<PAGE>
PROSPECTUS May 1, 1996
- ---------- As Revised November 4, 1996
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.
("AUSA"). 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 may make subsequent
additional Premium Payments of at least $50, including payments through
automatic deduction, at any time before the Annuity Commencement Date.The
maximum total premium payments allowed is $1,000,000 without prior approval of
AUSA.
Before the Annuity Commencement Date, the Owner may allocate Premium
Payments to one or more Subaccounts of the PFL 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 various options under
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 ten different Subaccounts (the "Subaccounts"). Assets of each
Subaccount are invested in shares of a corresponding Portfolio of a mutual
fund: the WRL Series Fund, Inc.'s, Growth Portfolio, managed by Janus Capital
Corporation, (the "WRL Growth Portfolio") and the portfolios of the Endeavor
Series Trust (together, the "Underlying Funds"). The Underlying Funds
currently consist of ten Portfolios: the WRL Growth Portfolio, the TCW Managed
Asset Allocation Portfolio; the TCW Money Market Portfolio; the T. Rowe Price
International Stock Portfolio; the Value Equity Portfolio; the Dreyfus Small
Cap Value Portfolio; the Dreyfus U.S. Government Securities Portfolio; the T.
Rowe Price Equity Income Portfolio; the T. Rowe Price Growth Stock Portfolio;
and the Opportunity Value Portfolio. The Underlying Funds are described in
separate prospectuses that accompany this Prospectus. The Owner bears the
entire investment risk for all amounts allocated to the Mutual Fund Account,
including possible loss of principal amount invested.
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 MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR THE
ENDEAVOR SERIES TRUST AND FOR THE WRL SERIES FUND, INC.'S GROWTH PORTFOLIO.
THE POLICY IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK OR DEPOSITORY INSTITUTION, AND IS NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
AVAP1196FI
<PAGE>
The Annuity Purchase 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 and will earn a specified rate of interest declared
periodically.
The Policies provide for monthly annuity payments to be made by PFL 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). The Owner can also elect to surrender
all or any portion of the Annuity Purchase Value in exchange for a cash
withdrawal payment from PFL; however, all withdrawals may be taxable, subject
to a Contingent Deferred Sales Charge and/or a penalty tax, and withdrawals
from the Fixed Account may be delayed and subject to an Excess Interest
Adjustment.
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 has been filed with
the Securities and Exchange Commission and is incorporated herein by
reference. The Statement of Additional Information is dated May 1, 1996, as
revised November 4, 1996, and is available at no cost to any person requesting
a copy by writing PFL at the Administrative and 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:
Financial Markets Division--Variable Annuity Dept.
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
Administrative Office
AUSA Life Insurance
Company, Inc.
666 Fifth Avenue, 25th Floor
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.
- 2 -
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
DEFINITIONS................................................................ 5
SUMMARY.................................................................... 8
CONDENSED FINANCIAL INFORMATION............................................ 18
FINANCIAL STATEMENTS....................................................... 19
HISTORICAL PERFORMANCE DATA................................................ 19
Standardized Performance Data............................................ 19
Hypothetical Performance Data of Subaccounts............................. 20
T. Rowe Price International Stock Subaccount............................. 21
Opportunity Value Subaccount--Hypothetical Data.......................... 21
Non-Standardized Performance Data........................................ 22
PUBLISHED RATINGS.......................................................... 22
AUSA LIFE INSURANCE COMPANY, INC. ......................................... 23
THE ENDEAVOR ACCOUNTS...................................................... 23
The Mutual Fund Account.................................................. 23
The Fixed Account........................................................ 27
Dollar Cost Averaging Fixed Account Option............................. 29
Transfers................................................................ 29
Reinstatements........................................................... 30
Dollar Cost Averaging (DCA).............................................. 31
Asset Rebalancing........................................................ 31
THE POLICY................................................................. 32
Policy Application and Issuance of Policies.............................. 32
Premium Payments......................................................... 33
Annuity Purchase Value................................................... 33
Adjusted Annuity Purchase Value (AAPV)................................... 34
Non-participating Policy................................................. 34
DISTRIBUTIONS UNDER THE POLICY............................................. 35
Surrenders............................................................... 35
Excess Interest Adjustments (EIA)........................................ 36
Systematic Payout Option................................................. 37
Annuity Payments......................................................... 37
Annuity Commencement Date.............................................. 37
Election of Payment Option............................................. 38
Premium Tax............................................................ 38
Supplementary Policy................................................... 39
Annuity Payment Options.................................................. 39
Death Benefit............................................................ 42
Death of Annuitant Prior to Annuity Commencement Date.................. 42
Death On or After Annuity Commencement Date............................ 44
Beneficiary............................................................ 44
Death of Owner........................................................... 44
Restrictions Under Section 403(b) Plans.................................. 44
Restrictions Under Qualified Policies.................................... 44
CHARGES AND DEDUCTIONS..................................................... 45
Contingent Deferred Sales Charge......................................... 45
Mortality and Expense Risk Charge........................................ 46
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Administrative Charges................................................... 46
Premium Taxes............................................................ 47
Federal, State and Local Taxes........................................... 47
Transfer Charge.......................................................... 47
Other Expenses Including Investment Advisory Fees........................ 48
Employee and Agent Purchases............................................. 48
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 48
Tax Status of the Policy................................................. 49
Taxation of Annuities.................................................... 49
DISTRIBUTOR OF THE POLICIES................................................ 55
VOTING RIGHTS.............................................................. 55
LEGAL PROCEEDINGS.......................................................... 56
STATEMENT OF ADDITIONAL INFORMATION........................................ 57
Appendix A............................................................... A-1
</TABLE>
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<PAGE>
DEFINITIONS
Accumulation Unit--An accounting unit of measure used in calculating the
Annuity Purchase Value.
Adjusted Annuity Purchase Value--An amount equal to the Annuity Purchase
Value increased or decreased by any Excess Interest Adjustments.
Administrative Office--AUSA Life Insurance Company, Inc., 666 Fifth Avenue,
25th Floor, New York, NY, 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. This date may not be later than the last day of the policy month
starting after the Annuitant attains age 85.
Annuity Payment Option or Payment Option--A method of receiving a stream of
Annuity Payments.
Annuity Purchase Value--On or before the Annuity Commencement Date, an
amount equal to (a) the Premiums Paid; minus (b) partial withdrawals taken;
plus (c) interest credited in the Fixed Account; plus (d) accumulated gains or
losses in the Mutual Fund Account; minus (e) any applicable service charges,
premium or other taxes, and transfer fees, if any.
Annuity Unit--An accounting unit of measure used in the calculation of the
amount of the second and each subsequent Variable Annuity Payment.
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 PFL 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 Administrative and Service Office.
Cash Value--The Adjusted Annuity Purchase Value less the Contingent Deferred
Sales Charge, if any.
Code--The Internal Revenue Code of 1986, as amended.
Contingent Deferred Sales Charge--The applicable surrender charge, assessed
on certain full or partial withdrawals of Premium Payments to cover expenses
relating to the sale of the Policies.
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<PAGE>
Current Interest Guarantee--PFL's guarantee to pay a declared Current
Interest Rate on amounts under a Policy allocated to the Fixed 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 credited
on amounts under a Policy allocated to the Fixed Account. This interest rate
will always equal or exceed a minimum of 3% (4% for Policies issued before May
1, 1996, and for Policies issued with a form number other than AV266 101 90
396).
Date of Issue--The date the Policy is issued, as shown on the Policy Data
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 PFL will constitute Due Proof of Death.
Excess Interest Adjustment--Adjustment to amounts withdrawn and/or
transferred from the Fixed Account Guaranteed Period Options to reflect
changes in interest rates declared by AUSA since the payment date. The Excess
Interest Adjustment (EIA) can be positive or negative.
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.
Guaranteed Period Options--The various guaranteed interest rate periods
which may be offered by AUSA into which premiums may be paid or amounts
transferred.
Investment Options--Any of the Guaranteed Period Options of the Fixed
Account, and the Dollar Cost Averaging Fixed Account Option, 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 Series Fund, Inc.'s Growth and
the portfolios of 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.
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<PAGE>
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 or a Successor Owner in the application. (See "Death Benefit," p. 42)
Policy Value--The term used for the Annuity Purchase Value in all Policies
except those issued with form number AV266 101 90 396.
Policy Year--A Policy Year begins on the Date of Issue and on each Policy
Anniversary.
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(b), 408, or 457 of the Code.
Service Office--Financial Markets Division--Variable Annuity Dept., 4333
Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001.
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 Series Fund, Inc.'s Growth Portfolio, managed by
Janus Capital Corporation, and the portfolios of 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 Written Request--Written notice, signed by the Policy
Owner, that gives AUSA the information it requires and is received at the
Service Office. For some transactions, AUSA may accept an electronic notice.
Such electronic notice must meet the requirements AUSA establishes for such
notices. Telephone instructions are not permitted.
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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.
Only Policies issued on or after May 1, 1996, with policy form number AV266
101 90 396 contain the following features: Excess Interest Adjustment, Dollar
Cost Averaging Fixed Account Option, Asset Rebalancing, and a minimum
effective annual interest rate of 3% in the Fixed Account along with
Guaranteed Period Options. References to these features in this Prospectus
will only apply for such Policies.
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 nine
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., OpCap Advisors (formerly known as Quest
for Value Advisors) (a subsidiary of Oppenheimer Capital), The Dreyfus
Corporation (a wholly-owned subsidiary of Mellon Bank, N.A.), 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 ten available Portfolios: the WRL Growth Portfolio,
managed by Janus Capital Corporation; the TCW Managed Asset Allocation
Portfolio (formerly, the Managed Asset Allocation Portfolio); the TCW Money
Market Portfolio (formerly, the Money Market Portfolio); the T. Rowe Price
International Stock Portfolio; the Value Equity Portfolio (formerly, the Quest
for Value Equity Portfolio); the Dreyfus Small Cap Value Portfolio (formerly
known as the Value Small Cap Portfolio, and prior to that the Quest for Value
Small Cap Portfolio); the Dreyfus U.S. Government Securities Portfolio
(formerly, the U.S. Government Securities
- 8 -
<PAGE>
Portfolio); the T. Rowe Price Equity Income Portfolio; the T. Rowe Price
Growth Stock Portfolio; and the Opportunity Value Portfolio (the
"Portfolios"). Each of the ten Subaccounts of the Mutual Fund Account invests
solely in a corresponding Portfolio of the Underlying Funds. Because the
Annuity Purchase Value 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. 23.)
The Fixed Account. The Fixed Account guarantees return of principal, and a
minimum effective annual interest rate of 3% (4% for Policies issued under a
form number other than AV266 101 90 396) on Premium Payments allocated to
(less amounts withdrawn and transferred from), 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. 27.)
Currently AUSA anticipates that the total number of Investment Options
offered will not exceed 17. However, AUSA reserves the right to offer
additional Investment Options in the future.
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 subsequent additional
Premium Payments of at least $50 each, including payments through
preauthorized check, at any time before the Annuity Commencement Date. The
maximum total premium payments allowed is $1,000,000 without prior approval of
AUSA. There is nothing deducted from Premium Payments, so all funds are
invested immediately. (But see "Contingent Deferred Sales Charge," p. 45.)
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. 33.)
TRANSFERS BEFORE THE ANNUITY COMMENCEMENT DATE
An Owner can transfer Annuity Purchase Values from one Subaccount to another
within the Mutual Fund Account or to the Fixed Account, or from the Guaranteed
Period Options of the Fixed Account to the Mutual Fund Account. The minimum
amount which may be transferred is $500 or the entire Subaccount or Guaranteed
Period Option value, whichever is less. However, following a transfer out of a
particular Subaccount or Guaranteed
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<PAGE>
Period Option, at least $500 must remain in that Subaccount or Guaranteed
Period Option. Transfers currently may be made by sending the appropriate
Written Notice or Request to the Service Office.
An Owner may choose which Guaranteed Period Option to transfer to or from.
Transfers (and withdrawals) from a Guaranteed Period Option prior to the end
of the Guaranteed Period are subject to the Excess Interest Adjustment, which
could be positive or negative (and which could increase or decrease the amount
available to transfer or withdraw). (see "Excess Interest Adjustment," p. 36.)
Transfers from the Dollar Cost Averaging Fixed Account Option (see "Dollar
Cost Averaging Fixed Account Option," p. 29), except through Dollar Cost
Averaging, are not allowed. Except for Policies issued on or after May 1,
1996, and with form number AV266 101 90 396, (1) transfers from the One Year
Option Fixed Account, except through Dollar Cost Averaging, are not allowed,
and (2) 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.
If the Excess Interest Adjustment (at the time of a transfer request only)
from any Guaranteed Period Option is a negative adjustment, then the maximum
amount that can be transferred is 25% of that Option's Annuity Purchase Value,
less amounts previously transferred out of that Option during the current
policy year. No maximum will apply to amounts transferred from any Guaranteed
Period if the Excess Interest Adjustment is a positive adjustment at the time
of transfer.
A $10 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.
29.)
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 Adjusted Annuity Purchase Value less any applicable
Contingent Deferred Sales Charge (described below). A surrender request must
be made by Written Request, and a request for a partial surrender must specify
the Guaranteed Period Options or Subaccounts from which the withdrawal is
requested. There is currently no limit on the frequency or timing of
withdrawals (See "Surrenders," p. 35) although for Qualified Policies the
retirement plan or applicable law may restrict and/or penalize withdrawals. In
addition to the Contingent Deferred Sales Charge, any applicable Excess
Interest Adjustment, and any applicable premium taxes, surrenders may be
subject to income taxes and a 10% penalty tax.
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<PAGE>
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 Contingent Deferred Sales Charge imposed seven
or more years after a Premium Payment 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. 45.) 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 Annuity Purchase Value, even if it is the first
withdrawal in any Policy Year, may be subject to an Excess Interest Adjustment
and 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 an Excess Interest Adjustment and without a Contingent Deferred Sales
Charge if it is the first withdrawal in the Policy Year).
Excess Interest Adjustment. Withdrawals and transfers out of Fixed Account
Guaranteed Interest Rate Period Options are subject to an Excess Interest
Adjustment, which could eliminate all interest in excess of the minimum
guaranteed effective annual interest rate of 3%. (The Excess Interest
Adjustment could also result in the crediting of additional interest). See
"Excess Interest Adjustment," p. 36.
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
Account's net assets. (See "Mortality and Expense Risk Charge," p. 46.)
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 Mutual Fund Account's net assets.
This charge is guaranteed never to exceed .30%. (See "Administrative Charges,"
p. 46.)
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 Annuity Purchase Value or $35 per year and is deducted
only from the Mutual Fund Account. For Policies issued on or after May 1,
1995, either (i) with form number AV266 101 90 396 or (2) with Endorsement AE
877 695, this charge is waived if the sum of the Premium
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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. 46.)
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 Annuity Purchase Value until withdrawal of all Annuity
Purchase Value, payment of the death benefit, or the Annuity Commencement
Date. (See "Premium Taxes," p. 47.)
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. 47.)
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
Annuity Purchase Value is in the Mutual Fund Account.
<TABLE>
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TCW T. ROWE DREYFUS T. ROWE T. ROWE
TCW MANAGED PRICE DREYFUS U.S. PRICE PRICE
MONEY ASSET INTERNATIONAL VALUE SMALL CAP GOVERNMENT EQUITY GROWTH OPPORTUNITY WRL
MARKET ALLOCATION STOCK EQUITY VALUE SECURITIES INCOME STOCK VALUE GROWTH
------ ---------- ------------- ------ --------- ---------- ------- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Policy Owner Transac-
tion Expenses
Sales Load On Purchase
Payments(/1/)........ 0 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% 77% 7%
Surrender Fees........ 0 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)(/3/)
Mortality and Expense
Risk Fees............ 1.25% 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% 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% 1.40%
Underlying Funds
Annual Expenses
(as a percentage of
average net assets)
Management Fees....... 0.50% 0.75% 0.90% 0.80% 0.80% 0.65% 0.80% 0.80% 0.80% 0.80%
Other Expenses........ 0.10% 0.09% 0.25% 0.06% 0.07% 0.19% 0.35% 0.46% 0.50% 0.06%
---- ---- ---- ---- ----- ---- ---- ---- ---- ----
Total Underlying Funds
Annual Expenses(/4/). 0.60% 0.84% 1.15% 0.86% 0.87% 0.84% 1.15% 1.26% 1.30% 0.86%
</TABLE>
- 12 -
<PAGE>
- ----------------------------------
/1/The Contingent Deferred Sales Charge and Transfer Fee, if any is imposed,
apply to each Policy, regardless of how Annuity Purchase 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. 48.)
/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.
/3/The fee table information relating to the Underlying Funds was provided to
AUSA by the Underlying Funds, and AUSA has not independently verified such
information.
/4/The Manager has agreed, until terminated by the Manager, to assume expenses
of the Portfolios that exceed the following rates: TCW Money Market--0.99%;
TCW Managed Asset Allocation--1.25%; T. Rowe Price International Stock--
1.53%; Value Equity--1.30%; Dreyfus Small Cap Value--1.30%; Dreyfus U.S.
Government Securities--1.00%; T. Rowe Price Equity Income--1.30%; T. Rowe
Price Growth Stock--1.30%; Opportunity Value--1.30%.
- 13 -
<PAGE>
Examples
An Owner would pay the following expenses on a $1,000 investment, assuming a
5% annual return on assets and assuming the entire Annuity Purchase Value is
in the applicable Subaccounts:
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>
TCW Money Market Portfolio...................... $91 $115 $141 $239
TCW Managed Asset Allocation Portfolio.......... $93 $122 $153 $263
T. Rowe Price International Stock Portfolio..... $96 $131 $168 $294
Value Equity Portfolio.......................... $94 $122 $154 $265
Dreyfus Small Cap Value Portfolio............... $94 $123 $154 $266
Dreyfus U.S. Government Securities Portfolio.... $93 $122 $153 $263
T. Rowe Price Equity Income Portfolio........... $96 $131 $169 $299
T. Rowe Price Growth Stock Portfolio............ $98 $135 $175 $311
Opportunity Value Portfolio..................... $98 $136 $177 $316
WRL Growth Portfolio............................ $94 $122 $154 $265
2. If the Policy is annuitized at the end of the applicable time period:*
TCW Money Market Portfolio...................... $21 $ 65 $111 $239
TCW Managed Asset Allocation Portfolio.......... $23 $ 72 $123 $263
T. Rowe Price International Stock Portfolio..... $26 $ 81 $138 $294
Value Equity Portfolio.......................... $24 $ 72 $124 $265
Dreyfus Small Cap Value Portfolio............... $24 $ 73 $124 $266
Dreyfus U.S. Government Securities Portfolio.... $23 $ 72 $123 $263
T. Rowe Price Equity Income Portfolio........... $26 $ 81 $139 $299
T. Rowe Price Growth Stock Portfolio............ $28 $ 85 $145 $311
Opportunity Value Portfolio..................... $28 $ 86 $147 $316
WRL Growth Portfolio............................ $24 $ 72 $124 $265
3. If the Policy is not surrendered or annuitized:
TCW Money Market Portfolio...................... $21 $ 65 $111 $239
TCW Managed Asset Allocation Portfolio.......... $23 $ 72 $123 $263
T. Rowe Price International Stock Portfolio..... $26 $ 81 $138 $294
Value Equity Portfolio.......................... $24 $ 72 $124 $265
Dreyfus Small Cap Value Portfolio............... $24 $ 73 $124 $266
Dreyfus U.S. Government Securities Portfolio.... $23 $ 72 $123 $263
T. Rowe Price Equity Income Portfolio........... $26 $ 81 $139 $299
T. Rowe Price Growth Stock Portfolio............ $28 $ 85 $145 $311
Opportunity Value Portfolio..................... $28 $ 86 $147 $316
WRL Growth Portfolio............................ $24 $ 72 $124 $265
</TABLE>
- ----------------------------------
* 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.
- 14 -
<PAGE>
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. 45, 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
.0583% based on an average Policy Value of $60,083.
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.
Except for Policies with form number AV266 101 90 396, the Death Benefit
will be as follows: During the first seven Policy Years, the Death Benefit
will be the greater of (a) the Annuity Purchase 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 Withdrawal taken (see p. 43). After
the seventh Policy Anniversary, the Death Benefit will be the greatest of (a),
(b) or (c), where (a) and (b) are defined above and where (c) is the Annuity
Purchase Value on the seventh Policy Anniversary, plus all Premiums paid less
any Adjusted Partial Withdrawal taken since that Policy Anniversary.
For Policies issued with form number AV266 101 90 396, the Death Benefit
will be the greater of (a) the Annuity Purchase Value or the Cash Value on the
date proof of death and election of the method of settlement are received, or
(b) the Annual Step-Up Death Benefit.
The Annual Step-Up Death Benefit is the highest Annuity Purchase Value on
any Policy Anniversary prior to the earlier of the owner's 81st birthday or
the date of death, plus any Premium Payments paid less any "Adjusted Partial
Withdrawals" since that anniversary.
The Death Benefit does not apply on the death of an Owner if the Owner is
not the Annuitant. If an Owner who is not the Annuitant dies before the
- 15 -
<PAGE>
Annuity Commencement Date, the amount payable under the Policy upon surrender
will be the Cash Value. These death benefit provisions may vary depending on
which state the Policy is issued in and when it was issued. No Contingent
Deferred Sales Charge and no Excess Interest Adjustment 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. 42.)
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 Annuity Purchase 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. 48.)
INQUIRIES, WRITTEN NOTICES AND WRITTEN 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 52499-0001. 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.
VARIATIONS IN POLICY PROVISIONS
Certain features described below may only be available to Policies purchased
after the effective date of the Policy form number used.
- 16 -
<PAGE>
Only Policies issued on or after May 1, 1996 with Policy form number AV266
101 90 396 contain the following features: Excess Interest Adjustment, a
minimum effective annual interest rate of 3% in the Fixed Account along with
Guaranteed Period Options, Dollar Cost Averaging Fixed Account Option, and
Asset Rebalancing. Thus, references to these features in this Prospectus will
only apply to such Policies.
* * *
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. 27.)
- 17 -
<PAGE>
CONDENSED FINANCIAL INFORMATION
The Accumulation Unit Values and the number of Accumulation Units
outstanding for each Subaccount from the date of inception (January 1, 1995,
except as noted below):
<TABLE>
<CAPTION>
TCW 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>
1995......................... 1.072424 1.115718 271,034.756
<CAPTION>
TCW 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>
1995......................... 1.301669 1.577873 607,869.454
<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>
1995......................... 1.073958 1.171039 681,093.799
<CAPTION>
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>
1995......................... 1.045610 1.387903 547,233.586
<CAPTION>
DREYFUS SMALL CAP VALUE 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>
1995......................... 1.072941 1.206843 535,283.029
<CAPTION>
DREYFUS 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>
1995(1)...................... 1.072051 1.124292 204,813.593
<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>
1995(2)...................... 1.116497 1.287240 293,619.530
<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>
1995(3)...................... 1.145983 1.353339 189,613.999
<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>
1995......................... 10.051117 14.583843 97,436.321
</TABLE>
- 18 -
<PAGE>
- ----------------------------------
*Prior to May 1, 1996, known as the Money Market Subaccount
**Prior to May 1, 1996, known as the Managed Asset Allocation Subaccount
***Prior to May 1, 1996, known as the Quest for Value Equity Subaccount
****Prior to October 29, 1996, known as the Value Small Cap Subaccount, and
prior to May 1, 1996, known as the Quest for Value Small Cap Subaccount
*****Prior to May 1, 1996, known as the U.S. Government Securities Subaccount
(1) Period from June 16, 1995 through December 31, 1995
(2) Period from June 28, 1995 through December 31, 1995
(3) Period from April 28, 1995 through December 31, 1995
The offering of the Opportunity Value Subaccount is expected to commence on
or about the date of this revised Prospectus. Accordingly, no comparable data
is available for that Subaccount.
FINANCIAL STATEMENTS
The financial statements of the Mutual Fund Account and 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 Subaccount investing in the TCW Money
Market Portfolio (the "TCW 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 TCW 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 TCW
Money Market Subaccount) for a Policy refers to the annualized income
generated by an investment under a Policy in the Subaccount over a
- 19 -
<PAGE>
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 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
any or all of 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............ 39.93% 12.60% 9.41% 7.20% 16.08% 15.93%
</TABLE>
<TABLE>
<CAPTION>
ONE YEAR INCEPTION OF
PERIOD ENDED THE SUBACCOUNT
12/31/95 TO 12/31/95
------------ --------------
<S> <C> <C>
TCW Managed Asset Allocation/1/..................... 15.88% 9.70%
Value Equity/2/..................................... 27.46% 12.08%
Dreyfus Small Cap Value /3/......................... 7.09% 5.80%
Dreyfus U.S. Government Securities /4/.............. 8.59% 4.29%
T. Rowe Price Equity Income /5/..................... -- 22.63%
T. Rowe Price Growth Stock /6/...................... -- 29.30%
</TABLE>
- ----------------------------------
/1/Inception Date of corresponding Portfolio--April 8, 1991.
/2/Inception Date of corresponding Portfolio--May 27, 1993.
- 20 -
<PAGE>
/3/Inception Date of corresponding Portfolio--May 4, 1993.
/4/Inception Date of corresponding Portfolio--May 13, 1994.
/5/Inception Date of corresponding Portfolio--January 3, 1995.
/6/Inception Date of corresponding Portfolio--January 3, 1995.
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).
Based on the method of calculation described in the Statement of Additional
Information, the average annual total return for the one year period ended
December 31, 1995 was 8.98%.
OPPORTUNITY VALUE SUBACCOUNT--HYPOTHETICAL DATA
The Opportunity Value Subaccount had not commenced operations as of the date
of this revised Prospectus, so no historical performance data exists for that
Subaccount. Likewise, the offering of shares of the Opportunity Value
Portfolio is expected to commence on or about the date of this revised
Prospectus. Accordingly, no comparable data is available for shares of that
Portfolio in which the Opportunity Value Subaccount will invest.
OpCap is the investment adviser for the Managed Portfolio of the
Accumulation Trust (formerly known as the Quest for Value Accumulation Trust)
(the "Accumulation Trust") a registered open-end investment company whose
shares are sold to certain variable accounts of life insurance companies. The
Managed Portfolio of the Accumulation Trust is substantially similar to the
Opportunity Value Portfolio in that it has the same investment objective as
the Opportunity Value Portfolio and is managed using the same investment
strategies and techniques as contemplated for the Opportunity Value Portfolio.
The following figures represent what the investment performance of the
Opportunity Value Subaccount would have been, IF that Subaccount had been in
existence since 1988, and invested in the Accumulation Trust. The performance
information regarding the Managed Portfolio of the Accumulation Trust which
has been obtained from OpCap, and is set forth in the current prospectus and
statement of additional information of the Accumulation Trust. Since this
Subaccount will only commence operations as of the date of this revised
Prospectus, these are not actual performance figures for the Opportunity Value
Subaccount. These are hypothetical average annual total return figures, which
represent the performance of the Managed Portfolio of the Accumulation Trust
(which are not available under the Policy), adjusted for the charges and
deductions applicable to the Policy.
- 21 -
<PAGE>
INVESTORS SHOULD NOT RELY ON THE FOLLOWING FINANCIAL INFORMATION AS AN
INDICATION OF THE FUTURE PERFORMANCE OF THE OPPORTUNITY VALUE SUBACCOUNT.
HYPOTHETICAL AVERAGE ANNUAL TOTAL RETURN
OF COMPARABLE SUBACCOUNT *(1)
<TABLE>
<CAPTION>
FOR THE FOR THE
FOR THE FIVE YEARS PERIOD FROM
YEAR ENDED ENDED INCEPTION TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1995 (2)
------------ ------------ ------------
<S> <C> <C> <C>
Opportunity Value Subaccount............. 38.62% 21.57% 18.05%
</TABLE>
- ----------------------------------
* On September 16, 1994, an investment company called Quest for Value
Accumulation Trust (the "Old Trust") was effectively divided into two
investment funds, the Old Trust and the Accumulation Trust, at which time
the Accumulation Trust commenced operations. The total net assets for the
Managed Portfolio immediately after the transaction was $682,601,380 with
respect to the Old Trust and $51,345,102 with respect to the Accumulation
Trust. For the period prior to September 16, 1994, the performance figures
above for the Managed Portfolio reflect the performance of the
corresponding Portfolio of the Old Trust.
(1) Reflects waiver of all or a portion of the advisory fees and
reimbursements of other expenses. Without such waivers and reimbursements,
the average annual total return during the periods would have been lower.
(2) The Portfolio commenced operations on August 1, 1988.
These figures are not an indication of the present, past, or future
performance of the Opportunity Value Subaccount.
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 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
- 22 -
<PAGE>
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 or of the safety or riskiness of an investment 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, 1995, AUSA had assets of
approximately $7.8 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.
THE ENDEAVOR ACCOUNTS
Premium Payments made 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
- 23 -
<PAGE>
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 Premium Payments under the Policies that are
allocated to it for investment in shares of the WRL Series Fund, Inc.'s Growth
Portfolio, managed by Janus Capital Corporation, and the Endeavor Series
Trust.
The Mutual Fund Account currently is divided into ten 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. To the extent that these assets are attributable to the Cash Value of
the Policies, these assets are not chargeable with liabilities incurred in any
other business operation of AUSA. 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 Growth Portfolio of the WRL Series Fund, Inc.
(collectively the "Underlying Funds"). The WRL Series Fund, Inc. and the
Endeavor Series Trust are each a series-type mutual fund registered with the
SEC under the 1940 Act as an open-end, diversified management investment
company./5/ The Underlying Funds currently consist of the following ten
Portfolios: the WRL Growth Portfolio, managed by Janus Capital Corporation,
the TCW Managed Asset Allocation Portfolio (formerly known as the Managed
Asset Allocation Portfolio), the TCW Money Market Portfolio (formerly known as
the Money Market Portfolio), the T. Rowe Price International Stock Portfolio,
the Value Equity Portfolio (formerly known as the Quest for Value Equity
Portfolio), the Dreyfus Small Cap Value Portfolio (formerly known as the Value
Small Cap Portfolio, and prior to that the Quest for Value Small Cap
Portfolio), the Dreyfus U.S. Government Securities Portfolio (formerly known
as the U.S. Government Securities Portfolio), the T. Rowe Price Equity Income
Portfolio, the T. Rowe Price Growth Stock Portfolio, and the Opportunity Value
Portfolio. The assets of
- ----------------------------------
/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.
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<PAGE>
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), OpCap Advisors (formerly known as Quest for Value Advisors), and The
Dreyfus Corporation (a wholly-owned subsidiary of Mellon Bank, N.A.), (the
"Advisers"), each perform investment advisory services for particular
Portfolios of Endeavor Series Trust. TCW Funds Management, Inc. is the Adviser
for the TCW Managed Asset Allocation Portfolio and the TCW 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.
OpCap Advisors is the Adviser for the Value Equity Portfolio and the
Opportunity Value Portfolio. The Dreyfus Corporation is the Adviser for the
Dreyfus U.S. Government Securities Portfolio, and the Dreyfus Small Cap Value
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 WRL Growth 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.
The investment objectives of each Portfolio are summarized as follows:
TCW 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.
TCW 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.
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<PAGE>
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.
Dreyfus Small Cap Value Portfolio--seeks capital appreciation through
investments in a diversified portfolio consisting primarily of equity
securities of companies with a median capitalization of approximately $750
million, provided that under normal market conditions at least 75% of the
Portfolio's investments will be in equity securities of companies with
capitalizations at the time of purchase between $150 million and $1.5 billion.
Dreyfus 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.
