As filed with the Securities and Exchange Commission on September 15, 1997
File Nos. 33-81800
811-8644
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 2 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 4 /X/
VARIABLE INSURANCE FUNDS
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: 1-800-257-5872
Jeffrey L. Steele, Esq.
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
Copies to:
Richard Ille Gregory Maddox
BISYS Fund Services BISYS Fund Services
3435 Stelzer Road 1230 Columbia Street, Suite 500
Columbus, Ohio 43219-3035 San Diego, CA 92101
It is proposed that this filing will become effective (check appropriate
box):
[] immediately upon filing pursuant to paragraph (b)
[X] on September 16, 1997 pursuant to paragraph (b)
[] 60 days after filing pursuant to paragraph (a)(1)
[] On (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[] on (date) pursuant to paragraph (a)(2) of Rule 485
Registrant has elected to register an indefinite number of shares of
beneficial interest pursuant to Rule 24f-2 under the Investment Company Act
of 1940. Registrant intends to file the notice required by Rule 24f-2 with
respect to its fiscal year ending December 31, 1997 on or before March 31,
1998.
<PAGE>
EXPLANATORY NOTE
This post-effective amendment no. 2 to the Registrant's registration
statement on Form N-1A (File Nos. 33-81800 and 811- 8644) is being filed to add
disclosure regarding two new series of Registrant, the AmSouth Regional Equity
Fund and the AmSouth Equity Income Fund, to the registration statement. This
amendment does not affect the Registrant's currently effective prospectus
describing the Variable Insurance Allocated Conservative Fund, Variable
Insurance Allocated Balanced Fund, Variable Insurance Allocated Growth Fund,
Variable Insurance Allocated Aggressive Fund, Variable Insurance Money Market
Fund, BB&T Growth and Income Fund and BB&T Capital Manager Fund, which is hereby
incorporated by reference from pre-effective amendment no. 2 to Registrant's
registration statement (File Nos. 33-81800 and 811-8644) as filed on May 29,
1997, nor does it affect the currently effective prospectus describing the BB&T
Growth and Income Fund, which is hereby incorporated by reference from the most
recent filing related to the same (File No. 33-81800) under Rule 497 under the
Securities Act of 1933.
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VARIABLE INSURANCE FUNDS
CROSS REFERENCE SHEET
Required by Rule 404
under the Securities Act of 1933
VARIABLE INSURANCE ALLOCATED CONSERVATIVE FUND
VARIABLE INSURANCE ALLOCATED BALANCED FUND
VARIABLE INSURANCE ALLOCATED GROWTH FUND
VARIABLE INSURANCE ALLOCATED AGGRESSIVE FUND
VARIABLE INSURANCE MONEY MARKET FUND
BB&T GROWTH AND INCOME FUND
BB&T CAPITAL MANAGER FUND
Form N-1A Part A Item Prospectus Caption
1. Cover page.................. Cover Page
2. Synopsis.................... Prospectus Summary; Fund Expenses
3. Condensed Financial
Information................. Not Applicable
4. General Description of
Registrant.................. Investment Objectives and
Policies; Investment Objectives
and Policies-Underlying Qualivest
Funds; Investment Objectives and
Policies-Underlying BB&T Funds;
Investment Techniques and Risk
Factors; General Information
5. Management of the Fund...... Management of the Funds
5A. Management's Discussion of
Fund Performance............ Not Applicable
6. Capital Stock and Other
Securities.................. Taxation; General Information
7. Purchase of Securities
Being Offered............... Valuation of Shares; Purchasing
Shares; Management of the Funds
8. Redemption or Repurchase.... Redeeming Shares
9. Pending Legal Proceedings... Not applicable
<PAGE>
VARIABLE INSURANCE FUNDS
CROSS REFERENCE SHEET
Required by Rule 404
under the Securities Act of 1933
BB&T GROWTH AND INCOME FUND
Form N-1A Part A Item Prospectus Caption
1. Cover page.................. Cover Page
2. Synopsis.................... Prospectus Summary; Fund Expenses
3. Condensed Financial
Information................. Not Applicable
4. General Description of
Registrant.................. Investment Objective and
Policies; Investment Techniques
and Risk Factors; General
Information
5. Management of the Fund...... Management of the Fund
5A. Management's Discussion of
Fund Performance............ Not Applicable
6. Capital Stock and Other
Securities.................. Taxation; General Information
7. Purchase of Securities
Being Offered............... Valuation of Shares; Purchasing
Shares; Management of the Fund
8. Redemption or Repurchase.... Redeeming Shares
9. Pending Legal Proceedings... Not applicable
<PAGE>
VARIABLE INSURANCE FUNDS
CROSS REFERENCE SHEET
Required by Rule 404
under the Securities Act of 1933
AMSOUTH REGIONAL EQUITY FUND
AMSOUTH EQUITY INCOME FUND
Form N-1A Part A Item Prospectus Caption
1. Cover page.................. Cover Page
2. Synopsis.................... Prospectus Summary; Fund Expenses
3. Condensed Financial
Information................. Not Applicable
4. General Description of
Registrant.................. Investment Objectives and
Policies; Investment Techniques
and Risk Factors; General
Information
5. Management of the Fund...... Management of the Funds
5A. Management's Discussion of
Fund Performance............ Not Applicable
6. Capital Stock and Other
Securities.................. Taxation; General Information
7. Purchase of Securities
Being Offered............... Valuation of Shares; Purchasing
Shares; Management of the Funds
8. Redemption or Repurchase.... Redeeming Shares
9. Pending Legal Proceedings... Not applicable
<PAGE>
VARIABLE INSURANCE FUNDS
CROSS REFERENCE SHEET
Required by Rule 404
under the Securities Act of 1933
VARIABLE INSURANCE ALLOCATED CONSERVATIVE FUND
VARIABLE INSURANCE ALLOCATED BALANCED FUND
VARIABLE INSURANCE ALLOCATED GROWTH FUND
VARIABLE INSURANCE ALLOCATED AGGRESSIVE FUND
VARIABLE INSURANCE MONEY MARKET FUND
BB&T GROWTH AND INCOME FUND
BB&T CAPITAL MANAGER FUND
AMSOUTH REGIONAL EQUITY FUND
AMSOUTH EQUITY INCOME FUND
Statement of Additional
Form N-1A Part B Item Information Caption
10. Cover Page.................. Cover Page
11. Table of Contents........... Table of Contents
12. General Information and
History..................... Not Applicable
13. Investment Objectives and
Policies.................... Investment Objectives and Policies;
Investment Restrictions
14. Management of the Fund...... Management of the Trust - Trustees
and Officers
15. Control Persons and Principal
Holders of Securities........ Management of the Trust - Trustees
and Officers
16. Investment Advisory and Other
Services.................... Management of the Trust -Investment
Advisers; Management of the Trust -
Custodians, Transfer Agent and Fund
Accounting Services; Management of
the Trust - Auditors
17. Brokerage Allocation........ Management of the Trust - Portfolio
Transactions
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18. Capital Stock and Other
Securities.................. Additional Information -
Description of Shares; Additional
Information - Shareholder and
Trustee Liability
19. Purchase, Redemption and
Pricing of Securities
Being Offered............... Additional Purchase and Redemption
Information
20. Tax Status.................. Additional Information - Additional
Tax Information
21. Underwriters................ Management of the Trust -
Distributor
22. Calculation of Performance
Data........................ Performance Information
23. Financial Statements........ Financial Statements
<PAGE>
AmSouth Regional Equity Fund
AmSouth Equity Income Fund
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-257-5872
Variable Insurance Funds (the "Trust") is an open-end management investment
company that currently offers nine separate diversified investment portfolios,
each with different investment objectives and policies. This Prospectus
describes the following two portfolios (the "Funds"):
o AmSouth Regional Equity Fund (the "Regional Equity Fund"); and
o AmSouth Equity Income Fund (the "Equity Income Fund").
Additional information about the Trust and each of the Funds, contained in a
Statement of Additional Information dated June 1, 1997, as amended or
supplemented, has been filed with the Securities and Exchange Commission and is
available upon request without charge by writing to the Trust at its address or
by calling the Trust at the telephone number shown above. The Statement of
Additional Information is incorporated herein by reference.
The Funds currently sell their shares of beneficial interest ("Shares") to a
segregated asset account ("Separate Account") of Hartford Life Insurance Company
("Hartford") to serve as the investment medium for variable annuity contracts
("Variable Contracts") issued by Hartford. Shares of the Funds also are sold to
qualified pension and retirement plans outside of the separate account context.
The Separate Account invests in Shares of the Funds in accordance with
allocation instructions received from owners of the Variable Contracts
("Variable Contract Owners"). Such allocation rights are described further in
the accompanying Separate Account prospectus.
Shares of the Funds are not deposits or obligations of, and are not endorsed,
insured or guaranteed by, any bank, the Federal Deposit Insurance Corporation,
or any other agency. An investment in the Funds involves investment risk,
including the possible loss of principal.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. Investors should read this
Prospectus and retain it for future reference.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF THE
SEPARATE ACCOUNT, WHICH ACCOMPANIES THIS PROSPECTUS. BOTH PROSPECTUSES SHOULD BE
READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
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.
The date of this Prospectus is September 16, 1997.
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY............................................................3
Shares Offered.......................................................3
Investment Objectives................................................3
Investment Policies..................................................3
Risk Factors and Special Considerations..............................3
Investment Adviser and Sub-Adviser...................................3
Other Information....................................................3
FUND EXPENSES.................................................................4
INVESTMENT OBJECTIVES AND POLICIES............................................5
Regional Equity Fund.................................................5
Equity Income Fund...................................................6
INVESTMENT TECHNIQUES AND RISK FACTORS........................................7
VALUATION OF SHARES..........................................................15
PURCHASING SHARES............................................................15
REDEEMING SHARES.............................................................16
MANAGEMENT OF THE FUNDS......................................................16
Trustees............................................................16
Investment Adviser and Sub-Adviser..................................16
Administrator and Distributor.......................................18
Other Service Providers.............................................18
Variable Contract Owner Servicing Agents............................19
Expenses............................................................19
Banking Laws........................................................19
TAXATION.....................................................................19
GENERAL INFORMATION..........................................................20
Description of the Trust and Its Shares.............................20
Performance Information.............................................21
Miscellaneous.......................................................21
2
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PROSPECTUS SUMMARY
Shares Offered . . . . . . . . . . . Shares of the Funds, which are two
separate diversified investment
portfolios of the Trust, a Massachusetts
business trust that is registered as an
open-end management investment company.
Shares of the Funds may be offered in
the future to other separate accounts of
Hartford, or to separate accounts
established by other affiliated or
unaffiliated insurance companies, to
serve as the underlying investment
medium for variable annuity and variable
life insurance contracts, which may pose
certain risks discussed under
"PURCHASING SHARES."
Investment Objectives . . . . . . . The Regional Equity Fund seeks to
provide capital growth.
The Equity Income Fund seeks to provide
above average income and capital
appreciation.
Investment Policies . . . . . . . . The Regional Equity Fund seeks its
investment objective by investing
primarily in a diversified portfolio of
common stocks and securities convertible
into common stocks, such as convertible
bonds and convertible preferred stocks,
of companies headquartered in the
Southern Region of the United States.
The Equity Income Fund will, under
normal market conditions, invest at
least 65% of its total assets in
income-producing equity securities,
including common stock, preferred stock
and securities convertible into common
stocks, such as convertible bonds and
convertible preferred stocks.
Risk Factors and Special
Considerations . . . . . . . An investment in the Funds involves a
certain amount of risk and may not be
suitable for all investors. See
"INVESTMENT TECHNIQUES AND RISK
FACTORS."
Investment Adviser
and Sub-Adviser . . . . . . AmSouth Bank ("AmSouth"), Birmingham,
Alabama, serves as investment adviser to
the Funds.
Rockhaven Asset Management, LLC
("Rockhaven"), Pittsburgh, Pennsylvania,
serves as investment sub-adviser to the
Equity Income Fund.
See "MANAGEMENT OF THE FUNDS -
Investment Adviser and Sub-Adviser."
Other Information . . . . . . . AmSouth is the custodian for the Funds.
BISYS Fund Services ("BISYS" or
"Distributor" or "Administrator") serves
as the distributor and administrator of
the Funds. BISYS Fund Services Ohio,
Inc. ("BISYS Ohio") serves as transfer
agent and dividend disbursing agent and
provides certain accounting services for
the Trust.
3
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FUND EXPENSES
The following expense table indicates costs and expenses that an investor should
anticipate incurring either directly or indirectly as a Shareholder of a Fund
during its first fiscal year of operation. The numbers reflect estimated levels
of operating expenses.
Shareholder Transaction Expenses Regional Equity Equity Income
Fund Fund
Maximum Sales Charge Imposed on Purchases .............None None
Maximum Sales Charge Imposed on Reinvested Dividends...None None
Deferred Sales Charge..................................None None
Redemption Fees........................................None None
Exchange Fees..........................................None None
Annual Fund Operating Expenses
(as a percentage of average net assets annualized)
Management Fees After Waiver (1)......................0.25% 0.25%
Other Expenses After Waiver (2) ......................1.00% 1.00%
Total Fund Operating Expenses After Waivers (3).......1.25% 1.25%
- -------------------
1 AmSouth has undertaken to waive a portion of its investment advisory fee
through December 31, 1997 to the extent that "Total Fund Operating Expenses"
for a Fund would exceed 1.25% of average daily net assets during this period.
Absent this waiver, "Management Fees" as a percentage of each Fund's average
daily net assets would be 0.60%.
2 BISYS has agreed to waive a portion of its administrative fees through
December 31, 1997. Absent this waiver, "Other Expenses" as a percentage of
each Fund's average daily net assets would be 1.10%.
3 Absent waivers, "Total Fund Operating Expenses" as a percentage of each
Fund's average daily net assets would be 1.70%.
The purpose of this table is to assist the prospective investor in understanding
the various costs and expenses that a Shareholder in the Funds will bear. The
following Example illustrates the expenses borne by Fund Shareholders.
Example
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return, and (2) redemption at the end of each time period:
Regional Equity Equity Income
Fund Fund
1 Year....................... $13 $13
3 Years...................... $40 $40
________________
* This example should not be considered a representation of future expenses,
which may be more or less than those shown. The assumed 5% annual return is
hypothetical and should not be considered a representation of past or
future annual return. Actual return may be greater or less than the assumed
amount.
4
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Funds are designed to achieve different investment objectives and to pursue
these objectives by means of different investment strategies. Shareholders
should be aware that the investments made by the Funds at any given time are not
expected to be the same as those made by other mutual funds for which AmSouth or
Rockhaven acts as investment adviser, including mutual funds with investment
objectives and policies similar to the Funds. Investors should carefully
consider their investment goals and willingness to tolerate investment risk
before allocating their investment to the Funds.
Regional Equity Fund
The Regional Equity Fund seeks to provide capital growth. It seeks this
objective by investing primarily in a diversified portfolio of common stock and
securities convertible into common stock, such as convertible bonds and
convertible preferred stock. Such securities must be issued by companies
headquartered in the Southern Region of the United States, which includes
Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South
Carolina, Tennessee and Virginia. The production of current income is an
incidental objective of the Regional Equity Fund. Most companies in which the
Regional Equity Fund invests are listed on national securities exchanges.
As investment adviser AmSouth seeks to invest in equity securities which are
believed to represent investment value. Factors which AmSouth may consider in
selecting equity securities include industry and company fundamentals,
historical price relationships, and/or underlying asset value.
As investment adviser to the Regional Equity Fund, AmSouth may use a variety of
economic projections, technical analysis, and earnings projections in
formulating individual stock purchase and sale decisions. AmSouth will select
investments that it believes have basic investment value which will eventually
be recognized by other investors, thus increasing their value to the Fund. In
the selection of the investments for the Regional Equity Fund, AmSouth may
therefore be making investment decisions which could be contrary to the present
expectations of other professional investors. These decisions may involve
greater risks compared to other mutual funds, of either (a) more accurate
assessment by other investors, in which case losses may be incurred by the Fund,
or (b) long delay in investor recognition of the accuracy of the investment
decisions of the Fund, in which case invested capital of the Fund in an
individual security or group of securities may not appreciate for an extended
period.
Under normal market conditions, the Regional Equity Fund may also invest up to
35% of the value of its total assets in common stocks and securities convertible
into common stock of companies headquartered outside the Southern Region,
preferred stocks, corporate bonds, mortgage-related and asset-backed securities,
notes, money market mutual funds, warrants, and obligations with maturities of
12 months or less such as commercial paper (including variable amount master
demand notes), bankers' acceptances, certificates of deposit, repurchase
agreements, obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, and demand and time deposits of domestic and
foreign banks and savings and loan associations. If deemed appropriate for
temporary defensive purposes, the Regional Equity Fund may increase its holdings
in short-term obligations up to 100% of its total assets and may also hold
uninvested cash pending investment. The Regional Equity Fund may also write
covered call options. See "INVESTMENT TECHNIQUES AND RISK FACTORS."
5
<PAGE>
The Regional Equity Fund normally invests at least 65% of the value of its total
assets in common stock and securities convertible into common stock of companies
headquartered in the Southern Region. There can be no assurance that the economy
of the Southern Region or the companies headquartered in the Southern Region
will grow in the future, or that a company headquartered in the Southern Region
whose assets, revenues or employees are located substantially outside of the
Southern Region will share in any economic growth of the Southern Region.
Additionally, any localized negative economic factors or possible physical
disasters in the Southern Region could have much greater impact on the Regional
Equity Fund's assets than on similar funds whose investments are geographically
more diverse.
Equity Income Fund
The Equity Income Fund seeks to provide above average income and capital
appreciation. It invests primarily in a diversified portfolio of common stocks,
preferred stocks, and securities that are convertible into common stocks, such
as convertible bonds and convertible preferred stocks. Under normal market
conditions, the Fund invests at least 65% of its total assets in
income-producing equity securities, including common stock, preferred stock, and
securities convertible into common stock such as convertible bonds and
convertible preferred stocks. The Equity Income Fund's stock selection
emphasizes those common stocks in each sector that have good value, attractive
yield, and dividend growth potential. The portion of the Fund's total assets
invested in common stock, preferred stock, and convertible securities varies
according to the Fund's assessment of market and economic conditions and
outlook. Most companies in which the Equity Income Fund invests are listed on
national securities exchanges.
AmSouth and Rockhaven seek to invest in equity securities which are believed to
represent investment value. Factors which may be considered in selecting equity
securities include industry and company fundamentals, historical price
relationships, and/or underlying asset value.
Under normal market conditions, the Equity Income Fund may also invest up to 35%
of the value of its total assets in corporate bonds, mortgage-related and
asset-backed securities, real estate investment trusts, notes, money market
mutual funds, warrants, and obligations with maturities of 12 months or less
such as commercial paper (including variable amount master demand notes),
bankers' acceptances, obligations issued or guaranteed by the U.S. Government or
its agencies or instrumentalities, and demand and time deposits of domestic and
foreign banks and savings and loan associations. If deemed appropriate for
temporary defensive purposes, the Equity Income Fund may increase its holdings
in short-term obligations up to 100% of its total assets and may also hold
uninvested cash pending investment. The Equity Income Fund may also write
covered call options. See "INVESTMENT TECHNIQUES AND RISK FACTORS."
* * * *
The investment objective of each Fund is a fundamental policy and as such may
not be changed without a vote of the holders of a majority of the outstanding
Shares of that Fund. Other policies of a Fund may be changed without a vote of
the holders of a majority of outstanding Shares of that Fund unless (i) the
policy is expressly deemed to be a fundamental policy or (ii) the policy is
expressly deemed to be changeable only by such majority vote. There can be no
assurance that the investment objective of any Fund will be achieved.
6
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INVESTMENT TECHNIQUES AND RISK FACTORS
Like any investment program, an investment in a Fund entails certain risks.
Convertible Securities
Convertible securities are fixed income securities that may be exchanged or
converted into a predetermined number of the issuer's underlying common stock at
the option of the holder during a specified time period. Convertible securities
may take the form of convertible preferred stock, convertible bonds or
debentures, units consisting of "usable" bonds and warrants or a combination of
the features of several of these securities. The Regional Equity Fund may invest
in convertible securities that are rated in the fourth highest rating group, or
higher, by a nationally recognized statistical rating organization ("NRSRO") at
the time of investment, or if unrated, are of comparable quality. The fourth
highest rating group corresponds to a rating of "BBB" by Standard & Poor's
Corporation ("S&P") and "Baa" by Moody's Investors Service, Inc. ("Moody's").
