that is not
collateralized defaults, the Portfolio would risk the loss of the net amount of
the payments that the Portfolio contractually is entitled to receive. The
Portfolio may buy and sell (i.e., write) caps and floors without limitation,
subject to the segregated account requirement described above.
In addition to the instruments, strategies and risks described in this
Statement of Additional Information and in the Prospectus, there may be
additional opportunities in connection with options, futures contracts, forward
currency contracts and other hedging techniques, that become available as the
Sub-Adviser develops new techniques, as regulatory authorities broaden the
range of permitted transactions and as new instruments and techniques are
developed. The Sub-Adviser may use these opportunities to the extent they are
consistent with the Portfolio's respective investment objectives and are
permitted by the Portfolio's respective investment limitations and applicable
regulatory requirements.
Special Investment Considerations and Risks. The successful use of the
investment practices described above with respect to futures contracts, options
on futures contracts, forward contracts, options on securities and on foreign
currencies, and swaps and swap-related products draws upon
- 17 -
<PAGE>
skills and experience which are different from those needed to select the other
instruments in which the Portfolio invests. Should interest or exchange rates
or the prices of securities or financial indices move in an unexpected manner,
the Portfolio may not achieve the desired benefits of futures, options, swaps
and forwards or may realize losses and thus be in a worse position than if such
strategies had not been used. Unlike many exchange-traded futures contracts and
options on futures contracts, there are no daily price fluctuation limits with
respect to options on currencies, forward contracts and other negotiated or
over-the-counter instruments, and adverse market movements could therefore
continue to an unlimited extent over a period of time. In addition, the
correlation between movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated
losses.
The Portfolio's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and
still developing, and it is impossible to predict the amount of trading
interest that may exist in those instruments in the future. Particular risks
exist with respect to the use of each of the foregoing instruments and could
result in such adverse consequences to the Portfolio as the possible loss of
the entire premium paid for an option bought by the Portfolio, the inability of
the Portfolio, as the writer of a covered call option, to benefit from the
appreciation of the underlying securities above the exercise price of the
option and the possible need to defer closing out positions in certain
instruments to avoid adverse tax consequences. As a result, no assurance can be
given that the Portfolio will be able to use those instruments effectively for
the purposes set forth above.
In connection with certain of its hedging transactions, the Portfolio must
place assets in a segregated account with the Fund's Custodian bank to ensure
that the Portfolio will be able to meet its obligations under these
instruments. Assets held in a segregated account generally may not be disposed
of during the period the Portfolio maintains the positions giving rise to the
segregation requirement. Segregation of a large percentage of the Portfolio's
assets could impede implementation of the Portfolio's investment policies or
the Portfolio's ability to meet redemption requests or other current
obligations.
Additional Risks of Options on Foreign Currencies, Forward Contracts and
Foreign Instruments. Unlike transactions entered into by the Portfolio in
futures contracts, options on foreign currencies and forward contracts are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board
Options Exchange, subject to SEC regulation. Similarly, options on currencies
may be traded over-the-counter. In an over-the-counter trading environment,
many of the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the buyer of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, an option writer and a buyer or seller of futures or forward
contracts could lose amounts substantially in excess of any premium received or
initial margin or collateral posted due to the potential additional margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges are available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing the
risk of
- 18 -
<PAGE>
counterparty default. Further, a liquid secondary market in options traded on a
national securities exchange may be more readily available than in the over-
the-counter market, potentially permitting the Portfolio to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign government restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be adversely affected by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in
the United States, and (v) low trading volume.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below:
<TABLE>
<CAPTION>
NAME, RELATIONSHIP WITH PRINCIPAL OCCUPATION
THE FUND, AND ADDRESS (1) PAST FIVE YEARS
------------------------- --------------------
<C> <S>
PETER R. BROWN (66) Chairman of the Board, Peter Brown
Director Construction Company (construction contractors
1475 South Belcher Road and engineers), Largo, Florida (1963 -
Largo, Florida 34620 present); Trustee of IDEX Fund, IDEX II Series
Fund and IDEX Fund 3; Rear Admiral (Ret.) U.S.
Navy Reserve, Civil Engineer Corps.
CHARLES C. HARRIS (64) Retired (1988 - present); Senior Vice-
Director President, Treasurer (1966 - 1988), Western
35 Winston Drive Reserve Life Assurance Co. of Ohio; Vice
Clearwater, Florida 34616 President, Treasurer (1968 - 1988), Director
(1968 - 1987), Pioneer Western Corporation;
Vice President of the Fund (1986 to December,
1990).
RUSSELL A. KIMBALL, Jr. (50) General Manager, Sheraton Sand Key Resort
Director (resort hotel), Clearwater, Florida (1975 -
1160 Gulf Boulevard present); Trustee of IDEX Total Income Trust.
Clearwater Beach, Florida 34630
</TABLE>
- 19 -
<PAGE>
<TABLE>
<CAPTION>
NAME, RELATIONSHIP WITH PRINCIPAL OCCUPATION
THE FUND, AND ADDRESS (1) PAST FIVE YEARS
------------------------- --------------------
<C> <S>
G. JOHN HURLEY (46) Executive Vice President (June 1993 - present),
Director and Executive Chief Operating Officer (March, 1994 - present)
Vice President (2) Western Reserve Life Assurance Co. of Ohio;
President and Chief Executive Officer (September,
1990 - present), Trustee (June, 1990 - present)
and Executive Vice President (June, 1988 -
September, 1990) of IDEX Fund, IDEX II Series
Fund and IDEX Fund 3; President, Chief Executive
Officer and Director of InterSecurities, Inc.