Opportunity Value Portfolio--seeks growth of capital over time through
investment in a portfolio consisting of common stocks, bonds and cash
equivalents, the percentages of which will vary based upon the Portfolio
Adviser's assessment of relative values.
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.
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 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
TCW Money Market Portfolio and the Dreyfus U.S. Government Securities
Portfolio, is not insured or guaranteed by the U.S. government or any
government agency.
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<PAGE>
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 TCW 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 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. In addition, all Policies issued
before May 1, 1996, and Policies issued on or after that date but
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issued under a form other than AV266 101 90 396 have different Fixed Account
features than those described in this Prospectus. For complete details
regarding the Fixed Account, see the Policy itself.
Premium Payments 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 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 SEC 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
Annuity Purchase Value in the Mutual Fund Account, AUSA bears the full
investment risk for all Annuity Purchase 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.
Premium Payments applied to and any amounts transferred to the Fixed Account
will reflect a fixed interest rate. The interest rates AUSA sets will be
credited for increments of at least one year measured from each premium
payment or transfer date. These rates will never be less than an effective
annual interest rate of 3%.
Guaranteed Periods. AUSA may offer optional guaranteed interest rate periods
("Guaranteed Period Options" or "GPOs") into which Premium Payments may be
paid or amounts transferred. For example, AUSA may offer Guaranteed Period for
periods of 1, 3, 5, or 7 years from time to time. The current interest rate
AUSA sets for funds entering each GPO will be guaranteed until the end of that
GPO's Guaranteed Period. At the end of the Guaranteed Period, the Premium
Payment or amount transferred into the GPO less any withdrawals or transfers
from that GPO, including the effect of any Excess Interest Adjustment or
Contingent Deferred Sales Charge due to withdrawals or transfers prior to the
end of the Guaranteed Period, plus accrued interest, will be rolled into a new
GPO(s).
The Policy Owner may choose the GPO(s) in which the Owner wants the funds
placed by giving AUSA notice within 30 days before the end of the expiring
GPO's Guaranteed Period. In the absence of such election, the new GPO's
Guaranteed Period will be the same as the expiring GPO's Period unless that
GPO is no longer offered, in which case, the next shorter GPO offered will be
used. AUSA reserves the right, for new Premium Payments, transfers, or
rollovers, to offer or not to offer any GPO except that AUSA will always offer
at least a one-year GPO.
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<PAGE>
Payments applied to a Guaranteed Period Option are subject to an Excess
Interest Adjustment as described below at page 36.
AUSA guarantees that, at any time prior to the Annuity Commencement Date,
the Annuity Purchase Value of 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, 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 or transfers to the Mutual Fund
Account (including any Contingent Deferred Sales Charges), plus interest at
the effective annual rate of 3% per year. Upon surrender of the Policy, the
Owner will receive at least the Premium Payments allocated to, less prior
withdrawals and transfers from, the Fixed Account.
The Current Interest Rates will be determined by AUSA in its sole
discretion.
For purposes of crediting interest, the oldest Premium Payment or transfer
into a Guaranteed Period Option within the Fixed Account, plus interest
allocable to that Premium Payment or transfer, is considered to be withdrawn
or transferred out first; the next oldest Premium 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 3% per year. (4% per year for Owners with a policy form number
other than AV266 101 90 396).
Dollar Cost Averaging Fixed Account Option. AUSA may offer a Dollar Cost
Averaging Fixed Account Option separate from the GPO(s). This option will have
a one-year interest rate guarantee and will only be available under a Dollar
Cost Averaging (DCA) program (see "Dollar Cost Averaging" p. 31.)
Prior to the Annuity Commencement Date, no transfers, except through DCA,
will be allowed from the DCA Fixed Account. DCA transfers must begin within 30
days after the Premium Payment or transfer to the DCA Fixed Account. Transfers
must be scheduled for at least six but not more than 24 months, or for at
least four, but not more than eight quarters. No changes to the amount
transferred will be allowed, but changes can be made to the Subaccounts to
which these transfers are allocated. DCA transfers from the DCA Fixed Account
will not be subject to an Excess Interest Adjustment.
TRANSFERS
An Owner can transfer Annuity Purchase 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
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<PAGE>
Policy Owner, to the Service Office. The minimum amount which may be
transferred is the lesser of $500 or the entire Subaccount or Guaranteed
Period Option Value. If the Subaccount or Guaranteed Period Option 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.
If the Excess Interest Adjustment (at the time of a transfer request) from
any GPO is a negative adjustment, then the maximum amount that can be
transferred is 25% of that GPO's Annuity Purchase Value, less amounts
previously transferred out of that GPO during the current Policy Year. No
maximum will apply to amounts transferred from any GPO if the Excess Interest
Adjustment is a positive adjustment at the time of transfer.
Transfers currently may be made without charge as often as the Owner wishes,
subject to the minimum amount specified above. AUSA reserves the right to
limit these transfers prior to the Annuity Commencement Date to no more than
12 per Policy Year in the future or to charge up to $10 per transfer in excess
of twelve per Policy Year; however, currently there is no charge for any
transfers.
Transfers out of the Dollar Cost Averaging Fixed Account, except through
Dollar Cost Averaging, are not allowed.
For Policies issued under form number AV266 101 90 396, transfers out of a
Guaranteed Period Option prior to the end of the Guaranteed Period are subject
to an Excess Interest Adjustment, which could increase or decrease the amount
available to transfer. Except for Policies issued with form number AV266 101
90 396, 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, whichever is greater. AUSA
may, at its discretion offer the Owner the option to transfer interest earned
in any of the Guaranteed Period Options to any Subaccount(s) of the Mutual
Fund Account. No Excess Interest Adjustment will apply to such tranfers of
interest. After the Annuity Commencement Date, transfers out of the Fixed
Account are not permitted. (See "Annuity Payment Options," page 39.)
REINSTATEMENTS
Requests are sometimes received by AUSA to reinstate funds which had been
transferred to another company via a Section 1035 exchange or trustee to
trustee transfer. In this situation AUSA will require the Owner to replace the
same total amount of money in the applicable Subaccounts and/or Fixed Accounts
as was taken from them to effect the Exchange. The total dollar amount of
funds reapplied to the Separate Account will be used to purchase a number of
units available for each Subaccount based on the unit prices at the date of
Reinstatement (within two days of the date the funds are received by AUSA). It
should be noted that the number of units available on the Reinstatement date
may be more or less than the number surrendered
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<PAGE>
for the Exchange. Amounts reapplied to the Fixed Account will receive the
interest rate they would otherwise have received, had they not been withdrawn.
However, an adjustment will be made to the amount reapplied to compensate AUSA
for the additional interest credited during the period of time between the
withdrawal and the reapplication of the funds. Owners should consult a
qualified tax adviser concerning the tax consequences of any Section 1035
exchanges or reinstatements.
DOLLAR COST AVERAGING (DCA)
Under the Dollar Cost Averaging program prior to the Annuity Commencement
Date, the Policy Owner can instruct AUSA to automatically transfer an amount
specified by the Policy Owner from the DCA Fixed Account Option, the TCW Money
Market Subaccount or the Dreyfus 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. If the DCA request is received prior to the 28th day of any month, the
first transfer will occur on the 28th day of that month. If the DCA request is
received on or after the 28th day of any month, the first transfer will occur
on the 28th day of the following month. The amount transferred each time must
be at least $500. A minimum of six monthly or four quarterly transfers are
required and a maximum of 24 monthly or eight quarterly transfers are allowed
from the DCA Fixed Account.
Dollar Cost Averaging results in the purchase of more Units when the Unit
Value is low, and fewer units when the Unit Value is high. However, there is
no guarantee that the Dollar Cost Averaging program will result in higher
Annuity Purchase Values or will otherwise be successful.
The Policy Owner may request Dollar Cost Averaging when purchasing the
Policy or at a later date. The program will terminate when the amount in the
TCW Money Market Subaccount, the DCA Fixed Account, or the Dreyfus U.S.
Government Securities Subaccount is insufficient for the next transfer, at
which time the remaining balance is transferred.
Except for DCA transfers from the DCA Fixed Account Option, 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. The minimum number of transfers (6
monthly or 4 quarterly) requirement must be satisfied each time the DCA
program is restarted following termination of the program for any reason.
There is no charge for this program.
ASSET REBALANCING
Prior to the Annuity Commencement Date the Policy Owner may instruct AUSA to
automatically transfer amounts among the Subaccounts of the Mutual Fund
Account on a regular basis to maintain a desired allocation of the Annuity
Purchase Value among the various Subaccounts offered. Rebalancing will occur
on a monthly, quarterly, semi-annual, or annual basis,
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<PAGE>
beginning on a date selected by the Policy Owner. The Policy Owner must select
the percentage of the Annuity Purchase Value desired in each of the various
Subaccounts offered (totaling 100%). Any amounts in the Fixed Account are
ignored for purposes of asset rebalancing. Rebalancing may be started,
stopped, or changed at any time, except that rebalancing will not be available
when:
(1) Dollar Cost Averaging is in effect; or
(2) any other transfer is requested.
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 reference to 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 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 or transmittal form can be accepted in the form received,
the initial Premium Payment will be credited to the Annuity Purchase Value
within two Business Days after the later of receipt of the information needed
to issue the Policy 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 Annuity
Purchase Value is the Policy Date. The Policy Date is the date used to
determine Policy Years and Policy Anniversaries.
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<PAGE>
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. Subsequent
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.
Subsequent Additional Premium Payments. While the Annuitant is living and
prior to the Annuity Commencement Date, the Owner may make Subsequent
Additional Premium Payments at any time, and in any frequency. The minimum
Subsequent Additional Premium Payment under both a Nonqualified Policy and a
Qualified Policy is $50, including payments through automatic deduction.
Subsequent Additional Premium Payments will be credited to the Policy and
added to the Annuity Purchase Value as of the Business Day when they are
received.
Maximum Total Premium Payments. The maximum total Premium Payments allowed
without prior approval of AUSA is $1,000,000.
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 or transmittal form. This allocation will
be used for Subsequent Additional Premium Payments unless the Owner requests a
change of allocation. All allocations must be made in whole percentages and
must total 100%. If the Owner fails to specify how Premium Payments are to be
allocated, the Premium Payment(s) cannot be accepted.
The Owner may change the allocation instructions for future Subsequent
Additional Premium Payments by sending Written Notice, signed by the Owner, to
AUSA's Service Office. The allocation change will apply to Premium 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.
ANNUITY PURCHASE VALUE
On the Policy Date, the Annuity Purchase Value equals the initial Premium
Payment. Thereafter, the Annuity Purchase Value equals the sum of the values
in the Mutual Fund Account and the Fixed Account. The
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Annuity Purchase Value will increase by (1) any Subsequent Additional Premium
Payments received by AUSA; (2) any increases in the Annuity Purchase Value due
to investment results of the selected Subaccount(s); (3) any positive Excess
Interest Adjustments on transfers, and (4) interest credited in the Fixed
Account. The Annuity Purchase Value will decrease by (1) any surrenders,
including applicable Excess Interest Adjustments and/or Contingent Deferred
Sales Charges; (2) any decreases in the Annuity Purchase Value due to
investment results of the selected Subaccounts; (3) the charges imposed by
AUSA; and (4) any negative Excess Interest Adjustments on transfers.
The Annuity Purchase 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 Payment is allocated or an
amount is transferred to a Subaccount of the Mutual Fund Account, it is
credited to the Annuity Purchase 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 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.
ADJUSTED ANNUITY PURCHASE VALUE (AAPV)
The Adjusted Annuity Purchase Value is the Annuity Purchase Value increased
or decreased by any Excess Interest Adjustment.
The AAPV will be used on the Annuity Commencement Date to provide the amount
of annuity payments under a Policy.
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.
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<PAGE>
DISTRIBUTIONS UNDER THE POLICY
SURRENDERS
Prior to the Annuity Commencement Date, 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 Adjusted Annuity Purchase Value less any applicable
Contingent Deferred Sales Charge and any applicable premium taxes. (See
"Annuity Payment Options," p. 39.) The Policy cannot be surrendered after the
Annuity Commencement Date. (See "Annuity Payments," p. 37)
When requesting a partial withdrawal ($500 minimum), the Owner must tell
AUSA how the withdrawal is to be allocated among various Guaranteed Period
Options of the Fixed Account and/or the Subaccount(s) of the Mutual Fund
Account. If the Owner's request for a partial withdrawal from a Guaranteed
Period Option of the Fixed Account is greater than the Cash Value of that
Guaranteed Period Option, AUSA will pay the Owner the amount of the Cash Value
of that Guaranteed Period Option. If no allocation instructions are given, the
withdrawal will be deducted from each Investment Option in the same proportion
that the Policy Owner's interest in each Investment Option bears to the
Policy's total Annuity Purchase Value.
Surrenders from the Fixed Account may be delayed for up to six months.
Beginning in the second Policy Year, an Owner may surrender up to 10% of the
Annuity Purchase Value without an Excess Interest Adjustment (EIA) and without
a Contingent Deferred Sales Charge if no withdrawal has been made in the
current Policy Year ("surrender charge free/adjustment free withdrawals").
Amounts withdrawn from the Policy 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 EIA and to the Contingent
Deferred Sales Charge. In addition, neither a Contingent Deferred Sales Charge
nor an EIA will be assessed if the policy withdrawal is necessary to meet the
minimum distribution requirements for that policy specified by the IRS for tax
qualified plans.
Withdrawals free of surrender charges and adjustments will reduce the
Annuity Purchase Value by the amount withdrawn. Amounts requested in excess of
the portion that is free of surrender charges and adjustments are Excess
Partial Withdrawals. Excess Partial Withdrawals will reduce the Annuity
Purchase Value by an amount equal to (X - Y + Z) where:
X = Excess Partial Withdrawal
Y = Excess Interest Adjustment = (X) X (G - C) X (M/12) where G, C, and M
are defined in the Excess Interest Adjustment Section.
Z = Contingent Deferred Sales Charge on X minus Y.
For a discussion of the Contingent Deferred Sales Charge, see "Contingent
Deferred Sales Charge," p. 45. For a discussion of the Excess Interest
Adjustment, see "Excess Interest Adjustment" below.
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Since the Owner assumes the investment risk with respect to Premium Payments
allocated to the Mutual Fund Account, and because withdrawals are subject to
an Excess Interest Adjustment and 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 Annuity Purchase Value is zero, all rights of the Owner and
Annuitant will terminate.
In addition to the Excess Interest Adjustment and Contingent Deferred Sales
Charge and any applicable premium taxes, surrenders may be subject to income
taxes and, if prior to age 59 1/2, a ten percent penalty tax. (See "Certain
Federal Income Tax Consequences," p. 48.)
EXCESS INTEREST ADJUSTMENT (EIA)
Only Policies issued on or after May 1, 1996 and under form number AV266 101
90 396 are subject to the EIA, if applicable.
Full surrenders, partial withdrawals and transfers from the Fixed Account
Guaranteed Periods will be subject to an Excess Interest Adjustment except as
provided for under "Surrenders" above or "Systematic Payout Plan," below.
Excess Interest Adjustment = S X (G - C) X (M/12)
where: S is the gross amount (i.e. before premium taxes, if any) being
surrendered or withdrawn that is subject to the Excess Interest
Adjustment.
G is the guaranteed interest rate applicable to S.
C is the current guaranteed interest rate then being offered on
new Policies for the next longer option period than "M". If this
Policy form or such an option period is no longer offered, "C"
will be the U.S. Treasury rate for the next longer maturity (in
whole years) than "M" on the 25th day of the previous calendar
month, plus up to 2%.
M is the number of months remaining in the option period for S,
rounded up to the next higher whole number of months.
Generally, if G is lower than C, the application of the EIA (a negative EIA
in this case) will result in a lower payment upon surrender. Conversely, if G
is higher than C, the application of the EIA (a positive EIA in this case)
will result in a higher payment upon surrender.
Upon transfer or withdrawal from any Guaranteed Period Option, or upon full
surrender of the Policy, the EIA for each Guaranteed Period Option will not
reduce the Adjusted Annuity Purchase Value for that Guaranteed Period Option
below the amount paid into, less any prior withdrawals and transfers from that
Guaranteed Period Option, plus interest at the 3% guaranteed effective annual
interest rate.
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<PAGE>
The formula for calculating the EIA and examples of the application of the
EIA are set forth in Appendix A to this Prospectus.
SYSTEMATIC PAYOUT OPTION
Under the Systematic Payout Option 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 payment is $50. The maximum payment is 10% of the Annuity Purchase
Value at the time the Systematic Payout is elected 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 (i.e., Systematic Payouts
will start at the end of the payment mode selected, but not earlier than 30
days from the date of request).
The Contingent Deferred Sales Charge and EIA will be waived for Policy
Owners under age 59 1/2 of tax qualified policies if they take Systematic
Payouts 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 and EIA will be waived if payments are made using the
Life Expectancy Recalculation Option.
In addition, for either tax qualified or non-tax qualified Policies the
Contingent Deferred Sales Charge and EIA will not be imposed on Systematic
Payouts.
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 tax treatment of systematic payouts from Nonqualified
Policies has had an unfavorable ruling regarding the ability to avoid the 10%
penalty tax. Therefore, the Policy Owner should consult a qualified tax
adviser before requesting a Systematic Payout. In certain circumstances
withdrawn amounts may be included in the Policy Owner's gross income. (See
"Certain Federal Income Tax Consequences," p. 48.)
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
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<PAGE>
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) at least thirty (30) days after the date notice of the change is
received by AUSA; and (2) not later than the last day of the policy 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 (i)
under Option 3, life income with level payments for 10 years certain, using
the existing Adjusted Annuity Purchase Value of the Fixed Account, or (ii)
under Option 3-V, life income with variable payments for 10 years certain,
using the existing Adjusted Annuity Purchase Value of the Mutual Fund Account,
or (iii) in a combination of (i) and (ii). If the Adjusted 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 Payment Options, to the
extent allowed by law and subject to the terms of any settlement agreement.
(See "Death Benefit," p. 42.) 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.
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<PAGE>
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 Policy Proceeds are to be applied to the Fixed and Variable
Options (and he must also specify which Subaccounts for the 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 Adjusted Annuity Purchase
Value will be applied to provide for Annuity Payments under the selected
Annuity Option as specified. The Adjusted Annuity Purchase Value is the
Annuity Purchase Value for the Valuation Period which ends immediately
preceding the Annuity Commencement Date, including the effect of any
applicable Excess Interest Adjustment, and reduced by any applicable premium
or similar taxes.
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 Adjusted Annuity Purchase 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" (male, female, and
unisex if required by law) mortality table improved to the year 2000 with
projection scale G. ("The 1983 Table a" mortality rates are adjusted based on
improvements in mortality since 1983 to more appropriately reflect increased
longevity. This is accomplished using a set of improvement factors referred to
as projection scale G.)
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
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<PAGE>
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 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
a 5% effective annual Assumed Investment Return and the "1983 Table a" (male,
female, and unisex if required by law) mortality table improved to the year
2000 with projection Scale G. ("The 1983 Table a" mortality rates are adjusted
based on improvements in mortality since 1983 to more appropriately reflect
increased longevity. This is accomplished using a set of improvement factors
referred to as projection scale G.) The dollar amount of subsequent Variable
Annuity Payments 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
Investment Return of 5% at all times, the amount of each Variable Annuity
Payment would remain equal. If actual investment performance exceeds the
Assumed Investment Return, the amount of the payments would increase.
Conversely, if actual investment performance is worse than the Assumed
Investment Return, the amount of the payments would decrease.
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<PAGE>
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 5-V--Joint and Survivor Annuity. Payments are made as long as either
the Annuitant or the joint Annuitant is living.
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.
Transfer. 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.
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<PAGE>
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 after the Annuity Commencement Date 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. 48.)
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 $50, AUSA may change, at its discretion, the frequency of payments
to such intervals as will result in payments of at least $50. If the Adjusted
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. A Death Benefit will
be paid to the Beneficiary if the Annuitant is also the Owner and the Owner
dies prior to the Annuity Commencement Date. The amount of the Death Benefit
will be the greater of a) the Annuity Purchase Value (or the Cash Value, if
greater) on the later of the date proof of the Owner's death and the date an
election of the method of settlement are received by AUSA's Service Office, or
b) the Guaranteed Minimum Death Benefit ("GMDB") described below.
The Annual Step-Up Guaranteed Minimum Death Benefit is the highest Annuity
Purchase Value on any Policy Anniversary prior to the earlier of the date of
death or the Owner's 81st birthday, plus Premium Payments less any Adjusted
Partial Withdrawals since that anniversary. For this purpose, the issue date
will be treated as a Policy Anniversary. The Annual Step-Up Guaranteed Minimum
Death Benefit only applies to Policies issued with form number AV266 101 90
396.
If the surviving spouse elects to continue the policy in lieu of receiving
the Death Benefit, an amount equal to the excess, if any, of the Guaranteed
Minimum Death Benefit (i.e., the Annual Step-Up Death Benefit) over the
Annuity Purchase Value, will then be added to the Annuity Purchase Value. This
amount will be added only once, at the time of such election.
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<PAGE>
Adjusted Partial Withdrawal. To determine the GMDB for each partial
withdrawal, the Adjusted Partial Withdrawal is the sum of (1) and (2), where
(1) The Surrender charge free/adjustment free withdrawal amount taken and,
(2) the product of (a) times (b) where:
(a) is the ratio of the amount of the Excess Partial Withdrawal to the
Annuity Purchase Value on the date of (but prior to) the Excess Partial
Withdrawal; and
(b) is the Death Benefit on the date of (but prior to) the Excess Partial
Withdrawal.
If a partial withdrawal is taken when the GMDB exceeds the Annuity Purchase
Value, then the partial withdrawal amount used to determine the GMDB 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 policy application or in writing that the Death
Benefit be paid upon the Annuitant's death and AUSA agrees to such 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.
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 date of the deceased Owner's death, or (2) payments under a
Payment Option must begin within one year of the deceased Owner'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 the date of the deceased Owner's
death. If the sole Beneficiary is the deceased Owner'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.)
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<PAGE>
Death On or After Annuity Commencement Date. The death benefit payable on or
after the Annuity Commencement Date depends on the Payment Option selected. If
any Owner dies on or after the Annuity Commencement Date, but before the
entire interest in the Policy is distributed, the remaining portion of such
interest in the Policy will be distributed at least as rapidly as under the
method of distribution being used as of the date of that Owner'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 Policies. (See also "Death Benefit," p.
42).
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 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.
RESTRICTIONS UNDER QUALIFIED POLICIES
Other restrictions with respect to the election, commencement, or
distribution of benefits may apply under Qualified Policies or under the terms
of the plans in respect of which Qualified Policies are issued.
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<PAGE>
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
Annuity Purchase 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. The Contingent
Deferred Sales Charge is also waived upon certain Systematic Payment Options
(see p. 37).
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 withdrawn, the
remaining Adjusted Annuity Premium 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>
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<PAGE>
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 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.
Annuity Purchase 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 Guaranteed Minimum
Death Benefit if that amount is higher than the Annuity Purchase 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.
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 Annuity Purchase Value of
each Policy, and also deducts a daily Administrative
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<PAGE>
Expense Charge from the assets of each Subaccount of the Mutual Fund Account.
The annual Policy Maintenance Charge is deducted from the Annuity Purchase
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 Annuity Purchase 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 Annuity Purchase
Value in the Mutual Fund Account.
AUSA also deducts a daily Administrative Expense Charge from the net 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 in 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 Annuity Purchase Value on (i) the Annuity
Commencement Date (thus reducing the Adjusted Annuity Purchase Value), (ii)
the total surrender of a Policy, or (iii) payment of the death proceeds of a
Policy.
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 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 $10 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, Premium Payment allocations are not considered
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<PAGE>
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. The bonus
will be reported to the Internal Revenue Service as taxable income to the
employee or registered representative. 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
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
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<PAGE>
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. Subsequent
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 a Subsequent 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), 408(a), or 457 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.
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 Annuity Purchase 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
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<PAGE>
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 Annuity Purchase Value (ignoring any
surrender charges except on a full surrender) exceeds the "Investment in the
Contract," such excess constitutes the "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 Annuity Purchase 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 Annuity Purchase 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 Annuity Purchase 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 Annuity Purchase
Value. A transfer of ownership or an assignment of a Policy, or designation of
an Annuitant or Beneficiary who is not also the Owner, as well as the
selection of certain Annuity Commencement Dates, may result in certain tax
consequences to the Owner that are not discussed herein. An Owner
contemplating any such transfer, designation, selection 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 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 or Withdrawals. In the case of a partial surrender (including
systematic withdrawals) under a Nonqualified Policy, the amount received
generally will be includable in gross income to the extent that it does not
exceed the "Income on the Contract," which is generally equal to the excess of
the Annuity Purchase Value immediately before the partial surrender over the
"Investment in the Contract" at that time. However for these purposes, the
Annuity Purchase Value immediately before a partial surrender may have to be
increased by any positive Excess Interest Adjustment which results from such a
partial surrender or which could
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<PAGE>
result from a simultaneous full surrender, and may need further adjustments if
the aggregation rules apply. There is, however, no definitive guidance on the
proper tax treatment of Excess Interest Adjustments, and the Owner should
contact a competent tax adviser with respect to the potential tax consequences
of an Excess Interest Adjustment that may apply in the case of a Non-Qualified
Policy or a Qualified Policy. In the case of a partial surrender (including
systematic withdrawals) under a Qualified Policy (other than one qualified
under Section 457 of the Code), a ratable portion of the amount received is
generally excludable from gross income, based on the ratio of the "Investment
in the Contract" to the individual's total account balance or accrued benefit
under the retirement plan at the time of each such payment. For a Qualified
Policy, 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," unless the aggregation rules apply.
Annuity Payments. Although the tax consequences may vary depending on the
Annuity Payment Option elected under the Policy, in general only a portion of
the Annuity Payments received after the Annuity Commencement Date will be
includable in the gross income of the recipient.
For Fixed Annuity Payments, in general the excludable portion of each
payment is determined by dividing the "Investment in the Contract" on the
Annuity Commencement Date by the total expected value of the Annuity Payments
for the term of the payments. 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.
For Variable Annuity Payments, the includable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is excludable from gross income. This dollar amount is determined
by dividing the "Investment in the Contract" on the Annuity Commencement Date
by the total number of expected periodic payments. 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.
Where an Owner allocates a portion of the Adjusted Annuity Purchase Value on
the Annuity Commencement Date to more than one annuity payment option (fixed
or variable), special rules govern the allocation of the Policy's entire
"Investment in the Contract" on such date to each such option, for purposes of
determining the excludable amount of each payment received under that option.
AUSA makes no attempt to describe these allocation rules, because they would
prescribe a complex variety of results, depending on how the allocations were
made among the various types of options. Instead, any Owner is advised to
consult a competent tax adviser
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<PAGE>
as to the potential tax effects of allocating any amount of Adjusted Annuity
Purchase Value to any particular annuity payment option.
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 Annuity Commencement Date that was
excluded from gross income is allowable as a deduction for the last taxable
year of the Annuitant.
Taxation of Death Benefit Proceeds. Amounts may be distributed from the
Policy because of the death of an Owner or the Annuitant. Generally, such
amounts are includible in the income of the recipient as follows: (1) if
distributed in a lump sum, they are taxed in the same manner as a full
surrender, as described above, or (2) if distributed under an Annuity Option,
they are taxed in the same manner as Annuity Payments, as described above. For
these purposes, the "Investment in the Contract" is not affected by the
Owner's or Annuitant's death. That is, the "Investment in the Contract"
remains generally the total premium payments less amounts received which were
not includible in gross income.
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. For certain Qualified Policies, certain distributions are
subject to mandatory withholding.
Qualified Policies. The Qualified Policy is designed for use with several
types of tax-qualified retirement plans. The tax rules applicable to
participants and beneficiaries in tax-qualified 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
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<PAGE>
(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.
Some retirement plans are subject to distribution and other requirements that
are not incorporated into our Policy administration procedures. Owners,
participants and beneficiaries are responsible for determining that
contributions, distributions and other transactions with respect to the
Policies comply with applicable law.
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
generally is not transferable by the Owner, e.g., the Owner may not designate
a new Owner, designate a Contingent Owner or assign the Policy as collateral
security; (iii) the total Premium Payments for any calendar year may not
exceed $2,000, except in the case of as a rollover amount or contribution
under Section 402(c), 403(a)(4), 403(b)(8) 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
Annuity Purchase Value. Policies intended to qualify as individual retirement
annuities under Section 408(b) of the Code contain such provisions.
Section 408 of the Code also indicates that no part of the funds for an
individual retirement account or annuity ("IRA") 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. 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 an
enhanced death benefit provision, such as the provision in the Policy,
comports with IRA qualification requirements.
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
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<PAGE>
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.
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 Annuity Purchase 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. For these purposes, the Annuity Purchase Value at year
end may have to be increased by any positive Excess Interest Adjustment which
could result from a full surrender at such time. There is, however, no
definitive guidance on the proper tax treatment of Excess Interest
Adjustments, and the Owner should contact a competent tax adviser with respect
to the potential tax consequences of an Excess Interest Adjustment.
Notwithstanding the preceding sentences in this paragraph, Section 72(u) of
the Code does not apply to (i) a Policy the nominal Owner
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<PAGE>
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 (other than one qualified
under Section 457) 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 will
enter into one or more agreements 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 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 Annuity Purchase
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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 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.
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<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 Annuity Purchase 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........................................................ 6
Investment Experience..................................................... 6
State Regulation of AUSA.................................................. 10
Records and Reports....................................................... 10
Distribution of the Policies.............................................. 10
Custody of Assets......................................................... 10
Historical Performance Data............................................... 11
Money Market Yields..................................................... 11
Other Subaccount Yields................................................. 12
Total Returns........................................................... 12
Other Performance Data.................................................. 13
Legal Matters............................................................. 13
Independent Auditors...................................................... 13
Other Information......................................................... 14
Financial Statements...................................................... 14
</TABLE>
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APPENDIX A
EXCESS INTEREST ADJUSTMENT(1)
The formula which will be used to determined the Excess Interest Adjustment
(EIA) is:
S*(G - C)* (M/12)
S= Gross amount being withdrawn that is subject to the EIA
G= Guaranteed Interest Rate in effect for the policy
C= Current Guaranteed Interest Rate then being offered on new premiums for
the next longer option period than "M". If this policy form or such an
option period is no longer offered, "C" will be the U.S. Treasury rate for
the next longer maturity (in whole years) than "M" on the 25th day of the
previous calendar month, plus up to 2%.
M= Number of months remaining in the current option period, rounded up to the
next higher whole number of months.