The Equity Income Fund may invest in convertible securities that are rated "BB"
by S&P and "Ba" by Moody's, or lower, at the time of investment, or if unrated,
are of comparable quality. If a convertible security falls below the minimum
rating after the Regional Equity Fund has purchased it, the Fund is not required
to drop the convertible bond from its portfolio, but will consider appropriate
action. The investment characteristics of each convertible security vary widely,
which allows convertible securities to be employed for different investment
objectives.
Securities which are rated "BB" or lower by S&P or "Ba" or lower by Moody's
either have speculative characteristics or are speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligations. There is no lower limit with respect to rating categories for
convertible securities in which the Equity Income Fund may invest.
Corporate debt obligations that are not determined to be investment grade are
high yield, high risk bonds, typically subject to greater market fluctuations
and greater risk of loss of income and principal due to an issuer's default. To
a greater extent than investment grade securities, lower rated securities tend
to reflect short-term corporate, economic and market developments, as well as
investor perceptions or the issuer's credit quality. Because investments in
lower rated securities involve greater investment risk, achievement of the
Equity Income Fund's investment objective may be more dependent on Rockhaven's
credit analysis than would be the case if the Equity Income Fund were investing
in higher rated securities. High yield securities may be more susceptible to
real or perceived adverse economic and competitive industry conditions than
investment grade securities. A projection of an economic downturn, for example,
could cause a decline in high yield prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. In addition, the secondary trading
market for high yield securities may be less liquid than the market for higher
grade securities. The market prices of debt securities also generally fluctuate
with changes in interest rates so that the Equity Income Fund's net asset value
can be expected to decrease as long-term interest rates rise and to increase as
long-term rates fall. In addition, lower rated securities may be more difficult
to dispose of or to value than high-rated, lower-yielding securities. Rockhaven
attempts to reduce the risks described above through diversification of the
Equity Income Fund's portfolio and by credit analysis of each issuer as well as
by monitoring broad economic trends and corporate and legislative developments.
Convertible bonds and convertible preferred stocks are fixed income securities
that generally retain the investment characteristics of fixed income securities
until they have been converted but also react to movements in the underlying
7
<PAGE>
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities, and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar non-convertible securities of the same
company. The interest income and dividends from convertible bonds and preferred
stocks provide a stream of income with generally higher yields than common
stocks, but lower than non-convertible securities of similar quality.
The Funds will exchange or convert the convertible securities held in their
portfolios into shares of the underlying common stock in instances in which, in
the opinion of AmSouth or Rockhaven, the investment characteristics of the
underlying common shares will assist the Funds in achieving their investment
objectives. Otherwise, the Funds will hold or trade the convertible securities.
In selecting convertible securities for a Fund, AmSouth and Rockhaven evaluate
the investment characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying equity security for
capital appreciation. In evaluating these matters with respect to a particular
convertible security, AmSouth and Rockhaven consider numerous factors, including
the economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.
As with all fixed income securities, the market values of convertible securities
tend to increase when interest rates decline and, conversely, tend to decline
when interest rates increase.
Put and Call Options
Each Fund may write covered call options (options on securities or currencies
owned by the Fund). When a portfolio security or currency subject to a call
option is sold, a Fund will effect a "closing purchase transaction"--the
purchase of a call option on the same security or currency with the same
exercise price and expiration date as the call option which such Fund previously
has written. If the Fund is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security or currency until the option
expires or the Fund delivers the underlying security or currency upon exercise.
In addition, upon the exercise of a call option by the holder thereof, a Fund
will forego the potential benefit represented by market appreciation over the
exercise price. Under normal conditions, it is not expected that a Fund will
cause the underlying value of portfolio securities and/or currencies subject to
such options to exceed 25% of its total assets.
Foreign Securities
The Funds may invest in foreign securities through the purchase of American
Depository Receipts ("ADRs") or the purchase of securities of the Toronto Stock
Exchange, but will not do so if immediately after a purchase and as a result of
the purchase the total value of such foreign securities owned by a Fund would
exceed 25% of the value of the total assets of that Fund. Each Fund may also
invest in securities issued by foreign branches of the U.S. banks and foreign
banks and in Canadian Commercial Paper and Europaper, which is U.S. dollar
denominated commercial paper of a foreign issuer.
8
<PAGE>
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of U.S.
domestic issuers. Such risks include political, social or economic instability
in the country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
limits on removal of currency or other assets, nationalization of assets,
foreign withholding and income taxation, and foreign trading practices
(including higher trading commissions, custodial charges and delayed
settlements). Such securities may be subject to greater fluctuations in price
than securities issued by U.S. corporations or issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The markets on which such
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. In addition, there may be less publicly
available information about a foreign company than about a U.S. domiciled
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. domestic companies. There is generally less government regulation of
securities exchanges, brokers and listed companies abroad than in the U.S.
Confiscatory taxation or diplomatic developments could also affect investment in
those countries. In addition, foreign branches of U.S. banks, foreign banks and
foreign issuers may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting, and recordkeeping standards than
those applicable to domestic branches of U.S. banks and U.S. domestic issuers.
If a security is denominated in foreign currency, the value of the security to a
Fund will be affected by changes in currency exchange rates and in exchange
control regulations, and costs will be incurred in connection with conversions
between currencies. Currency risks generally increase in lesser developed
markets. Exchange rate movements can be large and can endure for extended
periods of time, affecting either favorably or unfavorably a Fund's assets.
For many foreign securities, U.S. dollar denominated ADRs, which are traded in
the United States on exchanges or over-the-counter, are issued by domestic
banks. ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. ADRs do not eliminate all
the risk inherent in investing in the securities of foreign issuers' stock.
However, by investing in ADRs rather than directly in foreign issuers' stock, a
Fund can avoid currency risks during the settlement period for either purchase
or sales.
Unsponsored ADR programs are organized independently and without the cooperation
of the issuer of the underlying securities. As a result, available information
concerning the issuers may not be as current as for sponsored ADRs, and the
prices of unsponsored depository receipts may be more volatile than if such
instruments were sponsored by the issuer.
Foreign Currency Transactions
The value of the assets of a Fund as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and a Fund may incur costs in connection with
conversions between various currencies. A Fund will conduct its foreign currency
exchange transactions either on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market, or through forward contracts
to purchase or sell foreign currencies. A forward foreign currency exchange
contract ("forward currency 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 agreed upon by the parties, at a price set at the
time of the contract. These forward currency contracts are traded directly
between currency traders (usually large commercial banks) and their customers.
The Funds may enter into forward currency contracts in order to hedge against
adverse movements in exchange rates between currencies.
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By entering into a forward currency contract in U.S. dollars for the purchase or
sale of the amount of foreign currency involved in an underlying security
transaction, a Fund is able to protect itself against a possible loss between
trade and settlement dates resulting from an adverse change in the relationship
between the U.S. dollar and such foreign currency. However, this tends to limit
potential gains which might result from a positive change in such currency
relationships. A Fund may also hedge its foreign currency exchange rate risk by
engaging in a currency financial futures and options transactions. The
forecasting of short-term currency market movements is extremely difficult and
whether such a short-term heading strategy will be successful is highly
uncertain.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration of a forward currency contract. Accordingly, it may
be necessary for a Fund to purchase additional currency on the spot market if
the market value of the security is less than the amount of foreign currency
such Fund is obligated to deliver when a decision is made to sell the security
and make delivery of the foreign currency in settlement of a forward contract.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency such Fund is obligated to deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, it will incur a gain or a lost to the extent that there has been
movement in forward currency contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a new forward currency contract to
sell the foreign currency. Although such contracts tend to minimize the risk of
loss due to a decline in the value of the hedged currency, they also tend to
limit any potential gain which might result should the value of such currency
increase. The Funds will have to convert their holdings of foreign currencies
into U.S. dollars from time to time. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies.
Medium-Grade Securities
Each of the Funds may invest up to 10% of its total assets in debt securities
within the fourth highest rating group assigned by an NRSRO (i.e., BBB or Baa by
S&P and Moody's, respectively) and comparable unrated securities. This
limitation does not apply to convertible securities, which are discussed above.
These types of debt securities are considered by Moody's and S&P to have some
speculative characteristics, and are more vulnerable to changes in economic
conditions, higher interest rates or adverse issuer-specific developments which
are more likely to lead to a weaker capacity to make principal and interest
payments than comparable higher rated debt securities.
Should subsequent events cause the rating of a debt security purchased by a Fund
to fall below BBB or Baa, as the case may be, AmSouth or Rockhaven will consider
such an event in determining whether a Fund should continue to hold that
security. In no event, however, would a Fund be required to liquidate any such
portfolio security where the Fund would suffer a loss on the sale of such
security.
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Mortgage-Related and Asset-Backed Securities
Investments in these and other derivative securities will not be made for
purposes of leverage or speculation, but rather primarily for conventional
investment or hedging purposes, liquidity, flexibility and to capitalize on
market inefficiencies. Consistent with its investment objective, restrictions
and policies, each of the Funds may invest in mortgage-related securities, which
are securities representing interests in "pools" of mortgages in which payments
of both interest and principal on the securities are made monthly.
Early repayment of principal on mortgage-related securities may expose a Fund to
a lower rate of return upon reinvestment of principal. Like other fixed income
securities, when interest rates rise, the value of a mortgage-related security
generally will decline; however, when interest rates decline, the value of
mortgage-related securities with prepayment features may not increase as much as
other fixed income securities. For this and other reasons, the stated maturity
of a mortgage-related security may be shortened by unscheduled prepayments on
the underlying mortgages. Alternatively, the rate of prepayments on underlying
mortgages may have the effect of extending the effective maturity of the
security beyond what was anticipated at the time of purchase. To the extent that
unanticipated rates of prepayment on underlying mortgages increase the effective
maturity of a mortgage-related security, the volatility of such security can be
expected to increase. Accordingly, it may not possible to predict accurately a
security's return to a particular Fund.
Like mortgages underlying mortgage-backed securities, automobile sales contracts
or credit card receivables underlying asset-backed securities are subject to
prepayment, which may reduce the overall return to certificate holders.
Nevertheless, principal prepayment rates tend not to vary much with interest
rates, and the short-term nature of the underlying car loans or other
receivables tends to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in prepayment on the certificates
if the full amounts due on underlying sales contracts or receivables are not
realized because of unanticipated legal or administrative costs of enforcing the
contracts or because of depreciation or damage to the collateral (usually
automobiles) securing certain contracts, or other factors. In certain market
conditions, asset-backed securities may experience volatile fluctuations in
value and periods of illiquidity. If consistent with its investment objective
and policies, a Fund may invest in other asset-backed securities that may be
developed in the future.
Certain issuers of asset-backed securities are considered to be investment
companies under the Investment Company Act of 1940 (the "1940 Act"). The Funds
intend to conduct their operations so that they will invest their assets (when
combined with investments in securities of other investment companies, if any)
in the obligations of such issuers within applicable regulatory limits.
U.S. Government Obligations
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law.
The Stripped Treasury Obligations in which the Funds may invest do not include
Certificates of Accrual on Treasury Securities ("CATS") or Treasury Income
Growth Receipts ("TIGRs"). Stripped securities are issued at a discount to their
"face value" and may exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors.
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Bankers' Acceptances
The Funds may invest in bankers' acceptances guaranteed by domestic and foreign
banks if at the time of investment the guarantor bank has capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of its most recently
published financial statements).
Certificates of Deposit and Time Deposits
The Funds may invest in certificates of deposit and time deposits of domestic
and foreign banks and savings and loan associations if (a) at the time of
investment the depository institution has capital, surplus, and undivided
profits in excess of $100,000,000 (as of the date of its most recently published
financial statements), or (b) the principal amount of the instrument is insured
in full by the Federal Deposit Insurance Corporation.
Commercial Paper
Each of the Funds may, within the limitations described above, invest in
short-term promissory notes (including variable amount master demand notes)
issued by corporations and other entities, such as municipalities, rated at the
time of purchase within the two highest categories assigned by an NRSRO (e.g.,
A-2 or better by S&P, Prime-2 or better by Moody's) or, if not rated, determined
to be of comparable quality to instruments that are so rated. The Funds may also
invest in Canadian Commercial Paper, which is commercial paper issued by a
Canadian corporation or a Canadian counterpart of a U.S. corporation, and in
Europaper, which is U.S. dollar denominated commercial paper of a foreign
issuer.
Each of the Funds may invest in variable amount master demand notes, which are
unsecured demand notes that permit the indebtedness thereunder to vary, and that
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Although there is no secondary market in the notes, the Funds
may demand payment of principal and accrued interest at any time. While the
notes are not typically rated by credit rating agencies, issuers of variable
amount master demand notes (which are normally manufacturing, retail, financial,
and other business concerns) must satisfy the same criteria as set forth above
for commercial paper. AmSouth and Rockhaven each will consider the earning
power, cash flow, and other liquidity ratios of the issuers of such notes and
will continuously monitor their financial status and ability to meet payment on
demand. A note will be deemed to have a maturity equal to the period of time
remaining until the principal amount can be recovered from the issuer through
demand. The period of time remaining until the principal amount can be recovered
under a variable master demand note shall not exceed seven days.
Repurchase Agreements
Securities held by the Funds may be subject to repurchase agreements. Under the
terms of a repurchase agreement, a Fund would acquire securities from financial
institutions, subject to the seller's agreement to repurchase such securities at
a mutually agreed upon date and price, which includes interest negotiated on the
basis of current short-term rates. The seller under a repurchase agreement will
be required to maintain at all times the value of collateral held pursuant to
the agreement at not less than the repurchase price (including accrued
interest). If a seller defaults on its repurchase agreements, a Fund may suffer
a loss in disposing of the security subject to the repurchase agreement. For
further information about repurchase agreements, see "INVESTMENT OBJECTIVES AND
POLICIES--Additional Information on Portfolio Instruments--Repurchase
Agreements" in the Statement of Additional Information.
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Reverse Repurchase Agreements and Dollar Roll Agreements
The Funds may borrow funds by entering into reverse repurchase agreements and
dollar roll agreements. Pursuant to such reverse repurchase agreements, a Fund
would sell certain of its securities to financial institutions such as banks and
broker-dealers, and agree to repurchase them, or substantially similar
securities in the case of a dollar roll agreement, at a mutually agreed upon
date and price. A dollar roll agreement is analogous to a reverse repurchase
agreement, with a Fund selling mortgage-backed securities for delivery in the
current month and simultaneously contracting to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. At the
time a Fund enters into a reverse repurchase agreement or dollar roll agreement,
it will place in a segregated custodial account assets such as U.S. Government
securities or other liquid securities consistent with its investment
restrictions having a value equal to the repurchase price (including accrued
interest), and will subsequently continually monitor the account to ensure that
such equivalent value is maintained at all times. Reverse repurchase agreements
and dollar roll agreements involve the risk that the market value of securities
to be purchased by a Fund may decline below the price at which it is obligated
to repurchase the securities, or that the other party may default on its
obligation, so that a Fund is delayed or prevented from completing the
transaction.
When-Issued and Delayed-Delivery Transactions
Each of the Funds may purchase securities on a when-issued or delayed-delivery
basis. A Fund will engage in when-issued and delayed-delivery transactions only
for the purpose of acquiring portfolio securities consistent with its investment
objective and policies, not for investment leverage. When-issued securities are
securities purchased for delivery beyond the normal settlement date at a stated
price and yield and thereby involve a risk that the yield obtained in the
transaction will be less than that available in the market when delivery takes
place. A Fund will not pay for such securities or start earning interest on them
until they are received. When a Fund agrees to purchase such securities, its
Custodian will set aside cash or liquid securities equal to the amount of the
commitment in a segregated account. In when-issued and delayed-delivery
transactions, a Fund relies on the seller to complete the transaction; the
seller's failure to do so may cause such Fund to miss a price or yield
considered to be advantageous.
Lending of Portfolio Securities
In order to generate additional income, the Funds may from time to time lend
portfolio securities to broker-dealers, banks or institutional borrowers of
securities. The Funds must receive 100% collateral, in the form of cash or U.S.
Government securities. This collateral must be valued daily, and should the
market value of the loaned securities increase, the borrower must furnish
additional collateral to the lender. During the time portfolio securities are on
loan, the borrower pays the lender any dividends or interest paid on such
securities. Loans are subject to termination by the lender or the borrower at
any time. While a Fund does not have the right to vote securities on loan, each
lender intends to terminate the loan and regain the right to vote if that is
considered important with respect to the investment. In the event the borrower
defaults on its obligation to a Fund, the lender could experience delays in
recovering its securities and possible capital losses. The Funds will only enter
into loan arrangements with broker-dealers, banks or other institutions
determined to be creditworthy under guidelines established by the Board of
Trustees that permit each of the Funds to loan up to 33 1/3% of the value of its
total assets.
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Short-Term Obligations
The Funds may invest in high quality, short-term obligations (with maturities of
12 months or less) such as domestic and foreign commercial paper (including
variable amount master demand notes), bankers' acceptances, certificates of
deposit and demand and time deposits of domestic and foreign branches of U.S.
banks and foreign banks, and repurchase agreements, in order to acquire interest
income combined with liquidity. Such investments will be limited to those
obligations which, at the time of purchase, (i) possess one of the two highest
short-term ratings from NRSROs or (ii) do not possess a rating (i.e., are
unrated) but are determined to be of comparable quality to rated instruments
eligible for purchase. Under normal market conditions, each of the Funds will
limit its investment in short-term obligations to 35% of its total assets. For
temporary defensive purposes, as determined by AmSouth or Rockhaven, these
investments may constitute 100% of a Fund's portfolio and, in such
circumstances, will constitute a temporary suspension of such Fund's attempts to
achieve its investment objective.
Short-Term Trading
In order to generate income, the Funds may engage in the technique of short-term
trading. Such trading involves the selling of securities held for a short time,
ranging from several months to less than a day. The object of such short-term
trading is to increase the potential for capital appreciation and/or income of
the Funds in order to take advantage of what AmSouth or Rockhaven believes are
changes in market, industry or individual company conditions or outlook. Any
such trading would increase the portfolio turnover rate of the Funds and their
transaction costs.
Securities Issued by Other Investment Companies
Each of the Funds may invest up to 10% of its total assets in shares of money
market mutual funds for cash management purposes. A Fund will incur additional
expenses due to the duplication of expense as a result of investing in other
investment companies.
Real Estate Investment Trusts
The Equity Income Fund may invest in real estate investment trusts. Real estate
investment trusts are sensitive to factors such as changes in real estate values
and property taxes, interest rates, cash flow of underlying real estate assets,
overbuilding, and the management skill and creditworthiness of the issuer. Real
estate may also be affected by tax and regulatory requirements, such as those
relating to the environment.
Restricted Securities
Securities in which the Funds may invest include securities issued by
corporations without registration under the Securities Act of 1933, as amended
(the "1933 Act"), in reliance on the so-called "private placement" exemption
from registration which is afforded by Section 4(2) of the 1933 Act ("Section
4(2) securities"). Section 4(2) securities are restricted as to disposition
under the federal securities laws, and generally are sold to institutional
investors such as the Funds who agree that they are purchasing the securities
for investment and not with a view to public distribution. Any resale must also
generally be made in an exempt transaction. Section 4(2) securities are normally
resold to other institutional investors through or with the assistance of the
issuer or investment dealers who make a market in such Section 4(2) securities,
thus providing liquidity. Pursuant to procedures adopted by the Board of
Trustees of the Trust, AmSouth or Rockhaven may determine Section 4(2)
securities to be liquid if such securities are readily marketable. These
securities may include securities eligible for resale under Rule 144A under the
1933 Act.
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VALUATION OF SHARES
The net asset value of the Funds is determined and their Shares are priced as of
the closing of the NYSE (generally 4:00 p.m. Eastern Time) on each Business Day
("Valuation Time"). As used herein, Business Day is a day on which the New York
Stock Exchange ("NYSE") is open for trading, and any other day except days on
which there are insufficient changes in the value of a Fund's portfolio
securities to materially affect the Fund's net asset value or days on which no
Shares are tendered for redemption and no order to purchase any Shares is
received. Currently, the NYSE is closed on the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
Net asset value per Share for purposes of pricing sales and redemptions is
calculated by dividing the value of all securities and other assets belonging to
a Fund, less the liabilities charged to that Fund and any liabilities allocable
to that Fund, by the number of such Fund's outstanding Shares.