(May, 1988 - present); Assistant Vice President
of AEGON USA Managed Portfolios, Inc. (September,
1991 - August, 1992); Vice President of Pioneer
Western Corporation (May, 1988 - February, 1991).
JOHN R. KENNEY (57) Chairman of the Board of Directors (1987 -
Chairman of the Board of present), Chief Executive Officer (1982 -
Directors and President (2) present), President (1978 - 1987 and December,
1992 - present), Director (1978 - present),
Western Reserve Life Assurance Co. of Ohio;
Chairman of the Board of Directors and Chief
Executive Officer (1988 to February, 1991),
President (1988 - 1989), Director (1976 to
February, 1991), Executive Vice President (1972 -
1988), Pioneer Western Corporation (financial
services), Largo, Florida; President and Director
(1985 - September, 1990) and Director (December,
1990 to present), Idex Management, Inc.
(investment adviser), Largo, Florida; Trustee
(1987 - present), Chairman (December, 1989 to
September, 1990 and November, 1990 to present)
and President and Chief Executive Officer
(November, 1986 to September, 1990), IDEX Fund,
IDEX II Series Fund and IDEX Fund 3 (investment
companies), all of Largo, Florida.
RICHARD B. FRANZ, II (44) Senior Vice President, Chief Financial Officer
Treasurer (2) (1987 - present) and Treasurer (1988 - present),
Western Reserve Life Assurance Co. of Ohio;
Senior Vice President and Treasurer (1988 to
February, 1991), Pioneer Western Corporation
(financial services), Largo, Florida; Treasurer
(1988 - September, 1990 and November, 1990 to
present), IDEX Fund, IDEX II Series Fund and IDEX
Fund 3 (investment companies), all of Largo,
Florida.
REBECCA A. FERRELL (34) Attorney (August, 1993 - present), Western
Secretary and Assistant Reserve Life Assurance Co. of Ohio; Secretary and
Vice President (2) Assistant Vice President (March, 1994 - present)
of IDEX Fund, IDEX II Series Fund and IDEX Fund
3; Attorney, (September, 1992 - August, 1993),
Hearne, Graziano, Nader & Buhr, P.A.; Legal
Writing Instructor, (August, 1991 - June, 1992),
Florida State University College of Law; Teaching
Assistant, English, University of South Florida
(August, 1990 - July, 1991); Associate Attorney
(August, 1989 - July, 1990), Johnson, Blakely,
Pope, Bokor, Ruppel & Burns, P.A.
ALAN M. YAEGER (48) Executive Vice President (June, 1993 - present),
Executive Vice President (2) Senior Vice President (1981 - June, 1993) and
Actuary (1972 - present), Western Reserve Life
Assurance Co. of Ohio.
</TABLE>
- 20 -
<PAGE>
- --------
(1) The principal business address of each person listed, unless otherwise
indicated, is Western Reserve Life Assurance Co. of Ohio, P.O. Box 5068,
Clearwater, Florida 34618.
(2) Interested person as defined in the 1940 Act and affiliated person of
Investment Adviser.
The Fund pays no salaries or compensation to any of its officers, all of
whom are employees of WRL. The Fund pays an annual fee of $6,000 to each
Director who is not affiliated with the Investment Adviser or the Sub-Adviser.
Each Director also receives $500, plus expenses, per each regular and special
Board meeting attended. For the year ended December 31, 1994, the Portfolio
paid Directors' fees and expenses of $11,753. As of March 1, 1995, the
Directors and officers of the Fund beneficially owned in the aggregate less
than 1% of the Fund's shares through ownership of the Contract indirectly
invested in the Fund. The Board of Directors has established an Audit
Committee consisting of Messrs. Brown, Harris and Kimball. The following table
provides compensation amounts paid to disinterested Directors of the Fund for
the fiscal year ended December 31, 1994.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION PAID TO
DIRECTORS FROM WRL SERIES
AGGREGATE COMPENSATION FROM FUND, INC., IDEX FUND, IDEX II
NAME OF PERSON, POSITION WRL SERIES FUND, INC. SERIES FUND AND IDEX FUND 3
- ------------------------ --------------------------- ------------------------------
<S> <C> <C>
Peter R. Brown, Director $9,000 $24,333
Charles C. Harris, Di-
rector $9,000 $23,833
Russell A. Kimball, Jr.,
Director $9,000 $ 9,000
</TABLE>
The Fund permits "Access Persons" as defined by Rule 17j-1 under the 1940
Act to engage in personal securities transactions, subject to the terms of the
Code of Ethics and Insider Trading Policy (the "Policy") that has been adopted
by the Board of Directors of the Fund pursuant to Rule 17j-1 and other
applicable laws. Pursuant to the Policy, Access Persons generally must
preclear all personal securities transactions prior to trading, and are
subject to certain prohibitions on personal trading.
THE INVESTMENT ADVISER
The information that follows supplements the information provided about the
Investment Adviser under the caption "Management of the Fund--Investment
Adviser" in the Prospectus.
Western Reserve Life Assurance Co. of Ohio ("WRL" or the "Investment
Adviser") serves as the investment adviser to the Portfolio pursuant to an
Investment Advisory Agreement dated February 26, 1991 with the Fund. The
Investment Adviser is a wholly-owned subsidiary of First AUSA Life Insurance
Company ("First AUSA"), a stock life insurance company which is wholly-owned
by AEGON USA, Inc. ("AEGON"). AEGON is a financial services holding company
whose primary emphasis is on life and health insurance and annuity and
investment products. AEGON is a wholly-owned indirect subsidiary of AEGON nv,
a Netherlands corporation, which is a publicly traded international insurance
group.