EXAMPLE 1 (FULL SURRENDER, RATES INCREASE BY 3%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of Contract Year 3
Annuity Purchase Value ("APV") at
middle of Contract Year 3 = 50,000* (1.055) R 2.5 = 57,161.18
Penalty Free Amount at middle of
Contract Year 3 = 57,161.18* .10 = 5,716.12
Amount Subject to EIA = 57,161.18 - 5,716.12 = 51,445.06
EIA Floor = 50,000* (1.03) R 2.5 = 53,834.80
Excess Interest Adjustment
G = .055
C = .085
M = 30
Excess Interest Adjustment
= S* (G - C)* (M/12)
= 51,445.06* (.055 - .085)* (30/12)
= (3,858.38), but Excess Interest
Adjustment cannot cause the Adjusted
APV to fall below the floor, so the
adjustment is limited to 53,834.80 -
57,161.18 = (3,326.38)
Adjusted Annuity Purchase
Value ("AAPV") = APV + EIA = 57,161.18 + (3,326.38)
= 53,834.80
A-1
<PAGE>
Surrender Charges = (50,000 - 5,716.12)* .05
= 2,214.19
Net Surrender Value at middle of
Contract Year 3 = 53,834.80 - 2,214.19
= 51,620.61
EXAMPLE 2 (FULL SURRENDER, RATES DECREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of Contract Year 3
Annuity Purchase Value at middle
of Contract Year 3 = 50,000* (1.055) R 2.5 = 57,161.18
Penalty Free Amount at middle of
Contract Year 3 = 57,161.18* .10 = 5,716.12
Amount Subject to EIA = 57,161.18 - 5,716.12 = 51,445.06
EIA Floor = 50,000* (1.03) R 2.5 = 53,834.80
Excess Interest Adjustment
G = .055
C = .045
M = 30
Excess Interest Adjustment = S* (G - C)* (M/12) = 51,445.06*
(.055 - .045)* (30/12) = 1,286.13
Adjusted APV = 57,161.18 + 1,286.13 = 58,447.31
Surrender Charges = (50,000 - 5,716.12)* .05 = 2,214.19
Net Surrender Value at middle of
Contract Year 3 = 58,447.31 - 2,214.19 = 56,233.12
A-2
<PAGE>
On a partial surrender, AUSA will pay the policy holder the full amount of
withdrawal requested (as long as the Annuity Purchase Value is sufficient).
Surrender Charge free/adjustment free withdrawals will reduce the APV by the
amount withdrawn. Amounts withdrawn in excess of the Surrender Charge
free/adjustment free portion will reduce the APV by an amount equal to:
X-Y+Z
X= Excess Partial Withdrawal
Y= Excess Interest Adjustment = (X)*(G-C)*(M/12) where G, C, and M are
defined above.
Z= Surrender Charge on X and Y.
EXAMPLE 3 (PARTIAL WITHDRAWAL, RATES INCREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Surrender: $20,000; Middle of Contract Year 3
Annuity Purchase Value at middle
of Contract Year 3 = 50,000* (1.055) R 2.5 = 57,161.18
Penalty Free Amount at middle of
Contract Year 3 = 57,161.18* .10 = 5,716.12
Excess Interest/Surrender Charge (SC) Adjustment
X = 20,000 - 5,716.12=14,283.88
G = .055
C = .065
M = 30
Y = 14,283.88* (.055 - .065)* (30/12) = (357.10)
Z = .05* (20,000 - 5,716.12 - (357.10)) = 732.05
Reduction to APV for Excess
Withdrawal: = X - Y + Z
= 14,283.88 - (357.10) + 732.05
= 15,373.03
Remaining Annuity Purchase Value at
middle of Contract Year 3 = 57,161.18 - 5,716.12 - 15,373.03
= 36,072.03
A-3
<PAGE>
EXAMPLE 4 (PARTIAL WITHDRAWAL, RATES DECREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Surrender: $20,000; Middle of Contract Year 3
Annuity Purchase Value at middle
of Contract Year 3 = 50,000* (1,055) R 2.5 = 57,161.18
Penalty Free Amount at middle of
Contract Year 3 = 57,161.18* .10 = 5,716.12
Excess Interest/Surrender Charge Adjustment
X=20,000 - 5,716.12 = 14,283.88
G=.055
C=.045
M=30
Y=14.283.88*(.055 - .045)*(30/12) = 357.10
Z=.05* (20,000 - 5,716.12 - 357.10) = 696.34
Reduction to APV for Excess
Withdrawal:
= X - Y = Z
= 14,283.88 - 357.10 + 696.34
= 14,623.12
Remaining Annuity Purchase Value at
middle of Contract Year 3
= 57,161.18 - 5,716.12 - 14,623.12
= 38,821.94
(1)* represents multiplication;
R represents exponentiation.
A-4
<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 nine portfolios currently offered by
the Fund (the "Portfolios").
. TCW Money Market Portfolio
. TCW Managed Asset Allocation Portfolio
. T. Rowe Price International Stock Portfolio
. Value Equity Portfolio
. Dreyfus Small Cap Value Portfolio
. Dreyfus U.S. Government Securities Portfolio
. T. Rowe Price Equity Income Portfolio
. T. Rowe Price Growth Stock Portfolio
. Opportunity Value 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 November 4, 1996,
has been filed with the Securities and Exchange Commission and is available
upon request without charge by writing or calling the Fund at the address or
telephone number set forth on the back cover of this Prospectus. The Statement
of Additional Information is incorporated by reference into this Prospectus.
The date of this Prospectus is November 4, 1996.
<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 consists of 10 portfolios and currently issues shares of
nine 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 currently are offered only to various separate
accounts of PFL Life Insurance Company and certain of its affiliates ("PFL") to
fund various insurance contracts, including variable life insurance policies
(whether scheduled premium, flexible premium or single premium policies) or
variable annuity contracts. These insurance contracts are hereinafter referred
to as the "Contracts." The rights of PFL as the record holder for a separate
account of shares of the Portfolios are different from the rights of the owner
of a Contract. The terms "shareholder" or "shareholders" in this Prospectus
refer to PFL and not to any Contract owner.
The structure of the Fund permits Contract owners, within the limitations
described in the appropriate Contract, to allocate the amounts held by PFL
under the Contracts for investment in the various portfolios of the Fund. See
the prospectus and other material accompanying this Prospectus for a
description of the Contracts, which portfolios of the Fund are available to
Contract owners, and the relationship between increases or decreases in the net
asset value of shares of the portfolios (and any dividends and distributions on
such shares) and the benefits provided under the Contracts.
It is conceivable that in the future it may be disadvantageous for scheduled
premium variable life insurance separate accounts, flexible and single premium
variable life insurance separate accounts, and variable annuity separate
accounts to invest simultaneously in the Fund due to tax or other
considerations. The Trustees of the Fund intend to monitor events for the
existence of any irreconcilable material conflict between or among such
accounts, and PFL will take whatever remedial action may be necessary.
INVESTMENT OBJECTIVES
The Investment objectives of the Portfolios are as follows:
TCW Money Market Portfolio (formerly, 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>
TCW Managed Asset Allocation Portfolio (formerly, 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.
Value Equity Portfolio (formerly, Quest for Value Equity Portfolio)-- seeks
long term capital appreciation through investment in a diversified portfolio of
equity securities selected on the basis of a value oriented approach to
investing.
Dreyfus Small Cap Value Portfolio (formerly known as the Value Small Cap
Portfolio and prior to that the Quest for Value Small Cap Portfolio)--seeks
capital appreciation through investment in a diversified portfolio of equity
securities of companies with a median market capitalization of approximately
$750 million, provided that under normal market conditions at least 75% of the
Portfolio's investments will be in equity securities of companies with
capitalizations at the time of purchase between $150 million and $1.5 billion.
Dreyfus U.S. Government Securities Portfolio (formerly, U.S. Goverment
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.
Opportunity Value Portfolio--seeks growth of capital over time through
investment in a portfolio consisting of common stocks, bonds and cash
equivalents, the percentages of which will vary based upon the Portfolio
Adviser's assessment of relative values.
- 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, 1995 and in the Fund's Semi-Annual Report dated June 30, 1996, each of
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 and in the Semi-Annual Report which may
be obtained without charge by writing the Fund at the address on the back
cover of this Prospectus.
TCW MONEY MARKET PORTFOLIO*
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR PERIOD
6/30/96 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91*
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Performance:
Net asset value,
beginning of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- -------- -------- -------- --------
Net investment income#. 0.0238 0.0540 0.0337 0.0218 0.0287 0.0377
------- -------- -------- -------- -------- --------
Distributions:
Dividends from net
investment income..... (0.0238) (0.0540) (0.0336) (0.0218) (0.0287) (0.0377)
Distributions from net
realized capital
gains................. -- -- (0.0001) -- -- --
------- -------- -------- -------- -------- --------
Total distributions.... (0.0238) (0.0540) (0.0337) (0.0218) (0.0287) (0.0377)
------- -------- -------- -------- -------- --------
Net asset value, end of
period................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======== ======== ======== ========
Total return++......... 2.41% 5.54% 3.41% 2.19% 2.90% 3.84%
======= ======== ======== ======== ======== ========
Ratios to average net
assets/
supplemental data:
Net assets, end of
period
(in 000's)............ $31,241 $ 27,551 $ 20,766 $ 12,836 $ 4,527 $ 1,907
Ratio of net investment
income to average net
assets................ 4.80%+ 5.37% 3.58% 2.19% 2.84% 5.02%+
Ratio of operating
expenses to average
net assets**.......... 0.60%+ 0.60% 0.85% 0.99% 0.91% 0.00%+
</TABLE>
- ----------
* Effective May 1, 1996, the name of the Money Market Portfolio was changed
to TCW Money Market Portfolio. 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>
TCW MANAGED ASSET ALLOCATION PORTFOLIO*
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR PERIOD
6/30/96 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 12/31/95 12/31/94+++ 12/31/93+++ 12/31/92+++ 12/31/91*
----------- -------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating Performance:
Net asset value,
beginning of period.. $ 16.28 $ 13.48 $ 14.30 $ 12.31 $ 11.37 $10.00
-------- -------- -------- ------- ------- ------
Net investment
income#.............. 0.12 0.33 0.28 0.23 0.24 0.10
Net realized and
unrealized
gain/(loss) on
investments.......... 1.30 2.72 (1.03) 1.84 0.77 1.27
-------- -------- -------- ------- ------- ------
Net
increase/(decrease)
in net assets from
investment
operations........... 1.42 3.05 (0.75) 2.07 1.01 1.37
Dividends from net
investment income.... (0.32) (0.25) (0.07) (0.08) (0.07) --
-------- -------- -------- ------- ------- ------
Net asset value, end
of period............ $ 17.38 $ 16.28 $ 13.48 $ 14.30 $ 12.31 $11.37
======== ======== ======== ======= ======= ======
Total return++........ 8.69% 22.91% (5.28)% 16.79% 9.01% 13.70%
======== ======== ======== ======= ======= ======
Ratios to average net
assets/supplemental
data:
Net assets, end of
period (in 000's).... $219,790 $198,876 $172,449 $96,657 $14,055 $4,247
Ratio of net
investment income to
average net assets... 1.46%+ 2.12% 2.03% 1.71% 2.11% 4.54%+
Ratio of operating
expenses to average
net assets**......... 0.87%+ 0.84% 0.90% 1.12% 1.18% 0.00%+
Portfolio turnover
rate................. 33% 93% 67% 67% 50% 61%
Average commission
rate (per share of
security)(a)......... $ 0.0029 -- -- -- -- --
</TABLE>
- ----------
* Effective May 1, 1996, the name of the Managed Asset Allocation Portfolio
was changed to TCW Managed Asset Allocation Portfolio. 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.
(a) Average commission rate paid per share of securities purchased and sold by
the Portfolio.
- 5 -
<PAGE>
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO*
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR PERIOD
6/30/96 ENDED ENDED YEAR ENDED YEAR ENDED ENDED
(UNAUDITED)+++ 12/31/95## 12/31/94 12/31/93+++ 12/31/92+++ 12/31/91*
-------------- ---------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating Performance:
Net asset value,
beginning of period.. $ 12.19 $ 11.31 $ 11.99 $ 10.12 $10.52 $10.00
-------- ------- ------- ------- ------ ------
Net investment
income/(loss)#....... 0.09 0.09 (0.02) (0.04) 0.00*** 0.06
Net realized and
unrealized
gain/(loss) on
investments.......... 1.06 1.06 (0.66) 1.91 (0.38) 0.46
-------- ------- ------- ------- ------ ------
Net
increase/(decrease)
in net assets from
investment
operations........... 1.15 1.15 (0.68) 1.87 (0.38) 0.52
-------- ------- ------- ------- ------ ------
Distributions:
Dividends from net
investment income.... (0.09) -- -- -- (0.02) --
Distributions from net
realized gains....... 0.00*** (0.27) -- -- -- --
-------- ------- ------- ------- ------ ------
Total distributions... (0.09) (0.27) -- -- (0.02) --
-------- ------- ------- ------- ------ ------
Net asset value, end
of period............ $ 13.25 $ 12.19 $ 11.31 $ 11.99 $10.12 $10.52
======== ======= ======= ======= ====== ======
Total return++........ 9.45% 10.37% (5.67)% 18.48% (3.61)% 5.20%
======== ======= ======= ======= ====== ======
Ratios to average net
assets/supplemental
data:
Net assets, end of
period (in 000's).... $115,036 $92,352 $84,102 $52,777 $6,305 $3,200
Ratio of net
investment
income/(loss) to
average net assets... 1.34%+ 0.81% (0.16)% (0.31)% 0.01% 3.18%+
Ratio of operating
expenses to average
net assets**......... 1.21%+ 1.15% 1.16% 1.52% 1.43% 0.00%+
Portfolio turnover
rate................. 7% 111% 88% 37% 34% 0%
Average commission
rate (per share of
security)(a)......... $ 0.0014 -- -- -- -- --
</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.
## Rowe Price-Fleming International, Inc. became the Portfolio's Adviser
effective January 3, 1995.
(a) Average commission rate paid per share of securities purchased and sold by
the Portfolio.
- 6 -
<PAGE>
VALUE EQUITY PORTFOLIO*
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR PERIOD
ENDED 6/30/96 ENDED ENDED ENDED
(UNAUDITED)+++ 12/31/95 12/31/94 12/31/93*+++
-------------- -------- -------- ------------
<S> <C> <C> <C> <C>
Operating Performance:
Net asset value, beginning of
period....................... $ 14.23 $ 10.69 $ 10.28 $ 10.00
------- ------- ------- -------
Net investment income#......... 0.10 0.15 0.09 0.05
Net realized and unrealized
gain on investments.......... 1.59 3.52 0.33 0.23
------- ------- ------- -------
Net increase in net assets from
investment operations........ 1.69 3.67 0.42 0.28
------- ------- ------- -------
Distributions:
Dividends from net investment
income....................... (0.13) (0.09) (0.01) --
Distributions from net realized
gains........................ (0.24) (0.04) -- --
------- ------- ------- -------
Total distributions............ (0.37) (0.13) (0.01) --
------- ------- ------- -------
Net asset value, end of period. $ 15.55 $ 14.23 $ 10.69 $ 10.28
======= ======= ======= =======
Total return++................. 11.89% 34.59% 4.09% 2.80%
======= ======= ======= =======
Ratios to average net
assets/supplemental data:
Net assets, end of period (in
000's)....................... $96,555 $68,630 $32,776 $11,178
Ratio of net investment income
to average net assets........ 1.35%+ 1.56% 1.31% 0.84%+
Ratio of operating expenses to
average net assets**......... 0.93%+ 0.86% 1.02% 1.30%+
Portfolio turnover rate........ 20% 28% 56% 1%
Average commission rate (per
share of security)(a) ....... $0.0571 -- -- --
</TABLE>
- -----------
* Effective May 1, 1996, the name of the Quest for Value Equity Portfolio was
changed to Value Equity Portfolio. The Portfolio commenced operations on
May 27, 1993.
** Annualized expense ratio before waiver of fees by investment manager for
the period ended December 31, 1993 was 2.10%.
+ Annualized.
++ Total return represents aggregate total return for the periods indicated.
The total return of the Portfolio does not reflect the charges against the
separate accounts of PFL or the Contracts.
+++ Per share amounts have been calculated using the monthly average share
method which more appropriately presents the per share data for this period
since use of the undistributed method did not accord with results of
operations.
# Net investment income before fees waived by investment manager for the
period ended December 31, 1993 was $0.00.
(a) Average commission rate paid per share of securities purchased and sold by
the Portfolio.
- 7 -
<PAGE>
DREYFUS SMALL CAP VALUE PORTFOLIO*
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR PERIOD
ENDED 6/30/96 ENDED ENDED ENDED
(UNAUDITED)+++ 12/31/95 12/31/94+++ 12/31/93*+++
-------------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Operating Performance:
Net asset value, beginning
of period................. $ 12.22 $ 10.98 $ 11.18 $ 10.00
------- ------- ------- -------
Net investment income#...... 0.08 0.15 0.10 0.22
Net realized and unrealized
gain/(loss) on
investments............... 1.02 1.36 (0.30) 0.96
------- ------- ------- -------
Net increase/(decrease) in
net assets from investment
operations................ 1.10 1.51 (0.20) 1.18
------- ------- ------- -------
Distributions:
Dividends from net
investment income......... (0.14) (0.10) -- --
Distributions from net
realized gains............ (0.46) (0.17) -- --
------- ------- ------- -------
Total distributions......... (0.60) (0.27) -- --
------- ------- ------- -------
Net asset value, end of
period.................... $ 12.72 $ 12.22 $ 10.98 $ 11.18
======= ======= ======= =======
Total return++.............. 8.78% 14.05% (1.79)% 11.80%
======= ======= ======= =======
Ratios to average net
assets/supplemental data:
Net assets, end of period
(in 000's)................ $67,940 $52,597 $35,966 $12,699
Ratio of net investment
income to average net
assets.................... 1.22%+ 1.56% 0.89% 3.98%+
Ratio of operating expenses
to average net assets**... 0.95%+ 0.87% 1.03% 1.30%+
Portfolio turnover rate..... 38% 75% 77% 41%
Average commission rate (per
share of security)(a)..... $0.0492 -- -- --
</TABLE>
- -----------
* Effective October 29, 1996, the name of the Value Small Cap Portfolio was
changed to Dreyfus Small Cap Value Portfolio. On May 1, 1996, the name of
the Quest for Value Small Cap Portfolio was changed to Value Small Cap
Portfolio. The Portfolio commenced operations on May 4, 1993.
** Annualized operating expense ratio before waiver of fees by investment
manager for the period ended December 31, 1993 was 2.10%.
+ Annualized.
++ Total return represents aggregate total return for the periods indicated.
The total return of the Portfolio does not reflect the charges against the
separate accounts of PFL or the Contracts.
+++ 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.
(a) Average commission rate paid per share of securities purchased and sold by
the Portfolio.
- 8 -
<PAGE>
DREYFUS U.S. GOVERNMENT SECURITIES PORTFOLIO*
<TABLE>
<CAPTION>
SIX MONTHS YEAR PERIOD
ENDED 6/30/96 ENDED ENDED
(UNAUDITED)+++ 12/31/95 12/31/94*+++
-------------- -------- ------------
<S> <C> <C> <C>
Operating Performance:
Net asset value, beginning of period.... $ 11.39 $ 9.96 $10.00
------- ------- ------
Net investment income#.................. 0.30 0.30 0.24
Net realized and unrealized gain/(loss)
on investments........................ (0.60) 1.25 (0.28)
------- ------- ------
Net increase/(decrease) in net assets
resulting from investment operations.. (0.30) 1.55 (0.04)
------- ------- ------
Distributions:
Dividends from net investment income.... (0.22) (0.12) --
Distributions from net realized gains... (0.12) -- --
------- ------- ------
Total distributions..................... (0.34) (0.12) --
------- ------- ------
Net asset value, end of period.......... $ 10.75 $ 11.39 $ 9.96
======= ======= ======
Total return++.......................... (2.54)% 15.64% (0.40)%
======= ======= ======
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's).... $19,569 $12,718 $3,505
Ratio of net investment income to
average net assets.................... 5.53%+ 5.58% 4.14%+
Ratio of operating expenses to average
net assets**.......................... 0.80%+ 0.84% 0.78%+
Portfolio turnover rate................. 143% 161% 100%
</TABLE>
- -----------
* Effective May 1, 1996, the name of the U.S. Government Securities Portfolio
was changed to Dreyfus U.S. Government Securities Portfolio. 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.
- 9 -
<PAGE>
T. ROWE PRICE EQUITY INCOME PORTFOLIO
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
6/30/96 ENDED
(UNAUDITED)+++ 12/31/95*+++
-------------- ------------
<S> <C> <C>
Operating performance:
Net asset value, beginning of year............... $ 13.05 $ 10.00
------- -------
Net investment income............................ 0.20 0.34
Net realized and unrealized gain on investments.. 0.82 2.71
------- -------
Net increase in net assets resulting from
investment operations.......................... 1.02 3.05
------- -------
Distributions:
Dividends from net investment income............. (0.10) --
Distribution from net realized gains............. (0.04) --
------- -------
Total distributions.............................. (0.14) --
------- -------
Net asset value, end of year..................... $ 13.93 $ 13.05
======= =======
Total return++................................... 7.81% 30.50%
======= =======
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's)............... $45,764 $21,910
Ratio of net investment income to average net
assets......................................... 2.96%+ 3.24%+
Ratio of operating expenses to average net
assets......................................... 1.03%+ 1.15%+
Portfolio turnover rate.......................... 9% 16%
Average commission rate (per share of
security)(a)................................... $0.0278 --
</TABLE>
- -----------
* The Portfolio commenced operations on January 3, 1995.
+ 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 the period
since use of the undistributed method did not accord with results of
operations.
(a) Average commission rate paid per share of securities purchased and sold by
the Portfolio.
- 10 -
<PAGE>
T. ROWE PRICE GROWTH STOCK PORTFOLIO
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
6/30/96 ENDED
(UNAUDITED)+++ 12/31/95*+++
-------------- ------------
<S> <C> <C>
Operating performance:
Net asset value, beginning of year............... $ 13.72 $ 10.00
------- -------
Net investment income............................ 0.09 0.08
Net realized and unrealized gain on investments.. 1.00 3.64
------- -------
Net increase in net assets resulting from
investment operations.......................... 1.09 3.72
------- -------
Distributions:
Dividends from net investment income............. (0.01) --
Distributions from net realized gains............ (0.24) --
------- -------
Total distributions.............................. (0.25) --
------- -------
Net asset value, end of year..................... $ 14.56 $ 13.72
======= =======
Total return++................................... 7.94% 37.20%
======= =======
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's)............... $39,539 $21,651
Ratio of net investment income to average net
assets......................................... 1.24%+ 0.69%+
Ratio of operating expenses to average net
assets......................................... 1.07%+ 1.26%+
Portfolio turnover rate.......................... 31% 64%
Average commission rate (per share of
security)(a)................................... $0.0387 --
</TABLE>
- -----------
* The Portfolio commenced operations on January 3, 1995.
+ 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 the period
since use of the undistributed method did not accord with results of
operations.
(a) Average commission rate paid per share of securities purchased and sold by
the Portfolio.
----------------------
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: TCW Money Market--.99%, TCW Managed Asset
Allocation--1.25%, T. Rowe Price International Stock--1.53%, Value Equity--
1.30%, Dreyfus Small Cap Value--1.30%, Dreyfus U.S. Government Securities--
1.00%, T. Rowe Price Equity Income--1.30%, T. Rowe Price Growth Stock--1.30%
and Opportunity Value--1.30%.
The offering of shares of the Opportunity Value Portfolio is expected to
commence on or about the date of the Prospectus. Accordingly, no comparable
data is available for shares of this Portfolio.
- 11 -
<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.
TCW MONEY MARKET PORTFOLIO
The investment objective of the TCW Money Market Portfolio (formerly known as
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 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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<PAGE>
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 Service, a division of McGraw-Hill Companies, Inc.
("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
- 13 -
<PAGE>
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.
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.
- 14 -
<PAGE>
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.
TCW MANAGED ASSET ALLOCATION PORTFOLIO
The investment objective of the TCW Managed Asset Allocation Portfolio
(formerly known as 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.
The equity portion of the Portfolio will be invested in a diversified
selection of equity securities of established companies in sound financial
- 15 -
<PAGE>
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, collateralized mortgage obligations that are
issued or guaranteed by the U.S. government or instrumentalities or that are
collateralized by a portfolio of mortgages or mortgage-related securities
guaranteed by such an agency or instrumentality 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 NRSRO or if not rated, be of comparable quality as determined by the
Portfolio's Adviser. The NRSROs' descriptions of these bond ratings are set
forth in the Appendix to the Statement of Additional Information. Securities
rated in the fourth highest category may have speculative characteristics;
changes in economic or business conditions are more likely to lead to a
weakened capacity to make principal and interest payments than in the case of
higher grade bonds. Like the three highest grades, however, these securities
are considered investment grade.
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
- 16 -
<PAGE>
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 TCW 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 invest substantially all of the Portfolio's assets
outside the United States and diversify investments broadly among countries
throughout the world--developed, newly industrialized and emerging--by having
at least five different countries represented in
- 17 -
<PAGE>
the Portfolio. The Portfolio may invest in countries of the Far East and Europe
as well as South Africa, Australia, Canada, and other areas (including
developing countries). Further, not more than 20% of the Portfolio's net asset
value will be invested in securities of issuers located in any one country with
the exception of issuers located in Australia, Canada, France, Japan, the
United Kingdom or Germany (where the investment limitation is 35%). In
addition, the Adviser will consider factors applicable to United States
investors in making investment decisions for the Portfolio.
In seeking its objective, the Portfolio invests primarily in common stocks of
established foreign companies which have, in the Adviser's opinion, the
potential for growth of capital. However, the Portfolio may also invest in a
variety of other equity related securities such as preferred stocks, warrants
and convertible securities, as well as corporate and governmental debt
securities, when considered consistent with the Portfolio's investment
objective and program. The Portfolio may also invest in investment funds which
have been authorized by the governments of certain countries specifically to
permit foreign investment in securities of companies listed and traded on the
stock exchanges in these respective countries. The Portfolio's investment in
these funds is subject to the provisions of the Investment Company Act of 1940
(the "1940 Act"). If the Portfolio invests in such investment funds, the
Portfolio's shareholders will bear not only their proportionate share of the
expenses of the Portfolio (including operating expenses and the fees of the
investment manager), but also will bear indirectly similar expenses of the
underlying investment funds. In addition, the securities of these investment
funds may trade at a premium of their net asset value. Under normal conditions,
the 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
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<PAGE>
expected to increase the amounts of such dividends in future years as earnings
increase. It is expected that the Portfolio's investments will ordinarily be
traded on exchanges located at least in the respective countries in which the
various issuers of such securities are principally based.
In the event that future economic or financial conditions abroad adversely
affect equity securities, or stocks are considered overvalued, or the
Portfolio's Adviser believes that investing for defensive purposes is
appropriate, or in order to meet anticipated redemption requests, the Portfolio
may invest part or all of its assets in U.S. government securities, investment-
grade debt obligations of U.S. companies and high quality (within the two
highest rating categories assigned by a 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
- 19 -
<PAGE>
Portfolio's investment securities may be less liquid and subject to more rapid
and erratic price movements than securities of comparable U.S. companies.
Equity securities may trade at price/earnings multiples higher than comparable
United States securities and such levels may not be sustainable. There is
generally less government supervision and regulation of foreign stock
exchanges, brokers and listed companies than in the United States. Moreover,
settlement practices for transactions in foreign markets may differ from those
in United States markets. Such differences may include delays beyond periods
customary in the United States and practices, such as delivery of securities
prior to receipt of payment, which increase the likelihood of a "failed
settlement." Failed settlements can result in losses to the Portfolio. In less
liquid and well developed stock markets, such as those in some Asian and Latin
American countries, volatility may be heightened by actions of a few major
investors. For example, substantial increases or decreases in cash flows of
mutual funds investing in these markets could significantly affect stock prices
and, therefore, share prices.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher than for securities traded in the United States. Consequently,
the overall expense ratios of international funds are usually somewhat higher
than those of typical domestic stock funds.
In addition, the economies, markets and political structures of a number of
the countries in which the Portfolio can invest do not compare favorably with
the United States and other mature economies in terms of wealth and stability.
Therefore, investments in these countries may be riskier, and will be subject
to erratic and abrupt price movements. Some economies are less well developed
and less diverse (for example, Latin America, Eastern Europe and certain Asian
countries), and more vulnerable to the ebb and flow of international trade,
trade barriers and other protectionist or retaliatory measures (for example,
Japan, southeast Asia and Latin America). Some countries, particularly in Latin
America, are grappling with severe inflation and high levels of national debt.
Investments in countries that have recently begun moving away from central
planning and state-owned industries toward free markets, such as 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
- 20 -
<PAGE>
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.
VALUE EQUITY PORTFOLIO
The investment objective of the Value Equity Portfolio (formerly known as the
Quest for Value Equity Portolio) 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.
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<PAGE>
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 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.
DREYFUS SMALL CAP VALUE PORTFOLIO
The investment objective of the Dreyfus Small Cap Value Portfolio (formerly
known as the Value Small Cap Portfolio and prior to that as the Quest for Value
Small Cap Portfolio) is to seek capital appreciation through investments in a
diversified portfolio of equity securities of companies with a median market
capitalization of approximately $750 million, provided that under normal market
conditions at least 75% of the Portfolio's investments will be in equity
securities of companies with capitalizations at the time of purchase between
$150 million and $1.5 billion.
Small-capitalization companies are often under-priced for the following
reasons: (i) institutional investors, which currently represent a majority of
the trading volume in the shares of publicly-traded companies, are often less
interested in such companies because in order to acquire an equity position
that is large enough to be meaningful to an institutional investor, such an
investor may be required to buy a large percentage of the company's outstanding
equity securities and (ii) such companies may not be regularly researched by
stock analysts, thereby resulting in greater discrepancies in valuation.
The Portfolio will invest in equity securities of domestic and foreign (up to
5% of its total assets) issuers which would be characterized as "value"
companies according to criteria established by the Portfolio's Adviser. To
manage the Portfolio, the Portfolio's Adviser classifies issuers as "growth" or
"value" companies. In general, the Portfolio's Adviser believes that companies
with relatively low price to book ratios, low price to earnings ratios or
higher than average dividend payments in relation to price should be classified
as value companies. Alternatively, companies which have above average earnings
or sales growth and retention of earnings and command higher price to earnings
ratios fit the more classic growth description.
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<PAGE>
While seeking desirable equity investments, the Portfolio may invest in money
market instruments consisting of U.S. Government securities, certificates of
deposit, time deposits, bankers' acceptances, short-term investment grade
corporate bonds and other short-term debt instruments, and repurchase
agreements. Under normal market conditions, the Portfolio does not expect to
have a substantial portion of its assets invested in money market instruments.
However, when the Portfolio's Adviser determines that adverse market conditions
exist, the Portfolio may adopt a temporary defensive posture and invest all of
its assets in money market instruments.
Equity securities consist of common stocks, preferred stocks and securities
convertible into common stocks. Securities purchased by the Portfolio will be
traded on the New York Stock Exchange, the American Stock Exchange or in the
over-the-counter market, and will also include options, warrants, bonds, notes
and debentures which are convertible into or exchangeable for, or which grant a
right to purchase or sell, such securities. In addition, the Portfolio may
purchase securities issued by closed-end investment companies and foreign
securities that are listed on a domestic or foreign securities exchange, traded
in domestic or foreign over-the-counter markets or represented by American
Depositary Receipts.
The Portfolio is expected to have greater risk exposure and reward potential
than a fund which invests primarily in larger-capitalization companies. The
trading volumes of securities of smaller-capitalization companies are normally
less than those of larger-capitalization companies. This often translates into
greater price swings, both upward and downward. Since trading volumes are
lower, new demand for the securities of such companies could result in
disproportionately large increases in the price of such securities. The waiting
period for the achievement of an investor's objectives might be longer since
these securities are not closely monitored by research analysts and, thus, it
takes more time for investors to become aware of fundamental changes or other
factors which have motivated the Portfolio's purchase. Small-capitalization
companies often achieve higher growth rates and experience higher failure rates
than do larger-capitalization companies.
The Portfolio may invest in certain foreign securities which may represent a
greater degree of risk than investing in domestic securities. These risks are
discussed in the above section of this Prospectus describing the T. Rowe Price
International Stock Portfolio.
The Portfolio may employ certain investment strategies which are discussed
under the caption "Investment Strategies" below and in the Statement of
Additional Information.