The net asset value per Share of each Fund will fluctuate as the value of the
investment portfolio of a Fund changes.
The securities in each Fund will be valued at market value. If market quotations
are not available, the securities will be valued by a method which the Board of
Trustees believes accurately reflects fair value. For further information about
valuation of investments, see "NET ASSET VALUE" in the Statement of Additional
Information.
PURCHASING SHARES
As of the date of this Prospectus, Shares of the Funds are offered for purchase
by the Separate Account to serve as an investment medium for the Variable
Contracts issued by Hartford, and to qualified pension and retirement plans
outside of the separate account context. Shares of the Funds may be offered in
the future to other separate accounts established by or sold to separate
accounts of other affiliated or unaffiliated insurance companies, and may be
offered in the future to serve as an investment medium for variable life
insurance policies.
While the Funds currently do not foresee any disadvantages to Variable Contract
Owners if the Funds serve as an investment medium for both variable annuity
contracts and variable life insurance policies, due to differences in tax
treatment or other considerations, it is theoretically possible that the
interest of owners of annuity contracts and insurance policies for which the
Funds served as an investment medium might at some time be in conflict. However,
the Trust's Board of Trustees and each insurance company with a separate account
allocating assets to the Funds would be required to monitor events to identify
any material conflicts between variable annuity contract owners and variable
life insurance policy owners, and would have to determine what action, if any
should be taken in the event of such a conflict. If such a conflict occurred, an
insurance company participating in the Funds might be required to redeem the
investment of one or more of its separate accounts from the Funds, which might
force the Funds to sell securities at disadvantageous prices.
Shares of each Fund are purchased at the net asset value per Share (see
"VALUATION OF SHARES") next determined after receipt by the Distributor of an
order to purchase Shares. Purchases of Shares of the Funds will be effected only
on a Business Day of the Funds. An order received prior to the Valuation Time on
any Business Day will be executed at the net asset value determined as of the
Valuation Time on the date of receipt. An order received after the Valuation
Time on any Business Day will be executed at the net asset value determined as
of the Valuation Time on the next Business Day of that Fund.
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Each Fund reserves the right to discontinue offering Shares at any time. In the
event that a Fund ceases offering its Shares, any investments allocated to the
Fund will, subject to any necessary regulatory approvals, be invested in another
portfolio of the Trust deemed appropriate by the Trustees.
Exchange Privilege
Shares of a Fund may be exchanged at net asset value for Shares offered by the
other Fund. Exchanges are treated as a redemption of Shares and a purchase of
Shares of the other Fund and are effected at the respective net asset values per
Share of the Funds on the date of the exchange. The Funds reserve the right to
modify or discontinue the exchange privilege at any time without notice.
REDEEMING SHARES
Shares may be redeemed without charge on any day that net asset value is
calculated (see "VALUATION OF SHARES"). All redemption orders are effected at
the net asset value per Share next determined after receipt by the Distributor
of a redemption request. Payment for Shares redeemed normally will be made
within seven days.
The Trust intends to pay cash for all Shares redeemed, but under abnormal
conditions which make payment in cash unwise, payment may be made wholly or
partly in portfolio securities at their then market value equal to the
redemption price. In such cases, a Shareholder may incur brokerage costs in
converting such securities to cash.
See the Statement of Additional Information ("ADDITIONAL PURCHASE AND REDEMPTION
INFORMATION") for examples of when the right of redemption may be suspended.
Variable Contract Owners do not deal directly with the Funds to purchase,
redeem, or exchange Shares, and Variable Contract Owners should refer to the
prospectus for the Separate Account for information on the allocation of
premiums and on transfers of accumulated value among sub-accounts of the
Separate Account that invests in the Funds.
MANAGEMENT OF THE FUNDS
Trustees
Overall responsibility for management of the Trust rests with its Board of
Trustees. The Trust will be managed by the Trustees in accordance with the laws
of the Commonwealth of Massachusetts governing business trusts. The Trustees, in
turn, elect the officers of the Trust to supervise its day-to-day operations.
Investment Adviser and Sub-Adviser
AmSouth. AmSouth is the investment adviser of the Funds. AmSouth is the
principal bank affiliate of AmSouth Bancorporation, one of the largest banking
institutions headquartered in the mid-south region. AmSouth Bancorporation
reported assets as of December 31, 1996 of $18.4 billion and operated 272
banking offices in Alabama, Florida, Georgia and Tennessee. AmSouth has provided
investment management services through its Trust Investment Department since
1915. As of December 31, 1996, AmSouth and its affiliates had over $7.1 billion
in assets under discretionary management and provided custody services for an
additional $13.4 billion in securities. AmSouth, whose principal business
address is 1901 Sixth Avenue North, Birmingham, Alabama 35203 is the largest
provider of trust services in Alabama. AmSouth serves as administrator for over
$12 billion in bond issues, and its Trust Natural Resources and Real Estate
Department is a major manager of timberland, mineral, oil and gas properties and
other real estate interests.
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Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the respective investment objectives and restrictions of the
Funds, AmSouth manages the Funds, makes decisions with respect to and places
orders for all purchases and sales of their investment securities, and maintains
their records relating to such purchases and sales. Pedro Verdu, CFA, is the
portfolio manager for the Regional Equity Fund and, as such, has primary
responsibility for the day-to-day portfolio management of the Fund. Mr. Verdu
has twenty-seven years of experience as an analyst and portfolio manager; he is
currently the Director of Equity Investing at AmSouth.
Under an investment advisory agreement between the Trust and AmSouth, the fee
payable to AmSouth by each of the Funds for investment advisory services is the
lesser of (a) a fee computed daily and paid monthly at the annual rate of 0.60%
of such Fund's daily net assets or (b) such fee as may from time to time be
agreed upon in writing by the Trust and AmSouth. A fee agreed to in writing from
time to time by the Trust and AmSouth may be lower than the fee calculated at
the contractual annual rate and the effect of such lower fee would be to lower
the Fund's expenses and increase the net income of the Fund during the period
when such lower fee is in effect.
Rockhaven. Rockhaven serves as investment sub-adviser to the Equity Income Fund
pursuant to a sub-advisory agreement with AmSouth. Under the sub-advisory
agreement, Rockhaven manages the Fund, selects investments and places all orders
for purchases and sales of securities, subject to the general supervision of the
Trust's Board of Trustees and AmSouth in accordance with the Fund's investment
objective, policies and restrictions.
Rockhaven is 50% owned by AmSouth and 50% owned by Mr. Christopher H. Wiles.
Rockhaven was organized in 1997 to perform advisory services for investment
companies and has its principal offices at 100 First Avenue, Suite 1050,
Pittsburgh, PA 15222.
For its services and expenses incurred under the sub-advisory agreement,
Rockhaven is entitled to a fee payable by AmSouth. The fee is computed daily and
paid monthly at an annual rate of 0.36% of the Fund's average daily net assets
or such lower fee as may be agreed upon in writing by AmSouth and Rockhaven,
provided that if AmSouth waives a portion of its investment advisory fee,
Rockhaven has agreed that its sub-advisory fee shall not exceed 60% of AmSouth's
net investment advisory fee.
Mr. Wiles is the portfolio manager for the Equity Income Fund, and, as such, has
the primary responsibility for the day-to-day portfolio management of the Fund.
Mr. Wiles is the President and Chief Investment Officer of Rockhaven. From May,
1991 to January, 1997, he was portfolio manager of the Federated Equity Income
Fund.
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Administrator and Distributor
BISYS, 3435 Stelzer Road, Columbus, Ohio 43219-3035, a division of BISYS Group,
Inc., is the administrator for each Fund, and also acts as the Trust's principal
underwriter and distributor.
The Administrator generally assists in all aspects of the Funds' administration
and operation. For expenses assumed and services provided as administrator
pursuant to its Management and Administration Agreement with the Trust, the
Administrator receives a fee from each Fund equal to the lesser of a fee,
computed daily and paid periodically, at the annual rate of 0.20% of each Fund's
average daily net assets, or such other fee as may be agreed upon from time to
time by the Trust and the Administrator. The Administrator may periodically
voluntarily reduce all or a portion of its administrative fee with respect to
any Fund to increase the net income of such Fund available for distribution as
dividends. The voluntary fee reduction will cause the yield of that Fund to be
higher than it would otherwise be in the absence of such a reduction.
The Distributor acts as agent for the Funds in the distribution of each of their
Shares and, in such capacity, advertises and pays the cost of advertising,
office space and its personnel involved in such activities. The Distributor
serves in such capacity without remuneration from the Funds.
Other Service Providers
BISYS Ohio, 3435 Stelzer Road, Columbus, Ohio 43219-3035, serves as the Trust's
transfer agent and dividend disbursing agent and provides certain accounting
services for each of the Funds. BISYS Ohio receives an annual fee of $14 per
Variable Contract Owner account, subject to certain per-Fund base fees, for its
services as transfer agent, and, for its services as fund accountant, BISYS Ohio
receives a fee, computed daily and paid periodically, at an annual rate equal to
the greater of 0.03% of average daily net assets or $30,000 for each Fund.
Coopers & Lybrand L.L.P. serves as independent auditors for the Trust. AmSouth
is the custodian of the Funds. See "MANAGEMENT OF THE TRUST" in the Statement of
Additional Information for further information.
While BISYS Ohio is a distinct legal entity from BISYS (the Trust's
administrator and distributor), BISYS Fund Services Ohio, Inc. is considered to
be an affiliated person of BISYS under the 1940 Act due to, among other things,
the fact that BISYS Ohio is owned by substantially the same persons that
directly or indirectly own BISYS.
Variable Contract Owner Servicing Agents
The Trust has adopted a plan under which up to 0.25% of each Fund's average
daily net assets may be expended to procure Variable Contract Owner services.
Pursuant to agreements with the Funds, certain financial institutions and their
affiliates serve as Variable Contract Owner Servicing Agents to the Funds. A
Variable Contract Owner Servicing Agent generally provides support services to
its clients who are Variable Contract Owners by establishing and maintaining
accounts and records, providing account information, arranging for bank wires,
responding to routine inquiries, forwarding Variable Contract Owner
communications, assisting in the processing of purchase, exchange and redemption
requests, and assisting Variable Contract Owners in changing account
designations and addresses. For expenses incurred and services provided, each
Variable Contract Owner Servicing Agent receives a fee from each of the Funds,
computed daily and paid monthly, at an annual rate of up to 0.25% of the average
daily net assets of each Fund allocable to Variable Contracts owned by customers
of the Variable Contract Owner Servicing Agent. A Variable Contract Owner
Servicing Agent may periodically waive all or a portion of its servicing fees
with respect to a Fund to increase the net income of such Fund available for
distribution as dividends.
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Expenses
AmSouth, Rockhaven, and the Administrator each bear all expenses in connection
with the performance of its services other than the cost of securities
(including brokerage commissions) purchased for the Trust. Each Fund will bear
the following expenses relating to its operation: taxes, interest, fees of the
Trustees of the Trust, Securities and Exchange Commission fees, outside auditing
and legal expenses, advisory and administration fees, fees and out-of-pocket
expenses of the Custodian and fund accountant, certain insurance premiums, costs
of maintenance of the Trust's existence, costs of Shareholders' reports and
meetings, and any extraordinary expenses incurred in each Fund's operation.
Banking Laws
Federal banking laws and regulations presently prohibit a national bank or any
affiliate thereof from sponsoring, organizing or controlling a registered
open-end investment company continuously engaged in the issuance of its shares,
and generally from underwriting, selling or distributing securities, such as
Shares of the Funds.
AmSouth and Rockhaven each believes that it may perform advisory services for
the Funds as described herein and, provided that they do not engage in
underwriting, selling or distribution of the Funds' shares, their affiliates
believe that they may perform Variable Contract Owner servicing activities and
may receive compensation without violating federal banking laws and regulations.
In the event that, due to future events, either adviser is prohibited from
acting as an investment adviser of the Funds, it is probable that the Board of
Trustees would either recommend to Shareholders the selection of another
qualified adviser or, if that course of action appeared impractical, that the
Funds be liquidated.
TAXATION
Each Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). Accordingly, a Fund so
qualifying generally will not be subject to federal income taxes to the extent
that it distributed on a timely basis its investment company taxable income and
its net capital gains.
To comply with regulations under section 817(h) of the Code, each Fund is
required to diversify its investments. Generally, a Fund will be required to
diversify its investments so that on the last day of each quarter of a calendar
year no more than 55% of the value of its total assets is represented by any one
investment, no more than 70% is represented by any two investments, no more than
80% is represented by any three investments, and no more than 90% is represented
by any four investments. For this purpose, securities of a given issuer
generally are treated as one investment, but each U.S. Government agency and
instrumentality is treated as a separate issuer. Any security issued,
guaranteed, or insured (to the extent so guaranteed or insured) by the U.S. or
an agency or instrumentality of the U.S. is treated as a security issued by the
U.S. Government or its agency or instrumentality, whichever is applicable.
19
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Compliance with the diversification rules under Section 817(h) of the Code
generally will limit the ability of a Fund to invest greater than 55% of its
total assets in direct obligations of the U.S. Treasury (or any other issuer) or
to invest primarily in securities issued by a single agency or instrumentality
of the U.S. Government. If a Fund fails to meet the diversification requirement
under Section 817(h) of the Code, income with respect to Variable Contracts
invested in the Fund at any time during the calendar quarter in which the
failure occurred could become currently taxable to the owners of such Variable
Contracts and income for prior periods with respect to such contracts also could
be taxable, most likely in the year of the failure to achieve the required
diversification. Other adverse tax consequences could also ensue. If a Fund
failed to qualify as a regulated investment company, the results would be
substantially the same as a failure to meet the diversification requirements
under Section 817(h) of the Code.
The Treasury Department announced that it would issue future regulations or
rulings addressing the circumstances in which a variable contract owner's
control of the investments of the separate account may cause the contract owner,
rather than the insurance company, to be treated as the owner of the assets held
by the separate account. If the contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contract owner's gross income. It
is not known what standards will be set forth in the regulations or rulings.
In the event that rules or regulations are adopted, there can be no assurance
that the Funds will be able to operate as currently described, or that the Trust
will not have to change one or more Fund's investment objective or investment
policies. While each Fund's investment objective is fundamental and may be
changed only by a vote of a majority of its outstanding Shares, the investment
policies of a Fund may be modified as necessary to prevent any such prospective
rules and regulations from causing Variable Contract Owners to be considered the
owners of the Shares of a Fund.
Reference is made to the prospectus for the Separate Account and Variable
Contract for information regarding the federal income tax treatment of
distributions to the Separate Account. See "ADDITIONAL INFORMATION - Additional
Tax Information" in the Funds' Statement of Additional Information for more
information on taxes.
GENERAL INFORMATION
Description of the Trust and Its Shares
The Trust was organized as a Massachusetts business trust in 1994 and currently
consists of nine portfolios. Each Share represents an equal proportionate
interest in a Fund with other Shares of the same Fund, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
that Fund as are declared at the discretion of the Trustees. Shares are without
par value. Shareholders are entitled to one vote for each dollar of value
invested and a proportionate fractional vote for any fraction of a dollar
invested. Shareholders will vote in the aggregate and not by Fund except as
otherwise expressly required by law.
An annual or special meeting of Shareholders to conduct necessary business is
not required by the Trust's Declaration of Trust, the 1940 Act or other
authority except, under certain circumstances, to elect Trustees, amend the
Declaration of Trust, approve an investment advisory agreement, and to satisfy
certain other requirements. To the extent that such a meeting is not required,
the Trust may elect not to have an annual or special meeting.
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The Trust will call a special meeting of Shareholders for purposes of
considering the removal of one or more Trustees upon written request therefor
from Shareholders holding not less than 10% of the outstanding votes of the
Trust. At such a meeting, a quorum of Shareholders (constituting a majority of
votes attributable to all outstanding Shares of the Trust), by majority vote,
has the power to remove one or more Trustees. In accordance with current laws,
it is anticipated that an insurance company issuing a variable contract that
participates in a Fund will request voting instructions from variable contract
owners and will vote Shares or other voting interests in the separate account in
proportion of the voting instructions received. The Separate Account and
qualified pension and retirement plans are currently the only Shareholders of
the Fund, although other separate accounts of Hartford, or of other insurance
companies, may become Shareholders in the future.
Performance Information
From time to time performance information for the Funds showing their average
annual total return, aggregate total return and/or yield may be presented in
advertisements, sales literature and shareholder reports. Such performance
figures are based on historical earnings and are not intended to indicate future
performance. Average annual total return of a Fund will be calculated for the
period since the establishment of the Fund. Average annual total return is
measured by comparing the value of an investment in a Fund at the beginning of
the relevant period to the redemption value of the investment at the end of the
period (assuming immediate reinvestment of any dividends or capital gains
distributions and analyzing the result). Aggregate total return is calculated
similarly to average annual total return except that the return figure is
aggregated over the relevant period instead of annualized. Yield of a Fund will
be computed by dividing the net investment income per Share earned during a
recent one-month period by the per Share maximum offering price (reduced by any
undeclared earned income expected to be paid shortly as a dividend) on the last
day of the period and analyzing the result. Performance information for the
Funds will not be advertised or included in sales literature unless accompanied
by comparable performance information for the Separate Account.
In addition, from time to time each Fund may present its respective distribution
rates in supplemental sales literature which is accompanied or preceded by a
prospectus and in Shareholder reports. Distribution rates will be computed by
dividing the distribution per Share made by a Fund over a twelve-month period by
the maximum offering price per Share. The calculation of income in the
distribution rate includes both income and capital gain dividends and does not
reflect unrealized gains or losses, although a Fund may also present a
distribution rate excluding the effect of capital gains. The distribution rate
differs from the yield, because it includes capital gains which are often
non-recurring in nature, whereas yield does not include such items.
Total return and yield are functions of the type and quality of instruments held
in the portfolio, operating expenses, and market conditions. Consequently, total
return and yield will fluctuate and are not necessarily representative of future
results. Quotations of yield or total return for a Fund will not take into
account charges or deductions against the Separate Account or Variable Contract
specific deductions for cost of insurance charges, premium load, administrative
fees, maintenance fees, premium tax, mortality and expense risks, or other
charges that may be incurred under a Variable Contract for which the Fund serves
as an underlying investment vehicle. A Fund's yield and total return should not
be compared with mutual funds that sell their shares directly to the public
since the figures provided do not reflect charges against the Separate Account
or the Variable Contracts. Performance information for a Fund reflects only the
performance of a hypothetical investment in the Fund during the particular time
period on which the calculations are based. In addition, if AmSouth or BISYS
voluntarily reduce all or a part of their respective fees, the total return of a
Fund will be higher than it would otherwise be in the absence of such voluntary
fee reductions.
Miscellaneous
Inquiries regarding the Trust may be directed in writing to the Trust at 3435
Stelzer Road, Columbus, Ohio 43219-3035, or by calling toll free (800) 257-5872.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus in connection with the offering
made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Funds
or their Distributor. This Prospectus does not constitute an offering by the
Funds or by their Distributor in any jurisdiction in which such offering may not
lawfully be made.
21
<PAGE>
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
(800) 257-5872
STATEMENT OF ADDITIONAL INFORMATION
June 1, 1997, as
supplemented September 16, 1997
This Statement of Additional Information ("SAI") describes nine diversified
investment portfolios (the "Funds") of Variable Insurance Funds (the "Trust").
The Funds are:
o Variable Insurance Allocated Conservative Fund;
o Variable Insurance Allocated Balanced Fund;
o Variable Insurance Allocated Growth Fund;
o Variable Insurance Allocated Aggressive Fund;
o Variable Insurance Money Market Fund;
o BB&T Growth and Income Fund;
o BB&T Capital Manager Fund;
o AmSouth Regional Equity Fund; and
o AmSouth Equity Income Fund.