The Investment Advisory Agreement was most recently approved by the Fund's
Board of Directors, including a majority of the Directors who are not
"interested persons" of the Fund (as defined in the 1940 Act), on March 14,
1994. The Investment Advisory Agreement provides that it will continue in
effect from year to year if approved annually (a) by the Board of Directors of
the Fund or by a majority of the outstanding shares of the Portfolio, and (b)
by a majority of the Directors who are not parties to such contract or
"interested persons" of any such party. The Investment Advisory Agreement may
be terminated without penalty on 60 days' written notice at the option of
either party or by the vote of the shareholders of the Portfolio and
terminates automatically in the event of its assignment (within the meaning of
the 1940 Act).
- 21 -
<PAGE>
While the Investment Adviser is at all times subject to the direction of the
Board of Directors of the Fund, the Investment Advisory Agreement provides that
the Investment Adviser, subject to review by the Board of Directors, is
responsible for the actual management of the Portfolio and has responsibility
for making decisions to buy, sell or hold any particular security. The
Investment Adviser also is obligated to provide all the office space,
facilities, equipment and personnel necessary to perform its duties under the
Agreement. For further information about the management of the Portfolio, see
"The Sub-Adviser", below.
Advisory Fee. The method of computing the investment advisory fee is fully
described in the Prospectus. For the years ended December 31, 1994, 1993 and
1992, the Investment Adviser was paid fees for its services to the Portfolio in
the following amounts:
<TABLE>
<CAPTION>
ADVISORY FEES
YEAR ENDED
----------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
------------ ------------ ------------
<S> <C> <C>
$6,850,340 $6,840,711 $4,206,643
</TABLE>
Payment of Expenses. The Investment Adviser provides investment advisory
services and pays all compensation of and furnishes office space for officers
and employees of the Investment Adviser connected with investment management of
the Portfolio, as well as the fees of all directors of the Fund who are
affiliated persons of WRL or any of its subsidiaries. Accounting services are
provided for the Portfolio by the Investment Adviser. The Fund pays all other
expenses of the Portfolio incurred in its operation and all of the Portfolio's
general administrative expenses.
Expenses of the Portfolio that are borne directly by the Fund include
redemption expenses, expenses of portfolio transactions, shareholder servicing
costs, expenses of registering the shares under Federal and state securities
laws, pricing costs (including the daily calculation of net asset value),
interest, certain taxes, charges of the custodian and transfer agent, fees and
expenses of Fund non-interested directors, legal expenses, state franchise
taxes, cost of auditing services, costs of printing proxies and stock
certificates, Securities and Exchange Commission ("SEC") fees, advisory fees,
certain insurance premiums, costs of corporate meetings, costs of maintenance
of corporate existence, investor services (including allocable telephone and
personnel expenses), extraordinary expenses, and other expenses properly
payable by the Fund. Depending upon the nature of the lawsuit, litigation costs
may be borne by the Fund.
Expenses that relate exclusively to the Portfolio, such as brokerage
commissions, custodian fees, and registration fees for shares, are paid by the
Portfolio. Other expenses are allocated to the Portfolio in an equitable manner
determined by the Fund's Board of Directors.
The Investment Adviser has voluntarily undertaken, until at least April 30,
1996, to pay expenses on behalf of the Portfolio to the extent normal operating
expenses (including investment advisory fees but excluding interest, taxes,
brokerage fees, commissions and extraordinary charges) exceed, as a percentage
of the Portfolio's average daily net assets, 1.00%. (There were no expenses
paid by the Investment Adviser on behalf of the Portfolio for the fiscal years
ended December 31, 1994, 1993 and 1992 inasmuch as the normal operating
expenses of the Portfolio did not exceed the limitations described above.)
THE SUB-ADVISER
This discussion supplements the information provided about the Sub-Adviser
under the caption "Management of the Fund--The Sub-Adviser" in the Prospectus.
- 22 -
<PAGE>
Janus Capital Corporation (the "Sub-Adviser") serves as the Sub-Adviser for
the Portfolio pursuant to a Sub-Advisory Agreement dated February 26, 1991. The
Sub-Advisory Agreement was most recently approved by the Board of Directors of
the Fund, including a majority of the Directors who were not "interested
persons" of the Fund (as defined in the 1940 Act), on March 6, 1995. The Sub-
Advisory Agreement provides that it will continue in effect from year to year
if approved annually (a) by the Board of Directors of the Fund or by a majority
of the outstanding shares of the Portfolio, and (b) by a majority of the
Directors who are not parties to such Agreement or "interested persons" (as
defined in the 1940 Act) of any such party. The Sub-Advisory Agreement may be
terminated without penalty on 60 days' written notice at the option of either
party or by the vote of the shareholders of the Portfolio and terminates
automatically in the event of assignment (within the meaning of the 1940 Act)
or termination of the Investment Advisory Agreement.
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser provides investment
advisory assistance and portfolio management advice to the Investment Adviser
with respect to the Portfolio. Subject to review by the Investment Adviser and
the Board of Directors of the Fund, the Sub-Adviser is responsible for the
actual management of the Portfolio and for making decisions to buy, sell or
hold any particular security. The Sub-Adviser provides the portfolio managers
for the Portfolio. Such managers consider analyses from various sources, make
the necessary decisions and effect transactions accordingly. The Sub-Adviser
bears all of its expenses in connection with the performance of its services
under the Sub-Advisory Agreement, such as compensating and furnishing office
space for its officers and employees connected with investment and economic
research, trading and investment management of the Portfolio. The method of
computing the Sub-Adviser's fee is set forth in the Prospectus. For the years
ended December 31, 1994, 1993 and 1992, the Sub-Adviser was paid fees in the
amount of $3,425,888, $3,420,355 and $2,103,322, respectively.