DREYFUS U.S. GOVERNMENT SECURITIES PORTFOLIO
The investment objective of the Dreyfus U.S. Government Securities Portfolio
(formerly known as the U.S. Government Securities Portfolio)
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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;
. 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 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
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loans. Principal prepayments result from the sale of the underlying property or
the refinancing or foreclosure of underlying mortgages.
The yield of mortgage-backed securities is based on the average life of the
underlying pool of mortgage loans, which is computed on the basis of the
maturities of the underlying instruments. The actual life of any particular
pool may be shortened by unscheduled or early payments of principal and
interest. The occurrence of prepayments is affected by a wide range of
economic, demographic and social factors and, accordingly, it is not possible
to accurately predict the average life of a particular pool. For pools of fixed
rate 30-year mortgages, it has been common practice to assume that prepayments
will result in a 12-year average life. The actual prepayment experience of a
pool of mortgage loans may cause the yield realized by the Portfolio to differ
from the yield calculated on the basis of the average life of the pool. In
addition, if any of these mortgage-backed securities are purchased at a
premium, the premium may be lost in the event of early prepayment which may
result in a loss to the Portfolio.
Prepayments tend to increase during periods of falling interest rates, while
during periods of rising interest rates prepayments will most likely decline.
Reinvestment by the Portfolio of scheduled principal payments and unscheduled
prepayments may occur at higher or lower rates than the original investment,
thus affecting the yield of the Portfolio. Monthly interest payments received
by the Portfolio have a compounding effect which will increase the yield to
shareholders as compared to debt obligations that pay interest semiannually.
Because of the reinvestment of prepayments of principal at current rates,
mortgage-backed securities may be less effective than Treasury bonds of similar
maturity at maintaining yields during periods of declining interest rates.
Also, although the value of debt securities may increase as interest rates
decline, the value of these pass-through type of securities may not increase as
much due to the prepayment feature.
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
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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.
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
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financing statement and by having the servicer of the obligations, which is
usually the originator, take custody thereof. In such circumstances, if the
servicer were to sell the same obligations to another party, in violation of
its duty not to do so, there is a risk that such party could acquire an
interest in the obligations superior to that of holders of the asset backed
securities. Also, although most such obligations grant a security interest in
the motor vehicle being financed, in most states the security interest in a
motor vehicle must be noted on the certificate of title to perfect such
security interest against competing claims of other parties. Due to the large
number of vehicles involved, however, the certificate of title to each vehicle
financed, pursuant to the obligations underlying the asset backed securities,
usually is not amended to reflect the assignment of the seller's security
interest for the benefit of the holders of the asset backed securities.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on those securities.
In addition, various state and federal laws give the motor vehicle owner the
right to assert against the holder of the owner's obligation certain defenses
such owner would have against the seller of the motor vehicle. The assertion of
such defenses could reduce payments on the related asset backed securities.
Insofar as credit card receivables are concerned, credit card holders are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such holders the right to set off certain amounts
against balances owed on the credit card, thereby reducing the amounts paid on
such receivables. In addition, unlike most other asset backed securities,
credit card receivables are unsecured obligations of the card holder.
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
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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.
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 NRSROs'
descriptions of these bond ratings are set forth in the Appendix to the
Statement of Additional Information. Securities rated in the fourth highest
category may have speculative characteristics; changes in economic 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
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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 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
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component (dividends and interest earned) of the Portfolio's investments is
expected to be a significant contributor to the Portfolio's total return. The
Portfolio's yield is expected to be significantly above that of the 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).
The investment program of the Portfolio is based on several premises. First,
the Portfolio's Adviser believes that, over time, dividend income can account
for a significant component of the total return from equity investments.
Second, dividends are normally a more stable and predictable source of return
than capital appreciation. While the price of a company's stock generally
increases or decreases in response to short-term earnings and market
fluctuations, its dividends are generally less volatile. Finally, the
Portfolio's Adviser believes that stocks which distribute a high level of
current income tend to have less price volatility than those which pay below
average dividends.
To achieve its objective, the Portfolio, under normal circumstances, will
invest at least 65% of its total assets in income-producing common stocks,
whose prospects for dividend growth and capital appreciation are considered
favorable by its Adviser. To enhance capital appreciation potential, the
Portfolio also uses a "value" approach and invests in stocks and other
securities its Adviser believes are temporarily undervalued by various
measures, such as price/earnings ratios. The Portfolio's investments will
generally be made in companies which share some of the following
characteristics:
. established operating histories;
. above-average current dividend yields relative to the S&P 500;
. 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.
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 a NRSRO) U.S. and foreign dollar-
denominated money market securities including certificates of deposit, bankers'
acceptances, commercial paper, short-term corporate securities and repurchase
agreements.
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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 including municipal
securities, without regard to quality or rating. Such securities would be
purchased in companies which meet the investment criteria for the Portfolio.
The price of a bond fluctuates with changes in interest rates, rising when
interest rates fall and falling when interest rates rise. The Portfolio,
however, will not invest more than 10% of its total assets in securities rated
below Baa by Moody's or BBB by Standard & Poor's (commonly known as "junk
bonds"). Such securities may include bonds rated as low as C by Moody's and by
Standard & Poor's. See the Appendix to the Statement of Additional Information.
Investments in non-investment grade securities entail certain risks which are
discussed in the above section of this Prospectus describing the Dreyfus U.S.
Government Securities Portfolio under the heading "Lower-Rated Securities."
The Portfolio may employ certain investment strategies which are discussed
under the caption "Investment Strategies" below and in the Statement of
Additional Information.
T. ROWE PRICE GROWTH STOCK PORTFOLIO
The investment objectives of the T. Rowe Price Growth Stock Portfolio are to
seek long-term growth of capital and to increase dividend income through
investment primarily in common stocks of well-established growth companies. A
growth company is defined by the Portfolio's Adviser as one which: (1) has
demonstrated historical growth of earnings faster than the growth of inflation
and the economy in general; and (2) has indications of being able to continue
this growth pattern in the future. Total return will consist primarily of
capital appreciation or depreciation and secondarily of dividend income.
More than fifty years ago, Thomas Rowe Price pioneered the Growth Stock
Theory of Investing. It is based on the premise that inflation represents a
more serious, long-term threat to an investor's portfolio than stock market
fluctuations or recessions. Mr. Price believed that when a company's earnings
grow faster than both inflation and the economy in general, the market will
eventually reward its long-term earnings growth with a higher stock price. In
addition, the company should be able to raise its dividend in line with its
growth in earnings.
Although corporate earnings can be expected to be lower during periods of
recession, it is the Portfolio Adviser's opinion that, over the
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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 a NRSRO) U.S. and foreign dollar-
denominated money market securities including certificates of deposit, bankers'
acceptances, commercial paper, short-term corporate securities and repurchase
agreements.
The Portfolio may invest up to 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.
OPPORTUNITY VALUE PORTFOLIO
The investment objective of the Opportunity Value Portfolio is to achieve
growth of capital over time through investment in a portfolio consisting of
common stocks, bonds and cash equivalents, the percentages of which will vary
based on the Portfolio Adviser's assessments of the relative outlook for such
investments. In seeking to achieve its investment objective, the types of
equity securities in which the Portfolio may invest will be securities of
companies that are believed
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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 Adviser's
intention to invest in securities of companies 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. The Portfolio will invest primarily in stocks listed on the New York
Stock Exchange. In addition, it may also purchase securities of companies,
including companies with small market capitalizations, listed on other domestic
securities exchanges, securities traded in the domestic over-the-counter market
and foreign securities provided that they are listed on a domestic or foreign
securities exchange or represented by American Depositary Receipts listed on a
domestic securities exchange or traded in domestic or foreign over-the-counter
markets.
Investing in foreign securities may present 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. Investing in the securities of small capitalization companies
involves greater risk exposure and reward potential than investments in larger
capitalization companies. These risks are discussed in the above section of
this Prospectus describing the Dreyfus Small Cap Value Portfolio.
Debt securities are expected to be predominantly investment grade
intermediate to long-term U.S. Government and corporate debt, although the
Portfolio will also invest in high quality short-term money market and cash
equivalent securities and may invest almost all of its assets in such
securities when the Portfolio's Adviser deems it advisable in order to preserve
capital. The Portfolio's debt securities may also include mortgage-backed
securities issued by the U.S. Government, its agencies or instrumentalities and
collateralized mortgage obligations that are issued or guaranteed by the U.S.
Government or its agencies or instrumentalities or that are collateralized by a
portfolio of mortgages or mortgage-related securities guaranteed by such an
agency or instrumentality.
The effective maturity of a mortgage-backed security may be shortened by
unscheduled or early payment of principal and interest on the underlying
mortgages, which may affect the effective yield of such securities. The
principal that is returned may be invested in instruments having a higher or
lower yield than the prepaid instruments depending on then-current market
conditions.
Investment grade securities will, at the time of purchase, have ratings
within the four highest rating categories established by Moody's,
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Standard & Poor's, or a similar NRSRO or, if not rated, be of comparable
quality as determined by the Portfolio's Adviser. The NRSROs' descriptions of
these bond ratings are set forth in the Appendix to the Statement of
Additional Information. Securities rated in the fourth highest category may
have speculative characteristics; changes in economic or business conditions
are more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade bonds. Like the three highest
grades, however, these securities are considered investment grade.
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 knows 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 allocation of the Portfolio's assets among the different types of
permitted investments will vary from time to time based upon the Portfolio
Adviser's evaluation of economic and market trends and its perception of the
relative values available from such types of securities at any given time.
There is neither a minimum nor a maximum percentage of the Portfolio's assets
that may, at any given time, be invested in any of the types of investments
identified above. Consequently, while the Portfolio will earn income to the
extent it is invested in bonds or cash equivalents, the Portfolio does not
have any specific income objective. Although there is neither a minimum nor
maximum percentage of the Portfolio's assets that may, at any given time, be
invested in any of the types of investments identified above, it is
anticipated that most of the time the majority of the Portfolio's assets will
be invested in common stocks.
The Portfolio may employ certain investment strategies which are discussed
under the caption "Investment Strategies" below and in the Statement of
Additional Information.
INVESTMENT STRATEGIES
In addition to making investments directly in securities, the Portfolios
(other than the TCW 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 TCW
Managed Asset Allocation Portfolio does not presently intend to utilize
futures contracts and related options but may do so in the future. The
Advisers to the Dreyfus Small Cap Value Portfolio and the Opportunity Growth
Portfolio do not currently intend to write covered call and put options or
engage in transactions in futures contracts and related options, but may do so
in the future. The T. Rowe Price International Stock, Dreyfus U.S. Government
Securities, T. Rowe Price Equity Income, T. Rowe Price Growth Stock and
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Opportunity Value Portfolios may engage in foreign currency exchange
transactions to protect against changes in future exchange rates. All
Portfolios except the TCW 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 Dreyfus 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 TCW Money
Market Portfolio) may seek to increase the current return on its investments by
writing covered call or covered put options. The Advisers to the Dreyfus Small
Cap Value Portfolio and the Opportunity Value Portfolio have no present
intention to engage in this strategy, but may do so in the future.
In addition, a Portfolio (other than the TCW 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 on securities and any
index of securities in which the Portfolio may invest and the purchase and sale
of futures contracts and related options. The Advisers to the TCW Managed Asset
Allocation, Dreyfus Small Cap Value and Opportunity Value Portfolios have no
present intention to use this strategy, but may do so in the future.
The Adviser to the Dreyfus 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 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
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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 TCW 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 Dreyfus 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 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
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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 Dreyfus U.S. Government Securities, T.
Rowe Price Equity Income, T. Rowe Price Growth Stock, T. Rowe Price
International Stock and Opportunity Value 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 Dreyfus U.S.
Government Securities, T. Rowe Price Equity Income, T. Rowe Price Growth Stock,
T. Rowe Price International Stock and Opportunity Value 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 Dreyfus U.S. Government
Securities Portfolio may enter into various hedging transactions, such as
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
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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 Dreyfus 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 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
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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.
Reverse Repurchase Agreements. Each Portfolio is permitted to enter into
reverse repurchase agreements. In a reverse repurchase agreement, the Portfolio
sells a security and agrees to repurchase it at a mutually agreed upon date and
price, reflecting the interest rate effective for the term of the agreement.
For the purposes of the 1940 Act it is considered a form of borrowing by the
Portfolio and, therefore, is a form of leverage. Leverage may cause any gains
or losses of the Portfolio to be magnified.
Borrowings. A Portfolio other than the Dreyfus U.S. Government Securities, T.
Rowe Price Equity Income, T. Rowe Price Growth Stock, T. Rowe Price
International Stock and Opportunity Value Portfolios may borrow money for
temporary purposes in amounts up to 5% of its total assets. The Dreyfus 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 Dreyfus 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 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.
The Opportunity Value Portfolio may borrow money from banks as a temporary
measure for extraordinary or emergency purposes in amounts up to 10% of its
total assets. The Portfolio may not purchase additional securities when
borrowings exceed 5% of total assets.
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As a matter of operating policy, each of the Dreyfus 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 TCW
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 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.
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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 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 Dreyfus 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.
Fixed-Income Securities--Downgrades. If any security invested in by any of
the Portfolios loses its rating or has its rating reduced after the Portfolio
has purchased it, unless required by law, the Portfolio is not required to sell
or otherwise dispose of the security, but may consider doing so.
Illiquid Securities. Each Portfolio may invest up to 10% (15% with respect to
T. Rowe Price International Stock Portfolio, T. Rowe Price Equity Income
Portfolio, T. Rowe Price Growth Stock Portfolio, Dreyfus Small Cap Value
Portfolio and Opportunity Value Portfolio) of its net assets in illiquid
securities and other securities which are not readily marketable, including
non-negotiable time deposits, certain restricted securities not deemed by the
Fund's Trustees to be liquid and repurchase agreements with maturities longer
than seven days. Securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, which have been determined to be liquid, will not be
considered by the
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Portfolios' Advisers to be illiquid or not readily marketable and, therefore,
are not subject to the aforementioned 10% or 15% limits. The inability of a
Portfolio to dispose of illiquid or not readily marketable investments readily
or at a reasonable price could impair the Portfolio's ability to raise cash for
redemptions or other purposes. The liquidity of securities purchased by a
Portfolio which are eligible for resale pursuant to Rule 144A will be monitored
by the Portfolios' Advisers on an ongoing basis, subject to the oversight of
the Trustees. In the event that such a security is deemed to be no longer
liquid, a Portfolio's holdings will be reviewed to determine what action, if
any, is required to ensure that the retention of such security does not result
in a Portfolio having more than 10% or 15%, as applicable, of its assets
invested in illiquid or not readily marketable securities.
MANAGEMENT OF THE FUND
The Trustees and officers of the Fund provide broad supervision over the
business and affairs of the Portfolios and the Fund.
THE MANAGER
The Fund is managed by Endeavor Investment Advisers ("the Manager") which,
subject to the supervision and direction of the Trustees of the Fund, has
overall responsibility for the general management and administration of the
Fund. The Manager is a general partnership of which Endeavor Management Co. is
the managing partner. Endeavor Management Co., by whose employees all
management services performed under the management agreement are rendered to
the Fund, holds a 50.01% interest in the Manager and AUSA Financial Markets,
Inc., an affiliate of PFL, holds the remaining 49.99% interest therein. Vincent
J. McGuinness, a Trustee of the Fund, together with his family members and
trusts for the benefit of his family members, own all of Endeavor Management
Co.'s outstanding common stock. Mr. McGuinness is Chairman, Chief Executive
Officer and President of Endeavor Management Co.
The Manager is responsible for providing investment management and
administrative services to the Fund and in the exercise of such responsibility
selects the investment advisers for the Fund's Portfolios (the "Advisers") and
monitors the Advisers' investment programs and results, reviews brokerage
matters, oversees compliance by the Fund with various federal and state
statutes, and carries out the directives of the Trustees. The Manager is
responsible for providing the Fund with office space, office equipment, and
personnel necessary to operate and administer the Fund's business, and also
supervises the provision of services by third parties such as the Fund's
custodian and transfer agent. Pursuant to an administration agreement, First
Data Investor Services Group, Inc. ("First Data") will assist the Manager in
the performance of its administrative responsibilities to the Fund.
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As compensation for these services the Fund pays the Manager a monthly fee at
the following annual rates of each Portfolio's average daily net assets: TCW
Money Market Portfolio--.50%; TCW Managed Asset Allocation Portfolio--.75%; T.
Rowe Price International Stock Portfolio--.90%; Value Equity Portfolio--.80%;
Dreyfus Small Cap Value Portfolio--.80%; Dreyfus U. S. Government Securities
Portfolio--.65%; T. Rowe Price Equity Income Portfolio--.80%; T. Rowe Price
Growth Stock Portfolio--.80%; Opportunity Value Portfolio--.80%. The management
fees paid by the Portfolios (other than the TCW Money Market Portfolio and
Dreyfus U.S. Government Securities 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 First Data 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 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. OpCap Advisors may select, under certain circumstances, Oppenheimer &
Co., Inc., one of its affiliates, to execute
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transactions for the Value Equity and Opportunity Value 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.
The Board of Trustees of the Fund has authorized the Manager and the Advisers
to enter into arrangements with brokers who execute brokerage transactions for
the Portfolios whereby a portion of the commissions earned by such brokers will
be shared with a broker-dealer affiliate of the Manager. The affiliated broker
will act an "introducing broker" in the transaction. Subject to the
requirements of applicable law including seeking best price and execution of
orders, commissions paid to executing brokers will not exceed ordinary and
customary brokerage commissions.
The Board of Trustees has determined that the Fund's brokerage commissions
should be utilized for the Fund's benefit to the extent possible. After
reviewing various alternatives, the Board concluded that commissions received
by the broker-dealer affiliate of the Manager can be used to promote the
distribution of the Fund's shares including payments to broker-dealers who sell
the Contracts, the costs of training and educating such broker-dealers with
respect to the Contracts and other bona-fide distribution costs payable to
unaffiliated persons. Other than incidental costs related to establishing the
broker-dealer affiliate as an "introducing broker", no portion of the
commissions received by the broker-dealer affiliate of the Manager will be
retained for its or any affiliate's benefit. On a quarterly basis, the Manager
will report to the Board of Trustees the aggregate commissions received by its
broker-dealer affiliate and the distribution expenses paid from such
commissions. The Board of Trustees will periodically review the extent to which
the foregoing arrangement reduces distribution expenses currently being
incurred by the Manager or its affiliates on behalf of the Fund. The Board of
Trustees may determine from time to time other appropriate uses for the Fund
from the commissions it pays to executing brokers.
The Manager will not implement this program until any required exemptive or
no action relief is obtained from the Securities and Exchange Commission.
TCW Funds Management, Inc. ("TCW") is the Adviser to the TCW Money Market
Portfolio and the TCW 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 TCW Money Market
Portfolio and .375% of the average daily net assets of the TCW Managed Asset
Allocation Portfolio. TCW is a wholly owned subsidiary of The TCW Group, Inc.,
whose subsidiaries, including Trust Company of the West and TCW Asset
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Management Company, provide a variety of trust, investment management and
investment advisory services. TCW and its affiliates, which as of December 31,
1995 had approximately $52 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 TCW Money Market
Portfolio. Mr. Goldberg has been with TCW since 1984. Investment decisions for
the equity portion of the TCW Managed Asset Allocation Portfolio are made by
Norman Ridley in consultation with Stefan D. Abrams. Mr. Ridley is a Senior
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
TCW Managed Asset Allocation Portfolio are made by Mr. Goldberg.
OpCap Advisors ("OpCap") (formerly known as Quest for Value Advisors) is the
Adviser to the Value Equity Portfolio and the Opportunity Value Portfolio. As
compensation for its services as investment adviser, the Manager pays OpCap a
monthly fee at the annual rate of .40% of the average daily net assets of each
of the Value Equity and Opportunity Value Portfolios, subject to reduction
with respect to the Opportunity Value Portfolio in certain circumstances.
OpCap is a majority-owned subsidiary of Oppenheimer Capital, a general
partnership which is registered as an investment adviser under the Investment
Advisers Act of 1940. The employees of Oppenheimer Capital render all
investment management services performed under the Investment Advisory
Agreement to the Portfolios. Oppenheimer Financial Corp. holds a 33% interest
in Oppenheimer Capital. Oppenheimer Capital, L.P., a Delaware limited
partnership of which Oppenheimer Financial Corp. is the sole general partner,
owns the remaining 67% interest of Oppenheimer Capital. The units of
Oppenheimer Capital, L.P. are traded on the New York Stock Exchange. OpCap and
its affiliates have operated as investment advisers to both mutual funds and
other clients since 1968, and had approximately $37.3 billion under management
as of December 31, 1995.
Eileen Rominger, Managing Director of Oppenheimer Capital, is the portfolio
manager for the Value Equity Portfolio. Ms. Rominger has been with Oppenheimer
Capital since 1981. Richard J. Glasebrook II, Managing Director of Oppenheimer
Capital, is the portfolio manager for the Opportunity Value Portfolio. Mr.
Glasebrook has been with Oppenheimer Capital since 1990. Mr. Glasebrook was
recently named by Morningstar, Inc. (an independent service that monitors the
performance of registered investment companies) as its 1995 Variable Fund
Manager of the Year.
The Dreyfus Corporation ("Dreyfus") is the Adviser to the Dreyfus U.S.
Government Securities Portfolio and the Dreyfus Small Cap Value
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Portfolio. Dreyfus, which was formed in 1947, is a wholly-owned subsidiary of
Mellon Bank, N.A., which is a wholly-owned subsidiary of Mellon Bank
Corporation ("Mellon"). As of December 31, 1995, Dreyfus managed or
administered approximately $80 billion in assets for more than 1.7 million
investor accounts nationwide. As compensation for its services as investment
adviser, the Manager pays Dreyfus a monthly fee at the annual rate of .15% of
the average daily net assets of the Dreyfus U.S. Government Securities
Portfolio and .375% of the average daily net assets of the Dreyfus Small Cap
Value Portfolio.
Prior to September 16, 1996, OpCap was the Adviser to the Dreyfus Small Cap
Value Portfolio (formerly known as the Value Small Cap Portfolio and prior to
that the Quest for Value Small Cap Portfolio). As compensation for its services
as investment adviser, the Manager paid OpCap a monthly fee at the annual rate
of .40% of the Portfolio's average daily net assets.
Mellon is a publicly-owned multibank holding company incorporated under
Pennsylvania law in 1971 and registered under the Federal Bank Holding Company
Act of 1956, as amended. Mellon provides a comprehensive range of financial
products and services in domestic and selected international markets. Mellon is
among the twenty-five largest bank holding companies in the United States based
on total assets. Mellon's principal wholly-owned subsidiaries are Mellon Bank,
N.A., Mellon Bank (DE) National Association, Mellon Bank (MD), The Boston
Company, Inc., AFCO Credit Corporation and a number of companies known as
Mellon Financial Services Corporations. Through its subsidiaries, including
Dreyfus, Mellon managed more than $233 billion in assets as of December 31,
1995, including approximately $81 billion in proprietary mutual fund assets. As
of December 31, 1995, Mellon, through various subsidiaries, provided non-
investment services, such as custodial or administrative services, for more
than $786 billion in assets, including approximately $60 billion in mutual fund
assets.
Prior to May 1, 1996, The Boston Company Asset Management, Inc. ("Boston
Company"), an affiliate of Dreyfus, was the Dreyfus U.S. Government Securities
Portfolio's Adviser. Boston Company is a wholly-owned subsidiary of The Boston
Company, Inc., which is an indirect wholly-owned subsidiary of Mellon.
Andrew S. Windmueller, who has been employed by Dreyfus since October 1994
and by The Boston Company, Inc. since 1986, is the portfolio manager for the
Dreyfus U.S. Government Securities Portfolio. Mr. Windmueller is co-member of
the Fixed Income Strategy Committee and the Head of Credit Research of The
Boston Company, Inc. and Vice President of Boston Company.
The portfolio managers for the Dreyfus Small Cap Value Portfolio are David L.
Diamond and Peter I. Higgins. Mr. Diamond has been employed by Boston Company
since June, 1991 and by Dreyfus since October, 1994. Mr. Higgins has been
employed by The Boston Company,
- 46 -
<PAGE>
Inc. since August, 1988, by Boston Company since June, 1991 and by Dreyfus
since February, 1996.
T. Rowe Price Associates, Inc. ("T. Rowe Price") is the Adviser to the T.
Rowe Price Equity Income Portfolio and the T. Rowe Price Growth Stock
Portfolio. As compensation for its services as investment adviser, the Manager
pays T. Rowe Price a monthly fee at the annual rate of .40% of the daily net
assets of each of the T. Rowe Price Equity Income and T. Rowe Price Growth
Stock Portfolios. T. Rowe Price serves as investment manager to a variety of
individual and institutional investor accounts, including limited and real
estate partnerships and other mutual funds.
Investment decisions with respect to the T. Rowe Price Equity Income
Portfolio are made by an Investment Advisory Committee composed of the
following members: Brian C. Rogers, Chairman, Thomas H. Broadus, Jr., Richard
P. Howard, and William J. Stromberg. The Committee Chairman has day-to-day
responsibility for managing the Portfolio and works with the Committee in
developing and executing the Portfolio's investment program. Mr. Rogers has
been Chairman of the Committee since 1993. He joined T. Rowe Price in 1982 and
has been managing investments since 1983.
Investment decisions with respect to the T. Rowe Price Growth Stock Portfolio
are made by an Investment Advisory Committee composed of the following members:
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.
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.
- 47 -
<PAGE>
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 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, 1995, T.
Rowe Price and its affiliates managed more than $70 billion of assets of which
Price-Fleming managed the U.S. equivalent of approximately $20 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 27 years of experience with
the Fleming Group in research, client service and investment management.
(Fleming Group includes Flemings and/or Jardine Fleming). Christopher Alderson
jointed Price-Fleming in 1988 and has 10 years of experience with the Fleming
Group in research and portfolio management. Peter Askew joined Price-Fleming in
1988 and has 21 years of experience managing multi-currency fixed income
portfolios. Richard Bruce joined Price-Fleming in 1991 and has eight years of
experience in investment management with the Fleming Group in Tokyo. Mark
Edwards joined Price-Fleming in 1986 and has 15 years of experience in
financial analysis. John Ford joined Price-Fleming in 1982 and has 16 years of
experience with Fleming Group in research and portfolio management. Robert Howe
joined Price-Fleming in 1986 and has 15 years of experience in economic
research, company research and portfolio management. James Seddon joined Price-
Fleming in 1987 and has nine years of experience in investment management.
Benedict Thomas joined Price-Fleming in 1988 and has seven years of portfolio
management experience. David Warren joined Price-Fleming in 1984 and has 16
years of experience in equity research, fixed income research and portfolio
management.
- 48 -
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Portfolio intends to qualify each year as a "regulated investment
company" under the Internal Revenue Code. By so qualifying, a Portfolio will
not be subject to federal income taxes to the extent that its net investment
income and net realized capital gains are distributed to shareholders.
It is the intention of each Portfolio to distribute substantially all its net
investment income. Although the Trustees of the Fund may decide to declare
dividends at other intervals, dividends from investment income of each
Portfolio are expected to be declared annually (except with respect to the TCW
Money Market Portfolio where dividends will be declared daily and paid monthly)
and will be distributed to the various separate accounts of PFL and not to
Contract owners in the form of additional full and fractional shares of the
Portfolio and not in cash. The result is that the investment performance of the
Portfolios, including the effect of dividends, is reflected in the cash value
of the Contracts. See the prospectus for the Contracts accompanying this
Prospectus.
All net realized long- or short-term capital gains of each Portfolio, if any,
will be declared and distributed at least annually either during or after the
close of the Portfolio's fiscal year and will be reinvested in additional full
and fractional shares of the Portfolio. In certain foreign countries, interest
and dividends are subject to a tax which is withheld by the issuer. U.S. income
tax treaties with certain countries reduce the rates of these withholding
taxes. The Fund intends to provide the documentation necessary to achieve the
lower treaty rate of withholding whenever applicable or to seek refund of
amounts withheld in excess of the treaty rate.
For a discussion of the impact on Contract owners of income taxes PFL may owe
as a result of (i) its ownership of shares of the Portfolios, (ii) its receipt
of dividends and distributions thereon, and (iii) its gains from the purchase
and sale thereof, reference should be made to the prospectus for the Contracts
accompanying this Prospectus.
SALE AND REDEMPTION OF SHARES
The Fund continuously offers shares of each Portfolio only to separate
accounts of PFL, but may at any time offer shares to a separate account of any
other insurer approved by the Trustees.
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,
- 49 -
<PAGE>
policy loans, loan repayments, and benefit payments to be effected on a given
date pursuant to the terms of the Contracts. Such orders are effected, without
sales charge, at the net asset value per share for each Portfolio determined as
of the close of regular trading on the New York Stock Exchange (currently 4:00
p.m., New York City time), on that same date.
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 TCW 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 TCW Managed Asset Allocation, Value Equity, Dreyfus Small
Cap Value, Dreyfus U.S. Government Securities, T. Rowe Price Equity Income, T.
Rowe Price Growth Stock, T. Rowe Price International Stock and Opportunity
Value Portfolios or the "yield" and "effective yield" of the TCW Money Market
and Dreyfus 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 other than charges and deductions which are,
or may be, imposed under the Contracts. Figures will be given for the recent
one, five and ten year periods and for the life of the Portfolio if it has not
been in existence for any such periods. When considering "average annual total
return" figures for periods longer than one year, it is important to note that
a Portfolio's annual total return for any given year might have been greater or
less than its average for the entire period. "Cumulative total
- 50 -
<PAGE>
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 TCW 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 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 Dreyfus 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.
OpCap is the investment adviser of the Managed Portfolio of the Accumulation
Trust (formerly known as the Quest for Value Accumulation Trust) (the
"Accumulation Trust"), a registered open-end investment company whose shares
are sold to certain variable accounts of life insurance companies. The Managed
Portfolio of the Accumulation Trust is substantially similar to the Opportunity
Value Portfolio in that it has the same investment objective as the Opportunity
Value Portfolio and is managed using the same investment strategies and
techniques as contemplated for the Opportunity Value Portfolio.
At December 31, 1995 and as of the date of this Prospectus, the Opportunity
Value Portfolio had not commenced operations. Set forth below is certain
performance information regarding the Managed Portfolio of the Accumulation
Trust which has been obtained from OpCap, and is set forth in the current
prospectus and statement of additional information of the Accumulation Trust.
Investors should not rely on the following financial information as an
indication of the future performance of the Opportunity Value Portfolio.
- 51 -
<PAGE>
AVERAGE ANNUAL TOTAL RETURN OF COMPARABLE PORTFOLIO*(1)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE FIVE YEARS FROM INCEPTION
ENDED DECEMBER 31, ENDED DECEMBER 31, TO DECEMBER 31,
1995 1995 1995(2)
------------------ ------------------ ---------------
<S> <C> <C> <C>
Managed Portfolio of
Accumulation Trust..... 45.55% 23.34% 19.74%
</TABLE>
- -----------
* On September 16, 1994, an investment company called Quest for Value
Accumulation Trust (the "Old Trust") was effectively divided into two
investment funds, the Old Trust and the Accumulation Trust, at which time
the Accumulation Trust commenced operations. The total net assets for the
Managed Portfolio immediately after the transaction was $682,601,380 with
respect to the Old Trust and $51,345,102 with respect to the Accumulation
Trust. For the period prior to September 16, 1994, the performance figures
above for the Managed Portfolio reflect the performance of the
corresponding Portfolio of the Old Trust.
(1) Reflects waiver of all or a portion of the advisory fees and reimbursements
of other expenses. Without such waivers and reimbursements, the average
annual total return during the periods would have been lower.