The Trust offers an indefinite number of transferable units ("Shares") of each
Fund. Shares of the Allocated Funds and the Variable Insurance Money Market Fund
currently are sold to a segregated asset account (a "Separate Account") of
Nationwide Life and Annuity Insurance Company ("Nationwide") to serve as the
investment medium for variable annuity contracts ("Variable Contracts") issued
by Nationwide, while Shares of the BB&T Growth and Income Fund, the BB&T Capital
Manager Fund, the AmSouth Regional Equity Fund and the AmSouth Equity Income
Fund currently are sold to a segregated asset account (also a "Separate
Account") of Hartford Life Insurance Company ("Hartford") to serve as the
investment medium for Variable Contracts issued by Hartford. Shares of the Funds
also are sold to qualified pension and retirement plans outside of the separate
account context. The Separate Accounts invest in Shares of the Funds in
accordance with allocation instructions received from owners of the Variable
Contracts ("Variable Contract Owners").
This SAI is not a Prospectus and is authorized for distribution only when
preceded or accompanied by a Prospectus of the Funds, dated or supplemented the
date hereof. This SAI contains more detailed information than that set forth in
the Prospectus and should be read in conjunction with the Prospectus. This SAI
is incorporated by reference in its entirety into each Prospectus. Copies of a
Prospectus may be obtained by writing the Trust at 3435 Stelzer Road, Columbus,
Ohio 43219-3035, or by telephoning toll free (800) 257-5872.
<PAGE>
TABLE OF CONTENTS
INVESTMENT OBJECTIVES AND POLICIES............................................1
Additional Information on the Allocated Funds' and the Capital
Manager Fund's Investment Policies..................................1
Additional Information on Portfolio Instruments......................2
INVESTMENT RESTRICTIONS......................................................14
Portfolio Turnover..................................................16
NET ASSET VALUE..............................................................16
Valuation of the Money Market Fund..................................17
Valuation of Other Funds............................................17
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................18
MANAGEMENT OF THE TRUST......................................................18
Trustees and Officers...............................................18
Investment Advisers.................................................20
Investment Sub-Adviser..............................................22
Portfolio Transactions..............................................23
Glass-Steagall Act..................................................24
Administrator.......................................................25
Expenses............................................................26
Distributor.........................................................26
Custodians, Transfer Agent and Fund Accounting Services.............26
Auditors............................................................27
Legal Counsel.......................................................27
ADDITIONAL INFORMATION.......................................................27
Description of Shares...............................................27
Vote of a Majority of the Outstanding Shares........................28
Principal Shareholders..............................................28
Shareholder and Trustee Liability...................................29
Additional Tax Information..........................................29
Performance Information.............................................31
Miscellaneous.......................................................32
FINANCIAL STATEMENTS.........................................................32
APPENDIX .................................................................... i
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The Trust is an open-end management investment company which currently offers
nine separate diversified Funds, each with different investment objectives. This
SAI contains information about the following five Funds which, along with the
"Underlying Qualivest Funds" described below, are advised by Qualivest Capital
Management, Inc. ("Qualivest"): the Variable Insurance Allocated Conservative
Fund (the "Conservative Fund"), the Variable Insurance Allocated Balanced Fund
(the "Balanced Fund"), the Variable Insurance Allocated Growth Fund (the "Growth
Fund"), the Variable Insurance Allocated Aggressive Fund (the "Aggressive Fund")
(collectively, the "Allocated Funds"), and Variable Insurance Money Market Fund
(the "Money Market Fund"). This SAI also contains information about the
following two Funds which, along with the "Underlying BB&T Funds" described
below, are advised by Branch Banking and Trust Company ("BB&T"): the BB&T Growth
and Income Fund (the "Growth and Income Fund") and the BB&T Capital Manager Fund
(the "Capital Manager Fund"). In addition, this SAI contains information about
the AmSouth Regional Equity Fund (the "Regional Equity Fund"), which is advised
by AmSouth Bank ("AmSouth"), and the AmSouth Equity Income Fund ("Equity Income
Fund"), which is advised by AmSouth, with Rockhaven Asset Management, LLC
("Rockhaven") serving as sub-adviser.
Much of the information contained in this SAI expands upon subjects discussed in
the Prospectuses of the nine Funds described above. Capitalized terms not
defined herein are defined in such Prospectuses. No investment in a Fund should
be made without first reading the Fund's Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Additional Information on the Allocated Funds' and the Capital Manager Fund's
Investment Policies
Each Allocated Fund seeks its investment objective by investing in a diversified
portfolio of one or more of the following funds (the "Underlying Qualivest
Funds"), all of which are series of Qualivest Funds, an affiliated open-end
management investment company: the Qualivest Large Companies Value Fund (the
"Qualivest Large Companies Fund"), the Qualivest Small Companies Value Fund (the
"Qualivest Small Companies Fund"), the Qualivest International Opportunities
Fund (the "Qualivest International Fund"), and the Qualivest Optimized Stock
Fund (the "Qualivest Optimized Fund") (collectively, the "Qualivest Equity
Funds"); the Qualivest Intermediate Bond Fund and the Qualivest Diversified Bond
Fund (the "Qualivest Bond Fund") (collectively, the "Qualivest Income Funds");
and the Qualivest U.S. Treasury Money Market Fund (the "Qualivest U.S. Treasury
Fund") and the Qualivest Money Market Fund (collectively, the "Qualivest Money
Funds"). Accordingly, the investment performance of each Allocated Fund is
directly related to the performance of the Underlying Qualivest Funds, which may
engage in the investment techniques described below. The Capital Manager Fund
seeks its investment objective by investing in a diversified portfolio of one or
more of the following funds (the "Underlying BB&T Funds" and collectively with
the Underlying Qualivest Funds, the "Underlying Funds") all of which are series
of The BB&T Mutual Funds Group, another affiliated open-end management
investment company: the BB&T Growth and Income Stock Fund (the "BB&T Growth and
Income Fund"), the BB&T Balanced Fund, the BB&T Small Company Growth Fund, the
BB&T International Equity Fund, the BB&T Short-Intermediate U.S. Government
Income Fund (the "BB&T Short-Intermediate Fund"), the BB&T Intermediate U.S.
Government Bond Fund (the "BB&T Intermediate Bond Fund"), and the BB&T U.S.
Treasury Money Market Fund (the "BB&T U.S. Treasury Fund"). Accordingly, the
investment performance of the Capital Manager Fund is directly related to the
performance of the Underlying BB&T Funds, which may engage in the investment
techniques described below. In addition to shares of the Underlying Funds, for
temporary cash management purposes, each Allocated Fund and the Capital Manager
Fund may invest in short-term obligations (with maturities of 12 months or less)
consisting of commercial paper (including variable amount master demand notes)
and obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. These investments are described below under "Additional
Information on Portfolio Instruments."
<PAGE>
Additional Information on Portfolio Instruments
The following policies supplement the investment objectives and policies of the
Money Market Fund and the Underlying Funds as set forth in the Prospectus.
General. The Money Market Fund, Qualivest Equity Funds, Qualivest Income Funds
and Qualivest Money Funds will not acquire portfolio securities issued by, make
savings deposits in, or enter into repurchase, reverse repurchase, or dollar
roll agreements with affiliates of the Qualivest Funds, except that the
Qualivest Optimized Fund may invest in such securities if they are included in
the S&P 500 Index.
Bank Obligations. The Money Market Fund, the Growth and Income Fund, the
Regional Equity Fund, the Equity Income Fund and the Underlying Funds may invest
in bank obligations consisting of bankers' acceptances, certificates of deposit,
and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Bankers' acceptances invested in by
the Funds and the Underlying Funds will be those guaranteed by domestic and
foreign banks having, at the time of investment, capital, surplus, and undivided
profits in excess of $100,000,000 (as of the date of their most recently
published financial statements).
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return. Certificates of deposit and time
deposits will be those of domestic and foreign banks and savings and loan
associations, if (a) at the time of investment the depository institution has
capital, surplus, and undivided profits in excess of $100,000,000 (as of the
date of its most recently published financial statements), or (b) the principal
amount of the instrument is insured in full by the Federal Deposit Insurance
Corporation.
The Money Market Fund, the Regional Equity Fund, the Equity Income Fund and the
Underlying Qualivest Funds may also invest in Eurodollar Certificates of
Deposit, which are U.S. dollar denominated certificates of deposit issued by
offices of foreign and domestic banks located outside the United States; Yankee
Certificates of Deposit, which are certificates of deposit issued by a U.S.
branch of a foreign bank denominated in U.S. dollars and held in the United
States; Eurodollar Time Deposits ("ETDs"), which are U.S. dollar denominated
deposits in a foreign branch of a U.S. bank or a foreign bank; and Canadian Time
Deposits, which are basically the same as ETDs except they are issued by
Canadian offices of major Canadian banks.
2
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Commercial Paper. Commercial paper consists of unsecured promissory notes issued
by corporations. Except as noted below with respect to variable amount master
demand notes, issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Variable Amount Master Demand Notes. Variable amount master demand notes, in
which the Funds and the Underlying Funds (except for the BB&T U.S. Treasury
Fund) may invest, are unsecured demand notes that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the interest rate
according to the terms of the instrument. Because master demand notes are direct
lending arrangements between a Fund or Underlying Fund and the issuer, they are
not normally traded. Although there is no secondary market in the notes, a Fund
or Underlying Fund may demand payment of principal and accrued interest at any
time. While the notes are not typically rated by credit rating agencies, issuers
of variable amount master demand notes (which are normally manufacturing,
retail, financial, and other business concerns) must satisfy the same criteria
as set forth above for commercial paper. Qualivest, BB&T, AmSouth and any
sub-adviser each will consider the earning power, cash flow, and other liquidity
ratios of the issuers of such notes and will continuously monitor their
financial status and ability to meet payment on demand. In determining dollar
weighted average portfolio maturity, a variable amount master demand note will
be deemed to have a maturity equal to the longer of the period of time remaining
until the next interest rate adjustment or the period of time remaining until
the principal amount can be recovered from the issuer through demand.
Foreign Investments. Investment in foreign securities is subject to special
investment risks that differ in some respects from those related to investments
in securities of U.S. domestic issuers.
Because foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies, there may be less publicly available information
about a foreign company than about a U.S. company. Volume and liquidity in most
foreign bond markets are less than in the U.S., and securities of many foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. Fixed commissions on foreign securities exchanges are generally
higher than negotiated commissions on U.S. exchanges, although a Fund or an
Underlying Fund will endeavor to achieve the most favorable net results on
portfolio transactions. There is generally less government supervision and
regulation of securities exchanges, brokers, dealers and listed companies than
in the U.S., thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities.
Foreign markets also have different clearance and settlement procedures, and in
certain markets, there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Such delays in settlement could result in temporary periods
when a portion of the assets of a Fund or Underlying Fund investing in foreign
markets is uninvested and no return is earned thereon. The inability of such a
Fund or Underlying Fund to make intended security purchases due to settlement
problems could cause the Fund or Underlying Fund to miss attractive investment
opportunities. Losses to a Fund or Underlying Fund due to subsequent declines in
the value of portfolio securities, or losses arising out of an inability to
fulfill a contract to sell such securities, could result in potential liability
to the Fund or Underlying Fund. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
the investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
3
<PAGE>
In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers which have similar maturities and quality. Under
certain market conditions these investments may be less liquid than the
securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Finally, in the event of a default of any such foreign debt
obligations, it may be more difficult to obtain or to enforce a judgment against
the issuers of such securities.
A change in the value of any foreign currency against the U.S. dollar will
result in a corresponding change in the U.S. dollar value of securities
denominated in that currency. Such changes will also affect the income and
distributions to Shareholders of a Fund or an Underlying Fund investing in
foreign markets. In addition, although the a Fund or Underlying Fund will
receive income on foreign securities in such currencies, it will be required to
compute and distribute income in U.S. dollars. Therefore, if the exchange rate
for any such currency declines materially after income has been accrued and
translated into U.S. dollars, a Fund or Underlying Fund could be required to
liquidate portfolio securities to make required distributions. Similarly, if an
exchange rate declines between the time a Fund or Underlying Fund incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of such
currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater.
In general, there is a large, liquid market in the United States for many
American Depository Receipts ("ADRs"). The information available for ADRs is
subject to the accounting, auditing and financial reporting standards of the
domestic market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers may be
subject. Certain ADRs, typically those denominated as unsponsored, require the
holders thereof to bear most of the costs of such facilities, while issuers of
sponsored facilities normally pay more of the costs thereof. The depository of
an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited securities
or to pass through the voting rights to facility holders with respect to the
deposited securities, whereas the depository of a sponsored facility typically
distributes shareholder communications and passes through the voting rights.
Variable and Floating Rate Notes. The Money Market Fund and the Qualivest Money
Funds may acquire variable and floating rate notes, subject to the investment
objective, policies and restrictions applicable to each. A variable rate note is
one whose terms provide for the adjustment of its interest rate on set dates and
which, upon such adjustment, can reasonably be expected to have a market value
that approximates its par value. A floating rate note is one whose terms provide
for the adjustment of its interest rate whenever a specified interest rate
changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. Such notes are frequently not rated by
credit rating agencies; however, unrated variable and floating rate notes will
be determined by Qualivest, under guidelines established by the Board of
Trustees of the Trust or Qualivest Funds, as appropriate, to be of comparable
quality at the time of purchase to rated instruments eligible for purchase under
the Money Market Fund's investment policies. In making such determinations, the
investment adviser will consider the earning power, cash flow and other
liquidity ratios of the issuers of such notes (such issuers include financial,
merchandising, bank holding and other companies) and will continuously monitor
their financial condition. Although there may be no active secondary market with
respect to a particular variable or floating rate note purchased by the Money
Market Fund or Underlying Fund, it may resell the note at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Money Market Fund or Underlying Fund to dispose of a variable
or floating rate note in the event the issuer of the note defaulted on its
payment obligations and the Money Market Fund or Underlying Fund could, as a
result or for other reasons, suffer a loss to the extent of the default. To the
extent that the Money Market Fund or Underlying Fund is not entitled to receive
the principal amount of a note within seven days, such note will be treated as
an illiquid security for purposes of calculation of the limitation on investment
in illiquid securities as set forth in the Fund or Underlying Fund's investment
restrictions. Variable or floating rate notes may be secured by bank letters of
credit.
4
<PAGE>
Variable or floating rate notes invested in by the Money Market Fund or the
Qualivest Money Funds may have maturities of more than 397 days, as follows:
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 397 days will be deemed to have a maturity equal to the
period remaining until the next readjustment of the interest rate.
2. A variable rate note, the principal amount of which is scheduled on the face
of the instrument to be paid in 397 days or less, will be deemed to have a
maturity equal to the period remaining until the next readjustment of the
interest rate.
3. A variable rate note that is subject to a demand feature will 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 note that is subject to a demand feature will be deemed to
have a maturity equal to the period remaining until the principal amount can be
recovered through demand.
As used above, a note is "subject to a demand feature" where the Money Market
Fund or an Underlying Fund is entitled to receive the principal amount of the
note either at any time on no more than 30 days' notice or at specified
intervals not exceeding 397 days.
Money Market Funds. Each of the Growth and Income Fund, the Regional Equity
Fund, the Equity Income Fund, the Qualivest Equity Funds, the Qualivest Income
Funds, and the Underlying BB&T Funds (except for the BB&T U.S. Treasury Fund)
may invest up to 5% of the value of its total assets in the securities of any
one money market fund (including shares of certain affiliated money market funds
pursuant to an order from the Securities and Exchange Commission), provided that
no more than 10% of such Fund's total assets may be invested in the securities
of money market funds in the aggregate. The Money Market Fund and each of the
Qualivest Money Funds may invest up to 25% of its total assets in the securities
of money market funds.
In order to avoid the imposition of additional fees as a result of investments
by the Growth and Income Fund, the Regional Equity Fund, the Equity Income Fund,
the Qualivest Equity Funds, the Qualivest Income Funds, and the Underlying BB&T
Funds (except for the BB&T U.S. Treasury Fund) in shares of affiliated money
market funds, Qualivest, BB&T, AmSouth, Rockhaven, BISYS Fund Services ("BISYS"
or "Distributor" or "Administrator"), and their affiliates will not retain any
portion of their usual service fees from the Funds that are attributable to
investments in shares of the affiliated money market funds. No sales charges,
contingent deferred sales charges, 12b-1 fees, or other underwriting or
distribution fees will be incurred in connection with their investments in the
affiliated money market funds. These Funds will vote their shares of each of the
affiliated money market funds in proportion to the vote by all other
shareholders of such fund. Moreover, no single Fund or Underlying Fund may own
more than 3% of the outstanding shares of a single affiliated money market fund.
5
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U.S. Government Obligations. The BB&T U.S. Treasury Fund may invest in U.S.
Government securities to the extent that they are obligations issued or
guaranteed by the U.S. Treasury. The Money Market Fund, the Growth and Income
Fund, the Regional Equity Fund, the Equity Income Fund, and each of the other
Underlying Funds may invest in obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, including bills, notes and bonds
issued by the U.S. Treasury, as well as "stripped" U.S. Treasury obligations
such as Treasury Receipts issued by the U.S. Treasury representing either future
interest or principal payments. Stripped securities are issued at a discount to
their "face value," and may exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors. The stripped Treasury obligations in which the Funds and
Underlying Funds may invest do not include Certificates of Accrual on Treasury
Securities ("CATS") or Treasury Income Growth Receipts ("TIGRs").
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; and still others are supported only by the
creditworthiness of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law. Each Fund or
Underlying Fund will invest in the obligations of such agencies or
instrumentalities only when Qualivest, BB&T, AmSouth, or a sub-adviser believes
that the credit risk with respect thereto is minimal.
Options Trading. The Growth and Income Fund, the Qualivest Equity Funds, the
Qualivest Income Funds, the BB&T Small Company Growth Fund, and the BB&T
International Equity Fund may purchase put and call options. The Regional Equity
Fund and the Equity Income Fund may write (sell) "covered" call options and
purchase options to close out options previously written by it. A call option
gives the purchaser the right to buy, and a writer has the obligation to sell,
the underlying security or foreign currency at the stated exercise price at any
time prior to the expiration of the option, regardless of the market price or
exchange rate of the security or foreign currency, as the case may be. The
premium paid to the writer is consideration for undertaking the obligations
under the option contract. A put option gives the purchaser the right to sell
the underlying security or foreign currency at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
or exchange rate of the security or foreign currency, as the case may be. Put
and call options will be valued at the last sale price, or in the absence of
such a price, at the mean between bid and asked price.
When a Fund or Underlying Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund or Underlying
Fund is included in the liability section of its statement of assets and
liabilities as a deferred credit. The amount of the deferred credit will be
subsequently marked-to-market to reflect the current value of the option
written. The current value of the traded option is the last sale price or, in
the absence of a sale, the average of the closing bid and asked prices. If an
option expires on the stipulated expiration date, or if a Fund or Underlying
Fund enters into a closing purchase transaction, it will realize a gain (or a
loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the deferred credit related to such option
will be eliminated. If an option is exercised, the Fund or Underlying Fund may
deliver the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received
and the Fund or Underlying Fund will realize a gain or loss.
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The Regional Equity Fund and the Equity Income Fund may write only covered call
options. This means that the Regional Equity Fund and the Equity Income Fund
will only write a call option on a security which it already owns. Such options
must be listed on a national securities exchange and issued by the Options
Clearing Corporation. The purpose of writing covered call options is to generate
additional premium income for these Funds. This premium income will serve to
enhance the Fund's total return and will reduce the effect of any price decline
of the security involved in the option. Covered call options will generally be
written on securities which, in AmSouth's or Rockhaven's opinion, are not
expected to make any major price moves in the near future but which, over the
long term, are deemed to be attractive investments for the Fund. Under normal
conditions, it is not expected that the Regional Equity Fund or the Equity
Income Fund will cause the underlying value of portfolio securities and/or
currencies subject to such options to exceed 25% of its total assets.