The Sub-Adviser, located at 100 Fillmore Street, Suite 300, Denver, Colorado
80206, has been engaged in the management of Janus funds since 1969. Janus
Capital Corporation also serves as investment adviser or sub-adviser to other
mutual funds, and for individual, corporate, charitable and retirement
accounts. The aggregate market value of the assets managed by the Sub-Adviser
was approximately $23 billion as of March 1, 1995. Kansas City Southern
Industries, Inc. ("KCSI") owns 83% of the Sub-Adviser. KCSI, whose address is
114 West 11th Street, Kansas City, Missouri 64105-1804, is a publicly-traded
holding company whose largest subsidiary, the Kansas City Southern Railway
Company, is primarily engaged in the transportation industry. Other KCSI
subsidiaries are engaged in financial services and real estate.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
The information that follows supplements the information provided about
portfolio turnover under the caption "The Growth Portfolio and the Fund--
Portfolio Turnover" in the Prospectus. In computing the portfolio turnover rate
for the Portfolio, securities whose maturities or expiration dates at the time
of acquisition are one year or less are excluded. Subject to this exclusion,
the turnover rate for the Portfolio is calculated by dividing (a) the lesser of
purchases or sales of portfolio securities for the fiscal year by (b) the
monthly average of portfolio securities owned by the Portfolio during the
fiscal year. The portfolio turnover rates for the years 1994, 1993 and 1992
were 107.33%, 77.91% and 77.70%, respectively. The Fund's management is unable
to predict precisely the Portfolio's future annual turnover rate, although an
annual turnover rate in excess of 150% is not presently anticipated. Higher
turnover rates tend to result in higher brokerage fees.
- 23 -
<PAGE>
There are no fixed limitations regarding the portfolio turnover of the
Portfolio. Portfolio turnover rates are expected to fluctuate under constantly
changing economic conditions and market circumstances. Securities initially
satisfying the basic policies and objectives of the Portfolio may be disposed
of when they are no longer deemed suitable.
PLACEMENT OF PORTFOLIO BROKERAGE
Subject to policies established by the Board of Directors, the Sub-Adviser is
primarily responsible for placement of the Portfolio's securities transactions.
In placing orders, it is the policy of the Portfolio to obtain the most
favorable net results, taking into account various factors, including price,
dealer spread or commissions, if any, size of the transaction and difficulty of
execution. While the Sub-Adviser generally will seek reasonably competitive
spreads or commissions, the Portfolio will not necessarily be paying the lowest
spread or commission available. The Portfolio does not have any obligation to
deal with any broker, dealer or group of brokers or dealers in the execution of
transactions in portfolio securities.
Decisions as to the assignment of portfolio brokerage business for the
Portfolio and negotiation of its commission rates are made by the Sub-Adviser,
whose policy is to obtain "best execution" (prompt and reliable execution at
the most favorable security price) of all portfolio transactions. In placing
portfolio transactions, the Sub-Adviser may give consideration to brokers who
provide supplemental investment research, in addition to such research obtained
for a flat fee, to the Sub-Adviser, and pay spreads or commissions to such
brokers or dealers furnishing such services which are in excess of spreads or
commissions which another broker or dealer may charge for the same transaction.
In selecting brokers and in negotiating commissions, the Sub-Adviser
considers such factors as: the Sub-Adviser's knowledge of currently available
negotiated commission rates or prices of securities currently available and
other current transaction costs; the nature of the security being traded; the
size and type of the transaction; the nature and character of the markets for
the security to be purchased or sold; the desired timing of the trade; the
activity existing and expected in the market for the particular security;
confidentiality; the quality of execution, clearance, and settlement services;
financial stability; the existence of actual or apparent operational problems
of any broker or dealer; and research products or services to be provided.
These products and services may include furnishing advice, either directly or
through publications or writings, as to the value of securities, the
advisability of purchasing or selling specific securities and the availability
of securities or purchasers or sellers of securities; furnishing seminars,
information, analyses and reports concerning issuers, industries, securities,
trading markets and methods, legislative developments, changes in accounting
practices, economic factors and trends and portfolio strategy; access to
research analysts, corporate management personnel, industry experts, economists
and government officials; comparative performance evaluation and technical
measurement services and quotation services, and products and other services
(such as third party publications, reports and analyses, and computer and
electronic access, equipment, software, information and accessories that
deliver, process or otherwise utilize information), including the research
described above.
Supplemental research obtained through brokers or dealers will be in addition
to and not in lieu of the services required to be performed by the Sub-Adviser.
The expenses of the Sub-Adviser will not necessarily be reduced as a result of
the receipt of such supplemental information. The Sub-Adviser may use such
research products and services in servicing other accounts in addition to the
Portfolio. If the Sub-Adviser determines that any research product or service
has a mixed use, such that it also serves functions that do not assist in the
investment decision-making process, the Sub-Adviser will allocate the costs of
such service or product accordingly. The portion of the product or service that
a Sub-Adviser determines will assist it in the investment decision-making
- 24 -
<PAGE>
process may be paid for in brokerage commission dollars. Such allocation may
create a conflict of interest for the Sub-Adviser. Conversely, such
supplemental information obtained by the placement of business for the Sub-
Adviser will be considered by and may be useful to the Sub-Adviser in carrying
out its obligations to the Portfolio.
When the Portfolio purchases or sells a security in the over-the-counter
market, the transaction takes place directly with a principal market-maker,
without the use of a broker, except in those circumstances where, in the
opinion of the Sub-Adviser, better prices and executions are likely to be
achieved through the use of a broker. The Portfolio does not have any
obligation to deal with any broker, dealer or group of brokers or dealers in
the execution of transactions in portfolio securities.