(2) The Portfolio commenced operations on August 1, 1988.
----------------------
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 ten
series of shares. The Fund currently offers shares in nine 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
- 52 -
<PAGE>
not affect all portfolios, then only shareholders of the affected portfolio
will be entitled to vote on the matter.
Owners of the Contracts have certain voting interests in respect of shares of
the Portfolios. See "Voting Rights" in the prospectus for the Contracts
accompanying this Prospectus for a description of the rights granted Contract
owners to instruct voting of shares.
ADDITIONAL INFORMATION
TRANSFER AGENT AND CUSTODIAN
All cash and securities of the Fund are held by Boston Safe Deposit and Trust
Company as custodian. First Data, located at 4400 Computer Drive, Westborough,
Massachusetts 01581, serves as transfer agent for the Fund.
INDEPENDENT AUDITORS
Ernst & Young LLP, located at 200 Clarendon Street, Boston, Massachusetts,
02116, serves as the Fund's independent auditors.
----------------------
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement of which this Prospectus forms a part,
each such statement being qualified in all respects by such reference.
- 53 -
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund................................................................... 2
Financial Highlights....................................................... 4
Investment Objectives and Policies......................................... 12
TCW Money Market Portfolio................................................ 12
TCW Managed Asset Allocation Portfolio.................................... 15
T. Rowe Price International Stock Portfolio............................... 17
Value Equity Portfolio.................................................... 21
Dreyfus Small Cap Value Portfolio......................................... 22
Dreyfus U.S. Government Securities Portfolio.............................. 23
T. Rowe Price Equity
Income Portfolio........................................................ 29
T. Rowe Price Growth Stock Portfolio...................................... 31
Opportunity Value Portfolio............................................... 32
Investment Strategies..................................................... 34
Management of the Fund..................................................... 42
The Manager............................................................... 42
The Advisers.............................................................. 43
Dividends, Distributions and Taxes......................................... 49
Sale and Redemption of Shares.............................................. 49
Performance Information.................................................... 50
Organization and Capitalization of the Fund................................ 52
Additional Information..................................................... 53
Transfer Agent and
Custodian .............................................................. 53
Independent Auditors...................................................... 53
</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
2101 East Coast Highway, Suite 300
Corona del Mar, California 92625
(714) 760-0505
Manager
Endeavor Investment Advisers
2101 East Coast Highway, Suite 300
Corona del Mar, California 92625
Investment Advisers
TCW Funds Management, Inc.
865 S. Figueroa Street
Los Angeles, California 90071
OpCap Advisors
One World Financial Center
New York, New York 10281
The Dreyfus Corporation
200 Park Avenue
New York, New York 10166
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>
WRL SERIES FUND, INC.
GROWTH PORTFOLIO
SUPPLEMENT DATED OCTOBER 8, 1996 TO THE PROSPECTUS DATED MAY 1, 1996.
THE RESTRUCTURING PLAN. Pursuant to an internal restructuring plan (the
"Restructuring"), Western Reserve Life Assurance Co. of Ohio ("Western
Reserve"), the current investment adviser of the WRL Series Fund, Inc. (the
"Fund"), has formed two new wholly-owned subsidiaries. WRL Investment
Management, Inc. ("WRL Management") and WRL Investment Services, Inc. ("WRL
Services"). It is anticipated that WRL Management and WRL Services together
will assume the business of Western Reserve as it relates to the management,
supervision, and administration of registered investment companies, including
the Fund. If the Restructuring is implemented, (i) WRL Management will replace
Western Reserve as the investment adviser to each Portfolio of the Fund; and
(ii) WRL Services will replace Western Reserve as the provider of
administrative services to each Portfolio of the Fund. Western Reserve seeks
to implement the Restructuring effective January 1, 1997.
PROPOSED CHANGES IN ADVISORY AND SUB-ADVISORY ARRANGEMENTS. In light of the
Restructuring, shareholders of the Fund will be asked to approve a new
advisory agreement between the Fund, on behalf of each Portfolio, and WRL
Management. The new advisory agreements, if approved, will result in an
indirect increase in advisory fees. A change in the Funds investment adviser
from Western Reserve to WRL Management will also result in the assignment and
automatic termination of the current sub-advisory agreements for each
Portfolio of the Fund. Accordingly, with respect to each Portfolio,
shareholders of such Portfolio will be asked to approve a new sub-advisory
agreement between WRL Management and each sub-adviser to the Portfolios.
PROPOSED IMPLEMENTATION OF A DISTRIBUTION ("12B-1") PLAN. It is also
contemplated that, subject to shareholder approval, the Fund will adopt a
distribution plan ("12b-1 Plan") effective January 1, 1997. Under the 12b-1
Plan, InterSecurities, Inc. ("ISI"), an affiliate of Western Reserve, will
perform distribution-related services for the Fund. The 12b-1 Plan provides
that the Fund, on behalf of the Portfolios, will reimburse ISI for certain
expenses related to the distribution of Fund shares, and incurred or paid by
ISI. The 12b-1 Plan limits reimbursements to 0.15% on an annual basis, of the
average daily net asset value of shares of each Portfolio.
NECESSARY BOARD AND SHAREHOLDER APPROVALS. On October 3, 1996, at a special
meeting of the Board of Directors of the Fund (the "Board"), the Board
unanimously approved the proposed advisory and sub-advisory agreements, and
the 12b-1 Plan and related distribution agreement. The proposed advisory and
sub-advisory agreements, and the 12b-1 Plan, are subject to approval by a vote
of the majority of the outstanding voting securities of each Portfolio at a
special shareholders meeting (the "Meeting") currently anticipated to be held
on or about December 16, 1996. Policyowners with cash value attributable to a
Portfolio of the Fund on the record date of the shareholders' meeting will be
asked to provide voting instructions to Western Reserve in connection with the
Meeting.
<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 the 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 disclosure
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 OR OTHER FINANCIAL INSTITUTION, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE
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, 1996
<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................................................. 14
Taxes....................................................................... 14
Purchase and Redemption of Shares........................................... 15
Valuation of Shares......................................................... 16
The Fund and Its Shares..................................................... 16
Performance Information..................................................... 17
General Information......................................................... 18
</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, 1995, 1994, 1993, 1992, 1991,
1990, 1989, 1988 and 1987 and for the period October 2, 1986 through December
31, 1986 is taken from 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
1995 1994 1993 1992 1991 1990 1989 1988 1987 12/31/86
---------- -------- -------- -------- -------- -------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period... $ 23.81 $ 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. .26 .22 .28 .36 .27 .30 .19 .31 .21 .00
Net Gains or Losses on
Securities (both
realized and
unrealized).......... 10.97 (2.41) .79 .52 10.75 (.33) 6.29 1.83 1.00 .14
---------- -------- -------- -------- -------- -------- ------- ------- ------- ------
Total Income (Loss)
From Investment
Operations.......... 11.23 (2.19) 1.07 .88 11.02 (.03) 6.48 2.14 1.21 .14
---------- -------- -------- -------- -------- -------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... (.24) (.22) (.28) (.36) (.27) (.30) (.19) (.31) (.21) .00
Distributions (from
capital gains)....... (3.14) (.00) (.37) (.95) (1.97) (.04) (1.41) .00 .00 .00
Distributions in
excess of capital
gains................ .00 (.03) .00 .00 .00 .00 .00 .00 .00 .00
---------- -------- -------- -------- -------- -------- ------- ------- ------- ------
Total Distributions.. (3.38) (.25) (.65) (1.31) (2.24) (.34) (1.60) (.31) (.21) .00
---------- -------- -------- -------- -------- -------- ------- ------- ------- ------
Net Asset Value,
End of Period......... $ 31.66 $ 23.81 $ 26.25 $ 25.83 $ 26.26 $ 17.48 $ 17.85 $ 12.97 $ 11.14 $10.14
========== ======== ======== ======== ======== ======== ======= ======= ======= ======
Total Return*.......... 47.12% (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).. $1,195,174 $814,383 $934,810 $711,422 $393,511 $129,057 $74,680 $28,497 $15,815 $716
Ratio of Expenses to
Average Net Assets**.. .86% .84% .87% .86% .90% 1.00% 1.00% 1.00% 1.00% .19%
Ratio of Net Investment
Income to Average Net
Assets................ .90% .88% 1.07% 1.44% 1.21% 2.06% 1.18% 2.50% 1.84% .03%
Portfolio Turnover Rate
...................... 130.48% 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 periods the annualized
ratio of expenses to average net assets would have been 6.76%, 1.90%, 1.49%
and 1.13%, respectively, absent the advisory fee waiver by Western Reserve
Life.
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, and the Portfolio may not participate in market
advances or declines to
4
<PAGE>
the extent it would 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 repur-
chase agreements. See "Certain Portfolio Policies and Techniques--Repurchase
and Reverse Repurchase Agreements", p.6.
CERTAIN PORTFOLIO POLICIES AND TECHNIQUES; RISK FACTORS
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
6
<PAGE>
so. Zero coupon bonds do not make regular interest payments; rather, 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 does not have the right to vote securities on loan, but
would terminate the loan and regain the right to vote if it were considered
important with respect to the investment.
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
7
<PAGE>
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 provide cash
for redemptions, and will not exceed 25% of the Portfolio's net assets at the
time the loan or borrowing is made. In accordance with the requirements of
current California insurance regulations, the Portfolio will restrict
borrowings to no more than 10% of total assets, except that the Portfolio may
temporarily borrow amounts equal to as much as 25% of total assets if such
borrowing is necessary to meet redemptions. If California's insurance
regulations are changed at some future time to permit borrowings in excess of
10% but less than 25% of toal assets, the Portfolio may conduct borrowings in
accordance with such revised limits.
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
8
<PAGE>
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.
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
9
<PAGE>
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 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
10
<PAGE>
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.
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.
THE 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.
11
<PAGE>
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, 1995, the Fund paid the
Investment Adviser advisory fees of 0.80% of the average daily net assets of
the Portfolio.
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,
1997, 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, 1995, the expenses of the Portfolio, as a percentage
of the Portfolio's average daily net assets, were 0.86%.
THE SUB-ADVISER
Janus Capital Corporation, located at 100 Fillmore Street, 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"
12
<PAGE>
in the Statement of Additional Information for a more detailed description of
the previous experience of Janus Capital Corporation as an investment adviser.
Scott W. Schoelzel has served as the portfolio manager for the Portfolio
since January 2, 1996. Mr. Schoelzel also serves as co-portfolio manager of
other mutual funds. Mr. Schoelzel is a Vice president of the Sub-Adviser,
where he has been employed since 1994. From 1991 to 1993, Mr. Schoelzel was a
portfolio manager with Founders Asset Management, Denver, Colorado. Prior to
1991, he was a general partner of Ivy Lane Investments, Denver, Colorado (a
real estate investment brokerage).
The Sub-Adviser provides investment advisory assistance and portfolio
management advice to the Investment Adviser for the Portfolio. 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.
JOINT TRADING ACCOUNTS
Subject to approval by the Fund's Board of Directors, the Portfolio may
transfer uninvested cash balances on a daily basis into certain joint trading
accounts. Assets in the joint trading accounts are invested in money market
instruments. All other participants in the joint trading accounts will be
registered mutual funds or other clients of the Sub-Adviser or its affiliates.
The Portfolio will participate in the joint trading accounts only to the
extent that the investments of the joint trading
13
<PAGE>
accounts are consistent with the Portfolio's investment policies and
restrictions. the Sub-Adviser anticipates that the investments made by the
Portfolio through the joint trading accounts will be at least as advantageous
to the Portfolio as if the Portfolio had made such investment directly. (See
"The Sub-Adviser" in the Statement of Additional Information.)
PERSONAL SECURITIES TRANSACTIONS
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 ("Ethics Policy") that has been
adopted by the Board of Directors of the Fund. Access Persons are required to
follow the guidelines established by this Ethics Policy in connection with all
personal securities transactions and are subject to certain prohibitions on
personal trading. The Fund's Sub-Advisers, pursuant to Rule 17j-1 and other
applicable laws, and pursuant to the terms of the Ethics Policy, must adopt
and enforce their own Code of Ethics and Insider Trading Policies appropriate
to their operations. Each Sub-Adviser is required to report to the Board of
Directors on a quarterly basis with respect to the administration and
enforcement of such Ethics Policy, including any violations thereof which may
potentially affect the Fund.
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). Under the Code,
no tax is imposed on an insurance company with respect to income of a
qualifying separate account properly
14
<PAGE>
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 the securities of a particular foreign
government and its agencies, instrumentalities, and political subdivisions
will be considered securities issued by 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 in proper
form. Shares are sold and redeemed without the imposition of any sales
commission or redemption charge. However,
15
<PAGE>
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.
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.
Except for money market instruments maturing in 60 days or less, securities
held by the Portfolio are valued at market value. Securities for which market
values are not readily available are valued at fair value as determined in
good faith by the Advisers 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. (See the Statement of Additional Information for
details.)
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
16
<PAGE>
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.
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 disclosure 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.
17
<PAGE>
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, 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, Kiplinger's Personal Finance 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,
18
<PAGE>
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.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 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.
19
<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
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.
20
<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 (the "Policy")
offered by AUSA Life Insurance Company, Inc. You may obtain a copy of the
Prospectus dated May 1, 1996, as revised November 4, 1996 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-
0001. Terms used in the current Prospectus for the Policy are incorporated in
this Statement of Additional Information.
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 GROWTH PORTFOLIO OF THE WRL SERIES FUND, INC.
Dated: May 1, 1996, as revised November 4, 1996
AVAS1196
- 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 Annuity Purchase Values After the Annuity Commencement
Date................................................................... 4
Assignment.............................................................. 4
Evidence of Survival.................................................... 4
Amendments.............................................................. 4
Federal Tax Matters (45).................................................. 5
Tax Status of the Policy................................................ 5
Taxation of AUSA........................................................ 6
Investment Experience..................................................... 6
State Regulation of AUSA.................................................. 10
Records and Reports....................................................... 10
Distribution of the Policies (51)......................................... 10
Custody of Assets......................................................... 10
Historical Performance Data (8)........................................... 11
Money Market Yields..................................................... 11
Other Subaccount Yields................................................. 12
Total Returns........................................................... 12
Other Performance Data.................................................. 13
Legal Matters............................................................. 13
Independent Auditors...................................................... 13
Other Information......................................................... 14
Financial Statements (8).................................................. 14
</TABLE>
(Numbers in parenthesis indicate corresponding pages 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 27 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 ANNUITY PURCHASE 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 Annuity Purchase 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 certain circumstances, owners of variable annuity
contracts may be considered the owners, for federal income tax purposes, of
the assets of the separate accounts used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includable in the variable contract owner's gross income. The IRS has stated
in published rulings that a variable contract owner will be considered the
owner of separate account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection
with the issuance of regulations concerning diversification, that those
regulations "do not provide guidance concerning the circumstances in which
investor control of the investments of a segregated asset account may cause
the investor (i.e., the Owner), rather than the insurance company, to be
treated as the owner of the assets in the account." This announcement also
stated that guidance would be issued by way of regulations or rulings on the
"extent to which policyholders may direct their investments to particular
subaccounts without being treated as owners of the underlying assets."
The ownership rights under the Policy are similar to, but difference in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets.
For example, the Owner has additional flexibility in allocating Premium
Payments and Policy Values. These differences could result in an Owner being
treated as the owner of a pro rata portion of the assets of the Mutual Fund
Account. In addition, AUSA does not know what standards will be set forth, in
any, in the regulations or rulings which the Treasury Department has stated it
expects to issue. AUSA therefore reserves the right to modify the Policy as
necessary to attempt to prevent an Owner from being considered the owner of a
pro rata share of the assets of the Mutual Fund Account.
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 applied to provide an immediate annuity
- 5 -
<PAGE>
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 "Designated Beneficiary" as defined in Section
72(s) of the Code. 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. Under the Policy, the Beneficiary is the Designated
Beneficiary of an Owner/Annuitant and the Successor Owner is the Designated
Beneficiary of an Owner who is not the Annuitant. 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 maintain their
compliance with the Code requirements when clarified by regulation or
otherwise.
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 of the Mutual Fund Account,
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.
- 6 -
<PAGE>
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
(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
Then, the Investment Experience Factor = (11.57 + 0 -- 0) --
.0000380909 = Z = 1.0148741898 -----------------
(11.40 -- 0)
- 7 -
<PAGE>
FORMULA AND ILLUSTRATION FOR DETERMINING ACCUMULATION UNIT VALUE
Accumulation Unit Value = A x B
Where: The Accumulation Unit Value for the immediately preceding
A = 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
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: Annuity Unit Value for the immediately preceding Valuation Period.
A = 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: The Annuity Purchase Value as of the Annuity Commencement Date.
A = 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: The dollar amount of the first monthly Variable Annuity Payment.
A = 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. During
1995, the amount paid to AEGON USA Securities, Inc. and/or broker-dealers for
their services was $397,382. No Policies had yet been issued as of May 1,
1995, therefore no fees had been paid to AEGON USA Securities, Inc. and/or the
broker/dealers for their services during 1994 or prior years.
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.
- 10 -
<PAGE>
HISTORICAL PERFORMANCE DATA
MONEY MARKET YIELDS
AUSA may from time to time disclose the current annualized yield of the TCW
Money Market Subaccount, which invests in the TCW Money Market Portfolio, for
a 7-day period in a manner which does not take into consideration any realized
or unrealized gains or losses on shares of the TCW 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 TCW 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:
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.
Because of the charges and deductions imposed under a Policy, the yield for
the TCW Money Market Subaccount will be lower than the yield for the TCW 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 TCW 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:
NCS =The net change in the value of the Portfolio (exclusive of realized
gains and losses onthe 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.
The yield on amounts held in the TCW 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 TCW Money Market Subaccount's actual
- 11 -
<PAGE>
yield is affected by changes in interest rates on money market securities,
average portfolio maturity of the TCW Money Market Portfolio, the types and
quality of portfolio securities held by the TCW Money Market Portfolio and its
operating expenses. For the seven days ended December 31, 1995, the yield of
the TCW Money Market Subaccount was 2.99%, and the effective yield was 3.03%.
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
TCW Money Market Subaccount) for 30-day 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:
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.
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.
- 12 -
<PAGE>
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
Where:
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.
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:
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.
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, 1995 and 1994, and for
each of the two years in the period ended December 31, 1995, and the Financial
Statements of the AUSA Endeavor Variable Annuity Account at December 31, 1995,
and for each of the two years in the period then ended, included in this
Statement of Additional Information have been audited by Ernst & Young LLP,
Independent Auditors, Des Moines, Iowa.
- 13 -
<PAGE>
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 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).
Financial statements for the AUSA Endeavor Variable Annuity Account are
contained herein. 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, 1995 and 1994, and the statutory-
basis statements of operations, changes in capital and surplus and cash flows
for the years then ended. Our audits also included the statutory-basis
financial statement schedules required by Regulation S-X, Article 7. These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules 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, 1995 and 1994, or the results of its
operations or its cash flows for the years then ended.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of AUSA Life
Insurance Company, Inc. at December 31, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting practices prescribed or permitted by the Department of Insurance of
the State of New York. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic statutory-basis financial
statements taken as a whole, present fairly in all material respects
information set forth therein.
Ernst & Young LLP
Des Moines, Iowa
February 23, 1996
- 15 -
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
BALANCE SHEETS--STATUTORY BASIS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1995 1994
---------- ----------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments...................... $ 112,379 $ 89,532
Bonds................................................ 2,523,719 2,099,349
Stocks:
Preferred.......................................... 236 236
Common, at market (cost: $141 in 1995 and 1994).... 346 274
Mortgage loans on real estate........................ 768,424 862,352
Real estate acquired in satisfaction of debt......... 29,333 10,485
Policy loans......................................... 25 24
Other invested assets................................ 723 --
---------- ----------
Total cash and invested assets....................... 3,435,185 3,062,252
Accrued investment income.............................. 51,281 47,156
Federal income taxes recoverable....................... 12 12
Receivable from affiliates............................. 1,932 --
Other assets........................................... 6,189 1,690
Separate account assets................................ 4,249,345 2,907,674
---------- ----------
Total admitted assets................................ $7,743,944 $6,018,785
========== ==========
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life............................................... $ 356 $ 199
Annuity............................................ 122,145 7,572
Accident and health................................ 4,354 --
Policy and contract claim reserves:
Life............................................... 3 3
Accident and health................................ 152 --
Other policyholders' funds........................... 2,991,630 2,761,658
Remittances and items not allocated.................. 24,147 16,763
Asset valuation reserve.............................. 35,160 25,552
Interest maintenance reserve......................... 3,399 1,314
Payable to affiliates................................ -- 7,858
Short-term note payable to affiliate................. 15,200 5,200
Deferred income...................................... 19,182 26,592
Payable under assumption reinsurance agreement....... 73,546 85,612
Other liabilities.................................... 21,559 4,656
Separate account liabilities......................... 4,230,472 2,891,976
---------- ----------
Total liabilities.................................... 7,541,305 5,834,955
Commitments and contingencies
Capital and surplus:
Common stock, $125 par value, 20 shares authorized,
issued and outstanding.............................. 2,500 2,500
Paid-in surplus...................................... 251,150 210,150
Unassigned surplus (deficit)......................... (51,011) (28,820)
---------- ----------
Total capital and surplus............................ 202,639 183,830
---------- ----------
Total liabilities and capital and surplus............ $7,743,944 $6,018,785
========== ==========
</TABLE>
See accompanying notes.
- 16 -
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
STATEMENTS OF OPERATIONS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1995 1994
------------ -----------
<S> <C> <C>
Revenues:
Premiums and other considerations, net of
reinsurance:
Life............................................. $ 180 $ 10
Annuity.......................................... 1,107,020 426,329
Accident and health.............................. 213 --
Net investment income.............................. 268,678 254,539
Amortization of interest maintenance reserve....... 1,987 158
Commissions and expense allowances on reinsurance
ceded............................................. 8,793 11,191
------------ ----------
1,386,871 692,957
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits............ 221 8
Surrender benefits............................... 764,290 453,799
Other benefits................................... 1,931 870
Increase (decrease) in aggregate reserves for
policies and contracts:
Life........................................... 157 (1)
Annuity........................................ 114,209 2,722
Accident and health............................ 175 --
Increase in liability for premium and other
deposit type funds.............................. 229,962 34,294
------------ ----------
1,110,945 491,692
Insurance expenses:
Commissions...................................... 83,579 91,312
General insurance expenses....................... 63,316 57,207
Taxes, licenses and fees......................... 421 131
Transfers to separate accounts................... 139,912 63,209
Other expenses................................... 11 --
------------ ----------
287,239 211,859
------------ ----------
1,398,184 703,551
------------ ----------
Loss from operations before federal income taxes and
net realized capital losses on investments.......... (11,313) (10,594)
Federal income tax expense........................... -- --
------------ ----------
Loss from operations before net realized capital
losses on investments............................... (11,313) (10,594)
Net realized capital losses on investments (net of
amounts transferred to interest maintenance
reserve)............................................ (3,432) (928)
------------ ----------
Net loss............................................. $ (14,745) $ (11,522)
============ ==========
</TABLE>
See accompanying notes.
- 17 -
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL UNASSIGNED CAPITAL
COMMON PAID-IN SURPLUS AND
STOCK CAPITAL (DEFICIT) SURPLUS
------ ---------- ---------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1994.............. $2,500 $210,150 $ (4,297) $208,353
Net loss for 1994..................... -- -- (11,522) (11,522)
Net unrealized capital losses......... -- -- (35) (35)
Increase in non-admitted assets....... -- -- (855) (855)
Increase in asset valuation reserve... -- -- (12,809) (12,809)
Seed money contributed to separate
account.............................. -- -- (15,000) (15,000)
Increase in surplus in separate
account.............................. -- -- 15,698 15,698
------ -------- -------- --------
Balance at December 31, 1994............ 2,500 210,150 (28,820) 183,830
Capital contribution.................. -- 41,000 -- 41,000
Net loss for 1995..................... -- -- (14,745) (14,745)
Net unrealized capital gains.......... -- -- 172 172
Increase in non-admitted assets....... -- -- (61) (61)
Increase in asset valuation reserve... -- -- (9,608) (9,608)
Surplus effect of reinsurance......... -- -- (70) (70)
Redemption of separate account seed
money................................ -- -- (1,000) (1,000)
Increase in surplus in separate
account.............................. -- -- 3,121 3,121
------ -------- -------- --------
Balance at December 31, 1995............ $2,500 $251,150 $(51,011) $202,639
====== ======== ======== ========
</TABLE>
See accompanying notes.
- 18 -
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1994
----------- -----------
<S> <C> <C>
SOURCES OF CASH
Premiums and other considerations, net of
reinsurance......................................... $ 1,116,102 $ 438,260
Net investment income................................ 265,966 246,801
----------- -----------
1,382,068 685,061
Life and accident and health claims.................. (215) (10)
Surrender benefits and other fund withdrawals........ (764,290) (453,799)
Other benefits to policyholders...................... (1,931) (868)
Commissions, other expenses and other taxes.......... (160,462) (63,919)
Net transfers to separate accounts................... (139,912) (63,209)
Federal income taxes, excluding tax on capital gains. -- (62)
Net increase in policy loans......................... (1) (6)
Increase in remittances and items not allocated...... 7,384 10,340
----------- -----------
Net cash provided by operations...................... 322,641 113,528
Proceeds from investments sold, matured or repaid:
Bonds.............................................. 432,605 421,275
Common stocks...................................... -- 2,022
Mortgage loans..................................... 138,243 189,421
Real estate........................................ 4,952 32
Other, net......................................... 5 (48)
----------- -----------
Total cash from investments.......................... 575,805 612,702
Capital contribution................................. 41,000 --
Cash received in connection with a reinsurance
transaction......................................... 38 --
Issuance of intercompany notes payable, net.......... 10,000 5,200
Other sources........................................ 22,224 14,695
----------- -----------
Total sources of cash................................ 971,708 746,125
APPLICATIONS OF CASH
Cost of investments acquired:
Bonds.............................................. 878,082 1,038,312
Common stocks...................................... -- 27
Mortgage loans..................................... 54,140 1,544
Other invested assets.............................. 725 --
----------- -----------
Total investments acquired........................... 932,947 1,039,883
Seed money contributed to separate accounts.......... 1,000 15,000
Other applications................................... 14,914 4,229
----------- -----------
Total applications of cash........................... 948,861 1,059,112
----------- -----------
Net change in cash and short-term investments........ 22,847 (312,987)
Cash and short-term investments at beginning of year. 89,532 402,519
----------- -----------
Cash and short-term investments at end of year....... $ 112,379 $ 89,532
=========== ===========
</TABLE>
See accompanying notes.
- 19 -
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
AUSA Life Insurance Company, Inc. ("the Company") is a stock life insurance
company and is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA") which, in turn, is a wholly-owned subsidiary of AEGON USA
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands. Effective September 24, 1993,
First AUSA 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. On December 31, 1993, the Company entered into an
assumption reinsurance agreement with Mutual of New York ("MONY") to transfer
certain group pension business of MONY to the Company.
During 1995, the Board of Directors adopted a resolution calling for the
merger of all the assets and liabilities of International Life Investors
Insurance Company, an affiliate, into the Company. This merger is expected to
occur in 1996.
Financial Statements
The accompanying financial statements present the condition of the Company
at December 31, 1995 and 1994 and the results of its operations for the year
ended December 31, 1995 and 1994. Results of operations for 1993 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.
Nature of Business
The Company primarily sells group fixed and variable annuities. The Company
is licensed in 44 states and the District of Columbia and is actively in the
process of becoming licensed in all 50 states. Sales of the Company's products
are primarily through brokers and agents.
Basis of Presentation
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract reserves, guarantee fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and
assumptions utilized which could have a material impact on the financial
statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Department of Insurance of
the State of New York, which practices differ in some respects from generally
accepted accounting principles. The more significant of these differences are
as follows: (a) bonds are generally carried at amortized cost
- 20 -
<PAGE>
rather than segregating the portfolio into held-to-maturity (carried at
amortized cost), available-for-sale (carried at fair value), and trading
(reported at fair value) classifications; (b) acquisition costs of acquiring
new business are charged to current operations as incurred rather than
deferred and amortized over the life of the policies; (c) policy reserves on
traditional life products are based on statutory mortality rates and interest
which may differ from reserves based on reasonable assumptions of expected
mortality, interest, and withdrawals which include a provision for possible
unfavorable deviation from such assumptions; (d) policy reserves on certain
investment products use discounting methodologies utilizing statutory interest
rates rather than full account values; (e) reinsurance amounts are netted
against the corresponding receivable or payable rather than shown as gross
amounts on the balance sheet; (f) deferred income taxes are not provided for
the difference between the financial statement and income tax bases of assets
and liabilities; (g) net realized gains or losses attributed to changes in the
level of interest rates in the market are deferred and amortized over the
remaining life of the bond or mortgage loan, rather than recognized as gains
or losses in the statement of operations when the sale is completed;
(h) declines in the estimated realizable value of investments are provided for
through the establishment of a formula-determined statutory investment reserve
(carried as a liability) changes to which are charged directly to surplus,
rather than through recognition in the statement of operations for declines in
value, when such declines are judged to be other than temporary; (i) certain
assets designated as "non-admitted assets" have been charged to surplus rather
than being reported as assets; (j) revenues for universal life and investment
products consist of premiums received rather than policy charges for the cost
of insurance, policy administration charges, amortization of policy initiation
fees and surrender charges assessed; (k) pension expense is recorded as
amounts are paid; (l) adjustments to federal income taxes of prior years are
charged or credited directly to unassigned surplus, rather than reported as a
component of expense in the statement of operations; and (m) gains or losses
on dispositions of business are charged or credited directly to unassigned
surplus rather than being reported in the statement of operations. The effects
of these variances have not been determined by the Company.
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.
Cash and Cash Equivalents
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 cash equivalents.
Investments
Investments in bonds (except those to which the Securities Valuation Office
of the NAIC has ascribed a value), mortgage loans on real estate and short-
term investments are reported at cost adjusted for amortization of premiums
and accrual of discounts. 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. Amortization is computed using methods which result in
a level yield over the expected life of the security. The Company reviews its
prepayment assumptions on mortgage and other asset backed securities at
regular intervals and adjusts amortization rates retrospectively when such
assumptions are changed due to experience and/or expected future patterns.
Investments in preferred stocks in
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<PAGE>
good standing are reported at cost. Investments in preferred stocks not in
good standing are reported at the lower of cost or market. Common stocks,
which may include shares of mutual funds (money market and other), are carried
at market. Real estate is reported at cost less allowances for depreciation.
Depreciation is computed principally by the straight-line method. Policy loans
are reported at unpaid principal. Other invested assets consist principally of
investments in various joint ventures and are recorded at equity in underlying
net assets. Other "admitted assets" are valued, principally at cost, as
required or permitted by New York Insurance Laws.
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for
anticipated losses in the event of default by issuers of certain invested
assets. These amounts are determined using a formula prescribed by the NAIC
and are reported as a liability. The formula for the AVR provides for a
corresponding adjustment for realized gains and losses, net of amounts
attributed to changes in the general level of interest rates. Under a formula
prescribed by the NAIC, the Company defers, in the Interest Maintenance
Reserve (IMR), the portion of realized gains and losses on sales of fixed
income investments, principally bonds and mortgage loans, attributable to
changes in the general level of interest rates and amortizes those deferrals
over the remaining period to maturity of the security.
Interest income is recognized on an accrual basis. The Company does not
accrue income on bonds in default, mortgage loans on real estate in default
and/or foreclosure or which are delinquent more than twelve months, or real
estate where rent is in arrears for more than three months. Further, income is
not accrued when collection is uncertain. At December 31, 1995 and 1994, the
Company excluded investment income due and accrued of $183 and $774,
respectively, with respect to such practices.