Once the decision to write a call option has been made, AmSouth or Rockhaven, in
determining whether a particular call option should be written on a particular
security, will consider the reasonableness of the anticipated premium and the
likelihood that a liquid secondary market will exist for those options. Closing
transactions will be effected in order to realize a profit on an outstanding
call option, to prevent an underlying security from being called, or to permit
the sale of the underlying security. Furthermore, effecting a closing
transaction will permit a Fund to write another call option on the underlying
security with either a different exercise price or expiration date or both. If a
Fund desires to sell a particular security from its portfolio on which it has
written a call option, it will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security. There is, of course, no assurance
that the Fund will be able to effect such closing transactions at a favorable
price. If a Fund cannot enter into such a transaction, it may be required to
hold a security that it might otherwise have sold, in which case it would
continue to be at market risk on the security. This could result in higher
transaction costs. A Fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by the Regional Equity Fund and the Equity Income Fund will
normally have expiration dates of less than nine months from the date written.
The exercise price of the options may be below, equal to, or above the current
market values of the underlying securities at the time the options are written.
From time to time, a Fund may purchase an underlying security for delivery in
accordance with an exercise notice of a call option assigned to it, rather than
delivering such security from its portfolio. In such cases, additional costs
will be incurred. A Fund will realize a profit or loss from a closing purchase
transaction if the cost of the 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 is
likely to be offset in whole or in part by appreciation of the underlying
security owned by a Fund.
The Qualivest Equity Funds, the Qualivest Income Funds, and the BB&T
International Equity Fund also may purchase or sell index options. Index options
(or options on securities indices) are similar in many respects to options on
securities except that an index option gives the holder the right to receive,
upon exercise, cash instead of securities, if the closing level of the
securities index upon which the option is based is greater than, in the case of
a call, or less than, in the case of a put, the exercise price of the option.
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When-Issued and Delayed-Delivery Securities. The Money Market Fund, the Growth
and Income Fund, the Regional Equity Fund, the Equity Income Fund, and the
Underlying Funds (except the BB&T U.S. Treasury Fund) may purchase securities on
a "when-issued" or "delayed-delivery" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). When a Fund or Underlying
Fund agrees to purchase securities on a "when-issued" or "delayed-delivery"
basis, its custodian will set aside cash or liquid securities equal to the
amount of the commitment in a separate account. Normally, the custodian will set
aside securities to satisfy the purchase commitment, and in such a case, the
Fund or Underlying Fund may be required subsequently to place additional assets
in the separate account in order to assure that the value of the account remains
equal to the amount of its commitment. It may be expected that a Fund or
Underlying Fund investing in securities on a when-issued or delayed delivery
basis, net assets will fluctuate to a greater degree when it sets aside
securities to cover such purchase commitments than when it sets aside cash. In
addition, because the Fund or Underlying Fund will set aside cash or liquid
securities to satisfy its purchase commitments in the manner described above,
its liquidity and the ability of its investment adviser to manage it might be
affected in the event its commitments to purchase "when-issued" or
"delayed-delivery" securities ever exceeded 25% of the value of its assets.
Under normal market conditions, however, the Fund or Underlying Fund's
commitment to purchase "when-issued" or "delayed-delivery" securities will not
exceed 25% of the value of each Fund or Underlying Fund's total assets.
When a Fund or Underlying Fund engages in "when-issued" or "delayed-delivery"
transactions, it relies on the seller to consummate the trade. Failure of the
seller to do so may result in the Fund or Underlying Fund incurring a loss or
missing the opportunity to obtain a price considered to be advantageous.
Mortgage-Related Securities. The Money Market Fund, the Growth and Income Fund,
the Regional Equity Fund, the Equity Income Fund, the Underlying Qualivest Funds
(except the Qualivest Optimized Fund and the Qualivest International Fund), the
BB&T Short-Intermediate Fund, the BB&T Intermediate Bond Fund, the BB&T Balanced
Fund, and the BB&T Small Company Growth Fund each may consistent with its
investment objective and policies, invest in mortgage-related securities issued
or guaranteed by the U.S. Government, its agencies and instrumentalities. In
addition, each may invest in mortgage-related securities issued by
nongovernmental entities, provided, however, that to the extent the Fund or
Underlying Fund purchases mortgage-related securities from such issuers which
may, solely for purposes of the Investment Company Act of 1940, as amended
("1940 Act"), be deemed to be investment companies, the Fund or Underlying
Fund's investment in such securities will be subject to the limitations on its
investment in investment company securities.
Mortgage-related securities, for purposes of the Funds' Prospectus and this SAI,
represent pools of mortgage loans assembled for sale to investors by various
governmental agencies such as the Government National Mortgage Association
("GNMA") and government-related organizations such as the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"), as well as by nongovernmental issuers such as commercial banks,
savings and loan institutions, mortgage bankers and private mortgage insurance
companies. Although certain mortgage-related securities are guaranteed by a
third party or otherwise similarly secured, the market value of the security,
which may fluctuate, is not so secured. If a Fund or Underlying Fund purchases a
mortgage-related security at a premium, that portion may be lost if there is a
decline in the market value of the security whether resulting from changes in
interest rates or prepayments in the underlying mortgage collateral. As with
other interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true, since in periods of declining interest rates the mortgages
underlying the securities are prone to prepayment, thereby shortening the
average life of the security and shortening the period of time over which income
at the higher rate is received. When interest rates are rising, though, the rate
of prepayment tends to decrease, thereby lengthening the period of time over
which income at the lower rate is received. For these and other reasons, a
mortgage-related security's average maturity may be shortened or lengthened as a
result of interest rate fluctuations and, therefore, it is not possible to
predict accurately the security's return. In addition, regular payments received
in respect of mortgage-related securities include both interest and principal.
No assurance can be given as to the return the Funds or Underlying Funds will
receive when these amounts are reinvested.
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There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage related securities
and among the securities that they issue. Mortgage-related securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-related securities issued by FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of FNMA and are not backed by or entitled to
the full faith and credit of the United States. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to the timely payment of the principal and interest by FNMA. Mortgage-related
securities issued by FHLMC include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of
the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to the timely payment of interest, which is guaranteed by
FHLMC. FHLMC guarantees either ultimate collection or the timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
Restricted Securities. "Section 4(2) securities" are securities which are issued
in reliance on the "private placement" exemption from registration which is
afforded by Section 4(2) of the Securities Act of 1933 (the "1933 Act"). The
Money Market Fund, the BB&T U.S. Treasury Fund, and each Qualivest Money Fund
will not purchase Section 4(2) securities which have not been determined to be
liquid in excess of 10% of its net assets. The Growth and Income Fund, the
Regional Equity Fund, the Equity Income Fund, the Underlying BB&T Funds other
than the BB&T U.S. Treasury Fund, and each Qualivest Equity Fund and Qualivest
Income Fund will not purchase section 4(2) securities which have not been
determined to be liquid in excess of 15% of its net assets. Qualivest, BB&T,
AmSouth, Rockhaven and each sub-adviser to an Underlying BB&T Fund has been
delegated the day-to-day authority to determine whether a particular issue of
Section 4(2) securities that are eligible for resale under Rule 144A under the
1933 Act should be treated as liquid. Rule 144A provides a safe-harbor exemption
from the registration requirements of the 1933 Act for resales to "qualified
institutional buyers" as defined in Rule 144A. With the exception of registered
broker-dealers, a qualified institutional buyer must generally own and invest on
a discretionary basis at least $100 million in securities.
Qualivest, BB&T, AmSouth, Rockhaven or any other sub-adviser may deem Section
4(2) securities liquid if it believes that, based on the trading markets for
such security, such security can be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Fund or
Underlying Fund has valued the security. In making such determination, the
following factors, among others, may be deemed relevant: (i) the credit quality
of the issuer; (ii) the frequency of trades and quotes for the security; (iii)
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (iv) dealer undertakings to make a market in the
security; and (v) the nature of the security and the nature of market-place
trades.
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Treatment of Section 4(2) securities as liquid could have the effect of
decreasing the level of a Fund's or Underlying Fund's liquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing these securities.
Medium-Grade Debt Securities. The Regional Equity Fund, the Equity Income Fund,
Qualivest Large Companies Fund, the Qualivest Small Companies Fund, and each of
the Qualivest Income Funds may invest in debt securities which are within the
fourth highest rating group assigned by an NRSRO (e.g., including securities
rated BBB by Standard & Poor's Corporation ("S&P") or Baa by Moody's Investors
Service, Inc. ("Moody's")) or, if not rated, are determined to be of comparable
quality ("Medium-Grade Securities").
As with other fixed-income securities, Medium-Grade Securities are subject to
credit risk and market risk. Market risk relates to changes in a security's
value as a result of changes in interest rates. Credit risk relates to the
ability of the issuer to make payments of principal and interest. Medium-Grade
Securities are considered by Moody's to have speculative characteristics.
Medium-Grade Securities are generally subject to greater credit risk than
comparable higher-rated securities because issuers are more vulnerable to
economic downturns, higher interest rates or adverse issuer-specific
developments. In addition, the prices of Medium-Grade Securities are generally
subject to greater market risk and therefore react more sharply to changes in
interest rates. The value and liquidity of Medium-Grade Securities may be
diminished by adverse publicity and investor perceptions.
Because certain Medium-Grade Securities are traded only in markets where the
number of potential purchasers and sellers, if any, is limited, the ability of
the Regional Equity Fund, the Equity Income Fund or the Underlying Qualivest
Funds to sell such securities at their fair market value either to meet
redemption requests or to respond to changes in the financial markets may be
limited.
Particular types of Medium-Grade Securities may present special concerns. The
prices of payment-in-kind or zero-coupon securities may react more strongly to
changes in interest rates than the prices of other Medium-Grade Securities. Some
Medium-Grade Securities in which the Regional Equity Fund, the Equity Income
Fund and the Underlying Qualivest Funds may invest may be subject to redemption
or call provisions that may limit increases in market value that might otherwise
result from lower interest rates while increasing the risk that the Regional
Equity Fund, the Equity Income Fund or the Underlying Qualivest Funds may be
required to reinvest redemption or call proceeds during a period of relatively
low interest rates.
The credit ratings issued by nationally recognized statistical rating
organizations ("NRSROs") are subject to various limitations. For example, while
such ratings evaluate credit risk, they ordinarily do not evaluate the market
risk of Medium-Grade Securities. In certain circumstances, the ratings may not
reflect in a timely fashion adverse developments affecting an issuer. For these
reasons, Qualivest, AmSouth and Rockhaven conduct their own independent credit
analysis of Medium-Grade Securities.
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High Yield Securities. The Equity Income Fund may invest in high yield
convertible securities. High yield securities are securities that are rated
below investment grade by an NRSRO (e.g., "BB" or lower by S&P and "Ba" or lower
by Moody's). Other terms used to describe such securities include "lower rated
bonds," "non-investment grade bonds" and "junk bonds." Generally, lower rated
securities provide a higher yield than higher rated securities of similar
maturity, but are subject to a greater degree of risk with respect to the
ability of the issuer to meet its principal and interest obligations. Issuers of
high yield securities may not be as strong financially as those issuing higher
rated securities. The securities are regarded as predominantly speculative. The
market value of high yield securities may fluctuate more than the market value
of higher rated securities, since high yield securities tend to reflect
short-term corporate and market developments to a greater extent than higher
rated securities, which fluctuate primarily in response to the general level of
interest rates, assuming that there has been no change in the fundamental
interest rates, assuming that there has been no change in the fundamental
quality of such securities. The market prices of fixed income securities
generally fall when interest rates rise. Conversely, the market prices of fixed
income securities generally rise when interest rates fall.
Additional risks of high yield securities include limited liquidity and
secondary market support. As a result, the prices of high yield securities may
decline rapidly in the event that a significant number of holders decide to
sell. Changes in expectations regarding an individual issuer, an industry or
high yield securities generally could reduce market liquidity for such
securities and make their sale by the Equity Income Fund more difficult, at
least in the absence of price concessions. Reduced liquidity also could
adversely affect the Equity Income Fund's ability to accurately value high yield
securities. Issuers of high yield securities also are more vulnerable to real or
perceived economic changes (for instance, an economic downturn or prolonged
period of rising interest rates), political changes or adverse developments
specific to the issuer. Adverse economic, political or other developments may
impair the issuer's ability to service principal and interest obligations, to
meet projected business goals and to obtain additional financing, particularly
if the issuer is highly leveraged. In the event of a default, the Equity Income
Fund would experience a reduction of its income and could expect a decline in
the market value of the defaulted securities.
Guaranteed Investment Contracts. When investing in Guaranteed Investment
Contracts ("GICs"), the Money Market Fund and each of the Qualivest Income Funds
and the Qualivest Money Funds make cash contributions to a deposit fund of an
insurance company's general account. The insurance company then credits to the
deposit fund on a monthly basis guaranteed interest. The GICs provide that this
guaranteed interest will not be less than a certain minimum rate. The insurance
company may assess periodic charges against a GIC for expense and service costs
allocable to it, and the charges will be deducted from the value of the deposit
fund. The Qualivest Income Funds may invest in GICs without regard to the
ratings, if any, assigned to the issuing insurance companies' outstanding debt
securities. The Money Market Fund and Qualivest Money Funds may invest in GICs
issued by insurance companies whose outstanding debt securities are rated in the
first two rating categories by an NRSRO or, if not rated, that Qualivest deems
to be of comparable quality. Because the principal amount of a GIC may not be
received from the insurance company on seven days' notice or less, the GIC is
considered an illiquid investment, and, together with other instruments which
are deemed to be illiquid, will not exceed the Money Market Fund's or an
Underlying Qualivest Fund's restriction on investment in illiquid securities. In
determining average weighted portfolio maturity, GICs will be deemed to have a
maturity equal to the period of time remaining until the next readjustment of
the guaranteed interest rate.
Repurchase Agreements. Securities held by the Money Market Fund, the Growth and
Income Fund, the Regional Equity Fund, the Equity Income Fund and the Underlying
Funds (except the Qualivest U.S. Treasury Fund) may be subject to repurchase
agreements. Under the terms of a repurchase agreement, a Fund or Underlying Fund
would acquire securities from member banks of the Federal Deposit Insurance
Corporation and registered broker-dealers that Qualivest, BB&T, AmSouth or
Rockhaven deems creditworthy under guidelines approved by the Board of Trustees,
subject to the seller's agreement to repurchase such securities at a mutually
agreed-upon date and price. If the seller were to default on its repurchase
obligation or become insolvent, a Fund or Underlying Fund holding such
obligation would suffer a loss to the extent that the proceeds from a sale of
the underlying portfolio securities were less than the repurchase price under
the agreement. Securities subject to repurchase agreements will be held by the
relevant Fund's or Underlying Fund's custodian or another qualified custodian,
as appropriate, or in the Federal Reserve/Treasury book-entry system.
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Futures Contracts. The Growth and Income Fund, the Qualivest Equity Funds, the
Qualivest Income Funds, the BB&T Small Company Growth Fund, and the BB&T
International Equity Fund may enter into futures contracts. This investment
technique is designed primarily to hedge against anticipated future changes in
market conditions or foreign exchange rates which otherwise might adversely
affect the value of securities which a Fund or Underlying Fund holds or intends
to purchase. For example, when interest rates are expected to rise or market
values of portfolio securities are expected to fall, a Fund or an Underlying
Fund can seek through the sale of futures contracts to offset a decline in the
value of its portfolio securities. When interest rates are expected to fall or
market values are expected to rise, a Fund or Underlying Fund, through the
purchase of such contracts, can attempt to secure better rates or prices than
might later be available in the market when it effects anticipated purchases.
The acquisition of put and call options on futures contracts will, respectively,
give a Fund or an Underlying Fund the right (but not the obligation), for a
specified price, to sell or to purchase the underlying futures contract, upon
exercise of the option, at any time during the option period.
Futures transactions involve brokerage costs and require a Fund or an Underlying
Fund to segregate liquid assets, such as cash, U.S. Government securities or
other liquid securities to cover its obligation under such contracts. A Fund or
an Underlying Fund may lose the expected benefit of futures transactions if
interest rates, securities prices or foreign exchange rates move in an
unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Fund had not entered into any futures
transactions. In addition, the value of a Fund's futures positions may not prove
to be perfectly or even highly correlated with the value of its portfolio
securities and foreign currencies, limiting the Fund's ability to hedge
effectively against interest rate, foreign exchange rate and/or market risk and
giving rise to additional risks. There is no assurance of liquidity in the
secondary market for purposes of closing out futures positions.
Forward Foreign Currency Exchange Contracts. The Regional Equity Fund, the
Equity Income Fund, the Qualivest Equity Funds (other than the Qualivest
Optimized Fund) and the BB&T International Equity Fund may engage in foreign
currency exchange transactions. 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 ("Term") from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are traded directly between currency traders (usually large commercial
banks) and their customers.
No Underlying Fund intends to enter into such forward contracts if it would have
more than 10% of the value of its total assets committed to such contracts on a
regular or continuous basis. An Underlying Fund also will not enter into such
forward contracts or maintain a net exposure in such contracts where it would be
obligated to deliver an amount of foreign currency in excess of the value of
such Underlying Fund's securities or other assets denominated in that currency.
An Underlying Fund's custodian bank segregates cash or liquid securities in an
amount not less than the value of the Underlying Fund's total assets committed
to forward foreign currency exchange contracts entered into for the purchase of
a foreign security. If the value of the securities segregated declines,
additional cash or securities are added so that the segregated amount is not
less than the amount of such Underlying Fund's commitments with respect to such
contracts. The Underlying Funds generally do not enter into a forward contract
with a Term longer than one year.
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Foreign Currency Options. A foreign currency option provides the Growth and
Income Fund, Qualivest Large Companies Fund, Qualivest Small Companies Fund,
Qualivest International Fund, BB&T Small Company Growth Fund, or BB&T
International Equity Fund, as the option buyer, with the right to buy or sell a
stated amount of foreign currency at the exercise price at a specified date or
during the option period. A call option gives its owner the right, but not the
obligation, to buy the currency, while a put option gives its owner the right,
but not the obligation, to sell the currency. The option seller (writer) is
obligated to fulfill the terms of the option sold if it is exercised. However,
either seller or buyer may close its position during the option period in the
secondary market for such options any time prior to expiration.
A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect a Fund or Underlying Fund against an adverse
movement in the value of a foreign currency, it does not limit the gain which
might result from a favorable movement in the value of such currency. For
example, if a Fund or Underlying Fund were holding securities denominated in an
appreciating foreign currency and had purchased a foreign currency put to hedge
against a decline in the value of the currency, it would not have to exercise
its put. Similarly, if a Fund or Underlying Fund has entered into a contract to
purchase a security denominated in a foreign currency and had purchased a
foreign currency call to hedge against a rise in the value of the currency but
instead the currency had depreciated in value between the date of purchase and
the settlement date, such Fund or Underlying Fund would not have to exercise its
call but could acquire in the spot market the amount of foreign currency needed
for settlement.
Foreign Currency Futures Transactions. As part of its financial futures
transactions, the Growth and Income Fund, each Qualivest Equity Fund (except the
Qualivest Optimized Fund), the BB&T Small Company Growth Fund, and the BB&T
International Equity Fund may use foreign currency futures contracts and options
on such futures contracts. Through the purchase or sale of such contracts, a
Fund or Underlying Fund may be able to achieve many of the same objectives as
through forward foreign currency exchange contracts more effectively and
possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and may be traded on boards of trade and
commodities exchanges or directly with a dealer which makes a market in such
contracts and options. It is anticipated that such contracts may provide greater
liquidity and lower cost than forward foreign currency exchange contracts.
Regulatory Restrictions. As required by the Securities and Exchange Commission,
when purchasing or selling a futures contract or writing a put or call option or
entering into a forward foreign currency exchange purchase, a Fund or an
Underlying Fund will maintain in a segregated account cash or liquid securities
equal to the value of such contracts.
To the extent required to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid being classified as a "commodity pool
operator," a Fund or an Underlying Fund will not enter into a futures contract
or purchase an option thereon if immediately thereafter the initial margin
deposits for futures contracts held by such Fund plus premiums paid by it for
open options on futures would exceed 5% of such Fund's total assets. Such Fund
or Underlying Fund will not engage in transactions in financial futures
contracts or options thereon for speculation, but only to attempt to hedge
against changes in market conditions affecting the values of securities which
such Fund holds or intends to purchase. When futures contracts or options
thereon are purchased to protect against a price increase on securities intended
to be purchased later, it is anticipated that at least 25% of such intended
purchases will be completed. When other futures contracts or options thereon are
purchased, the underlying value of such contracts will at all times not exceed
the sum of: (1) accrued profit on such contracts held by the broker; (2) cash or
high quality money market instruments set aside in an identifiable manner; and
(3) cash proceeds from investments due in 30 days.