Normally, the Portfolio will deal directly with the underwriters or dealers
who make a market in the securities involved unless better prices and execution
are available elsewhere. Such dealers usually act as principals for their own
account. On occasion, securities may be purchased directly from the issuer.
Bonds and money market securities are generally traded on a net basis and do
not normally involve either brokerage commissions or transfer taxes. The cost
of portfolio securities transactions of the Portfolio that are transactions
with principals will consist primarily of brokerage commissions or dealer or
underwriter spreads between the bid and asked price, although purchases from
underwriters of portfolio securities include a commission or concession paid by
the issuer. No stated commission is generally applicable to securities traded
in the U.S. over-the-counter markets, but the prices of those securities
include undisclosed commissions or mark-ups.
Securities held by the Portfolio may also be held by other separate accounts,
mutual funds or other accounts for which the Investment Adviser or Sub-Adviser
serves as an adviser, or held by the Investment Adviser or Sub-Adviser for
their own accounts. Because of different investment objectives or other
factors, a particular security may be bought by the Investment Adviser or Sub-
Adviser for one or more clients when one or more clients are selling the same
security. If purchases or sales of securities for the Portfolio or other
entities for which they act as investment adviser or for their advisory clients
arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective entities and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Investment Adviser or Sub-Adviser during
the same period may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
On occasions when the Investment Adviser or the Sub-Adviser deems the
purchase or sale of a security to be in the best interests of the Portfolio as
well as other accounts or companies, it may to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for such other accounts or companies in order to obtain favorable
execution and lower brokerage commissions. In that event, allocation of the
securities purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to the Portfolio
and to such other accounts or companies. In some cases this procedure may
adversely affect the size of the position obtainable for the Portfolio.
The Board of Directors of the Fund periodically reviews the brokerage
placement practices of the Sub-Adviser on behalf of the Portfolio, and reviews
the prices and commissions, if any, paid by the Portfolio to determine if they
were reasonable.
The Board of Directors of the Fund has authorized the Sub-Adviser to consider
sales of the individual and group life insurance policies and variable annuity
contracts issued by Western Reserve Life Assurance Co. of Ohio by a broker-
dealer as a factor in the selection of broker-dealers
- 25 -
<PAGE>
to execute Portfolio transactions. In addition, the Sub-Adviser may
occasionally place portfolio business with affiliated brokers of the Investment
Adviser or the Sub-Adviser, including: DST Securities, Inc., 301 West 11th
Street, Kansas City, Missouri 64105; and InterSecurities, Inc., P.O. Box 5068,
Clearwater, Florida 33518. As stated above, any such placement of portfolio
business will be subject to the ability of the broker-dealer to provide best
execution and to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc.
The Portfolio paid aggregate commissions for the years ended December 31,
1994, 1993 and 1992, in the amount of $1,466,443, $1,022,522 and $924,540,
respectively. For the years ended December 31, 1994, 1993 and 1992, the
Portfolio paid commissions to DST Securities, Inc. in the amount of $2,796,
$85,404 and $14,292, respectively. The percentage of the Portfolio's aggregate
brokerage commissions and aggregate dollar amount of transactions paid to DST
Securities, Inc. during the Portfolio's most recent fiscal year did not exceed
one percent.
PURCHASE AND REDEMPTION OF SHARES
OFFERING OF THE SHARES AND DETERMINATION OF OFFERING PRICE
Shares of the Portfolio are sold only to the Separate Accounts. The Separate
Account invests in shares of the Portfolio in accordance with the allocation
instructions received from owners of the Contract ("Owners"). Such allocation
rights are further described in the prospectus for the Contract. Shares of the
Portfolio are sold and redeemed at their net asset value as described in the
Prospectus. Net asset value of the Portfolio's shares is determined, once
daily, as of the close of the regular session of business on the New York Stock
Exchange ("Exchange") (usually 4:00 p.m., Eastern time), on each day the
Exchange is open, or at such other times as the Fund may determine. (Currently
the Exchange is closed on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.)
Net asset value of a Portfolio share is computed by dividing the value of the
net assets of the Portfolio by the total number of shares of the Portfolio
outstanding.
PORTFOLIO NET ASSET VALUATION
As stated in the Prospectus and above, the net asset value of a Portfolio
share is determined, once daily, as of the close of the regular session of
business on the Exchange (usually 4:00 p.m., Eastern time), on each day the
Exchange is open, or at such other times as the Fund may determine. The per
share net asset value of the Portfolio is determined by dividing the total
value of the securities and other assets, less liabilities, by the total number
of shares outstanding. In determining asset value, securities listed on the
national securities exchanges and the NASDAQ National Market are valued at the
closing prices on such markets, or if such a price is lacking for the trading
period immediately preceding the time of determination, such securities are
valued at their current bid price. Other securities which are traded on the
over-the-counter market are valued at bid price. Foreign securities and
currencies are converted to U.S. dollars using the exchange rate in effect at
the close of the Exchange. Other securities for which quotations are not
readily available, and other assets, are valued at fair values as determined in
good faith by the Sub-Adviser under the supervision of the Fund's Board of
Directors. Money market instruments maturing in 60 days or less are valued on
the amortized cost basis discussed above.
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Portfolio. It does not represent or project future investment
performance.
- 26 -
<PAGE>
The Portfolio commenced operations on October 2, 1986. The rates of return
shown below depict the actual investment experience of the Portfolio for the
periods shown.
CALCULATION OF PERFORMANCE RELATED INFORMATION
TOTAL RETURN
The rates of return shown below are based on the actual investment
performance, after the deduction of investment advisory fees and direct
Portfolio expenses. The rates are average annual compounded rates of return for
the periods ended on December 31, 1993.