MONY entered into foreign exchange interest rate swap agreements to modify
the interest characteristics of certain of its outstanding fixed maturity
securities from a fixed rate in a foreign currency to a fixed rate in U. S.
Dollars prior to the reinsurance assumption agreement. These agreements were
assigned to the Company in connection with the reinsurance assumption
agreement. The interest rate swap agreements involve the exchange of a fixed
rate in a foreign currency for fixed rate interest payments in U. S. Dollars
over the life of the agreement without an exchange of the underlying principal
amount of $32,500 at December 31, 1995 and 1994. The differential to be paid
or received is accrued as incurred and recognized as an adjustment to interest
related to the underlying fixed maturity. The related amount payable to or
receivable from counterparties is included in other liabilities or assets. The
fair values of the swap agreements are not recognized in the financial
statements.
Deferred income for unrealized gains and losses on the securities valued at
market at the time of the assumption reinsurance agreement (described in Note
4) are returned to Mutual of New York at the time of realization pursuant to
the agreement.
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
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<PAGE>
computed principally on the Net Level Premium 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
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.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
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.
Separate Account
Assets held in trust for purchases of separate account contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. Income and gains and losses with respect to these
assets accrue to the benefit of the policyholders. The Company received
separate account premiums of $536,128 and $180,789 in 1995 and 1994,
respectively. The assets in the separate accounts for the variable annuities
and participating annuities are held at a market value of $3,650,091 and
$2,398,125 for the years ended December 31, 1995 and 1994, respectively.
The separate account assets in the fixed government accounts and stable fund
accounts are carried at an amortized cost of $599,254 and $509,549 for the
years ended December 31, 1995 and 1994, respectively.
Reclassifications
Certain reclassifications have been made to the 1994 financial statements to
conform to the 1995 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures
about Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statutory-basis balance sheet, for which it is practicable to estimate that
value. SFAS No. 119, Disclosures About Derivative Financial Instruments and
Fair Value of Financial Instruments, requires additional disclosures about
derivatives. 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.
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<PAGE>
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. SFAS No. 107 and No. 119 exclude
certain financial instruments and all nonfinancial instruments from their
disclosure requirements and allows companies to forego the disclosures when
those estimates can only be made at excessive cost. 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 statutory-basis 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 statutory-basis 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.
Interest rate swap: Estimated fair value of the foreign currency interest
rate swap is based upon the pricing differential for similar swap
agreements. The fair value of the interest rate swap has been included with
the fair value of the underlying fixed maturities.
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.
The following sets forth a comparison of the fair values and carrying values
of the Company's financial instruments subject to the provisions of SFAS
No.107 and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1995 1994
--------------------- ---------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds................... $2,523,719 $2,605,786 $2,099,349 $1,976,667
Preferred stocks........ 236 180 236 162
Common stock............ 346 346 274 274
Mortgage loans on real
estate................. 768,424 806,395 862,352 851,352
Policy loans............ 25 25 24 24
Cash and short-term
investments............ 112,379 112,379 89,532 89,532
Separate account assets. 4,249,345 4,261,843 2,907,674 2,876,170
LIABILITIES
Investment contract
liabilities............ 3,113,766 3,077,557 2,771,701 2,685,570
Separate account
annuities.............. 4,237,983 4,219,281 2,886,836 2,841,006
</TABLE>
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<PAGE>
3. 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, 1995
Bonds:
United States Government and
agencies..................... $ 81,460 $ 1,010 $ 21 $ 82,449
State, municipal and other
government................... 20,584 871 14 21,441
Public utilities.............. 169,422 3,105 498 172,029
Industrial and miscellaneous.. 1,482,600 51,205 7,727 1,526,078
Mortgage-backed securities.... 769,653 36,675 2,539 803,789
---------- ------- -------- ----------
2,523,719 92,866 10,799 2,605,786
Preferred stocks................ 236 -- 56 180
---------- ------- -------- ----------
$2,523,955 $92,866 $ 10,855 $2,605,966
========== ======= ======== ==========
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
========== ======= ======== ==========
</TABLE>
The carrying value and estimated market value of bonds at December 31, 1995,
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............................... $ 62,034 $ 62,250
Due after one year through five years................. 795,601 808,309
Due after five years through ten years................ 773,886 809,464
Due after ten years................................... 122,545 121,974
---------- ----------
1,754,066 1,801,997
Mortgage-backed securities............................ 769,653 803,789
---------- ----------
$2,523,719 $2,605,786
========== ==========
</TABLE>
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<PAGE>
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1994
-------- --------
<S> <C> <C>
Interest on bonds and notes.............................. $180,500 $145,612
Mortgage loans........................................... 98,653 117,859
Real estate.............................................. 2,400 322
Dividends on equity investments.......................... 19 51
Interest on policy loans................................. 1 1
Other investment loss.................................... (3,927) (2,458)
-------- --------
Gross investment income.................................. 277,646 261,387
Investment expenses...................................... 8,968 6,848
-------- --------
Net investment income.................................... $268,678 $254,539
======== ========
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1994
-------- --------
<S> <C> <C>
Proceeds................................................. $432,605 $421,275
======== ========
Gross realized gains..................................... $ 7,214 $ 7,643
Gross realized losses.................................... 13,407 13,681
-------- --------
Net realized losses...................................... $ (6,193) $ (6,038)
======== ========
</TABLE>
At December 31, 1995, investments with an aggregate carrying value of $2,089
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 are summarized below:
<TABLE>
<CAPTION>
REALIZED
----------------
YEAR ENDED
DECEMBER 31
----------------
1995 1994
------- -------
<S> <C> <C>
Debt securities........................................... $(6,193) $(6,038)
Short-term investments.................................... 2 (48)
Mortgage loans on real estate............................. (3,650) 1,067
Real estate............................................... (628) --
Other invested assets..................................... 11,109 5,412
------- -------
640 393
Tax effect................................................ -- --
Transfer to interest maintenance reserve.................. (4,072) (1,321)
------- -------
Total realized losses..................................... $(3,432) $ (928)
======= =======
</TABLE>
- 26 -
<PAGE>
<TABLE>
<CAPTION>
CHANGE IN
UNREALIZED
-------------
YEAR ENDED
DECEMBER 31
-------------
1995 1994
------ -----
<S> <C> <C>
Debt securities.............................................. $(750) $ --
Equity securities............................................ 72 (35)
----- ----
Change in unrealized depreciation............................ $(678) $(35)
===== ====
</TABLE>
Gross unrealized gains and gross unrealized losses on equity securities at
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-----------
1995 1994
---- ----
<S> <C> <C>
Unrealized gains................................................. $205 $133
Unrealized losses................................................ -- --
---- ----
Net unrealized gains............................................. $205 $133
==== ====
</TABLE>
During 1995, the Company issued mortgage loans with interest rates ranging
from 7.41% to 9.86%. The maximum percentage of any one loan to the value of
the underlying real estate at origination was 86%. Mortgage loans with a
carrying value of $13,780 were non-income producing for the previous twelve
months. Accrued interest of $150 related to these mortgage loans was excluded
from investment income. The Company refinanced the mortgage loans of two
properties with an aggregate carrying value of $23,378 to reduce the interest
rates, as a result of the current interest rate environment. The Company
requires all mortgage loans to carry fire insurance equal to the value of the
underlying property.
During 1995 and 1994, there were $14,264 and $10,587, respectively, in
foreclosed mortgage loans that were transferred to real estate. At December 31,
1995 and 1994, the Company held a mortgage loan loss reserve in the asset
valuation reserve of $9,921 and $9,061, respectively.
At December 31, 1995, the mortgage loan portfolio is diversified by
geographic region and specific collateral property type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION PROPERTY TYPE DISTRIBUTION
- ----------------------------- -----------------------------
<S> <C> <C> <C>
South Atlantic.......... 31.1% Retail.................. 36.7%
E. North Central........ 20.7 Office.................. 33.2
Mountain................ 15.6 Apartment............... 17.2
New England............. 11.5 Other................... 10.4
W. North Central........ 9.8 Industrial.............. 2.5
W. South Central........ 8.3
Pacific................. 3.0
</TABLE>
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<PAGE>
At December 31, 1995, 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.................................................. $44,370
Connecticut National Bank......................................... 36,220
Green Tree Financial Corporation.................................. 35,831
Standard Credit Card.............................................. 32,629
PSEG Capital...................................................... 28,783
Chemical Banking.................................................. 26,166
Triax Association................................................. 25,000
</TABLE>
4. 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.
Premiums earned reflect the following reinsurance assumed and ceded amounts
for the year ended December 31:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Direct premiums........................................ $1,105,029 $295,678
Reinsurance assumed.................................... 35,847 130,665
Reinsurance ceded...................................... (33,463) (4)
---------- --------
Net premiums earned.................................... $1,107,413 $426,339
========== ========
</TABLE>
The aggregate reserves for policies and contracts were reduced for reserve
credits for reinsurance ceded at December 31, 1995 and 1994 of $32,948 and $0,
respectively.
On December 31, 1993, the Company and MONY entered into an assumption
reinsurance agreement whereby, all of the general account liabilities were
novated to the Company from MONY as state approvals were received.
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, 1995 and 1994, the
Company owed MONY $73,546 and $85,612, respectively, which represents the
amount earned by MONY under the gain sharing calculation and certain fees for
investment management services for the respective years.
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<PAGE>
In connection with the transaction, MONY purchased $150,000 and $50,000 in
Series A and Series B notes, respectively, of AEGON. 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.
AEGON provides general and administrative services for the transferred
business under a related agreement with MONY. The agreement specifies
prescribed rates for expenses to administer the business up to certain levels.
In addition, AEGON also provides investment management services on the assets
underlying the new pension business written by the Company while MONY
continues to provide investment management services for assets supporting the
remaining policy liabilities which were transferred at December 31, 1993.
On October 1, 1995, the Company entered into a reinsurance agreement with a
non-affiliate. As a result, the Company received $4,242 of assets, including
$38 of cash and $4,312 of liabilities. The difference between the assets and
the liabilities of $70 was charged directly to unassigned surplus.
5. INCOME TAXES
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to loss from operations before taxes and
realized capital losses for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------
1995 1994
------- -------
<S> <C> <C>
Computed tax benefit at federal statutory rate (35%)....... $(3,959) $(3,708)
Tax reserve adjustment..................................... 184 121
Deferred acquisition cost-- tax basis...................... 596 6
Carryforward of current year operating loss................ 3,351 3,460
Other items--net........................................... (172) 121
------- -------
Federal income 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, 1995). 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.
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $19,400 which expire through 2010.
- 29 -
<PAGE>
6. POLICY AND CONTRACT ATTRIBUTES
A portion of the Company's policy reserves and other policyholders' funds
relate to liabilities established on a variety of the Company's products that
are not subject to significant mortality or morbidity risk; however, there may
be certain restrictions placed upon the amount of funds that can be withdrawn
without penalty. The amount of reserves on these products, by withdrawal
characteristics, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------
AMOUNT PERCENT OF TOTAL
---------- ----------------
<S> <C> <C>
Subject to discretionary withdrawal with market
value adjustment............................... $ 506,683 16.1%
Subject to discretionary withdrawal at book
value less surrender charge.................... 1,892,739 60.1%
Subject to discretionary withdrawal at market
value.......................................... 2 0.0%
Subject to discretionary withdrawal at book
value (minimal or no charges or adjustments)... 523,843 16.7%
Not subject to discretionary withdrawal
provision...................................... 223,617 7.1%
---------- -----
3,146,884 100.0%
Less reinsurance ceded.......................... 32,948
----------
Total policy reserves on annuities and deposit
fund liabilities............................... $3,113,936
==========
</TABLE>
Separate and variable account assets held by the Company represent contracts
where the benefit is determined by the performance of the investments held in
the separate account. There may be certain restrictions placed upon the amount
of funds that can be withdrawn without penalty. The amount of separate account
liabilities on these products, by withdrawal characteristics, are summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
---------- -------------- ----------
<S> <C> <C> <C>
Subject to discretionary withdrawal
with market value adjustment.......... $ 290,684 $ -- $ 290,684
Subject to discretionary withdrawal at
book value less surrender charge...... 280,770 -- 280,770
Subject to discretionary withdrawal at
market value.......................... 97,049 1,492,670 1,589,719
Not subject to discretionary
withdrawal............................ 2,076,810 -- 2,076,810
---------- ---------- ----------
$2,745,313 $1,492,670 $4,237,983
========== ========== ==========
</TABLE>
At December 31, 1995 and 1994, the Company had insurance in force
aggregating $52 and $65, respectively, in which the gross premiums are less
than the net premiums required by the valuation standards established by the
Insurance Division, Department of Commerce, of the State of Iowa.
- 30 -
<PAGE>
7. 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 1996
without prior approval.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the
FASB 87 expense as a percent of salaries. The benefits are based on years of
service and the employee's compensation during the highest five consecutive
years of employment. The Company was allocated no pension expense for the
years ended December 31, 1995 and 1994. The plan is subject to the reporting
and disclosure requirements of the Employee Retirement Income Security Act of
1974.
The Company's employees also participate in a contributory defined
contribution plan sponsored by AEGON which is qualified under Section 401(k)
of the Internal Revenue Service Code. Employees of the Company who customarily
work at least 1,000 hours during each calendar year and meet the other
eligibility requirements, are participants of the plan. Participants may elect
to contribute up to fifteen percent of their salary to the plan. The Company
will match an amount up to three percent of the participant's salary.
Participants may direct all of their contributions and plan balances to be
invested in a variety of investment options. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement Income
Security Act of 1974. The Company was allocated no expense for the years ended
December 31, 1995 and 1994.
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also
sponsors an employee stock option plan for individuals employed at least three
years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been
accrued or funded as deemed appropriate by management of AEGON and the
Company.
In addition to pension benefits, the Company participates in plans sponsored
by AEGON that provide postretirement medical, dental and life insurance
benefits to employees meeting certain eligibility requirements. Portions of
the medical and dental plans are contributory. The expenses of the
postretirement plans calculated on the pay-as-you-go basis are charged to
affiliates in accordance with an intercompany cost sharing arrangement. The
Company was allocated no expense for the years ended December 31, 1995 and
1994.
9. RELATED PARTY TRANSACTIONS
In accordance with an agreement between AEGON and the Company, AEGON 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.
- 31 -
<PAGE>
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.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1995 and
1994, the Company paid $2,212 and $0, respectively, for these services, which
approximates their costs to the affiliates.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rates ranging from 5.00% to 5.85% at December 31,
1995. During 1995 and 1994, the Company paid interest of $193 and $43,
respectively, to affiliates.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for
compensatory and punitive damages, in addition to contract liability, it is
management's opinion, after consultation with counsel and a review of
available facts, that damages arising from such demands will not be material
to the Company's financial position.
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. The guaranty fund expense was
$15 and $0 for the years ended December 31, 1995 and 1994, respectively.
- 32 -
<PAGE>
SCHEDULE I
AUSA LIFE INSURANCE COMPANY, INC.
SUMMARY OF INVESTMENTS--OTHER THAN
INVESTMENTS IN RELATED PARTIES
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
AMOUNT AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST(1) VALUE BALANCE SHEET(2)
------------------ ---------- --------- ----------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and government
agencies and authorities.............. $ 499,932 $ 517,318 $ 499,232
States, municipalities and political
subdivisions.......................... 5,068 5,444 5,062
Foreign governments.................... 15,980 15,996 15,522
Public utilities....................... 172,286 172,029 169,422
All other corporate bonds.............. 1,853,621 1,894,999 1,834,481
Redeemable preferred stock............... 236 180 236
---------- --------- ----------
Total fixed maturities................... 2,547,123 2,605,966 2,523,955
EQUITY SECURITIES
Common stocks--industrial, miscellaneous
and all other........................... 141 346 346
---------- --------- ----------
Total equity securities.................. 141 346 346
Mortgage loans on real estate............ 768,424 768,424
Real estate.............................. 29,333 29,333
Policy loans............................. 25 25
Cash and short-term investments.......... 112,379 112,379
---------- ----------
Total investments........................ $3,457,425 $3,434,462
========== ==========
</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.
(2) Amounts differ from cost as certain bonds have been adjusted to reflect
other than temporary declines in value charged to surplus, as prescribed
by the NAIC.
- 33 -
<PAGE>
SCHEDULE III
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, 1995
Individual life.............................. $ 354 $-- $ 3
Individual health............................ 4,021 333 152
Group life and health........................ 2 -- --
Annuity...................................... 122,145 -- --
-------- ---- ----
$126,522 $333 $155
======== ==== ====
DECEMBER 31, 1994
Individual life.............................. $ 197 $-- $ 3
Individual health............................ -- -- --
Group life and health........................ 2 -- --
Annuity...................................... 7,572 -- --
-------- ---- ----
$ 7,771 $-- $ 3
======== ==== ====
</TABLE>
- 34 -
<PAGE>
<TABLE>
<CAPTION>
NET BENEFITS, CLAIMS OTHER
PREMIUM INVESTMENT LOSSES AND OPERATING PREMIUMS
REVENUE INCOME SETTLEMENT EXPENSES EXPENSES WRITTEN
------- ---------- ------------------- --------- ----------
<S> <C> <C> <C> <C>
$ 180 $ 47 $ 4 $ 4 $ --
213 85 386 62 --
-- -- -- -- 195
1,107,020 268,546 1,110,555 287,173 1,606,197
- ---------- -------- ---------- -------- ----------
$1,107,413 $268,678 $1,110,945 $287,239 $1,606,392
========== ======== ========== ======== ==========
$ 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>
- 35 -
<PAGE>
SCHEDULE IV
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,
1995
Life insurance in force.. $ 629 $ 150 $ -- $ 479 -- %
========== ======= ======== ========== ====
Premiums:
Individual life........ $ 184 $ 4 $ -- $ 180 -- %
Individual health...... -- -- -- -- --
Group life and health.. -- -- -- -- --
Annuity................ 1,105,029 33,459 35,847 1,107,233 3
---------- ------- -------- ---------- ----
$1,104,845 $33,463 $ 35,847 $1,107,413 3%
========== ======= ======== ========== ====
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>
- 36 -
<PAGE>
THE AUSA ENDEAVOR VARIABLE ANNUITY ACCOUNT
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Contract Owners of
The AUSA Endeavor Variable Annuity Account,
AUSA Life Insurance Company, Inc.:
We have audited the accompanying balance sheet of The AUSA Endeavor Variable
Annuity Account, formerly the ILI Endeavor Variable Annuity Account,
(comprising, respectively, the Money Market, Managed Asset Allocation, T. Rowe
Price International Stock, formerly Global Growth, Quest for Value Equity,
Quest for Value Small Cap, U.S. Government Securities, T. Rowe Price Equity
Income, T. Rowe Price Growth Stock and Growth subaccounts) as of December 31,
1995, and the related statements of operations and changes in contract owners'
equity for the periods indicated therein. These financial statements are the
responsibility of the Variable Account'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. Our
procedures included confirmation of mutual fund shares owned as of December
31, 1995 by correspondence with the mutual funds' transfer agent. 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.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of each of the respective
subaccounts constituting The AUSA Endeavor Variable Annuity Account at
December 31, 1995, and the results of their operations and changes in their
contract owners' equity for the periods indicated therein in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Des Moines, Iowa
February 6, 1996
- 37 -
<PAGE>
THE AUSA ENDEAVOR VARIABLE ANNUITY ACCOUNT
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
MANAGED
MONEY ASSET
MARKET ALLOCATION
TOTAL SUBACCOUNT SUBACCOUNT
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Investments in mutual funds, at current market
value:
Endeavor Series Trust--Money Market
Portfolio
302,444.300 shares @ $1.00 (cost
$302,444).................................. $ 302,444 302,444 --
Endeavor Series Trust--Managed Asset
Allocation Portfolio 58,916.896 shares
@ $16.28 (cost $849,657)................... 959,167 -- 959,167
Endeavor Series Trust--T. Rowe Price
International Stock Portfolio 65,430.721
shares @ $12.19 (cost $775,306)............ 797,600 -- --
Endeavor Series Trust--Quest for Value
Equity Portfolio 53,374.980 shares @ $14.23
(cost $699,422)............................ 759,526 -- --
Endeavor Series Trust--Quest for Value Small
Cap Portfolio 52,866.272 shares @ $12.22
(cost $600,276)............................ 646,026 -- --
Endeavor Series Trust--U.S. Government
Securities Portfolio 20,217.241 shares
@ $11.39 (cost $224,556)................... 230,274 -- --
Endeavor Series Trust--T. Rowe Price Equity
Income Portfolio 28,963.239 shares @ $13.05
(cost $356,632)............................ 377,970 -- --
Endeavor Series Trust--T. Rowe Price Growth
Stock Portfolio 18,704.168 shares @ $13.72
(cost $240,718)............................ 256,621 -- --
WRL Series Fund, Inc.--Growth Portfolio
44,885.227 shares @ $31.660740 (cost
$1,347,228)................................ 1,421,100 -- --
---------- ------- -------
Total investments in mutual funds........... 5,750,728 302,444 959,167
---------- ------- -------
Total Assets................................ $5,750,728 302,444 959,167
========== ======= =======
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Contract terminations payable............... $ 255 46 26
---------- ------- -------
Total Liabilities........................... 255 46 26
Contract Owners' Equity:
Deferred annuity contracts terminable by
owners (Notes 2 and 5)..................... 5,750,473 302,398 959,141
---------- ------- -------
$5,750,728 302,444 959,167
========== ======= =======
</TABLE>
See accompanying Notes to Financial Statements.
- 38 -
<PAGE>
<TABLE>
<CAPTION>
T. ROWE PRICE QUEST QUEST U.S. T. ROWE PRICE T. ROWE PRICE
INTERNATIONAL FOR VALUE FOR VALUE GOVERNMENT EQUITY GROWTH
STOCK EQUITY SMALL CAP SECURITIES INCOME STOCK GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ------------- ---------- ---------- ---------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
-- -- -- -- -- -- --
-- -- -- -- -- -- --
797,600 -- -- -- -- -- --
-- 759,526 -- -- -- -- --
-- -- 646,026 -- -- -- --
-- -- -- 230,274 -- -- --
-- -- -- -- 377,970 -- --
-- -- -- -- -- 256,621 --
-- -- -- -- -- -- 1,421,100
------- ------- ------- ------- ------- ------- ---------
797,600 759,526 646,026 230,274 377,970 256,621 1,421,100
------- ------- ------- ------- ------- ------- ---------
797,600 759,526 646,026 230,274 377,970 256,621 1,421,100
======= ======= ======= ======= ======= ======= =========
13 19 23 4 11 9 104
------- ------- ------- ------- ------- ------- ---------
13 19 23 4 11 9 104
797,587 759,507 646,003 230,270 377,959 256,612 1,420,996
------- ------- ------- ------- ------- ------- ---------
797,600 759,526 646,026 230,274 377,970 256,621 1,421,100
======= ======= ======= ======= ======= ======= =========
</TABLE>
- 39 -
<PAGE>
THE AUSA ENDEAVOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995, EXCEPT AS NOTED
<TABLE>
<CAPTION>
MONEY
MARKET
TOTAL SUBACCOUNT
-------- ----------
<S> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends............................................. $168,612 4,279
Expenses (Note 4):
Administration Fee.................................... 2,205 70
Mortality and expense risk charge..................... 39,312 1,104
-------- -------
Net investment income (loss)....................... 127,095 3,105
-------- -------
NET REALIZED AND UNREALIZED CAPITAL GAIN FROM INVESTMENTS
Net realized capital gain (loss) from sales of
investments:
Proceeds from sales................................... 764,926 149,327
Cost of investments sold.............................. 733,060 149,327
-------- -------
Net realized capital gain (loss) from sales of
investments.............................................. 31,866 --
-------- -------
Net change in unrealized appreciation/depreciation of
investments:
Beginning of the period................................. (72,254) --
End of the period....................................... 354,489 --
-------- -------
Net change in unrealized appreciation/depreciation
of investments..................................... 426,743 --
-------- -------
Net realized and unrealized capital gain from
investments........................................ 458,609 --
-------- -------
INCREASE FROM OPERATIONS.................................. $585,704 3,105
======== =======
</TABLE>
(1) Period from June 16, 1995 (commencement of operations) to December 31, 1995
(2) Period from June 28, 1995 (commencement of operations) to December 31, 1995
(3) Period from April 28, 1995 (commencement of operations) to December 31,
1995
See accompanying Notes to Financial Statements.
- 40 -
<PAGE>
<TABLE>
<CAPTION>
MANAGED T. ROWE PRICE QUEST QUEST U.S. T. ROWE PRICE T. ROWE PRICE
ASSET INTERNATIONAL FOR VALUE FOR VALUE GOVERNMENT EQUITY GROWTH
ALLOCATION STOCK EQUITY SMALL CAP SECURITIES INCOME STOCK GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT/1/ SUBACCOUNT/2/ SUBACCOUNT/3/ SUBACCOUNT
- ---------- ------------- ---------- ---------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
10,741 9,218 1,199 8,097 52 294 37 134,695
658 364 174 251 -- -- -- 688
10,013 6,196 4,009 5,560 710 996 967 9,757
------- ------- ------ ------- ------ ------ ------ -------
70 2,658 (2,984) 2,286 (658) (702) (930) 124,250
------- ------- ------ ------- ------ ------ ------ -------
123,035 104,421 53,908 124,482 50,497 52,973 5,852 100,431
119,969 109,820 41,468 121,345 49,695 50,009 5,042 86,385
------- ------- ------ ------- ------ ------ ------ -------
3,066 (5,399) 12,440 3,137 802 2,964 810 14,046
------- ------- ------ ------- ------ ------ ------ -------
(17,019) (23,084) 1,856 (137) -- -- -- (33,870)
109,510 22,294 60,104 45,750 5,718 21,338 15,903 73,872
------- ------- ------ ------- ------ ------ ------ -------
126,529 45,378 58,248 45,887 5,718 21,338 15,903 107,742
------- ------- ------ ------- ------ ------ ------ -------
129,595 39,979 70,688 49,024 6,520 24,302 16,713 121,788
------- ------- ------ ------- ------ ------ ------ -------
129,665 42,637 67,704 51,310 5,862 23,600 15,783 246,038
======= ======= ====== ======= ====== ====== ====== =======
</TABLE>
- 41 -
<PAGE>
THE AUSA ENDEAVOR VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994, EXCEPT AS NOTED
<TABLE>
<CAPTION>
MANAGED T. ROWE PRICE
MONEY ASSET INTERNATIONAL
MARKET ALLOCATION STOCK
TOTAL SUBACCOUNT SUBACCOUNT SUBACCOUNT
-------------------- ----------------- ---------------- ----------------
1995 1994 1995 1994/1/ 1995 1994 1995 1994
---------- --------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income
(loss)................... $127,095 (11,336) 3,105 424 70 (3,641) 2,658 (4,028)
Net realized capital gain
(loss)................... 31,866 (2,536) -- -- 3,066 (1,317) (5,399) 78
Net change in unrealized
appreciation/depreciation
of investments........... 426,743 (72,009) -- -- 126,529 (17,283) 45,378 (23,321)
---------- --------- -------- ------- ------- ------- ------- -------
Increase (decrease) from
operations............... 585,704 (85,881) 3,105 424 129,665 (22,241) 42,637 (27,271)
---------- --------- -------- ------- ------- ------- ------- -------
CONTRACT TRANSACTIONS
Net contract purchase
payments................. 3,101,963 1,676,100 364,210 75,106 171,807 527,169 414,317 378,543
Transfer payments from
(to) other subaccounts or
general account.......... 359,061 45,761 (120,602) (19,845) 123,270 12,015 (11,421) 12,264
Contract terminations,
withdrawals, and other
deductions............... (116,242) (8,786) -- -- (36,468) (6,310) (27,021) (1,238)
---------- --------- -------- ------- ------- ------- ------- -------
Increase from contract
transactions............. 3,344,782 1,713,075 243,608 55,261 258,609 532,874 375,875 389,569
---------- --------- -------- ------- ------- ------- ------- -------
Net increase in contract
owners' equity........... 3,930,486 1,627,194 246,713 55,685 388,274 510,633 418,512 362,298
---------- --------- -------- ------- ------- ------- ------- -------
CONTRACT OWNERS' EQUITY
Beginning of period....... 1,819,987 192,793 55,685 -- 570,867 60,234 379,075 16,777
---------- --------- -------- ------- ------- ------- ------- -------
End of period............. $5,750,473 1,819,987 302,398 55,685 959,141 570,867 797,587 379,075
========== ========= ======== ======= ======= ======= ======= =======
</TABLE>
(1) Period from March 17, 1994 (commencement of operations) to December 31,
1994
(2) Period from June 16, 1995 (commencement of operations) to December 31, 1995
(3) Period from June 28, 1995 (commencement of operations) to December 31, 1995
(4) Period from April 28, 1995 (commencement of operations) to December 31,
1995
See accompanying Notes to Financial Statements.
- 42 -
<PAGE>
<TABLE>
<CAPTION>
QUEST QUEST U.S. T. ROWE PRICE T. ROWE PRICE
FOR VALUE FOR VALUE GOVERNMENT EQUITY GROWTH
EQUITY SMALL CAP SECURITIES INCOME STOCK GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ---------------- ---------------- ---------- ------------- ------------- ------------------
1995 1994 1995 1994 1995/2/ 1995/3/ 1995/4/ 1995 1994
- ------- ------- -------- ------- ---------- ------------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(2,984) (628) 2,286 (2,828) (658) (702) (930) 124,250 (635)
12,440 18 3,137 (519) 802 2,964 810 14,046 (796)
58,248 1,853 45,887 (166) 5,718 21,338 15,903 107,742 (33,092)
- ------- ------- -------- ------- ------- ------- ------- --------- --------
67,704 1,243 51,310 (3,513) 5,862 23,600 15,783 246,038 (34,523)
- ------- ------- -------- ------- ------- ------- ------- --------- --------
452,866 96,333 337,487 282,278 223,574 269,068 203,721 664,913 316,671
138,439 1,925 (3,930) 4,475 834 86,340 38,125 108,006 34,927
(2,005) -- (23,639) -- -- (1,049) (1,017) (25,043) (1,238)
- ------- ------- -------- ------- ------- ------- ------- --------- --------
589,300 98,258 309,918 286,753 224,408 354,359 240,829 747,876 350,360
- ------- ------- -------- ------- ------- ------- ------- --------- --------
657,004 99,501 361,228 283,240 230,270 377,959 256,612 993,914 315,837
- ------- ------- -------- ------- ------- ------- ------- --------- --------
102,503 3,002 284,775 1,535 -- -- -- 427,082 111,245
- ------- ------- -------- ------- ------- ------- ------- --------- --------
759,507 102,503 646,003 284,775 230,270 377,959 256,612 1,420,996 427,082
======= ======= ======== ======= ======= ======= ======= ========= ========
</TABLE>
- 43 -
<PAGE>
THE AUSA ENDEAVOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--Effective January 1, 1995, AUSA Life Insurance Company, Inc.
assumed the Endeavor Variable Annuity policies issued by International Life
Investors Insurance Company, another indirect, wholly-owned subsidiary of
AEGON USA, Inc. In conjunction with this assumption, the AUSA Endeavor
Variable Annuity Account ("Mutual Fund Account") commenced operations on
January 1, 1995. On that same day, all the assets and liabilities of the ILI
Endeavor Variable Annuity Account were merged into the Mutual Fund Account.