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INVESTMENT RESTRICTIONS
Each Fund's investment objective is fundamental and may not be changed without a
vote of the holders of a majority of the Fund's outstanding Shares. In addition,
the following investment restrictions may be changed with respect to a
particular Fund only by a vote of a majority of the outstanding Shares of that
Fund (as defined under "ADDITIONAL INFORMATION -- Vote of a Majority of the
Outstanding Shares" in this SAI).
None of the Funds will:
1. Purchase any securities which would cause more than 25% of the
value of the Fund's total assets at the time of purchase to be invested in
securities of one or more issuers conducting their principal business activities
in the same industry, provided that: (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, domestic bank certificates of deposit or bankers' acceptances
issued by United States branches of domestic banks (for the Money Market Fund),
and repurchase agreements secured by obligations of the U.S. Government or its
agencies or instrumentalities; (b) wholly owned finance companies will be
considered to be in the industries of their parents if their activities are
primarily related to financing the activities of their parents; (c) an Allocated
Fund and the Capital Manager Fund may invest more than 25% of its total assets
in investment companies, or portfolios thereof, that are Underlying Funds of
such Fund; and (d) utilities will be divided according to their services. For
example, gas, gas transmission, electric and gas, electric and telephone will
each be considered a separate industry.
2. Purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of the
value of the Fund's total assets would be invested in such issuer, or the Fund
would hold more than 10% of the outstanding voting securities of the issuer,
except that 25% or less of the value of a Fund's total assets may be invested
without regard to such limitations. There is no limit to the percentage of
assets that may be invested in U.S. Treasury bills, notes, or other obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. In addition, there is no limit to the percentage of assets
that an Allocated Fund or the Capital Manager Fund may invest in any investment
company;
3. Borrow money or issue senior securities, except that a Fund may
borrow from banks or brokers, in amounts up to 10% of the value of its total
assets at the time of such borrowing. A Fund will not purchase securities while
its borrowings exceed 5% of its total assets;
4. Make loans, except that a Fund may purchase or hold debt
instruments and lend portfolio securities (in an amount not to exceed one-third
of its total assets), in accordance with its investment objective and policies,
make time deposits with financial institutions and enter into repurchase
agreements;
5. Underwrite the securities issued by other persons, except to the
extent that a Fund may be deemed to be an underwriter under certain securities
laws in the disposition of "restricted securities;"
6. Purchase or sell commodities or commodities contracts, except to
the extent disclosed in the current Prospectus of the Fund; and
14
<PAGE>
7. Purchase or sell real estate (although investments in marketable
securities of companies engaged in such activities and securities secured by
real estate or interests therein, or in Underlying Funds investing in such
securities, are not prohibited by this restriction).
Irrespective of investment restriction number 2 above and pursuant to Rule 2a-7
under the 1940 Act, the Money Market Fund will, with respect to 100% of its
total assets, limit its investment in the securities of any one issuer in the
manner provided by such Rule.
The following additional investment restrictions are not fundamental policies
and therefore may be changed without the vote of a majority of the outstanding
Shares of a Fund. None of the Funds may:
1. Engage in any short sales (except for short sales "against the
box");
2. Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition or reorganization, (b) to
the extent permitted by the 1940 Act or pursuant to any exemptions therefrom,
and (c) as consistent with the investment policies of an Allocated Fund or the
Capital Manager Fund;
3. Mortgage or hypothecate the Fund's assets in excess of one-third
of the Fund's total assets; and
4. Purchase or otherwise acquire any securities if, as a result,
more than 15% (10% of the case of the Money Market Fund) of the Fund's net
assets would be invested in securities that are illiquid.
If any percentage restriction described above is satisfied at the time of
purchase, a later increase or decrease in such percentage resulting from a
change in net asset value will not constitute a violation of such restriction.
However, should a change in net asset value or other external events cause a
Fund's investments in illiquid securities to exceed the limitation set forth in
such Fund's Prospectus, that Fund will act to cause the aggregate amount of
illiquid securities to come within such limit as soon as reasonably practicable.
In such an event, however, that Fund would not be required to liquidate any
portfolio securities where the Fund would suffer a loss on the sale of such
securities.
Due to the investment policies of the Allocated Funds and the Capital Manager
Fund, each of these Funds will concentrate more than 25% of its total assets in
the investment company industry. However, no Underlying Fund in which such Funds
invest will concentrate more than 25% of its total assets in any one industry.
15
<PAGE>
Portfolio Turnover
Changes may be made in a Fund's portfolio consistent with the investment
objective and policies of the Fund whenever such changes are believed to be in
the best interests of the Fund and its Shareholders. The portfolio turnover
rates for all of the Funds may vary greatly from year to year as well as within
a particular year, and may be affected by cash requirements for redemptions of
Shares and by requirements which enable the Funds to receive certain favorable
tax treatments. High portfolio turnover rates will generally result in higher
transaction costs to a Fund, including brokerage commissions.
The portfolio turnover rate of each Allocated Fund and Capital Manager Fund is
expected to be low, as such Fund will purchase or sell shares of the Underlying
Qualivest Funds or Underlying BB&T Funds, respectively, to (i) accommodate
purchases and sales of such Fund's Shares, and (ii) change the percentage of its
assets invested in each Underlying Fund in which it invests in response to
market conditions. The Growth and Income Fund, the Regional Equity Fund and the
Equity Income Fund will be managed without regard to its portfolio turnover
rate. It is anticipated that the annual portfolio turnover rate for an
Underlying Fund normally will not exceed the amount stated in such Fund's
Prospectus.
The portfolio turnover rate for each of the Funds is calculated by dividing the
lesser of a Fund's purchases or sales of portfolio securities for the year by
the monthly average value of the securities. The Securities and Exchange
Commission requires that the calculation exclude all securities whose remaining
maturities at the time of acquisition are one year or less.
NET ASSET VALUE
The net asset value of each Fund is determined and the Shares of each Fund are
priced as of the Valuation Times on each Business Day of the Trust. A "Business
Day" is a day on which the New York Stock Exchange ("NYSE") is open for trading,
and any other day (other than a day on which there are insufficient changes in
the value of a Fund's portfolio securities to materially affect the Fund's net
asset value or days on which no Shares of the Fund are tendered for redemption
and no order to purchase any Shares is received). Currently, the NYSE is closed
on the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas.
16
<PAGE>
Valuation of the Money Market Fund
The Money Market Fund has elected to use the amortized cost method of valuation
pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an instrument at
its cost initially and thereafter assuming a constant amortization to maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. This method may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Money Market Fund would receive if it sold the instrument. The value
of securities in this Fund can be expected to vary inversely with changes in
prevailing interest rates.
Pursuant to Rule 2a-7, the Money Market Fund will maintain a dollar-weighted
average maturity appropriate for its objective of maintaining a stable net asset
value per Share, provided that the Money Market Fund will not purchase any
security with a remaining maturity of more than 397 days (thirteen months)
(securities subject to repurchase agreements may bear longer maturities) nor
maintain a dollar-weighted average maturity which exceeds 90 days. The Board of
Trustees has also undertaken to establish procedures reasonably designed, taking
into account current market conditions and the investment objective of this
Fund, to stabilize the net asset value per share of the Money Market Fund for
purposes of sales and redemptions at $1.00. These procedures include review by
the Trustees, at such intervals as they deem appropriate, to determine the
extent, if any, to which the net asset value per Share of the Fund calculated by
using available market quotations deviates from $1.00 per Share. In the event
such deviation exceeds one-half of one percent, Rule 2a-7 requires that the
Board of Trustees promptly consider what action, if any, should be initiated. If
the Trustees believe that the extent of any deviation from the Money Market
Fund's $1.00 amortized cost price per Share may result in material dilution or
other unfair results to new or existing investors, they will take such steps as
they consider appropriate to eliminate or reduce, to the extent reasonably
practicable, any such dilution or unfair results. These steps may include
selling portfolio instruments prior to maturity, shortening the dollar-weighted
average maturity, withholding or reducing dividends, reducing the number of the
Money Market Fund's outstanding Shares without monetary consideration, or
utilizing a net asset value per Share determined by using available market
quotations.
Valuation of Other Funds
Portfolio securities, the principal market for which is a securities exchange,
will be valued at the closing sales price on that exchange on the day of
computation, or, if there have been no sales during such day, at the latest bid
quotation. Portfolio securities, the principal market for which is not a
securities exchange, will be valued at their latest bid quotation in such
principal market. If no such bid price is available, then such securities will
be valued in good faith at their respective fair market values using methods
determined by or under the supervision of the Board of Trustees. Foreign
securities are valued based on quotations from the primary market in which they
are traded and are translated from the local currency into U.S. dollars using
current exchange rates. Portfolio securities with a remaining maturity of 60
days or less will be valued either at amortized cost or original cost plus
accrued interest, which approximates current value.
All other assets and securities, including securities for which market
quotations are not readily available, will be valued at their fair market value
as determined in good faith under the general supervision of the Board of
Trustees.
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<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Shares of each Fund are sold on a continuous basis by the Distributor, and
the Distributor has agreed to use appropriate efforts to solicit all purchase
orders. The public offering price of Shares of the Funds is their net asset
value per Share.
The Trust may suspend the right of redemption or postpone the date of payment
for Shares during any period when (a) trading on the NYSE is restricted by
applicable rules and regulations of the Securities and Exchange Commission, (b)
the NYSE is closed for other than customary weekend and holiday closings, (c)
the Securities and Exchange Commission has by order permitted such suspension,
or (d) an emergency exists as a result of which (i) disposal by the Trust of
securities owned by it is not reasonably practical or (ii) it is not reasonably
practical for the Trust to determine the fair market value of its net assets.
Variable Contract Owners do not deal directly with the Funds to purchase,
redeem, or exchange Shares, and Variable Contract Owners should refer to the
prospectus for the applicable Separate Account for information on the allocation
of premiums and on transfers of accumulated value among sub-accounts of the
pertinent Separate Account that invests in the Funds.
Each Fund reserves the right to discontinue offering Shares at any time. In the
event that a Fund ceases offering its Shares, any investments allocated to the
Fund will, subject to any necessary regulatory approvals, be invested in another
portfolio of the Trust deemed appropriate by the Trustees.
MANAGEMENT OF THE TRUST
Trustees and Officers
Overall responsibility for management of the Trust rests with its Board of
Trustees, who are elected by the Shareholders of the Trust. The Trustees elect
the officers of the Trust to supervise actively its day-to-day operations.
The names of the Trustees, their addresses, ages, and principal occupations
during the past five years are set forth below:
Principal Occupation During
Name, Address, and Age Past 5 Years
- ---------------------- --------------------------
James H. Woodward Chancellor, University of North
University of North Carolina Carolina at Charlotte.
at Charlotte
Charlotte, NC 28223
Age: 57
Michael Van Buskirk Chief Executive Officer, Ohio Bankers
37 West Broad Street Association (industry trade association).
Suite 1001
Columbus, OH 43215
Age: 50
Walter B. Grimm* Employee of BISYS Fund Services
3435 Stelzer Road (6/92-present); President, Leigh
Columbus, Oh 43219 Investments (investment firm)
Age: 50 (7/87-6/92).
* Mr. Grimm is an "interested person" of the Trust as that term is defined in
the 1940 Act.
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<PAGE>
The Trust pays each Trustee who is not an employee of BISYS or its affiliates a
retainer fee at the rate of $500 per calendar quarter, reasonable out-of-pocket
expenses, $500 for each regular meeting of the Board of Trustees attended in
person, and $250 for each regular meeting of the Board of Trustees attended by
telephone. The Trust also pays each such Trustee $500 for each special meeting
of the Board of Trustees attended in telephone, and $250 for each special
meeting of the Board of Trustees attended by telephone. For the fiscal year
ending December 31, 1997, the Trust anticipates paying the following
compensation to the Trustees of the Trust:
Aggregate Compensation Total Compensation from
Name from Trust* Trust and Fund Complex**
James H. Woodward $3,000 $ 12,000
Michael Van Buskirk $3,000 $ 3,000
Walter B. Grimm $0 $ 0
* The Trust does not accrue pension or retirement benefits as part of Fund
expenses, and Trustees of the Trust are not entitled to benefits upon
retirement from the Board of Trustees.
** The Fund Complex consists of the Trust, Qualivest Funds, the Tax-Free Trust
of Oregon, The BB&T Mutual Funds Group and AmSouth Mutual Funds.
The officers of the Trust, their addresses, ages, and principal occupations
during the past five years are as follows (unless otherwise indicated, the
address of each officer is 3435 Stelzer Road, Columbus, OH 43219):
<TABLE>
<S> <C> <C>
Position(s) Held Principal Occupation
Name and Address With the Trust During Past 5 Years
- ---------------- ---------------- -------------------
Richard Ille President and Chief Employee of BISYS Fund
Age: 32 Executive Officer Services (7/90 - present).
Walter Grimm Vice President Employee of BISYS Fund
Age: 50 Services (6/92-present);
President, Leigh Investments
(investment firm)(7/87-6/92).
Carl Juckett Vice President Employee of BISYS Services
Age: 42 (7/94 - present); Manager,
Broker/Dealer and Investment
Accounting Systems,
Huntington Bank(1/89 - 7/94).
Frank Deutchki Vice President Employee of BISYS Fund
Age: 43 Services (4/96 - present);
Vice President, Audit
Director at Mutual Funds
Services Company, a
subsidiary of United States
Trust Company of New York
(2/89-3/96).
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<PAGE>
Dana Gentile Vice President and Employee of BISYS Fund
Age: 34 Secretary Services (1987-present).
Gregory Maddox Vice President and Employee of BISYS Fund
Columbia Square Assistant Secretary Services (4/91 - present).
Suite 500
1230 Columbia Street
San Diego, CA 92101
Age: 27
John Calvano Vice President and Employee of BISYS Fund
Age: 37 Assistant Secretary Services (10/94-present);
Investment Representative,
BA Investment Services
(7/92 - 8/94); Marketing
Manager, Great Western
Investment Management
(10/86-7/94).
William Tomko Treasurer, Comptroller, Employee of BISYS Fund
Age: 38 and Principal Financial Services (4/87-present).
and Accounting Officer
Alaina Metz Assistant Secretary Employee of BISYS Fund
Age: 29 Services (6/95 - present);
Supervisor, Mutual Fund
Legal Department, Alliance
Capital Management (5/89
- 6/95).
</TABLE>
The officers of the Trust receive no compensation directly from the Trust for
performing the duties of their offices. BISYS receives fees from the Trust for
acting as Administrator. BISYS Fund Services Ohio, Inc. receives fees from the
Trust for providing certain fund accounting services.
As of September 1, 1997, the Trustees and officers of the Trust, as a group,
owned less than one percent of the Shares of any Fund of the Trust.
Investment Advisers
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Funds' investment objectives and restrictions, investment
advisory services are provided to the Allocated Funds and the Money Market Fund
by Qualivest, P.O. Box 2758, Portland, Oregon 97208, pursuant to an Investment
Advisory Agreement dated June 1, 1997 (the "Qualivest Investment Advisory
Agreement").
Qualivest is a wholly owned subsidiary of United States National Bank of Oregon,
which in turn is a wholly owned subsidiary of U.S. Bancorp, a publicly held bank
holding company.
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<PAGE>
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Funds' investment objectives and restrictions, investment
advisory services are provided to the Growth and Income Fund and the Capital
Manager Fund by BB&T, 434 Fayetteville Street Mall, Raleigh, NC 27601, pursuant
to an Investment Advisory Agreement dated June 1, 1997 (the "BB&T Investment
Advisory Agreement").
BB&T is the oldest bank in North Carolina and is the principal bank affiliate of
Southern National Corporation ("SNC"), a bank holding company that is a North
Carolina corporation, headquartered in Winston-Salem, North Carolina.
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Funds' investment objectives and restrictions, investment
advisory services are provided to the Regional Equity Fund and the Equity Income
Fund by AmSouth, 1901 Sixth Avenue North, Birmingham, AL 35203, pursuant to an
Investment Advisory Agreement dated September 16, 1997 (the "AmSouth Investment
Advisory Agreement").
AmSouth is the principal bank affiliate of AmSouth Bancorporation, one of the
largest banking institutions headquartered in the mid-south region.
Under the Investment Advisory Agreements, Qualivest, BB&T and AmSouth (the
"Investment Advisers") have agreed to provide, either directly or through one or
more sub-advisers, investment advisory services for each of the Funds as
described in the Prospectus. For the services provided and expenses assumed
pursuant to the Qualivest Investment Advisory Agreement, each of the following
Funds pays Qualivest a fee, computed daily and paid monthly, at the following
annual rates calculated as a percentage of the average daily net assets of such
Fund: 0.35% for the Money Market Fund; 0.05% for the Conservative Fund; 0.05%
for the Balanced Fund; 0.05% for the Growth Fund; and 0.05% for the Aggressive
Fund. For the services provided and expenses assumed pursuant to the BB&T
Investment Advisory Agreement, each of the following Funds pays BB&T a fee,
computed daily and paid monthly, at the following annual rates, calculated as a
percentage of the average daily net assets of such Fund: 0.74% for the Growth
and Income Fund, and 0.25% for the Capital Manager Fund. For the services
provided and expenses assumed pursuant to the AmSouth Investment Advisory
Agreement, each of the Regional Equity Fund and the Equity Income Fund pays
AmSouth a fee, computed daily and paid monthly, at the annual rate of 0.60%,
calculated as a percentage of the average daily net assets of such Fund.
Unless sooner terminated, each Investment Advisory Agreement continues in effect
as to a particular Fund for an initial term of two years, and thereafter for
successive one-year periods if such continuance is approved at least annually by
the Board of Trustees or by vote of a majority of the outstanding Shares of such
Fund and a majority of the Trustees who are not parties to the Investment
Advisory Agreement or interested persons (as defined in the 1940 Act) of any
party to the Investment Advisory Agreement by votes cast in person at a meeting
called for such purpose. Each Investment Advisory Agreement is terminable as to
a particular Fund at any time on 60 days' written notice without penalty by the
Trustees, by vote of a majority of the outstanding Shares of that Fund, or by
the Investment Adviser. Each Investment Advisory Agreement also terminates
automatically in the event of any assignment, as defined in the 1940 Act.
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<PAGE>
Each Investment Advisory Agreement provides that the Investment Adviser shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Trust in connection with the performance of its duties, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith, or gross negligence on the part of the Investment Adviser or any
sub-advisers in the performance of their duties, or from reckless disregard of
their duties and obligations thereunder.
From time to time, advertisements, supplemental sales literature, and
information furnished to present or prospective Shareholders of the Funds may
include descriptions of an Investment Adviser including, but not limited to, (i)
descriptions of the Investment Adviser's operations; (ii) descriptions of
certain personnel and their functions; and (iii) statistics and rankings related
to the Investment Adviser's operations.
Investment Sub-Adviser
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Fund's investment objective and restrictions, investment
sub-advisory services are provided to the Equity Income Fund by Rockhaven, 100
First Avenue, Suite 1050, Pittsburgh, PA 15222, pursuant to a sub-advisory
agreement with AmSouth dated September 16, 1997 (the "Sub-Advisory Agreement").
Rockhaven is 50% owned by AmSouth and 50% owned by Mr. Christopher H. Wiles.
Under the Sub-Advisory Agreement, Rockhaven (the "Sub-Adviser") has agreed to
provide investment advisory services for the Equity Income Fund as described in
the Prospectus. For its services and expenses incurred under the Sub-Advisory
Agreement, Rockhaven is entitled to a fee payable by AmSouth. The fee is
computed daily and paid monthly at an annual rate of 0.36% of the Fund's average
daily net assets or such lower fee as may be agreed upon in writing by AmSouth
and Rockhaven, provided that if AmSouth waives a portion of its investment
advisory fee, the Sub-Adviser has agreed that its sub-advisory fee shall not
exceed 60% of AmSouth's net investment advisory fee.