The rates of return do not reflect charges or deductions against the Separate
Account, or charges and deductions against the Contract. Accordingly, these
rates of return do not illustrate how actual investment performance will affect
benefits under the Contract. The prospectus for the Contract contains relevant
performance information. Moreover, these rates of return are not an estimate,
projection or guarantee of future performance.
Also shown are comparable figures for the unmanaged Standard & Poor's Index
of 500 Common Stocks, a widely used measure of stock market performance.
AVERAGE ANNUAL COMPOUNDED RATES OF RETURN
FOR THE PERIODS ENDED ON DECEMBER 31, 1994
<TABLE>
<CAPTION>
INCEPTION* 5 YEARS 4 YEARS 3 YEARS 2 YEARS 1 YEAR
---------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Growth Portfolio 14.48% 9.24% 11.75% (0.81)% (2.36)% (8.31)%
Standard & Poor's Index
of 500 Common Stocks 12.17% 8.65% 11.83% 6.24% 5.57% 1.26%
</TABLE>
- --------
* The Portfolio commenced operations on October 2, 1986.
Additional information regarding the investment performance of the Portfolio
appears in the Prospectus.
Total Return for the Portfolio
Total return quotations for the Portfolio are computed by finding the
average annual compounded rates of return over the relevant periods that
would equate the initial amount invested to the ending redeemable value,
according to the following equation:
P(1+T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value (at the end of the applicable period of
a hypothetical $1,000 payment made at the beginning of the applicable
period).
The total return quotation calculations for the Portfolio reflect the
deduction of a proportionate share of the Portfolio's investment advisory fee
and Portfolio expenses and assume that all dividends and capital gains during
the period are reinvested in the Portfolio when made. The calculations also
assume a complete redemption as of the end of the particular period.
- 27 -
<PAGE>
TAXES
Shares of the Portfolio are offered only to the Separate Account of PFL that
funds the Contracts. See the prospectus for the Contract for a discussion of
the special taxation of insurance companies with respect to the Separate
Account and the Contract, and the holders thereof.
The Portfolio has qualified and expects to continue to qualify as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended
(the "Code"). In order to qualify for that treatment, the Portfolio must
distribute to its Policyholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain, and net gains from certain foreign
currency transactions) ("Distribution Requirement") and must meet several
additional requirements. These requirements include the following: (1) the
Portfolio must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of securities or foreign currencies, or other
income (including gains from options, futures or forward contracts) derived
with respect to its business of investing in securities or those currencies
("Income Requirement"); (2) the Portfolio must derive less than 30% of its
gross income each taxable year from the sale or other disposition of
securities, or any of the following, that were held for less than three
months--options, futures or forward contracts (other than those on foreign
currencies), or foreign currencies (or options, futures or forward contracts
thereon) that are not directly related to the Portfolio's principal business of
investing in securities (or options and futures with respect thereto) ("Short-
Short Limitation"); (3) at the close of each quarter of the Portfolio's taxable
year, at least 50% of the value of its total assets must be represented by cash
and cash items, U.S. Government securities, securities of other RICs, and other
securities that, with respect to any one issuer, do not exceed 5% of the value
of the Portfolio's total assets and that do not represent more than 10% of the
outstanding voting securities of the issuer; and (4) at the close of each
quarter of the Portfolio's taxable year, not more than 25% of the value of its
total assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer.
As noted in the Prospectus, the Portfolio must, and intends to, comply with
the diversification requirements imposed by section 817(h) of the Code and the
regulations thereunder. These requirements, which are in addition to the
diversification requirements mentioned above, place certain limitations on the
proportion of the Portfolio's assets that may be represented by any single
investment (which includes all securities of the same issuer). For these
purposes, each U.S. Government agency or instrumentality is treated as a
separate issuer, while a particular foreign government and its agencies,
instrumentalities and political subdivisions all are considered the same
issuer. For information concerning the consequences of failure to meet the
requirements of section 817(h), see the respective prospectus for the Contract.
The Portfolio will not be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only shareholders
are segregated asset accounts of life insurance companies held in connection
with variable annuity contracts and/or variable life insurance policies.
Dividends and interest received by the Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and foreign countries generally do not impose taxes on capital gains
in respect of investments by foreign investors.
The Portfolio may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for
- 28 -
<PAGE>
the production of, passive income. Under certain circumstances, the Portfolio
will be subject to Federal income tax on a portion of any "excess distribution"
received on the stock of a PFIC or of any gain on disposition of that stock
(collectively "PFIC income"), plus interest thereon, even if the Portfolio
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Portfolio's investment
company taxable income and, accordingly, will not be taxable to it to the
extent that income is distributed to its shareholders. If the Portfolio invests
in a PFIC and elects to treat the PFIC as a "qualified electing fund," then in
lieu of the foregoing tax and interest obligation, the Portfolio will be
required to include in income each year its pro rata share of the qualified
electing fund's annual ordinary earnings and net capital gain (the excess of
net long-term capital gain over net short-term capital loss), even if they are
not distributed to the Portfolio; those amounts would be subject to the
Distribution Requirement. In most instances it will be very difficult, if not
impossible, to make this election because of certain requirements thereof.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by the
Portfolio. Income from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures and forward contracts derived by the Portfolio
with respect to its business of investing in securities or foreign currencies,
will qualify as permissible income under the Income Requirement. However,
income from the disposition of options and futures contracts (other than those
on foreign currencies) will be subject to the Short-Short Limitation if they
are held for less than three months. Income from the disposition of foreign
currencies, and options, futures, and forward contracts on foreign currencies,
that are not directly related to the Portfolio's principal business of
investing in securities (or options and futures with respect thereto) also will
be subject to the Short-Short Limitation if they are held for less than three
months.