The Mutual Fund Account is a segregated investment account of AUSA Life
Insurance Company, Inc. ("AUSA Life"), an indirect, wholly-owned subsidiary of
AEGON USA, Inc. ("AUSA"), a holding company. AUSA is an indirect, wholly-owned
subsidiary of AEGON nv, a holding company organized under the laws of The
Netherlands.
The T. Rowe Price Equity Income, the U.S. Government Securities, the T. Rowe
Price Growth Stock, and the Money Market subaccounts, as part of the Mutual
Fund Account, commenced operations on June 28, 1995, June 16, 1995, April 28,
1995, and March 17, 1994, respectively. Effective March 24, 1995, the names of
the Global Growth Portfolio and Global Growth Subaccount were changed to T.
Rowe Price International Stock Portfolio and T. Rowe Price International Stock
Subaccount, respectively. The investment objective of the portfolio was
changed from investment on a global basis to investment on an international
basis (i.e. in non-U.S. companies). The investment adviser of the Endeavor
Series Trust is Endeavor Investment Advisers, a general partnership between
Endeavor Management Co. and AUSA Financial Markets Inc., an affiliate of AUSA
Life. The investment advisor for the WRL Series Fund, Inc. is Western Reserve
Life Assurance Co. of Ohio, an affiliate of AUSA Life.
The Mutual Fund Account is registered with the Securities and Exchange
Commission as a Unit Investment Trust pursuant to provisions of the Investment
Company Act of 1940.
Investments--Net purchase payments received by the Mutual Fund Account are
invested in the portfolios of the Endeavor Series Trust, and the Growth
Portfolio of the WRL Series Fund, Inc. (collectively the "Series Funds"), as
selected by the contract owner. Investments are stated at the closing net
asset values per share on December 31, 1995.
Realized capital gains and losses from sale of shares in the Series Funds
are determined on the first-in, first-out basis. Investment transactions are
accounted for on the trade date (date the order to buy or sell is executed)
and dividend income is recorded on the ex-dividend date. Unrealized gains or
losses from investments in the Series Funds are credited or charged to
contract owners' equity.
Dividend Income--Dividends received from the Series Funds investments are
reinvested to purchase additional mutual fund shares.
- 44 -
<PAGE>
2. CONTRACT OWNERS' EQUITY
A summary of deferred annuity contracts terminable by owners at December 31,
1995 follows:
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION TOTAL
SUBACCOUNT UNITS OWNED UNIT VALUE CONTRACT VALUE
---------- ------------ ------------ --------------
<S> <C> <C> <C>
Money Market..................... 271,034.756 $ 1.115718 $ 302,398
Managed Asset Allocation......... 607,869.454 1.577873 959,141
T. Rowe Price International
Stock........................... 681,093.799 1.171039 797,587
Quest for Value Equity........... 547,233.586 1.387903 759,507
Quest for Value Small Cap........ 535,283.029 1.206843 646,003
U.S. Government Securities....... 204,813.593 1.124292 230,270
T. Rowe Price Equity Income...... 293,619.530 1.287240 377,959
T. Rowe Price Growth Stock....... 189,613.999 1.353339 256,612
Growth........................... 97,436.321 14.583843 1,420,996
----------
$5,750,473
==========
</TABLE>
A summary of changes in contract owners' account units follows:
<TABLE>
<CAPTION>
T. ROWE T. ROWE T. ROWE
MANAGED PRICE QUEST QUEST U.S. PRICE PRICE
MONEY ASSET INTERNATIONAL FOR VALUE FOR VALUE GOVERNMENT EQUITY GROWTH
MARKET ALLOCATION STOCK EQUITY SMALL CAP SECURITIES INCOME STOCK GROWTH
SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT.
-------- ---------- ------------- --------- --------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Units outstanding at
1/1/94................. -- 43,225 14,507 2,948 1,386 -- -- -- 10,009
Units purchased......... 70,621 390,851 328,628 93,234 259,793 -- -- -- 29,222
Units redeemed and
transferred............ (18,697) 4,490 9,835 1,850 4,237 -- -- -- 3,260
-------- ------- ------- ------- ------- ------- ------- ------- ------
Units outstanding at
12/31/94............... 51,924 438,566 352,970 98,032 265,416 -- -- -- 42,491
Units purchased......... 329,022 110,905 362,256 344,140 292,146 204,064 223,477 160,519 48,457
Units redeemed and
transferred............ (109,911) 58,398 (34,132) 105,062 (22,279) 750 70,143 29,095 6,488
-------- ------- ------- ------- ------- ------- ------- ------- ------
Units outstanding
12/31/95............... 271,035 607,869 681,094 547,234 535,283 204,814 293,620 189,614 97,436
======== ======= ======= ======= ======= ======= ======= ======= ======
</TABLE>
3. TAXES
Operations of the Mutual Fund Account form a part of AUSA Life, which is
taxed as a life insurance company under Subchapter L of the Internal Revenue
Code of 1986, as amended (the Code). The operations of the Mutual Fund Account
are accounted for separately from other operations of AUSA Life for purposes
of federal income taxation. The Mutual Fund Account is not separately taxable
as a regulated investment company under Subchapter M of the Code and is not
otherwise taxable as an entity separate from AUSA Life. Under existing federal
income tax laws, the income of the Mutual Fund Account, to the extent applied
to increase reserves under the variable annuity policies, is not taxable to
AUSA Life.
4. ADMINISTRATIVE, MORTALITY AND EXPENSE RISK CHARGE
Administrative charges include an annual charge of the lesser of 2% of the
policy value or $35 per contract which will commence on the first policy
anniversary of each contract owner's account. For policies issued on or after
May 1, 1995, the fee 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. Charges for administrative fees to the variable annuity contracts
are an expense of the Mutual Fund Account.
AUSA Life deducts a daily charge equal to an annual rate of 1.25% of the
value of the contract owners' account as a charge for assuming certain
mortality and expense risks. AUSA Life also deducts a daily charge equal to an
annual rate of .15% of the contract owners' account for administrative
expenses.
- 45 -
<PAGE>
5. NET ASSETS
At December 31, 1995 contract owners' equity was comprised of:
<TABLE>
<CAPTION>
T. ROWE QUEST QUEST T. ROWE T. ROWE
MANAGED PRICE FOR FOR U.S. PRICE PRICE
MONEY ASSET INT'L VALUE VALUE GOV'T EQUITY GROWTH
MARKET ALLOCATION STOCK EQUITY SMALL CAP SECURITIES INCOME STOCK GROWTH
TOTAL SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT.
---------- -------- ---------- -------- -------- --------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit transactions,
accumulated net
investment income
and realized
capital gains...... $5,395,984 302,398 849,631 775,293 699,403 600,253 224,552 356,621 240,709 1,347,124
Adjustment for ap-
preciation to mar-
ket value.......... 354,489 -- 109,510 22,294 60,104 45,750 5,718 21,338 15,903 73,872
---------- ------- ------- ------- ------- ------- ------- ------- ------- ---------
Total Contract Own-
ers' Equity........ $5,750,473 302,398 959,141 797,587 759,507 646,003 230,270 377,959 256,612 1,420,996
========== ======= ======= ======= ======= ======= ======= ======= ======= =========
</TABLE>
6. PURCHASES AND SALES OF INVESTMENT SECURITIES
The aggregate cost of purchases and proceeds from sales of investments were
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 OR
COMMENCEMENT OF OPERATIONS TO DECEMBER 31
-----------------------------------------
1995 1994
-------------------- --------------------
PURCHASES SALES PURCHASES SALES
-------------------- --------------------
<S> <C> <C> <C> <C>
Endeavor Series Trust
Money Market Portfolio........ $ 396,123 149,327 $ 85,906 30,258
Managed Asset Allocation Port-
folio........................ 380,622 123,035 583,629 53,308
T. Rowe Price International
Stock Portfolio.............. 482,406 104,421 403,512 17,370
Quest for Value Equity Portfo-
lio.......................... 639,975 53,908 98,386 489
Quest for Value Small Cap
Portfolio.................... 436,139 124,482 293,269 8,768
U.S. Government Securities
Portfolio.................... 274,251 50,497 -- --
T. Rowe Price Equity Income
Portfolio.................... 406,641 52,973 -- --
T. Rowe Price Growth Stock
Portfolio.................... 245,760 5,852 -- --
WRL Series Fund, Inc.
Growth Portfolio.............. 970,989 100,431 359,303 8,831
----------- -------- ----------- --------
$ 4,232,906 764,926 $1,824,005 119,024
=========== ======== =========== ========
</TABLE>
- 46 -
<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 TCW Money Market Portfolio
(formerly, the Money Market Portfolio), the TCW Managed Asset Allocation
Portfolio (formerly, the Managed Asset Allocation Portfolio), the T. Rowe
Price International Stock Portfolio (formerly, the Global Growth Portfolio),
the Value Equity Portfolio (formerly, the Quest for Value Equity Portfolio),
the Dreyfus Small Cap Value Portfolio (formerly, the Value Small Cap Portfolio
and prior to that the Quest for Value Small Cap Portfolio), the Dreyfus U.S.
Government Securities Portfolio (formerly, the U.S. Government Securities
Portfolio), the T. Rowe Price Equity Income Portfolio, the T. Rowe Price
Growth Stock Portfolio and the Opportunity Value Portfolio of Endeavor Series
Trust (the "Fund"), dated November 4, 1996, which may be obtained by writing
the Fund at 2101 East Coast Highway, Suite 300, Corona del Mar, California
92625 or by telephoning (714) 760-0505. 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............................................ 6
Repurchase Agreements.................................................... 8
Forward Commitments...................................................... 9
Securities Loans......................................................... 9
Lower Rated Bonds........................................................ 9
Interest Rate Transactions............................................... 10
Dollar Roll Transactions................................................. 11
Portfolio Turnover....................................................... 11
Investment Restrictions.................................................... 12
Other Policies........................................................... 13
Performance Information.................................................... 15
Total Return............................................................. 15
Yield.................................................................... 16
Non-Standardized Performance............................................. 17
Portfolio Transactions..................................................... 17
Management of the Fund..................................................... 20
Trustees and Officers.................................................... 20
The Manager.............................................................. 23
The Advisers............................................................. 24
Redemption of Shares....................................................... 26
Net Asset Value............................................................ 26
Taxes...................................................................... 27
Federal Income Taxes..................................................... 27
Organization and Capitalization of the Fund................................ 28
Legal Matters.............................................................. 30
Custodian.................................................................. 30
Financial Statements....................................................... 30
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 November 4, 1996.
- 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 TCW Money Market
Portfolio and the TCW Managed Asset Allocation Portfolio, Rowe Price-Fleming
International, Inc. as investment adviser for the T. Rowe Price International
Stock Portfolio, OpCap Advisors (formerly, Quest for Value Advisors) as
investment adviser for the Value Equity Portfolio and Opportunity Value
Portfolio, The Dreyfus Corporation as investment adviser for the Dreyfus U.S.
Government Securities Portfolio and Dreyfus Small Cap Value Portfolio and T.
Rowe Price Associates, Inc. as investment adviser for the T. Rowe Price Equity
Income Portfolio and T. Rowe Price Growth Stock Portfolio.
OPTIONS AND FUTURES STRATEGIES (All Portfolios except TCW 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 TCW Managed Asset Allocation Portfolio does not
presently intend to utilize options or futures contracts and related options
but may do so in the future. The Advisers to the Dreyfus Small Cap Value
Portfolio and the Opportunity Value Portfolio do not currently intend to write
covered put and call options or engage in transactions in futures contracts
and related options, but may do so in the future. Expenses and losses incurred
as a result of such hedging strategies will reduce a Portfolio's current
return.
The ability of a Portfolio to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to stock indices and
U.S. government securities are relatively new and still developing. It is
impossible to predict the amount of trading interest 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 purchase put
options to protect its portfolio holdings in an underlying security against a
decline in market value. This protection is provided during the life of the
put option since the Portfolio, as holder of the put, is able to sell the
underlying security at the exercise price regardless of any decline in the
underlying security's market price. For the purchase of a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs. By using put options in this manner, any profit which the Portfolio
might otherwise have realized on the underlying security will be reduced by
the premium paid for the put option and by transaction costs.
A Portfolio may also purchase a call option to hedge against an increase in
price of a security that it intends to purchase. This protection is provided
during the life of the call option since the Portfolio, as holder of the call,
is able to buy the underlying security at the exercise price regardless of any
increase in the underlying security's market price. For the purchase of a call
option to be profitable, the market price of the underlying security must rise
sufficiently above the exercise price to cover the premium and transaction
costs. By using call options in this manner, any profit which the Portfolio
might have realized had it bought the underlying security at the time it
purchased the call option will be reduced by the premium paid for the call
option and by transaction costs.
No Portfolio intends to purchase put or call options if, as a result of any
such transaction, the aggregate cost of options held by the Portfolio at the
time of such transaction would exceed 5% of its total assets.
Purchase and Sale of Options and Futures on Stock Indices. A Portfolio may
purchase and sell options on stock indices and stock index futures contracts
either as a hedge against movements in the equity markets or for other
investment purposes.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the
closing level of that stock index is greater than, in the case of a call, or
less than, in the case of a put, the exercise price of the option. This amount
of cash is equal to such difference between the closing price of the index and
the exercise price of the option expressed in dollars times a specified
- 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 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.
- 4 -
<PAGE>
A Portfolio will enter into futures contracts which are traded on national
or foreign futures exchanges, and are standardized as to maturity date and the
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission ("CFTC"). Futures are traded in London at the London
International Financial Futures Exchange, in Paris, at the MATIF, and in Tokyo
at the Tokyo Stock Exchange.
Options on Futures Contracts. A Portfolio may purchase and write call and
put options on stock index and interest rate futures contracts. A Portfolio
may use such options on futures contracts in connection with its hedging
strategies in lieu of purchasing and writing options directly on the
underlying securities or stock indices or purchasing or selling the underlying
futures. For example, a Portfolio may purchase put options or write call
options on stock index futures or interest rate futures, rather than selling
futures contracts, in anticipation of a decline in general stock market prices
or rise in interest rates, respectively, or purchase call options or write put
options on stock index or interest rate futures, rather than purchasing such
futures, to hedge against possible increases in the price of equity securities
or debt securities, respectively, which the Portfolio intends to purchase.
In connection with transactions in stock index options, stock index futures,
interest rate futures and related options on such futures, a Portfolio will be
required to deposit as "initial margin" an amount of cash and short-term U.S.
government securities. The current initial margin requirement per contract is
approximately 2% of the contract amount. Thereafter, subsequent payments
(referred to as "variation margin") are made to and from the broker to reflect
changes in the value of the futures contract. Brokers may establish deposit
requirements higher than exchange minimums.
Limitations. A Portfolio will not purchase or sell futures contracts or
options on futures contracts or stock indices for non-hedging purposes if, as
a result, the sum of the initial margin deposits on its existing futures
contracts and related options positions and premiums paid for options on
futures contracts or stock indices would exceed 5% of the net assets of the
Portfolio 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.
- 5 -
<PAGE>
FOREIGN CURRENCY TRANSACTIONS (Dreyfus U.S. Government Securities, T. Rowe
Price Equity Income, T. Rowe Price Growth Stock, T. Rowe Price International
Stock and Opportunity Value Portfolios)
Foreign Currency Exchange Transactions. The Dreyfus U.S. Government
Securities, T. Rowe Price Equity Income, T. Rowe Price Growth Stock, T. Rowe
Price International Stock and Opportunity Value Portfolios may engage in
foreign currency exchange transactions to protect against uncertainty in the
level of future exchange rates. The Adviser to a Portfolio may engage in
foreign currency exchange transactions in connection with the purchase and
sale of portfolio securities ("transaction hedging"), and to protect the value
of specific portfolio positions ("position hedging").
A Portfolio may engage in "transaction hedging" to protect against a change
in the foreign currency exchange rate between the date on which the Portfolio
contracts to purchase or sell the security and the settlement date, or to
"lock in" the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. For that purpose, a Portfolio may purchase or sell a foreign
currency on a spot (or cash) basis at the prevailing spot rate in connection
with the settlement of transactions in portfolio securities denominated in
that foreign currency.
If conditions warrant, a Portfolio may also enter into contracts to purchase
or sell foreign currencies at a future date ("forward contracts") and purchase
and sell foreign currency futures contracts as a hedge against changes in
foreign currency exchange rates between the trade and settlement dates on
particular transactions and not for speculation. A foreign currency forward
contract is a negotiated agreement to exchange currency at a future time at a
rate or rates that may be higher or lower than the spot rate. Foreign currency
futures contracts are standardized exchange-traded contracts and have margin
requirements.
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
- 6 -
<PAGE>
foreign currency the Portfolio is obligated to deliver and if a decision is
made to sell the security or securities and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of
the foreign currency received upon the sale of the portfolio security or
securities if the market value of such security or securities exceeds the
amount of foreign currency the Portfolio is obligated to deliver.
Hedging transactions involve costs and may result in losses. A Portfolio may
write covered call options on foreign currencies to offset some of the costs
of hedging those currencies. A Portfolio will engage in over-the-counter
transactions only when 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
- 7 -
<PAGE>
to purchase or sell foreign currency futures contracts only on exchanges or
boards of trade where there appears to be an active secondary market, there
can be no assurance that a secondary market on an exchange or board of trade
will exist for any particular contract or at any particular time. In such
event, it may not be possible to close a futures position and, in the event of
adverse price movements, a Portfolio would continue to be required to make
daily cash payments of variation margin.
Foreign Currency Options. Options on foreign currencies operate similarly to
options on securities, and are traded primarily in the over-the-counter
market, although options on foreign currencies have recently been listed on
several exchanges. Such options will be purchased or written only when a
Portfolio's Adviser believes that a liquid secondary market exists for such
options. There can be no assurance that a liquid secondary market will exist
for a particular option at any specific time. Options on foreign currencies
are affected by all of those factors which influence foreign exchange rates
and investments generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available 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, T. Rowe Price International Stock, Dreyfus Small Cap Value
and Opportunity Value 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.
- 8 -
<PAGE>
FORWARD COMMITMENTS (All Portfolios)
Each of the Portfolios may enter into forward commitments to purchase
securities. An amount of cash or short-term U.S. government securities equal
to the Portfolio's commitment will be deposited in a segregated account at the
Fund's custodian bank to secure the Portfolio's obligation. Although a
Portfolio will generally enter into forward commitments to purchase securities
with the intention of actually acquiring the securities for its portfolio (or
for delivery pursuant to options contracts it has entered into), the Portfolio
may dispose of a security prior to settlement if its Adviser deems it
advisable to do so. The Portfolio may realize short-term gains or losses in
connection with such sales.
SECURITIES LOANS (All Portfolios)
Each of the Portfolios may pay reasonable finders', administrative and
custodial fees in connection with loans of its portfolio securities. Although
voting rights or the right to consent accompanying loaned securities pass to
the borrower, a Portfolio retains the right to call the loan at any time on
reasonable notice, and will do so in order that the securities may be voted by
the Portfolio with respect to matters materially affecting the investment. A
Portfolio may also call a loan in order to sell the securities involved. Loans
of portfolio securities will only be made to borrowers considered by a
Portfolio's Adviser to be creditworthy under guidelines adopted by the
Trustees of the Fund.
LOWER RATED BONDS (Value Equity, Dreyfus U.S. Government Securities,
Opportunity Value and T. Rowe Price Equity Income Portfolios)
The Value Equity Portfolio and Opportunity Value Portfolio may invest up to
5% of their assets, the T. Rowe Price Equity Income Portfolio may invest up to
10% of its assets and the Dreyfus 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 Service, a
division of McGraw-Hill Companies, Inc. ("Standard & Poor's") (commonly known
as "junk bonds"). Securities rated less than Baa by Moody's or BBB by Standard
& Poor's are classified as non-investment grade securities and are considered
speculative by those rating agencies. It is each Portfolio Adviser's policy
not to rely exclusively on ratings issued by credit rating agencies but to
supplement such ratings with the Adviser's own independent and ongoing review
of credit quality. Junk bonds may be issued as a consequence of corporate
restructurings, such as leveraged buyouts, mergers, acquisitions, debt
recapitalizations, or similar events or by smaller or highly leveraged
companies. When economic conditions appear to be deteriorating, junk bonds may
decline in market value due to investors' heightened concern over credit
quality, regardless of prevailing interest rates. Although the growth of the
high yield securities market in the 1980s had paralleled a long economic
expansion, 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
- 9 -
<PAGE>
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 (Dreyfus U.S. Government Securities Portfolio)
Among the strategic transactions into which the Dreyfus U.S. Government
Securities Portfolio may enter are interest rate swaps and the purchase or
sale of related caps and floors. The Portfolio expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. The Portfolio intends to use these transactions as hedges and not
as speculative investments and will not sell interest rate caps or floors
where it does not own securities or other instruments providing the income
stream the Portfolio may be obligated to pay. Interest rate swaps involve the
exchange by the Portfolio with another party of their respective commitments
to pay or receive interest, e.g., an exchange of floating rate payments for
fixed rate payments with respect to a notional amount of principal. A currency
swap is an agreement to exchange cash flows on a notional amount of two or
more currencies based on the relative value differential among them and an
index swap is an agreement to swap cash flows on a notional amount based on
changes in the values of the reference indices. The purchase of a cap entitles
the purchaser, to the extent that a specific index exceeds a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such cap. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount.
The Portfolio will usually enter into swaps on a net basis, i.e., the two
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.
- 10 -
<PAGE>
DOLLAR ROLL TRANSACTIONS (Dreyfus U.S. Government Securities Portfolio)
The Dreyfus 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 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 Dreyfus U.S. Government Securities Portfolio,
Dreyfus Small Cap Value and the TCW Money Market Portfolio anticipate that
portfolio turnover will generally not exceed 100% per year. The Adviser to the
Dreyfus U.S. Government Securities Portfolio anticipates that portfolio
turnover will generally not exceed 100% per year, exclusive of dollar roll
transactions. The Adviser to the Dreyfus Small Cap Value Portfolio anticipates
that the Portfolio's portfolio turnover rate will generally not exceed 175%.
With respect to the TCW 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. Higher portfolio turnover rates usually
generate additional brokerage commissions and expenses.
- 11 -
<PAGE>
For the fiscal year ended December 31, 1995, the portfolio turnover rate for
the T. Rowe Price International Stock Portfolio was 111% as compared with
turnover rate of 88% for the fiscal year ended December 31, 1994. The increase
in portfolio turnover rate was in connection with the change of the
Portfolio's investment objective from investment on a global basis to
investment on an international basis (i.e., in non-U.S. companies).
For the fiscal year ended December 31, 1995, the portfolio turnover rate for
the Dreyfus U.S. Government Securities Portfolio was 161% as compared with a
turnover rate of 100% for the period ended December 31, 1994. The increase in
portfolio turnover rate was due to an increased number of market-related
investment opportunities for the Portfolio.
INVESTMENT RESTRICTIONS
Except for restriction numbers 2, 3, 4, 11 and 12 with respect to the T.
Rowe Price Equity Income, T. Rowe Price Growth Stock and Opportunity Value
Portfolios and restriction number 11 with respect to the T. Rowe Price
International Stock and Dreyfus Small Cap Value Portfolios (which restrictions
are not fundamental policies), the following investment restrictions (numbers
1 through 12) are fundamental policies, which may not be changed without the
approval of a majority of the outstanding shares of the Portfolio, and apply
to each of the Portfolios except as otherwise indicated. As provided in the
1940 Act, a vote of a majority of the outstanding shares necessary to amend a
fundamental policy means the affirmative vote of the lesser of (1) 67% or more
of the shares present at a meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy, or
(2) more than 50% of the outstanding shares of the Portfolio.
A Portfolio may not:
1. Borrow money 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 Dreyfus U.S. Government Securities Portfolio 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; 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; and except that the Opportunity Value Portfolio may
borrow money from banks or through reverse repurchase agreements for temporary
or emergency purposes in amounts up to 10% of its total assets.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure borrowings permitted by restriction 1 above. Collateral arrangements
with respect to margin for futures contracts and options are not deemed to be
pledges or other encumbrances for purposes of this restriction.
3. Purchase securities on margin, except a Portfolio may obtain such short-
term credits as may be necessary for the clearance of securities transactions
and may make margin deposits in connection with transactions in options,
futures contracts and options on such contracts.
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<PAGE>
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 TCW 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 TCW Money Market Portfolio obligations of
domestic branches of United States banks.
11. Invest more than 10% (15% with respect to the T. Rowe Price Equity
Income Portfolio, the T. Rowe Price Growth Stock Portfolio, the T. Rowe Price
International Stock Portfolio, the Dreyfus Small Cap Value Portfolio and the
Opportunity Value 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 TCW 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
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<PAGE>
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 TCW 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.
Each of the Value Equity and Dreyfus Small Cap Value Portfolios may not
invest more than 5% of the value of its total assets in warrants not listed on
either the New York or American Stock Exchange. Each of the T. Rowe Price
Equity Income, T. Rowe Price Growth Stock, T. Rowe Price International Stock
and Opportunity Value 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.
- 14 -
<PAGE>
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 TCW Managed
Asset Allocation, Value Equity, Dreyfus Small Cap Value, Dreyfus U.S.
Government Securities, T. Rowe Price Equity Income and T. Rowe Price Growth
Stock Portfolios for the specific periods.
With respect to the T. Rowe Price International Stock Portfolio which
commenced operation April 8, 1991, effective January 1, 1995, the Portfolio's
Adviser was changed to Rowe Price-Fleming International, Inc. ("Price-
Fleming"). Prior to March 24, 1995, the Portfolio was known as the Global
Growth Portfolio. Subsequent to such time, the Portfolio's investment
objective was changed from investments in small capitalization companies on a
global basis to investments in a broad range of established companies on an
international basis (i.e., non-U.S. companies). Because of the change of the
Portfolio's Adviser, performance information for the period from inception to
December 31, 1995 is not presented. Such information is not reflective of
Price-Fleming's ability to manage the Portfolio. Information with respect to
the Portfolio's per share income and capital changes from inception through
December 31, 1995 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 available upon written request to the Fund.
<TABLE>
<CAPTION>
FOR PERIOD
FOR THE ONE FOR THE FIVE FROM
YEAR YEAR INCEPTION(1)
PERIOD ENDED PERIOD ENDED TO JUNE 30,
JUNE 30, 1996 JUNE 30, 1996 1996
-------------- -------------- --------------
<S> <C> <C> <C>
TCW Managed Asset Allocation(2).. 16.10%/16.10%* 12.67%/12.39%* 12.27%/11.96%*
T. Rowe Price International Stock 17.55%/17.55%* N/A 17.32%/17.32%*
Quest for Value Equity(3)........ 24.01%/24.01%* N/A 16.67%/16.52%*
Quest for Value Small Cap(4)..... 16.91%/16.91%* N/A 10.29%/10.18%*
T. Rowe Price Equity Income(5)... 25.28%/25.28%* N/A 25.71%/25.71%*
T. Rowe Price Growth Stock(5).... 21.29%/21.29%* N/A 30.11%/30.11%*
Dreyfus U.S. Government
Securities(6)................... 2.88%/ 2.88%* N/A 5.57%/ 5.37%*
</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) With respect to T. Rowe Price International Stock Portfolio, period
commenced on January 1, 1995.
(2) The Portfolio commenced operations on April 8, 1991.
(3) The Portfolio commenced operations on May 27, 1993.
(4) The Portfolio commenced operations on May 4, 1993.
(5) The Portfolio commenced operations on January 3, 1995.
(6) The Portfolio commenced operations on May 13, 1994.
- 15 -
<PAGE>
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 TCW Money Market Portfolio's and
the Dreyfus 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 TCW 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 TCW 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 Dreyfus 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:
YIELD=2[a-b+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
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.
- 16 -
<PAGE>
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 the opinion that, because this material must be analyzed and reviewed,
its receipt and use does not tend to reduce expenses but may benefit the
Portfolio by supplementing the Adviser's research. In seeking the most
favorable price and execution available, an Adviser may, if permitted by law,
consider sales of the Contracts as described in the Prospectus a factor in the
selection of broker-dealers.
The Board of Trustees of the Fund has authorized the Manager and the
Advisers to enter into arrangements with brokers who execute brokerage
transactions for the Portfolios whereby a portion of the commissions earned by
such brokers will be shared with a broker-dealer affiliate of the Manager. The
affiliated broker will act as an "introducing broker" in the transaction.
Subject
to the requirements of applicable law including seeking best price and
execution of orders,
- 17 -
<PAGE>
commissions paid to executing brokers will not exceed ordinary and customary
brokerage commissions.
The Board of Trustees has determined that the Fund's brokerage commissions
should be utilized for the Fund's benefit to the extent possible. After
reviewing various alternatives, the Board concluded that commissions received
by the broker-dealer affiliate of the Manager can be used to promote the
distribution of the Fund's shares including payments to broker-dealers who
sell the Contracts, the costs of training and educating such broker-dealers
with respect to the Contracts and other bona-fide distribution costs payable
to unaffiliated persons. Other than incidental costs related to establishing
the broker-dealer affiliate as an "introducing broker", no portion of the
commissions received by the broker-dealer affiliate of the Manager will be
retained for its or any affiliate's benefit. On a quarterly basis, the Manager
will report to the Board of Trustees the aggregate commissions received by its
broker-dealer affiliate and the distribution expenses paid from such
commissions. The Board of Trustees will periodically review the extent to
which the foregoing arrangement reduces distribution expenses currently being
incurred by the Manager or its affiliates on behalf of the Fund. The Board of
Trustees may determine from time to time other appropriate uses for the Fund
from the commissions it pays to executing brokers.
The Manager will not implement this program until any required exemptive or
no-action relief is obtained from the Securities and Exchange Commission.
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 Value Equity and Opportunity Value 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, 1993, the TCW Money Market Portfolio did not
pay any brokerage commissions, while the TCW Managed Asset Allocation
Portfolio and T. Rowe Price International Stock Portfolio (formerly, the
Global Growth Portfolio) paid $84,401 and $199,921,
- 18 -
<PAGE>
respectively in brokerage commissions. For the fiscal period ended December
31, 1993, the Value Equity Portfolio and Dreyfus Small Cap Value Portfolio
paid $11,051 and $23,537, respectively in brokerage commissions, of which
$7,758 (70%) with respect to the Value Equity Portfolio and $17,401 (74%) with
respect to the Dreyfus Small Cap Value Portfolio was paid to Opco. For the
year ended December 31, 1994, the TCW Money Market Portfolio did not pay any
brokerage commissions, while the TCW 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 Value Equity Portfolio and Dreyfus Small Cap Value Portfolio paid $58,472
and $100,262, respectively, in brokerage commissions, of which $32,796
(78.29%) with respect to the Value Equity Portfolio and $58,028 (72.78%) with
respect to the Dreyfus Small Cap Value Portfolio was paid to Opco. For the
fiscal period ended December 31, 1994, the Dreyfus U.S. Government Securities
Portfolio paid no brokerage commissions. For the year ended December 31, 1995,
the TCW Money Market Portfolio and the Dreyfus U.S. Government Securities
Portfolio did not pay any brokerage commissions, while the TCW Managed Asset
Allocation Portfolio paid $187,103 in brokerage commissions. For the year
ended December 31, 1995, the T. Rowe Price International Stock Portfolio, the
Value Equity Portfolio and the Dreyfus Small Cap Value Portfolio paid
$395,753, $57,800, and $101,885, respectively, in brokerage commissions of
which $33,338 (8.42%), $15,101 (3.82%) and $673 (.17%) with respect to the T.