Unless sooner terminated, the Sub-Advisory Agreement shall continue with respect
to the Equity Income Fund for an initial term of two years, and thereafter for
successive one-year periods if such continuance is approved at least annually by
the Board of Trustees of the Trust or by vote of the holders of a majority of
the outstanding voting Shares of the Fund and a majority of the Trustees who are
not parties to the Sub-Advisory Agreement or interested persons (as defined in
the 1940 Act) of any party to the Sub-Advisory Agreement by vote cast in person
at a meeting called for such purpose. The Agreement may be terminated with
respect to the Fund by the Trust at any time without the payment of any penalty
by the Board of Trustees of the Trust, by vote of the holders of a majority of
the outstanding voting securities of the Fund, or by the Investment Advisor or
Sub-Advisor on 60 days' written notice. This Agreement will also immediately
terminate in the event of its assignment, as defined in the 1940 Act.
22
<PAGE>
The Sub-Advisory Agreement provides that Rockhaven shall not be liable for any
error of judgment or mistake of law or for any loss suffered by AmSouth, the
Trust or the Fund in connection with the performance of its duties, except that
Rockhaven shall be liable to AmSouth for a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of Rockhaven in the performance of its duties or from reckless disregard by
it of its obligations or duties thereunder.
From time to time, advertisements, supplemental sales literature and information
furnished to present or prospective Variable Contract Owners may include
descriptions of Rockhaven including, but not limited to, (i) descriptions of
Rockhaven's operations; (ii) descriptions of certain personnel and their
functions; and (iii) statistics and rankings relating to Rockhaven's operations.
Portfolio Transactions
The Investment Advisers and the Sub-Adviser determine, subject to the general
supervision of the Board of Trustees and in accordance with each Fund's
investment objective and restrictions, which securities are to be purchased and
sold by a Fund, and which brokers or dealers are to be eligible to execute such
Fund's portfolio transactions.
Purchases and sales of portfolio securities which are debt securities usually
are principal transactions in which portfolio securities are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. Purchases from underwriters of portfolio securities generally
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers serving as market makers may include the spread between
the bid and asked price. Transactions on stock exchanges involve the payment of
negotiated brokerage commissions. Transactions in the over-the-counter market
are generally principal transactions with dealers. With respect to the
over-the-counter market, the Trust, where possible, will deal directly with
dealers who make a market in the securities involved except in those
circumstances where better price and execution are available elsewhere.
Allocation of transactions, including their frequency, to various brokers and
dealers is determined by each Investment Adviser or Sub-Adviser in its best
judgment and in a manner deemed fair and reasonable to Shareholders. In
selecting a broker or dealer, each Investment Adviser or Sub-Adviser evaluates a
wide range of criteria, including the commission rate or dealer mark-up,
execution capability, the broker's/dealer's positioning and distribution
capabilities, back office efficiency, ability to handle difficult trades,
financial stability, reputation, prior performance, and, in the case of
brokerage commissions, research. The primary consideration is the broker's
ability to provide prompt execution of orders in an effective manner at the most
favorable price for the security. Subject to this consideration, brokers and
dealers who provide supplemental investment research to an Investment Adviser or
Sub-Adviser may receive orders for transactions on behalf of the Trust. Research
may include brokers' analyses of specific securities, performance and technical
statistics, and information databases. It may also include maintenance research,
which is the information that keeps an Investment Adviser or Sub-Adviser
informed concerning overall economic, market, political and legal trends. Under
some circumstances, an Investment Adviser's or Sub-Adviser's evaluation of
research and other broker selection criteria may result in one or a few brokers
executing a substantial percentage of a Fund's trades. This might occur, for
example, where a broker can provide best execution at a cost that is reasonable
in relation to its services and the broker offers unique or superior research
facilities, special knowledge or expertise in a Fund's relevant markets, or
access to proprietary information about companies that are a majority of a
Fund's investments.
23
<PAGE>
Research information so received is in addition to and not in lieu of services
required to be performed by each Investment Adviser or Sub-Adviser and does not
reduce the fees payable to an Investment Adviser or Sub-Adviser by the Trust.
Such information may be useful to an Investment Adviser or Sub-Adviser in
serving both the Trust and other clients and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
in carrying out its obligations to the Trust. While each Investment Adviser or
Sub-Adviser generally seeks competitive commissions, the Trust may not
necessarily pay the lowest commission available on each brokerage transaction
for reasons discussed above.
Investment decisions for each Fund are made independently from those for the
other Funds or any other portfolio, investment company or account managed by
Qualivest, BB&T, AmSouth or Rockhaven. Any such other portfolio, investment
company or account may also invest in the same securities as the Trust. When a
purchase or sale of the same security is made at substantially the same time on
behalf of a Fund and another Fund, portfolio, investment company or account, the
transaction will be averaged as to price and available investments will be
allocated as to amount in a manner which the Investment Adviser or Sub-Adviser
believes to be equitable to the Fund(s) and such other portfolio, investment
company or account. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
by a Fund. To the extent permitted by law, the Investment Adviser or Sub-Adviser
may aggregate the securities to be sold or purchased for a Fund with those to be
sold or purchased for the other Funds or for other portfolio, investment
companies or accounts in order to obtain best execution. In making investment
recommendations for the Trust, an Investment Adviser or Sub-Adviser will not
inquire or take into consideration whether an issuer of securities proposed for
purchase or sale by the Trust is a customer of the Investment Adviser, the
Sub-Adviser or BISYS, their parents or their subsidiaries or affiliates and, in
dealing with its customers, Qualivest, BB&T, AmSouth, Rockhaven, their parents,
subsidiaries, and affiliates will not inquire or take into consideration whether
securities of such customers are held by the Trust.
Glass-Steagall Act
In 1971, the United States Supreme Court held that the Federal statute commonly
referred to as the "Glass-Steagall Act" prohibits a national bank from operating
a mutual fund for the collective investment of managing agency accounts.
Subsequently, the Board of Governors of the Federal Reserve System (the "Board")
issued a regulation and interpretation to the effect that the Glass-Steagall Act
and such decision: (a) forbid a bank holding company registered under the
Federal Bank Holding Company Act of 1956 (the "Holding Company Act") or any
non-bank affiliate thereof from sponsoring, organizing, or controlling a
registered, open-end investment company continuously engaged in the issuance of
its shares, but (b) do not prohibit such a holding company or affiliate from
acting as investment adviser, transfer agent, and custodian to such an
investment company. In 1981, the United States Supreme Court determined that the
Board did not exceed its authority under the Holding Company Act when it adopted
its regulation and interpretation authorizing bank holding companies and their
nonbank affiliates to act as investment advisers to registered closed-end
investment companies. The Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their nonbank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
24
<PAGE>
The Investment Advisers and the Sub-Adviser believe that they possess the legal
authority to perform the services for the Funds contemplated by the Prospectus,
this SAI, the Investment Advisory Agreements and the Sub-Advisory Agreement
without violation of applicable statutes and regulations. Future changes in
either federal or state statutes and regulations relating to the permissible
activities of banks or bank holding companies and the subsidiaries or affiliates
of those entities, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent an
Investment Adviser or the Sub-Adviser from continuing to serve as investment
adviser to the Funds or could restrict the services which it is permitted to
perform for the Funds. In addition, such changes, decisions or interpretations
could prevent an Investment Adviser's or Sub-Adviser's affiliates from
performing Variable Contract Owner servicing activities or from receiving
compensation therefor or could restrict the types of services such entities are
permitted to provide and the amount of compensation they are permitted to
receive for such services. Depending upon the nature of any changes in the
services which could be provided by the Investment Advisers or the Sub-Adviser,
the Board of Trustees would review the Trust's relationship with the Investment
Advisers or the Sub-Adviser and consider taking all action necessary in the
circumstances.
Administrator
BISYS serves as general manager and administrator to the Trust pursuant to a
Management and Administration Agreement dated June 1, 1997 (the "Administration
Agreement"). The Administrator assists in supervising all operations of each
Fund (other than those performed by Qualivest, BB&T and AmSouth under the
Investment Advisory Agreements, by Rockhaven under the Sub-Advisory Agreement,
by BISYS Fund Services Ohio, Inc. as fund accountant and dividend disbursing
agent, and by the Trust's custodian(s)). The Administrator is a broker-dealer
registered with the Securities and Exchange Commission, and is a member of the
National Association of Securities Dealers, Inc. The Administrator provides
financial services to institutional clients.
Under the Administration Agreement, the Administrator has agreed to maintain
office facilities for the Trust; furnish statistical and research data, clerical
and certain bookkeeping services and stationery and office supplies; prepare the
periodic reports to the Securities and Exchange Commission on Form N-SAR or any
replacement forms therefor; compile data for, prepare for execution by the Funds
and file certain federal and state tax returns and required tax filings; prepare
compliance filings pursuant to state laws with the advice of the Trust's
counsel; keep and maintain the financial accounts and records of the Funds,
including calculation of daily expense accruals; in the case of the Money Market
Fund, determine the actual variance from $1.00 of its net asset value per Share;
and generally assist in all aspects of the Trust's operations other than those
performed by the Investment Advisers under the Investment Advisory Agreements,
by the Sub-Adviser under the Sub-Advisory Agreement, by the fund accountant and
dividend disbursing agent, and by the Trust's custodian(s). Under the
Administration Agreement, the Administrator may delegate all or any part of its
responsibilities thereunder.
The Administrator receives a fee from each Fund for its services as
Administrator and expenses assumed pursuant to the Administration Agreement,
calculated daily and paid periodically, equal to the lesser of (a) the fee
calculated at the indicated annual rate of each Fund's average daily net assets,
or (b) such other fee as may from time to time be agreed upon by the Trust and
the Administrator: each Allocated Fund -- 0.07%; Money Market Fund -- 0.13%; and
Growth and Income Fund, Capital Manager Fund, Regional Equity Fund, and Equity
Income Fund -- 0.20%. The Administrator may voluntarily reduce all or a portion
of its fee with respect to any Fund in order to increase the net income of one
or more of the Funds available for distribution as dividends.
The Administration Agreement is terminable with respect to a particular Fund
upon mutual agreement of the parties to the Administration Agreement, upon
notice given at least 60 days prior to the expiration of the Agreement's
then-current term, and for cause (as defined in the Administration Agreement) by
the party alleging cause, on no less than 60 days' written notice by the Board
of Trustees or by the Administrator.
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The Administration Agreement provides that the Administrator shall not be liable
for any error of judgment or mistake of law or any loss suffered by the Trust in
connection with the matters to which the Administration Agreement relates,
except a loss resulting from willful misfeasance, bad faith, or gross negligence
in the performance of its duties, or from the reckless disregard by the
Administrator of its obligations and duties thereunder.
Expenses
Any expense reimbursements will be estimated daily and reconciled and paid on a
monthly basis. Fees imposed upon customer accounts for cash management services
are not included within Trust expenses for purposes of any such expense
limitation.
Distributor
BISYS serves as distributor to the Trust pursuant to the Distribution Agreement
dated June 1, 1997 (the "Distribution Agreement"). Unless otherwise terminated,
the Distribution Agreement will remain in effect for an initial term of two
years, and thereafter continues for successive one-year periods if approved at
least annually (i) by the Board of Trustees or by the vote of a majority of the
outstanding Shares of the Trust, and (ii) by the vote of a majority of the
Trustees who are not parties to the Distribution Agreement or interested persons
(as defined in the 1940 Act) of any party to the Distribution Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement may be terminated in the event of any assignment, as
defined in the 1940 Act.
Custodians, Transfer Agent and Fund Accounting Services
United States National Bank of Oregon, 321 S.W. 6th, Portland, Oregon 97204,
serves as custodian to the Trust with respect to each Allocated Fund and the
Money Market Fund pursuant to a Custody Agreement dated as of June 1, 1997.
Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45263, serves as
custodian to the Trust with respect to the Growth and Income Fund and the
Capital Manager Fund pursuant to a Custody Agreement dated as of May 21, 1997.
AmSouth serves as custodian to the Trust with respect to the Regional Equity
Fund and the Equity Income Fund pursuant to a Custody Agreement dated as of
September 16, 1997. Each custodian's responsibilities include safeguarding and
controlling the Funds' cash and securities, handling the receipt and delivery of
securities, and collecting interest and dividends on such Funds' investments.
BISYS Fund Services Ohio Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035,
serves as transfer agent and dividend disbursing agent for all Funds of the
Trust pursuant to an agreement dated as of June 1, 1997. Under this agreement,
BISYS Fund Services Ohio, Inc. performs the following services, among others:
maintenance of Shareholder records for each of the Trust's Shareholders of
record; processing Shareholder purchase and redemption orders; processing
transfers and exchanges of Shares on the Shareholder files and records;
processing dividend payments and reinvestments; and assistance in the mailing of
Shareholder reports and proxy solicitation materials.
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In addition, BISYS Fund Services Ohio, Inc. provides certain fund accounting
services to the Trust pursuant to a Fund Accounting Agreement dated June 1,
1997. Under the Fund Accounting Agreement, BISYS Fund Services Ohio, Inc.
maintains the accounting books and records for the Funds, including journals
containing an itemized daily record of all purchases and sales of portfolio
securities, all receipts and disbursements of cash and all other debits and
credits, general and auxiliary ledgers reflecting all asset, liability, reserve,
capital, income and expense accounts, including interest accrued and interest
received, and other required separate ledger accounts; maintains a monthly trial
balance of all ledger accounts; performs certain accounting services for the
Funds, including calculation of the daily net asset value per Share, calculation
of the dividend and capital gain distributions, if any, and of yield,
reconciliation of cash movements with custodians, affirmation to custodians of
portfolio trades and cash settlements, verification and reconciliation with
custodians of daily trade activity; provides certain reports; obtains dealer
quotations, prices from a pricing service or matrix prices on all portfolio
securities in order to mark the portfolio to the market; and prepares an interim
balance sheet, statement of income and expense, and statement of changes in net
assets for the Funds.
Auditors
The firm of Coopers & Lybrand L.L.P., 100 East Broad Street, Columbus, Ohio
43215, serves as independent auditors for the Trust. Its services comprise
auditing the Trust's financial statements and advising the Trust as to certain
accounting and tax matters.
Legal Counsel
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005 is counsel
to the Trust and has passed upon the legality of the Shares offered hereby.
ADDITIONAL INFORMATION
Description of Shares
The Trust is a Massachusetts business trust. The Trust was organized on July 20,
1994, and the Trust's Declaration of Trust was filed with the Secretary of State
of the Commonwealth of Massachusetts on the same date. The Declaration of Trust,
as amended and restated, authorizes the Board of Trustees to issue an unlimited
number of Shares, which are units of beneficial interest, without par value. The
Trust currently has nine series of Shares which represent interests in each
series of the Trust. The Trust's Declaration of Trust authorizes the Board of
Trustees to divide or redivide any unissued Shares of the Trust into one or more
additional series or classes by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting power,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.
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Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus and this SAI, the Trust's
Shares will be fully paid and non-assessable by the Trust. In the event of a
liquidation or dissolution of the Trust, Shareholders of a Fund are entitled to
receive the assets available for distribution belonging to that Fund, and a
proportionate distribution, based upon the relative asset values of the
respective series, of any general assets not belonging to any particular series
which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding Shares of each Fund
affected by the matter. For purposes of determining whether the approval of a
majority of the outstanding Shares of a Fund will be required in connection with
a matter, a Fund will be deemed to be affected by a matter unless it is clear
that the interests of each Fund in the matter are identical, or that the matter
does not affect any interest of the Fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy submitted to
Shareholders would be effectively acted upon with respect to a series only if
approved by a majority of the outstanding Shares of such Fund. However, Rule
18f-2 also provides that the ratification of independent public accountants, the
approval of principal underwriting contracts, and the election of Trustees may
be effectively acted upon by Shareholders of the Trust voting without regard to
Fund.
Vote of a Majority of the Outstanding Shares
As used in the Funds' Prospectuses and the SAI, "vote of a majority of the
outstanding Shares of the Trust or the Fund" means the affirmative vote, at an
annual or special meeting of Shareholders duly called, of the lesser of (a) 67%
or more of the votes of Shareholders of the Trust or the Fund present at such
meeting at which the holders of more than 50% of the votes attributable to the
Shareholders of record of the Trust or the Fund are represented in person or by
proxy, or (b) the holders of more than 50% of the outstanding votes of
Shareholders of the Trust or the Fund.
Principal Shareholders
As of September 1, 1997, Hartford Life Insurance Company Separate Account Two,
200 Hopmeadow Street, Simsbury, Connecticut 06070 owned 68.6% and Wilbranch,
P.O. Box 2887, Wilson, North Carolina 27894 owned 31.4% of the outstanding
Shares of the Growth and Income Fund, the sole operational Fund as of that date,
and thus may be deemed to be able to control the outcome of any matter submitted
to a vote of the Shareholders of the Trust or of that Fund.
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Shareholder and Trustee Liability
Under Massachusetts law, holders of units of interest in a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that Shareholders shall not be subject to any personal liability for the
obligations of the Trust. The Declaration of Trust provides for indemnification
out of the trust property of any Shareholder held personally liable solely by
reason of his or her being or having been a Shareholder. The Declaration of
Trust also provides that the Trust shall, upon request, reimburse any
Shareholder for all legal and other expenses reasonably incurred in the defense
of any claim made against the Shareholder for any act or obligation of the
Trust, and shall satisfy any judgment thereon. Thus, the risk of a Shareholder
incurring financial loss on account of Shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
The Declaration of Trust states further that no Trustee, officer, or agent of
the Trust shall be personally liable in connection with the administration or
preservation of the assets of the Trust or the conduct of the Trust's business;
nor shall any Trustee, officer, or agent be personally liable to any person for
any action or failure to act except for his own bad faith, willful misfeasance,
gross negligence, or reckless disregard of his duties. The Declaration of Trust
also provides that all persons having any claim against the Trustees or the
Trust shall look solely to the assets of the Trust for payment.
Additional Tax Information
The following discussion summarizes certain U.S. federal tax considerations
incidental to an investment in a Fund. Each Fund intends to qualify annually and
to elect to be treated as a regulated investment company under the Internal
Revenue Code of 1986 , as amended (the "Code").
To qualify as a regulated investment company, each Fund generally must, among
other things: (i) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of stock, securities or foreign currencies,
or other income derived with respect to its business in such stock, securities
or currencies; (ii) derive in each taxable year less than 30% of its gross
income from the sale or other disposition of certain assets held less than three
months including stocks, securities, and certain foreign currencies, futures,
options, and forward contracts; (iii) diversify its holdings so that, at the end
of each quarter of the taxable year (a) at least 50% of the market value of the
Fund's assets is represented by cash, U.S. Government securities, the securities
of other regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (b) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies); and (iv) distribute at least 90% of its investment
company taxable income (which includes, among other items, dividends, interest,
and net short-term capital gains in excess of any net long-term capital losses)
each taxable year.
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As a regulated investment company, a Fund generally will not be subject to U.S.
federal income tax on its investment company taxable income and net capital
gains (any net long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers from prior years), if any, that it
distributes to Shareholders. Each Fund intends to distribute to its
Shareholders, at least annually, substantially all of its investment company
taxable income and any net capital gains. In addition, amounts not distributed
by a Fund on a timely basis in accordance with a calendar year distribution
requirement may be subject to a nondeductible 4% excise tax. To avoid the tax, a
Fund may be required to distribute (or be deemed to have distributed) during
each calendar year, (i) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (ii) at least 98% of
its capital gains in excess of its capital losses for the twelve month period
ending on October 31 of the calendar year (adjusted for certain ordinary
losses), and (iii) all ordinary income and capital gains for previous years that
were not distributed during such years. To avoid application of the excise tax,
each Fund intends to make its distributions in accordance with the calendar year
distribution requirement. A distribution will be treated as paid on December 31
of the calendar year if it is declared by a Fund during October, November, or
December of that year to Shareholders of record on a date in such a month and
paid by the Fund during January of the following calendar year. Such
distributions will be taxable to Shareholders (such as the Separate Accounts)
for the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are actually received.
If a Fund invests in shares of a foreign investment company, the Fund may be
subject to U.S. federal income tax on a portion of an "excess distribution"
from, or of the gain from the sale of part or all of the shares in, such
company. In addition, an interest charge may be imposed with respect to deferred
taxes arising from such distributions or gains.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time that Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain futures contracts, forward contracts, and options, gains
or losses attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security or contract and the date of disposition
also are treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "Section 988" gains or losses, may increase or decrease the
amount of a Fund's investment company taxable income to be distributed to its
Shareholders as ordinary income.