If the Portfolio satisfies certain requirements, any increase in value on a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Portfolio satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. The Portfolio intends that, when it engages in hedging
transactions, they will qualify for this treatment, but at the present time it
is not clear whether this treatment will be available for all of the
Portfolio's hedging transactions. To the extent this treatment is not
available, the Portfolio may be forced to defer the closing out of certain
options and futures contracts beyond the time when it otherwise would be
advantageous to do so, in order for the Portfolio to qualify as a RIC.
The foregoing is only a general summary of some of the important Federal
income tax considerations generally affecting the Portfolio and its Owners. No
attempt is made to present a complete explanation of the Federal tax treatment
of the Portfolio's activities, and this discussion and the discussion in the
prospectus or statement of additional information for the Contract are not
intended as a substitute for careful tax planning. Accordingly, potential
investors are urged to consult their own tax advisors for more detailed
information and for information regarding any state, local, or foreign taxes
applicable to the Contract and the holders thereof.
CAPITAL STOCK OF THE FUND
As described in the Prospectus, the Fund offers a separate class of common
stock for each portfolio of the Fund.
- 29 -
<PAGE>
REGISTRATION STATEMENT
The Fund has filed with the Securities and Exchange Commission, Washington,
D.C., a Registration Statement under the Securities Act of 1933, as amended,
with respect to the securities to which this Statement of Additional
Information relates. If further information is desired with respect to the
Portfolio or such securities, reference is made to the Registration Statement
and the exhibits filed as part thereof.
FINANCIAL STATEMENTS
The audited financial statements for each Portfolio described in this
Statement of Additional Information for the year ended December 31, 1994 and
the report of the Fund's independent accountants are included in the Fund's
1994 Annual Report and are incorporated by reference to such Report.
- 30 -
<PAGE>
APPENDIX A
DESCRIPTION OF PORTFOLIO SECURITIES
The following is intended only as a supplement to the information contained
in the Prospectus and should be read only in conjunction with the Prospectus.
Terms defined in the Prospectus and not defined herein have the same meanings
as those in the Prospectus.
1.Certificate of Deposit. A certificate of deposit generally is a short-term,
interest bearing negotiable certificate issued by a commercial bank or savings
and loan association against funds deposited in the issuing institution.
2.Eurodollar Certificate of Deposit. A Eurodollar certificate of deposit is a
short-term obligation of a foreign subsidiary of a U.S. bank payable in U.S.
dollars.
3.Floating Rate Note. A floating rate note is debt issued by a corporation or
commercial bank that is typically several years in term but whose interest rate
is reset every one to six months.
4.Time Deposit. A time deposit is a deposit in a commercial bank for a
specified period of time at a fixed interest rate for which a negotiable
certificate is not received.
5.Bankers' Acceptance. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with international
commercial transactions (to finance the import, export, transfer or storage of
goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity.
6.Variable Amount Master Demand Note. A variable amount master demand note is
a note which fixes a minimum and maximum amount of credit and provides for
lending and repayment within those limits at the discretion of the lender.
Before investing in any variable amount master demand notes, the Portfolio will
consider the liquidity of the issuer through periodic credit analysis based
upon publicly available information.
7.Commercial Paper. Commercial paper is a short-term promissory note issued
by a corporation primarily to finance short-term credit needs.
8.Repurchase Agreement. A repurchase agreement is an instrument under which
the Portfolio acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a mutually agreed upon time and price. The total
amount received on repurchase is calculated to exceed the price paid by the
Portfolio, reflecting an agreed upon market rate of interest for the period
from the time of the Portfolio's purchase of the security to the settlement
date (i.e., the time of repurchase), and would not necessarily relate to the
interest rate on the underlying securities. The Portfolio will only enter into
repurchase agreements with respect to underlying securities consisting of U.S.
Government or government agency securities, certificates of deposit, commercial
paper or bankers' acceptances, and will be entered only with primary dealers.
While the Portfolio may invest in repurchase agreements for periods up to 30
days, it is expected that typically such periods will be for a week or less.
The staff of the Securities and Exchange Commission has taken the position that
repurchase agreements of greater than seven days together with other illiquid
investments should be limited to an amount not in excess of 15% of the
Portfolio's net assets.
A-1
<PAGE>
Although repurchase transactions usually do not impose market risks on the
purchaser, the Portfolio would be subject to the risk of loss if the seller
fails to repurchase the securities for any reason and the value of the
securities is less than the agreed upon repurchase price. In addition, if the
seller defaults, the Portfolio may incur disposition costs in connection with
liquidating the securities. Moreover, if the seller is insolvent and bankruptcy
proceedings are commenced, under current law, the Portfolio could be ordered by
a court not to liquidate the securities for an indeterminate period of time and
the amount realized by the Portfolio upon liquidation of the securities may be
limited.
9.Reverse Repurchase Agreement. A reverse repurchase agreement involves the
sale of securities held by the Portfolio, with an agreement to repurchase the
securities at an agreed upon price, date and interest payment. The Portfolio
will use the proceeds of the reverse repurchase agreements to purchase other
money market securities maturing, or under an agreement to resell, at a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Portfolio will utilize reverse repurchase agreements when the
interest income to be earned from the investment of the proceeds from the
transaction is greater than the interest expense of the reverse repurchase
transaction.
10.Asset-Backed Securities. The Portfolio may invest in securities backed by
automobile receivables and credit-card receivables and other securities backed
by other types of receivables or other assets. Credit support for asset-backed
securities may be based on the underlying assets and/or provided through credit
enhancements by a third party. Credit enhancement techniques include letters of
credit, insurance bonds, limited guarantees (which are generally provided by
the issuer), senior-subordinated structures and over-collateralization. The
Portfolio will only purchase an asset-backed security if it is rated at least
"A" by S&P or Moody's.