Rowe Price International Stock Portfolio was paid to Robert Fleming Holdings
Limited and Jardine Fleming Group Limited, Ord Minnett and OpCo, respectively,
$29,271 (50.64%) with respect to the Value Equity Portfolio and $36,216
(35.55%) with respect to the Dreyfus Small Cap Value Portfolio was paid to
OpCo. For the fiscal period ended December 31, 1995, the T. Rowe Price Equity
Income Portfolio and the T. Rowe Price Growth Stock Portfolio paid $18,059 and
$39,447, respectively in brokerage commissions of which $10 (0.06%) with
respect to the T. Rowe Price Equity Income Portfolio was paid to OpCo and $536
(1.36%), $507 (1.29%) and $23 (0.06%) with respect to the T. Rowe Price Growth
Stock Portfolio was paid to Boston Safe Deposit and Trust Company, Jardine
Fleming Group Limited and OpCo, respectively.
- 19 -
<PAGE>
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust, their ages and their
principal occupations during the past five years are set forth below. Unless
otherwise indicated, the business address of each is 2101 East Coast Highway,
Suite 300, Corona del Mar, California 92625.
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION(S)
POSITION(S) HELD DURING PAST
NAME, AGE AND ADDRESS WITH REGISTRANT 5 YEARS
--------------------- ---------------- -------------
<S> <C> <C>
James R. McInnis (48) President President of Endeavor Group (broker-
dealer) since June, 1991; President
of McGuinness & Associates
(insurance marketing) from March,
1983 to June, 1991.
*Vincent J. McGuinness (61) Trustee Chairman, Chief Executive Officer,
and Director of McGuinness &
Associates, Endeavor Group, VJM
Corporation (oil and gas),
McGuinness Group (insurance
marketing) and until January, 1994,
Swift Energy Marketing Company and
since September, 1988 Endeavor
Management Co.; President of VJM
Corporation, Endeavor Management Co.
and since February, 1996 McGuinness
& Associates.
Timothy A. Devine (61) Trustee Prior to September, 1993, President
2200 S. Fairview and Chief Executive Officer, Devine
Santa Ana, Properties, Inc. Since September,
California 92704 1993, Vice President, Plant Control,
Inc. (landscape contracting and
maintenance).
Thomas J. Hawekotte (61) Trustee President, Thomas J. Hawekotte, P.C.
1200 Lake Shore Drive (law practice).
Chicago, Illinois 60610
Steven L. Klosterman (44) Trustee Since July, 1995, President of
462 Stevens Avenue Klosterman Capital Corporation
Suite 206 (investment adviser); Investment
Solana Beach, Counselor, Robert J. Metcalf &
California 92075 Associates, Inc. (investment
adviser) from August, 1990 to June,
1995.
*Halbert D. Lindquist (49) 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).
</TABLE>
- 20 -
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION(S)
POSITION(S) HELD DURING PAST
NAME, AGE AND ADDRESS WITH REGISTRANT 5 YEARS
--------------------- ---------------- -------------
<S> <C> <C>
R. Daniel Olmstead, Jr. (64) Trustee Rancher since December, 1989.
2885 N. River Road
St. Anthony, Idaho 83445
Norman Ridley (50) Vice President Since 1985, Senior Vice President,
865 S. Figueroa Street TCW Asset Management Company and
Suite 1800 Trust Company of the West.
Los Angeles, California
90017
Ronald E. Robison (57) 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 (50) 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.
Eileen Rominger (41) 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; Portfolio Manager,
Oppenheimer Quest Value Fund, Inc.,
OCC Accumulation Trust, Enterprise
Accumulation Trust and Penn Series
Fund, open-end investment companies.
**Vincent J. McGuinness, Jr. (31) Chief Financial Since September, 1996, Chief
Officer (Treasurer) Financial Officer and since May,
1996, Director Endeavor Management
Co.; since August, 1996, Chief
Financial Officer of VJM
Corporation; since May, 1996,
Executive Vice President and
Director of Sales, Western Division
of Endeavor Group; Chief Financial
Officer of McGuinness & Associates;
since March, 1996, Director of
McGuinness Group. From July, 1993 to
August, 1995, Rocky Mountain
Regional Marketing Director for
Endeavor Group. MBA graduate student
from September, 1991 to May, 1993.
</TABLE>
- 21 -
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION(S)
POSITION(S) HELD DURING PAST
NAME, AGE AND ADDRESS WITH REGISTRANT 5 YEARS
--------------------- ---------------- -------------
<S> <C> <C>
Pamela A. Shelton (47) Secretary Since October, 1993, Executive
Secretary to Chairman of the Board
and Chief Executive Officer of,
and since April, 1996, Secretary
of McGuinness & Associates,
Endeavor Group, VJM Corporation,
McGuinness Group and Endeavor
Management Co.; from July, 1992 to
October, 1993, Administrative
Secretary, Mayor and City Council,
City of Languna Nigual, California
and from November, 1986 to July,
1992, Executive Secretary to
Chairman of the Board and Chief
Executive Officer of, and from
October, 1990 to July, 1992,
Secretary of McGuinness &
Associates, Endeavor Group, VJM
Corporation, McGuinness Group,
Endeavor Management Co. and Swift
Energy Marketing Company.
</TABLE>
- --------
* An "interested person" of the Fund as defined in the 1940 Act.
** Vincent J. McGuinness, Jr. is the son of Vincent J. McGuinness.
No remuneration will be paid by the Fund to any Trustee or officer of the
Fund who is affiliated with the Manager or the Advisers. Each Trustee who is
not an affiliated person of the 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, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM FUND
AGGREGATE AND FUND
NAME OF COMPENSATION COMPLEX
PERSON FROM FUND PAID TO TRUSTEES
------- ------------ ----------------
<S> <C> <C>
Vincent J. McGuinness............................. $ -- $ --
Timothy A. Devine................................. 4,500 4,500
Thomas J. Hawekotte............................... 4,500 4,500
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
- 22 -
<PAGE>
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 TCW Money Market, TCW Managed Asset Allocation and T. Rowe Price
International Stock 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 Value Equity and Dreyfus Small Cap Value 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 Value
Equity and Dreyfus Small Cap Value Portfolios, on April 19, 1993. With respect
to the Dreyfus 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 Dreyfus 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.
With respect to the Opportunity Value Portfolio, the Management Agreement was
approved by the Trustees of the Fund (including all of the Trustees who are
not "interested persons" of the Manager) on August 13, 1996 and by PFL Life
Insurance Company, the sole shareholder of the Opportunity Value Portfolio, on
August 26, 1996. See "Organization and Capitalization of the Fund." The
Management Agreement will continue in force for two years from its date,
November 23, 1992 with respect to the TCW Money Market, TCW Managed Asset
Allocation and T. Rowe Price International Stock Portfolios, April 19, 1993
with respect to the Value Equity and Dreyfus Small Cap Value Portfolios, March
25, 1994 with respect to the Dreyfus 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 August 26, 1996 with respect to the
Opportunity Value Portfolio, and from year to year thereafter, but only so
long as its continuation as to each Portfolio is specifically approved at
least annually (i) by the Trustees or by the vote of a majority of the
outstanding voting securities (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.
- 23 -
<PAGE>
THE ADVISERS
The Investment Advisory Agreements between the Manager and TCW Funds
Management, Inc. were approved by the Trustees of the Fund (including all the
Trustees who are not "interested persons" of the Manager or of the Adviser) on
July 20, 1992, and by the shareholders of the Fund on November 23, 1992. The
Investment Advisory Agreements between the Manager and OpCap Advisors
(formerly known as 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 with respect to the Value
Equity Portfolio and August 13, 1996 with respect to the Opportunity Value
Portfolio and by PFL Life Insurance Company as sole shareholder of the Value
Equity and Opportunity Value Portfolios on April 19, 1993 and August 26, 1996,
respectively. 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 Dreyfus U.S. Government Securities Portfolio on March
7, 1994. The Investment Advisory Agreement was transferred to The Dreyfus
Corporation effective May 1, 1996. 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,
Price-Fleming became the Adviser of T. Rowe Price International Stock
Portfolio. The Investment Advisory Agreement with Price-Fleming for the
T. Rowe Price International Stock Portfolio was approved by the Trustees of
the Fund (including all the Trustees who are not "interested persons" of the
Manager or of the Adviser) on December 19, 1994 and by shareholders of the
Portfolio on March 24, 1995. Effective September 16, 1996, The Dreyfus
Corporation became the Adviser of the Dreyfus Small Cap Value Portfolio. The
Investment Advisory Agreement with The Dreyfus Corporation was approved by the
Trustees of the Fund (including all of the Trustees who are not "interested
persons" of the Manager or of the Adviser) on August 13, 1996 and by the
shareholders of the Portfolio on October 29, 1996. See "Organization and
Capitalization of the Fund."
Each agreement will continue in force for two years from its date, November
23, 1992 with respect to the TCW Money Market and TCW Managed Asset Allocation
Portfolios, April 19, 1993 with respect to the Value Equity Portfolio, March
25, 1994 with respect to the Dreyfus U.S. Government Securities Portfolio,
December 28, 1994 with respect to the T. Rowe Price Equity Income and T. Rowe
Price Growth Stock Portfolios, January 1, 1995 with respect to the T. Rowe
Price International Stock Portfolio, September 16, 1996 with respect to the
Dreyfus Small Cap Value Portfolio and November 4, 1996 with respect to the
Opportunity Value Portfolio, and from year to year thereafter, but only so
long as its continuation as to a Portfolio is specifically approved at least
annually (i) by the Trustees or by the vote of a majority of the outstanding
voting securities (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 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.
- 24 -
<PAGE>
The following table shows the fees paid by each of the Portfolios and any
fee waivers or reimbursements during the years ended December 31, 1993,
December 31, 1994 and December 31, 1995.
<TABLE>
<CAPTION>
1995*
--------------------------------
INVESTMENT INVESTMENT
MANAGEMENT MANAGEMENT OTHER
FEE FEE EXPENSES
PAID WAIVED REIMBURSED
---------- ---------- ----------
<S> <C> <C> <C>
TCW Money Market Portfolio.................... $117,465 $-- $--
TCW Managed Asset Allocation Portfolio........ 1,388,652 -- --
T. Rowe Price International Stock Portfolio... 759,830 -- --
Value Equity Portfolio........................ 395,205 -- --
Dreyfus Small Cap Value Portfolio............. 339,672 -- --
Dreyfus U.S. Government Securities Portfolio.. 42,531 -- --
T. Rowe Price Equity Income Portfolio......... 70,664 -- --
T. Rowe Price Growth Stock Portfolio.......... 75,681 -- --
</TABLE>
<TABLE>
<CAPTION>
1994
--------------------------------
INVESTMENT INVESTMENT
MANAGEMENT MANAGEMENT OTHER
FEE FEE EXPENSES
PAID WAIVED REIMBURSED
---------- ---------- ----------
<S> <C> <C> <C>
TCW Money Market Portfolio................... $ 111,100 $ -- $ --
TCW Managed Asset Allocation Portfolio....... 1,151,688 -- --
T. Rowe Price International Stock Portfolio.. 696,732 -- --
Value Equity Portfolio....................... 191,316 -- --
Dreyfus Small Cap Value Portfolio............ 214,198 -- --
Dreyfus U.S. Government Securities Portfo-
lio**....................................... 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>
TCW Money Market Portfolio.................... $ 23,471 $21,640 --
TCW Managed Asset Allocation Portfolio........ 305,989 -- --
T. Rowe Price International Stock Portfolio... 211,211 -- --
Value Equity Portfolio........................ -- 18,606 --
Dreyfus Small Cap Value Portfolio............. -- 17,970 --
</TABLE>
- --------
* The information presented for the T. Rowe Price Equity Income and T. Rowe
Price Growth Stock Portfolios is for the period January 3, 1995
(commencement of operations) ended December 31, 1995.
** The information with respect to the Dreyfus 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 Value Equity Portfolio is
for the period May 27, 1993 (commencement of operations) ended December
31, 1993 and with respect to the Dreyfus Small Cap Value 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.
- 25 -
<PAGE>
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
on shares of the Portfolios for more than seven days during any period (1)
when the New York Stock Exchange is closed or trading on the Exchange is
restricted as determined by the Securities and Exchange Commission, (2) when
an emergency exists, as defined by the Securities and Exchange Commission,
which makes it not reasonably practicable for a Portfolio to dispose of
securities owned by it or fairly to determine the value of its assets, or (3)
as the Securities and Exchange Commission may otherwise permit.
The value of the shares on redemption may be more or less than the
shareholder's cost, depending upon the market value of the portfolio
securities at the time of redemption.
NET ASSET VALUE
The net asset value per share of each Portfolio is determined as of the
close of regular trading of the New York Stock Exchange (currently 4:00 p.m.,
New York City time), Monday through Friday, exclusive of national business
holidays. The Fund will be closed on the following national business holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Portfolio securities for which
the primary market is on a domestic or foreign exchange or which are traded
over-the-counter and quoted on the NASDAQ System will be valued at the last
sale price on the day of valuation or, if there was no sale that day, at the
last reported bid price, using prices as of the close of trading. Portfolio
securities not quoted on the NASDAQ System that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, will be valued at the most recently
quoted bid price provided by the principal market makers.
In the case of any securities which are not actively traded, reliable market
quotations may not be considered to be readily available. These investments
are stated at fair value as determined under the direction of the Trustees.
Such fair value is expected to be determined by utilizing information
furnished by a pricing service which determines valuations for normal,
institutional-size trading units of such securities using methods based on
market transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders.
If any securities held by a Portfolio are restricted as to resale, their
fair value will be determined following procedures approved by the Trustees.
The fair value of such securities is generally determined as the amount which
the Portfolio could reasonably expect to realize from an orderly disposition
of such securities over a reasonable period of time. The valuation procedures
applied in any specific instance are likely to vary from case to case.
However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by the Portfolio in connection with
such disposition). In addition, specific factors are also generally
considered, such as the cost of the investment, the market value of any
unrestricted securities of the same class (both at the time of purchase and at
the time of valuation), the size of the holding, the prices of any recent
transactions or offers with respect to such securities and any available
analysts' reports regarding the issuer.
Notwithstanding the foregoing, short-term debt securities with maturities of
60 days or less will be valued at amortized cost.
- 26 -
<PAGE>
The TCW 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 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 Portfolio other than the TCW Money Market 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 a Portfolio initially
expressed in foreign currencies will be converted to U.S. dollar values at the
mean of the bid and offer prices of such currencies against U.S. dollars last
quoted on a valuation date by any recognized dealer.
TAXES
FEDERAL INCOME TAXES
Each Portfolio intends to qualify each year as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). By
so qualifying, a Portfolio will not be subject to federal income taxes to the
extent that its net investment income and net realized capital gains are
distributed.
In order to so qualify, a Portfolio must, among other things, (1) derive at
least 90% of its gross income in each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stocks or securities or foreign currencies, or other income
(including but not limited to gains from options, futures or forward
contracts) derived with respect to its business of investing in such stocks or
securities; (2) derive less than 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
- 27 -
<PAGE>
respect of any one issuer to 5% of the value of the Portfolio's assets and to
not more than 10% of the voting securities of such issuer, and (b) not more
than 25% of the value of its assets is invested in securities of any one
issuer (other than government securities).
As a regulated investment company, a Portfolio will not be subject to
federal income tax on net investment income and capital gains (short- and
long-term), if any, that it distributes to its shareholders if at least 90% of
its net investment income and net short-term capital gains for the taxable
year are distributed, but will be subject to tax at regular corporate rates on
any income or gains that are not distributed. In general, dividends will be
treated as paid when actually distributed, except that dividends declared in
October, November or December and made payable to shareholders of record in
such a month will be treated as having been paid by the Portfolio (and
received by shareholders) on December 31, provided the dividend is paid in the
following January. Each Portfolio intends to satisfy the distribution
requirement in each taxable year.
The Portfolios will not be subject to the 4% federal excise tax imposed on
registered investment companies that do not distribute all of their income and
gains each calendar year because such tax does not apply to a registered
investment company whose only shareholders are segregated asset accounts of
life insurance companies held in connection with variable annuity and/or
variable life insurance policies.
The Fund intends to comply with section 817(h) of the Code and the
regulations issued thereunder. As required by regulations under that section,
the only shareholders of the Fund and its Portfolios will be life insurance
company segregated asset accounts (also referred to as separate accounts) that
fund variable life insurance or annuity contracts and the general account of
PFL Life Insurance Company which provided the initial capital for the
Portfolios of the Fund. See the prospectus or other material for the Contracts
for additional discussion of the taxation of segregated asset accounts and of
the owner of the particular Contract described therein.
Section 817(h) of the Code and Treasury Department regulations thereunder
impose certain diversification requirements on the segregated asset accounts
investing in the Portfolios of the Fund. These requirements, which are in
addition to the diversification requirements applicable to the Fund under the
1940 Act and under the regulated investment company provisions of the Code,
may limit the types and amounts of securities in which the Portfolios may
invest. Failure to meet the requirements of section 817(h) could result in
current taxation of the owner of the Contract on the income of the Contract.
The Fund may therefore find it necessary to take action to ensure that a
Contract continues to qualify as a Contract under federal tax laws. The Fund,
for example, may be required to alter the investment objectives of a Portfolio
or substitute the shares of one Portfolio for those of another. No such change
of investment objectives or substitution of securities will take place without
notice to the shareholders of the affected Portfolio and the approval of a
majority of such shareholders and without prior approval of the Securities and
Exchange Commission, to the extent legally required.
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
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<PAGE>
designated ten series, nine of which are currently offered. Each series of
shares represents the beneficial interest in a separate Portfolio of assets of
the Fund, which is separately managed and has its own investment objective and
policies. The Trustees of the Fund have authority, without the necessity of a
shareholder vote, to establish additional portfolios and series of shares. The
shares outstanding are, and those offered hereby when issued will be, fully
paid and nonassessable by the Fund. The shares have no preemptive, conversion
or subscription rights and are fully transferable.
The assets received from the sale of shares of a Portfolio, and all income,
earnings, profits and proceeds thereof, subject only to the rights of
creditors, constitute the underlying assets of the Portfolio. The underlying
assets of a Portfolio are required to be segregated on the Fund's books of
account and are to be charged with the expenses with respect to that
Portfolio. Any general expenses of the Fund not readily attributable to a
Portfolio will be allocated by or under the direction of the Trustees in such
manner as the Trustees determine to be fair and equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the Portfolio and the other Portfolios.
Each share has one vote, with fractional shares voting proportionately.
Shareholders of a Portfolio are not entitled to vote on any matter that
requires a separate vote of the shares of another Portfolio but which does not
affect the Portfolio. The Agreement and Declaration of Trust does not require
the Fund to hold annual meetings of shareholders. Thus, there will ordinarily
be no annual shareholder meetings, unless otherwise required by the 1940 Act.
The Trustees of the Fund may appoint their successors until fewer than a
majority of the Trustees have been elected by shareholders, at which time a
meeting of shareholders will be called to elect Trustees. Under the Agreement
and Declaration of Trust, any Trustee may be removed by vote of two-thirds of
the outstanding shares of the Fund, and holders of 10% or more of the
outstanding shares can require the Trustees to call a meeting of shareholders
for the purpose of voting on the removal of one or more Trustees. If ten or
more shareholders who have been such for at least six months and who hold in
the aggregate shares with a net asset value of at least $25,000 inform the
Trustees that they wish to communicate with other shareholders, the Trustees
either will give such shareholders access to the shareholder lists or will
inform them of the cost involved if the Fund forwards materials to the
shareholders on their behalf. If the Trustees object to mailing such
materials, they must inform the Securities and Exchange Commission and
thereafter comply with the requirements of the 1940 Act.
PFL will vote shares of the Fund as described under the caption "Voting
Rights" in the prospectus or other material for the Contracts which
accompanies the Prospectus.
As of July 31, 1996, the PFL Endeavor Variable Annuity Account owned of
record the following percentages of the outstanding shares of each Portfolio:
78.92% of the TCW Money Market Portfolio; 95.83% of the TCW Managed Asset
Allocation Portfolio; 92.12% of the T. Rowe Price International Stock
Portfolio; 88.27% of the Value Equity Portfolio; 90.56% of the Dreyfus Small
Cap Value Portfolio; 76.04% of the Dreyfus U.S. Government Securities
Portfolio; 83.67% of the T. Rowe Price Equity Income Portfolio; and 82.17% of
the T. Rowe Price Growth Stock Portfolio. As of July 31, 1996, the PFL
Endeavor Platinum Variable Annuity Account owned of record the following
percentages of the outstanding shares of each Portfolio: 19.25% of the TCW
Money Market Portfolio; 3.50% of the TCW Managed Asset Allocation Portfolio;
6.36% of the T. Rowe Price International Stock Portfolio; 9.95% of the Value
Equity Portfolio; 7.67% of the Dreyfus Small Cap Value Portfolio; 21.55% of
the Dreyfus U.S. Government Securities Portfolio; 13.69% of the T. Rowe Price
Equity Income Portfolio; and 15.61% of the T. Rowe Price Growth Stock
Portfolio. As of July 31, 1996, the AUSA Endeavor Variable Annuity Account
owned of
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<PAGE>
record the following percentages of the outstanding shares of each Portfolio:
1.83% of the TCW Money Market Portfolio; 0.67% of the TCW Managed Asset
Allocation Portfolio; 1.51% of the T. Rowe Price International Stock
Portfolio; 1.78% of the Value Equity Portfolio; 1.78% of the Dreyfus Small Cap
Value Portfolio; 2.40% of the Dreyfus U.S. Government Securities Portfolio;
2.65% of the T. Rowe Price Equity Income Portfolio; and 2.22% of the T. Rowe
Price Growth Stock Portfolio.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Fund. However, the Agreement
and Declaration of Trust disclaims shareholder liability for acts and
obligations of the Fund and requires that notice of such disclaimer be given
in each agreement, obligation or instrument entered into or executed by the
Fund or the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of Fund property for all loss and expense of any
shareholders held personally liable for obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to
meet its obligations. The likelihood of such circumstances is remote.
LEGAL MATTERS
Certain legal matters are passed on for the Fund by Sullivan & Worcester LLP
of Washington, D.C.
CUSTODIAN
Boston Safe Deposit and Trust Company, located at One Boston Place, Boston,
Massachusetts 02108, serves as the custodian of the Fund. Under the Custody
Agreement, Boston Safe holds the Portfolios' securities and keeps all
necessary records and documents.
FINANCIAL STATEMENTS
The financial statements of the TCW Money Market Portfolio, TCW Managed
Asset Allocation Portfolio, T. Rowe Price International Stock Portfolio, Value
Equity Portfolio, Dreyfus Small Cap Value Portfolio, Dreyfus U.S. Government
Securities Portfolio, T. Rowe Price Equity Income Portfolio and T. Rowe Price
Growth Stock Portfolio for the fiscal year ended December 31, 1995, including
notes to the financial statements and supplementary information and the
Independent Auditors Report, and for the six month period ended June 30, 1996
(unaudited) are included in the Fund's Annual Report to shareholders and Semi-
Annual Report to shareholders, respectively. Copies of the Annual Report and
Semi-Annual Report accompany this Statement of Additional Information. The
financial statements included in the Annual Report are incorporated herein by
reference.
- 30 -
<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 Standard &
Poor's rating of A-1+ and A-1 as being in Standard & Poor'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,
1996.
- 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 11
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 7
Investments in Futures, Options
and Other
Derivative Instruments........ 7 5
Management of the Fund........... 20 11
Directors and Officers......... 20 11
The Investment Adviser......... 22 11
The Sub-Adviser................ 23 12
Joint Trading Accounts......... 24 13
Portfolio Transactions and Bro-
kerage.......................... 25 13
Portfolio Turnover............. 25 11
Placement of Portfolio Broker-
age........................... 25 13
Purchase and Redemption of
Shares.......................... 27 16
Offering of the Shares and De-
termination
of Offering Price............. 27 16
Portfolio Net Asset Valuation.. 27 16
Investment Experience Informa-
tion............................ 28 18
Calculation of Performance Re-
lated Information............... 28 18
Total Return................... 28 18
Taxes............................ 29 14
Capital Stock of the Fund........ 31 17
Registration Statement........... 31 N/A
Financial Statements............. 31 19
Appendix A--Description of Port-
folio Securities................ A-1 4
Appendix B--Description of Se-
lected Corporate Bond and Com-
mercial Paper Ratings........... B-1 5
</TABLE>
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<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 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
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).
- 3 -
<PAGE>
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 net 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 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
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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. State laws and
regulations may impose additional limitations on borrowing, lending and use of
options, futures, and other derivative instruments. In addition, such laws and
regulations may require the Portfolio's investments in foreign securities to
meet additional diversification and other requirements.
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
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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 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 does not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if it were considered important with respect to the
investment. 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.
To the extent the Portfolio invests directly in foreign securities, the
Portfolio will engage in foreign exchange transactions. The foreign currency
exchange market is subject to little government regulation, and such
transactions generally occur directly between parties rather than on an
exchange or in an organized market. This means that the Portfolio is subject
to the full risk of default by a counterparty in such a transaction. Because
such transactions often take place between different time zones, the Portfolio
may be required to complete a currency exchange transaction at a time outside
of normal business hours in the counterparty's location, making prompt
settlement of such transaction impossible. This exposes the Portfolio to an
increased risk that the counterparty will be unable to settle the transaction.
Although the counterparty in such transactions is often a bank or other
financial institution, currency transactions are generally not covered by
insurance otherwise applicable to such institutions. 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
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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.
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
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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 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
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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
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
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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.
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" on page 14. 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.
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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.
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
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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.
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
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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.
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
- 13 -
<PAGE>
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 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
- 14 -
<PAGE>
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.
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.
- 15 -
<PAGE>
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 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
- 16 -
<PAGE>
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 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
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<PAGE>
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 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,
- 18 -
<PAGE>
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 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
- 19 -
<PAGE>
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 (67) Chairman of the Board, Peter Brown
Director Construction Company (construction contractors
1475 South Belcher Road and engineers), Largo, Florida (1963 -
Largo, Florida 34641 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 (65) 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. (51) General Manager, Sheraton Sand Key Resort
Director (resort hotel), Clearwater, Florida (1975 -
1160 Gulf Boulevard present).
Clearwater Beach, Florida 34630
JOHN R. KENNEY (58) 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
</TABLE>
- 20 -
<PAGE>
<TABLE>
<CAPTION>
NAME, RELATIONSHIP WITH PRINCIPAL OCCUPATION
THE FUND, AND ADDRESS (1) PAST FIVE YEARS
------------------------- --------------------
<C> <S>
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.
G. JOHN HURLEY (47) Executive Vice President (June 1993 -
Director and Executive present), Chief Operating Officer (March,
Vice President (2) 1994 - present) 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).
RICHARD B. FRANZ, II (45) Senior Vice President (1987 - present), Chief
Treasurer (2) Financial Officer (1987 - December, 1995) 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.
ALAN M. YAEGER (49) Executive Vice President (June, 1993 -
Executive Vice President (2) present), Chief Financial Officer (December,
1995 - present), Senior Vice President (1981 -
June, 1993) and Actuary (1972 - present),
Western Reserve Life Assurance Co. of Ohio.
REBECCA A. FERRELL (35) Assistant Vice President and Counsel (June,
Secretary, 1995 - present), Attorney (August, 1993 -
Vice President, and Counsel (2) June, 1995), Western Reserve Life Assurance
Co. of Ohio; Secretary and Assistant Vice
President (March, 1994 - September, 1995),
Vice President and Counsel (September, 1995 -
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, (August,
1990 - July, 1991) University of South
Florida.
</TABLE>
- --------
(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.
- 21 -
<PAGE>
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, 1995, the Portfolio
paid Directors' fees and expenses of $10,513. The following table provides
compensation amounts paid to disinterested Directors of the Fund for the
fiscal year ended December 31, 1995.
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 $9,500 $32,500
Charles C. Harris, Di-
rector $9,500 $32,000
Russell A. Kimball, Jr.,
Director $8,500 $ 8,500
</TABLE>
Commencing on January 1, 1996, a non-qualified deferred compensation plan
(the "Plan") became available to directors who are not interested persons of
the Fund. Under the Plan, compensation may be deferred that would otherwise be
payable by the Fund, IDEX Fund, IDEX II Series Fund, and/or IDEX Fund 3 to a
disinterested Director or Trustee on a current basis for services rendered as
director. Deferred compensation amounts will accumulate based on the value of
Class A shares of a portfolio of IDEX II Series Fund (without imposition of
sales charges), as elected by the directors. It is not anticipated that the
Plan will have any impact on the Fund.
As of March 1, 1996, 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 INVESTMENT ADVISER
The information that follows supplements the information provided about the
Investment Adviser under the caption "Management of the Fund--The 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 18,
1996. 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).
- 22 -
<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, 1995, 1994 and
1993, 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,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C>
$7,847,750 $6,850,340 $6,840,711
</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, 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 fees and expenses of Fund non-interested directors,
legal expenses, state franchise taxes, cost of auditing services, costs of
printing proxies, 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 Portfolio's Investment Adviser.
The Investment Adviser has voluntarily undertaken, until at least April 30,
1997, 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, 1995, 1994, and 1993 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.
- 23 -
<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 18,
1996. 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, 1995, 1994 and 1993, the Sub-Adviser was paid fees in the
amount of $3,923,875, $3,425,888 and $3,420,355, respectively.
The Sub-Adviser, located at 100 Fillmore Street, 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 $34 billion as of March 1, 1996. 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.
JOINT TRADING ACCOUNTS
As described in the Prospectus, the Portfolio and other clients of the Sub-
Adviser and its affiliates may place assets in joint trading accounts for the
purpose of making short-term investments in money market instruments. The
Board of Directors of the Fund must approve the participation of each
Portfolio in these joint trading accounts, and procedures pursuant to which
the joint accounts will operate. The joint trading accounts are to be operated
pursuant to an exemptive order issued to the Sub-Adviser and certain of its
affiliates by the SEC. All joint account participants including the Portfolio,
will bear the expenses of the joint trading accounts in proportion to their
investments. Financial difficulties of other participants in the joint
accounts could cause delays or other difficulties for the Portfolio in
withdrawing their assets from joint trading accounts.
- 24 -
<PAGE>
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 1995, 1994
and 1993 were 130.48%, 107.33%, and 77.91%, 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.
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
- 25 -
<PAGE>
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 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
- 26 -
<PAGE>
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 a broker-dealer as a factor in the
selection of broker-dealers 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,
1995, 1994 and 1993, in the amount of $1,577,115, $1,466,443 and $1,022,522,
respectively. For the year ended December 31, 1995, the Portfolio did not pay
any brokerage commissions to DST Securities, Inc. For the years ended December
31, 1994 and 1993, the Portfolio paid commissions to DST Securities, Inc. in
the amount of $2,796 and $85,404, 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 currently 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 and disclosure
documents 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. (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. The per share net asset value of the Portfolio is
- 27 -
<PAGE>
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.
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, 1995.
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, 1995
<TABLE>
<CAPTION>
INCEPTION* 5 YEARS 4 YEARS 3 YEARS 2 YEARS 1 YEAR
---------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Growth Portfolio 17.63% 18.06% 9.46% 11.94% 16.15% 47.12%
Standard & Poor's Index
of 500 Common Stocks 14.68% 16.59% 13.36% 15.34% 18.07% 37.58%
</TABLE>
- --------
* The Portfolio commenced operations on October 2, 1986.
Additional information regarding the investment performance of the Portfolio
appears in the Prospectus.
- 28 -
<PAGE>
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.
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
- 29 -
<PAGE>
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 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 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 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
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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.
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 the Portfolio described in this
Statement of Additional Information for the year ended December 31, 1995 and
the report of the Fund's independent accountants are included in the Fund's
1995 Annual Report and are incorporated herein by reference to such Report.
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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.
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
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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.
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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.
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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.
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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.
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