11.Mortgage-Backed Securities. The Portfolio may purchase mortgage-backed
securities issued by government and non-government entities such as banks,
mortgage lenders, or other financial institutions. Mortgage-backed securities
include mortgage pass-through securities, mortgage-backed bonds, and mortgage
pay-through securities. A mortgage pass-through security is a pro-rata interest
in a pool of mortgages where the cash flow generated from the mortgage
collateral is passed through to the security holder. Mortgage-backed bonds are
general obligations of their issuers, payable out of the issuers' general funds
and additionally secured by a first lien on a pool of mortgages. Mortgage pay-
through securities exhibit characteristics of both pass-through and mortgage-
backed bonds. Mortgage-backed securities also include other debt obligations
secured by mortgages on commercial real estate or residential properties. Other
types of mortgage-backed securities will likely be developed in the future, and
the Portfolio may invest in them if it is determined they are consistent with
the Portfolio's investment objective and policies.
12.Collateralized Mortgage Obligations. (CMOs) are pay-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and series that have different maturities and often are retired in
sequence.
13.Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
are created when the principal and interest payments of a mortgage-backed
security are separated by a U.S. Government agency or a financial institution.
The holder of the "principal-only" security receives the principal payments
made by the underlying mortgage-backed security, while the holder of the
"interest-only" security receives interest payments from the same underlying
security.
The value of mortgage-backed securities may change due to changes in the
market's perception of issuers. In addition, the mortgage securities market in
general may be adversely affected by regulatory or tax changes. Non-
governmental mortgage-backed securities may offer a higher yield than those
issued by government entities but also may be subject to greater price change
then government securities.
A-2
<PAGE>
Like most mortgage securities, mortgage-backed securities are subject to
prepayment risk. When prepayment occurs, unscheduled or early payments are made
on the underlying mortgages, which may shorten the effective maturities of
those securities and may lower their total returns. Furthermore, the prices of
stripped mortgage-backed securities can be significantly affected by changes in
interest rates as well. As interest rates fall, prepayment rates tend to
increase, which in turn tends to reduce prices of "interest-only" securities
and increase prices of "principal-only" securities. Rising interest rates can
have the opposite effect.
14.Zero Coupon Bonds. Zero coupon bonds are created three ways:
1) U.S. TREASURY STRIPS (Separate Trading of Registered Interest and
Principal of Securities) are created when the coupon payments and the
principal payment are stripped from an outstanding Treasury bond by the
Federal Reserve Bank. Bonds issued by the Resolution Funding Corporation
(REFCORP) and the Financial Corporation (FICO) also can be stripped in
this fashion.
2) STRIPS are created when a dealer deposits a Treasury Security or a
Federal agency security with a custodian for safe keeping and then sells
the coupon payments and principal payments that will be generated by
this security separately. Proprietary receipts, such as Certificates of
Accrual on Treasury Securities (CATS), Treasury Investment Growth
Receipts (TIGRS), and generic Treasury Receipts (TRs), are stripped U.S.
Treasury securities separated into their component parts through
custodial arrangements established by their broker sponsors. FICO bonds
have been stripped in this fashion. The Portfolio has been advised that
the staff of the Division of Investment Management of the Securities and
Exchange Commission does not consider such privately stripped
obligations to be U.S. Government securities, as defined by the 1940
Act. Therefore, the Portfolio will not treat such obligations as U.S.
Government securities for purposes of the 65% portfolio composition
ratio.
3) ZERO COUPON BONDS can be issued directly by Federal agencies and
instrumentalities, or by corporations. Such issues of zero coupon bonds
are originated in the form of a zero coupon bond and are not created by
stripping an outstanding bond.
Zero coupon bonds do not make regular interest payments. Instead they are
sold at a deep discount from their face value. Because a zero coupon bond does
not pay current income, its price can be very volatile when interest rates
change. In calculating its dividends, the fund takes into account as income a
portion of the difference between a zero coupon bond's purchase price and its
face value.
A-3
<PAGE>
APPENDIX B
DESCRIPTION OF SELECTED CORPORATE BOND AND
COMMERCIAL PAPER RATINGS
CORPORATE BONDS--MOODY'S INVESTORS SERVICE, INC.
Aaa--Bonds which are rated Aaa are judged to be of 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 on such issues.
Aa--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.
A--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.
Baa--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.
Ba--Bonds which are rated Ba are judged to have speculative elements and
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well safe-
guarded during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a 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.
Unrated--Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
B-1
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CORPORATE BONDS--STANDARD & POOR'S CORPORATION
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they exhibit an adequate degree of protection,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC and CC--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. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-)--The ratings from "AA" to "BBB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Unrated--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
COMMERCIAL PAPER--MOODY'S INVESTORS SERVICE, INC.
"Prime-1"--Commercial paper issuers rated Prime-1 are judged to be of the
best quality. 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 term, such changes are most unlikely to
impair the fundamentally strong position of short-term obligations.
"Prime-2"--Issuers in the Commercial Paper market rated Prime-2 are high
quality. Protection for short-term holders is assured with liquidity and value
of current assets as well as cash generation in sound relationship to current
indebtedness. They are rated lower than the best commercial paper issuers
because margins of protection may not be as large or because fluctuations of
protective elements over the near or immediate term may be of greater
amplitude. Temporary increases in relative short and overall debt load may
occur. Alternative means of financing remain assured.
COMMERCIAL PAPER--STANDARD & POOR'S CORPORATION
"A"--Issues assigned this highest rate are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2 and 3 to indicate the relative degree of safety.
"A-1"--This designation indicates that the degree of safety regarding timely
payment is very strong.
"A-2"--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not overwhelming as for issues
designated "A-1".
"A-3"--Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designation.
B-2