Distributions
Distributions of any investment company taxable income (which includes among
other items, dividends, interest, and any net realized short-term capital gains
in excess of net realized long-term capital losses) are treated as ordinary
income for tax purposes in the hands of a Shareholder (such as a Separate
Account). Net capital gains (the excess of any net long-term capital gains over
net short term capital losses) will, to the extend distributed, be treated as
long-term capital gains in the hands of the Separate Accounts regardless of the
length of time a Separate Account may have held the Shares.
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Hedging Transactions
The 30% limitation and the diversification requirements applicable to a Fund's
assets may limit the extent to which a Fund will be able to engage in
transactions in options, futures contracts, or forward contracts.
Other Taxes
Distributions may also be subject to additional state, foreign and local taxes,
depending on each shareholder's situation. Shareholders are advised to consult
their own tax advisers with respect to the particular tax consequences to them
of an investment in a Fund.
Performance Information
Each Fund may, from time to time, include its yield or total return in
advertisements or reports to Shareholders or prospective investors. Performance
information for the Funds will not be advertised or included in sales literature
unless accompanied by comparable performance information for a separate account
to which the Funds offer their Shares.
Standardized seven-day yield for the Money Market Fund is computed by
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account in that Fund having a balance of one Share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from Shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then multiplying the base period return by (365/base period). The
net change in the account value of the Money Market Fund includes the value of
additional Shares purchased with dividends from the original Share, dividends
declared on both the original Share and any such additional Shares, and all
fees, other than nonrecurring account charges, that are charged to all
Shareholder accounts in proportion to the length of the base period and assuming
that Fund's average account size. The capital changes to be excluded from the
calculation of the net change in account value are net realized gains and losses
from the sale of securities and unrealized appreciation and depreciation. The
30-day yield is calculated as described above except that the base period is 30
days rather than seven days.
Yields of the other Funds are computed by analyzing net investment income per
Share for a recent 30-day period and dividing that amount by a Share's maximum
offering price (reduced by any undeclared earned income expected to be paid
shortly as a dividend) on the last trading day of that period. Net investment
income will reflect amortization of any market value premium or discount of
fixed income securities (except for obligations backed by mortgages or other
assets) and may include recognition of a pro rata portion of the stated dividend
rate of dividend paying portfolio securities. The yield of each of these Funds
will vary from time to time depending upon market conditions, the composition of
a Fund's portfolio and operating expenses of the Trust allocated to each Fund.
Yield should also be considered relative to changes in the value of a Fund's
Shares and to the relative risks associated with the investment objective and
policies of each of the Funds.
At any time in the future, yields may be higher or lower than past yields and
there can be no assurance that any historical results will continue.
Standardized quotations of average annual total return for Fund Shares will be
expressed in terms of the average annual compounded rate of return for a
hypothetical investment in Shares over periods of 1, 5 and 10 years or up to the
life of the Fund), calculated pursuant to the following formula: P(1 + T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of expenses (on an annual basis), and
assume that all dividends and distributions on Shares are reinvested when paid.
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Performance information for the Funds may be compared in reports and promotional
literature to the performance of other mutual funds with comparable investment
objectives and policies through various mutual fund or market indices such as
those prepared by Dow Jones & Co., Inc., S&P, Shearson Lehman Brothers, Inc. and
The Russell 2000 Index and to data prepared by Lipper Analytical Services, Inc.,
a widely recognized independent service which monitors the performance of mutual
funds, Morningstar, Inc. and the Consumer Price Index. Comparisons may also be
made to indices or data published in Money Magazine, Forbes, Barron's, The Wall
Street Journal, The Bond Buyer's Weekly 20-Bond Index, The Bond Buyer's Index,
The Bond Buyer, The New York Times, Business Week, Pensions and Investments, and
U.S.A. Today. In addition to performance information, general information about
these Funds that appears in a publication such as those mentioned above may be
included in advertisements and in reports to Variable Contract Owners.
Each Fund may also compute aggregate total return for specified periods. The
aggregate total return is determined by dividing the net asset value of this
account at the end of the specified period by the value of the initial
investment and is expressed as a percentage. Calculation of aggregate total
return assumes reinvestment of all income dividends and capital gain
distributions during the period.
The Funds also may quote annual, average annual and annualized total return and
aggregate total return performance data for various periods other than those
noted above. Such data will be computed as described above, except that the
rates of return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return.
Quotations of yield or total return for the Funds will not take into account
charges and deductions against a Separate Account to which the Funds' Shares are
sold or charges and deductions against the Variable Contracts. The Funds' yield
and total return should not be compared with mutual funds that sell their shares
directly to the public since the figures provided do not reflect charges against
the Separate Accounts or the Variable Contracts. Performance information for any
Fund reflects only the performance of a hypothetical investment in the Fund
during the particular time period in which the calculations are based.
Performance information should be considered in light of the Funds' investment
objectives and policies, characteristics and quality of the portfolios and the
market conditions during the given time period, and should not be considered as
a representation of what may be achieved in the future.
Miscellaneous
Individual Trustees are elected by the Shareholders and, subject to removal by
the vote of two-thirds of the Board of Trustees, serve for a term lasting until
the next meeting of Shareholders at which Trustees are elected. Such meetings
are not required to be held at any specific intervals. Individual Trustees may
be removed by vote of the Shareholders voting not less than a majority of the
Shares then outstanding, cast in person or by proxy at any meeting called for
that purpose, or by a written declaration signed by Shareholders voting not less
than two-thirds of the Shares then outstanding. In accordance with current laws,
it is anticipated that an insurance company issuing a variable contract that
participates in the Funds will request voting instructions from variable
contract owners and will vote shares or other voting interests in the separate
account in proportion of the voting instructions received. The Separate Accounts
and qualified pension and retirement plans currently are the only Shareholders
of the Funds, although other separate accounts of Nationwide or Hartford, or
other insurance companies, may become Shareholders in the future.
The Trust is registered with the Securities and Exchange Commission as a
management investment company. Such registration does not involve supervision by
the Securities and Exchange Commission of the management or policies of the
Trust.
The Prospectus and this SAI omit certain of the information contained in the
Registration Statement filed with the Securities and Exchange Commission. Copies
of such information may be obtained from the Securities and Exchange Commission
upon payment of the prescribed fee.
The Prospectus and this SAI are not an offering of the securities herein
described in any state in which such offering may not lawfully be made. No
salesman, dealer, or other person is authorized to give any information or make
any representation other than those contained in the Prospectus and this SAI.
FINANCIAL STATEMENTS
The Trust's financial statements for the Funds, including the related notes
thereto, dated as of May 21, 1997, are included herein.
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Report of Independent Accountants
To the Trustees of the Variable Insurance Funds:
We have audited the accompanying statement of assets and liabilities of the
BB&T Growth and Income Fund as of May 21, 1997. This financial statement is the
responsibility of the Variable Insurance Fund's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit 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 statement is free from material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of the BB&T Growth and Income
Fund as of May 21, 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
May 22, 1997
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VARIABLE INSURANCE FUNDS
BB&T Growth and Income Fund
Statement of Assets and Liabilities
As of May 21, 1997
ASSETS:
Cash $100,000
Deferred organization expenses 15,000
Total Assets 115,000
LIABILITIES:
Accrued organization expenses 15,000
NET ASSETS: $100,000
NET ASSETS CONSIST OF:
Capital - 10,000 shares of beneficial interest issued and outstanding;
unlimited shared authorized [par value $0.001]
- Institutional Service Class $100,000
NET ASSET VALUE:
Institutional Service Shares ($100,000/10,000 shares issued
and outstanding) - offering and redemption price per share $10.00
See notes to financial statements.
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VARIABLE INSURANCE FUNDS
BB&T Growth and Income Fund
NOTES TO FINANCIAL STATEMENTS
May 21, 1997
1. ORGANIZATION
Variable Insurance Funds (the "Trust"), an open-end management
investment company established as a Massachusetts business trust, is
registered under the Investment Company Act of 1940 (the "1940 Act").
The Company offers shares of the following funds: Variable Insurance
Allocated Conservative Fund, Variable Insurance Allocated Balanced
Fund, Variable Insurance Allocated Growth Fund, Variable Insurance
Allocated Aggressive Fund (collectively, the "Allocated Funds"),
Variable Insurance Money Market Fund, BB&T Growth and Income Fund and
BB&T Capital Manager Fund (collectively, the "Funds") each of which
offers Institutional Shares. The accompanying financial statement
relates only to the BB&T Growth and Income Fund (the "Fund"). The Fund
had no operations other than those actions relating to organizational
matters. As of May 21, 1997, all outstanding shares of the Fund are
owned by Branch Banking and Trust Company.
The investment objective of the Fund is to seek to provide capital
growth, current income or both by investing in stocks, which may
include common stock, preferred stock, warrants, or debt instruments
that are convertible into common stocks.
2. ORGANIZATION EXPENSES
All costs incurred by the Trust in connection with the organization of
the Fund and the initial public offering of shares of the Fund,
principally professional fees and printing, have been deferred. Upon
commencement of operations of the Fund, the deferred organization
expenses will be amortized on a straight-line basis over a period of
two years. In the event that any of the initial shares of the Fund are
redeemed during the amortization period by any holder thereof, the
redemption proceeds will be reduced by any unamortized organization
expenses in the same proportion as the number of said shares being
redeemed bears to the number of initial shares that are outstanding at
the time of the redemption.
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3. RELATED PARTY TRANSACTIONS
Branch Banking and Trust Company ("BB&T") serves as the Investment
Advisor for the Growth and Income Fund. Under an advisory agreement
with the Fund, BB&T is entitled to receive fees at an annual rate equal
to the lessor of : (a) 0.74% of the Fund's average daily net assets; or
(b) such fee as may from time to time be agreed upon in writing by the
Trust and BB&T. BISYS Fund Services ("BISYS") serves the Fund as
Administrator. For its services as Administrator, BISYS receives a fee
at an amount of 0.20% of the Fund's average daily net assets. BISYS
also serves as Distributor for the Fund's shares. BISYS Fund Services
Ohio, Inc., an affiliate of BISYS, serves as the Trust's transfer agent
and dividend disbursing agent.
Certain officers of the Trust are affiliated with BISYS. Such persons
are not paid directly by the Trust for serving in those capacities.
4. ESTIMATES
The preparation of this financial statement requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statement. Actual results
could differ from those estimates.
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APPENDIX
DESCRIPTION OF BOND RATINGS
Description of Moody's bond ratings:
Excerpts from Moody's description of its bond ratings are listed as
follows: Aaa - judged to be the best quality and they carry the smallest degree
of investment risk; Aa - judged to be of high quality by all standards -
together with the Aaa group, they comprise what are generally known as
high-grade bonds; A - possess many favorable investment attributes and are to be
considered as "upper medium grade obligations"; Baa - considered to be 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; Ba - judged to have speculative
elements, their future cannot be considered as well assured; B - generally lack
characteristics of the desirable investment; Caa - are of poor standing - such
issues may be in default or there may be present elements of danger with respect
to principal or interest; Ca - speculative in a high degree, often in default; C
- - lowest rated class of bonds, regarded as having extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating
categories. The modifier 1 indicates that the security is in the higher end of
its rating category; the modifier 2 indicates a mid-range ranking; and modifier
3 indicates a ranking toward the lower end of the category.
Description of S&P's bond ratings:
Excerpts from S&P's description of its bond ratings are listed as
follows: AAA - highest grade obligations, in which capacity to pay interest and
repay principal is extremely strong; AA - has a very strong capacity to pay
interest and repay principal, and differs from AAA issues only in a small
degree; A - has a strong capacity to pay interest and repay principal, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories; BBB
- - 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 repay principal for debt in this category than in
higher rated categories. This group is the lowest which qualifies for commercial
bank investment. BB, B, CCC, CC, C - predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligations; BB indicates the highest grade and C the lowest within the
speculative rating categories. D interest or principal payments are in default.
S&P applies indicators "+," no character, and "-" to its rating
categories. The indicators show relative standing within the major rating
categories.
i
<PAGE>
Description of Moody's ratings of short-term municipal obligations:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity. Ratings categories for securities in these groups
are as follows: MIG 1/VMIG 1 - denotes best quality, there is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing; MIG 2/VMIG 2 - denotes high
quality, margins of protection are ample although not as large as in the
preceding group; MIG 3/VMIG 3 - denotes high quality, all security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades; MIG 4/VMIG 4 - denotes adequate quality, protection commonly regarded as
required of an investment security is present, but there is specific risk; SQ -
denotes speculative quality, instruments in this category lack margins of
protection.
Description of Moody's commercial paper ratings:
Excerpts from Moody's commercial paper ratings are listed as follows:
Prime - 1 - issuers (or supporting institutions) have a superior ability for
repayment of senior short-term promissory obligations; Prime - 2 - issuers (or
supporting institutions) have a strong ability for repayment of senior
short-term promissory obligations; Prime - 3 - issuers (or supporting
institutions) have an acceptable ability for repayment of senior short-term
promissory obligations; Not Prime - issuers do not fall within any of the Prime
categories.
Description of S&P's ratings for corporate and municipal bonds:
Investment grade ratings: AAA - the highest rating assigned by S&P,
capacity to pay interest and repay principal is extremely strong; AA - has a
very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in a small degree; A - has 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 in
higher rated categories; BBB - 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 repay principal for
debt in this category than in higher rated categories.
Speculative grade ratings: BB, B, CCC, CC, C - debt rated in these
categories is regarded as having predominantly speculative characteristics with
respect to capacity to pay interest and repay principal - while such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions; CI - reserved
for income bonds on which no interest is being paid; D -in default, and payment
of interest and/or repayment of principal is in arrears. Plus (+) or Minus (-) -
the ratings from "AA" to "CCC" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
ii
<PAGE>
Description of S&P's rating for municipal notes and short-term municipal demand
obligations:
Rating categories are as follows: SP-1 - has a very strong or strong
capacity to pay principal and interest - those issues determined to possess
overwhelming safety characteristics will be given a plus (+) designation; SP-2 -
has a satisfactory capacity to pay principal and interest; SP-3 - issues
carrying this designation have a speculative capacity to pay principal and
interest.
Description of S&P's ratings for short-term corporate demand obligations and
commercial paper:
An S&P commercial paper rating is a current assessment of the
likelihood of timely repayment of debt having an original maturity of no more
than 365 days. Excerpts from S&P's description of its commercial paper ratings
are listed as follows: A-1 - the degree of safety regarding timely payment is
strong - those issues determined to possess extremely strong safety
characteristics will be denoted with a plus (+) designation; A-2 capacity for
timely payment is satisfactory - however, the relative degree of safety is not
as high as for issues designated "A-1;" A-3 - has adequate capacity for timely
payment - however, is more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations; B - regarded as
having only speculative capacity for timely payment; C - a doubtful capacity for
payment; D - in payment default - the "D" rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
iii
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Included in Part A:
Included in Part B:
Report of Independent Accountants
Statement of Assets and Liabilities
(b) Exhibits
(1) (a) Amended and Restated Declaration of Trust dated July 20,
1994, as amended and restated February 5, 1997(1)
(b) Establishment and Designation of Series effective
February 5, 1997(1)
(c) Redesignation of Two Existing Series and Establishment
and Designation of Two Additional Series effective
August 13, 1997(3)
(2) By-Laws(1)
(3) Not Applicable
(4) Articles V and VI of the Registrant's Amended and Restated
Declaration of Trust define rights of holders of Shares.
(5) (a) Form of Investment Advisory Agreement between Registrant
and Qualivest Capital Management Inc.(2)
(b) Form of Investment Advisory Agreement between
Registrant and Branch Banking and Trust Company(2)
(c) Form of Investment Advisory Agreement between
Registrant and AmSouth Bank
(d) Form of Sub-Advisory Agreement between AmSouth Bank and
Rockhaven Asset Management, LLC
(6) Form of Distribution Agreement between Registrant and BISYS
Fund Services(3)
(7) Not Applicable
(8) (a) Form of Custodian Agreement between Registrant and
United States National Bank of Oregon(2)
(b) Form of Custodian Agreement between Registrant and
Fifth Third Bank(2)
(c) Form of Custodian Agreement between Registrant and
AmSouth Bank
(9) (a) Form of Management and Administration Agreement between
the Registrant and BISYS Fund Services(3)
C-1
<PAGE>
(b) Form of Fund Accounting Agreement between the
Registrant and BISYS Fund Services Ohio, Inc.(3)
(c) Form of Transfer Agency Agreement between the
Registrant and BISYS Fund Services Ohio, Inc.(3)
(d) Form of Fund Participation Agreement with Hartford Life
Insurance Company
(e) Form of Participation Agreement with Nationwide Life
and Annuity Insurance Company*
(f) Form of Variable Contract Owner Servicing Agreement(3)
(10) Opinion and Consent of Counsel(2)
(11) Consent of Independent Auditors
(12) Not Applicable
(13) Purchase Agreement(2)
(14) Not Applicable
(15) Not Applicable
(16) Schedule of Computation of Performance Information*
(17) Financial Data Schedule Pursuant to Rule 483 (filed as
Exhibit 27)
(18) Not Applicable
(19) (a) Secretary's Certificate Pursuant to Rule 483(b)(2)
Powers of Attorney(2)
- ----------
* To be filed by amendment.
1 Filed with Pre-Effective Amendment No. 2 to Registrant's Registration
Statement on February 5, 1997.
2 Filed with Pre-Effective Amendment No.2 to Registrant's Registration
Statement on May 29, 1997.
3 Filed with Post-Effective Amendement No. 1 to Registrant's Registration
Statement on July 3, 1997.
C-2
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant
Not applicable
Item 26. Number of Record Holders
There are two shareholders of record as of the date of this filing.
Item 27. Indemnification
Reference is made to Article IV of the Registrant's Agreement and
Declaration of Trust (Exhibit 1(a)) which is incorporated by reference
herein.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant by the Registrant pursuant to the Fund's
Declaration of Trust, its By-Laws or otherwise, the Registrant is aware
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and,
therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in connection with the successful
defense of any act, suit or proceeding) is asserted by such trustees,
officers or controlling persons in connection with shares being
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issues.
Item 28. Business and Other Connections of Investment Advisers and thei
Officers and Directors
The business of each of the Investment Advisers is summarized under
"MANAGEMENT OF THE TRUST" in the Prospectuses constituting Part A of
this Registration Statement, which summaries are incorporated herein by
reference. The business or other connections of each director and
officer of Qualivest Capital Management, Inc. are currently listed in
its investment adviser registration on Form ADV (File No. 801-22741)
and are hereby incorporated herein by reference thereto.
C-3
<PAGE>
Set forth below is information as to any other business, vocation or
employment of a substantial nature (other than service in wholly owned
subsidiaries or the parent corporation of Branch Banking and Trust
Company) in which each director or senior officer of Branch Banking and
Trust Company is, or at any time during the past two fiscal years has
been, engaged for his own account or in the capacity of director,
officer, employee, partner or trustee.
Name and Position with Branch Other business, profession,
Banking and Trust Company vocation, or employment
John A. Allison IV None
Chairman of the Board and
Chief Executive Officer
Paul B. Barringer President and Chief Executive Officer
Director Coastal Lumber Company
Weldon, N.C.
W. R. Cuthbertson, Jr. None
Director
Ronald E. Deal Investor, Chairman Wesley Hall
Director Hickory, N.C.
Albert J. Dooley, Sr. Dooley, Dooley, Spence & Parker
Director Lexington, S.C.
Joseph L. Dudley, Sr. Owner
Director Dudley Products
Kernersville, S.C.
Tom D. Efird President
Director Standard Distributors, Inc.
Gastonia, N.C.
O. William Fenn, Jr. NC Department of Commerce,
Director Furniture Export Office
High Point, N.C.
Paul S. Goldsmith BB&T Insurance Services, Inc.
Director Greenville, S.C.
Dr. Lloyd Vincent Hackley President NC System of Community
Director Colleges
Raleigh, N.C.
C-4
<PAGE>
Ernest F. Hardee Ernest Francis Realty Corp.,
Director Hardee Realty Corporation
Portsmouth, VA
James A. Hardison None
Director
Dr. Richard Janeway Executive Vice President for Healthirs
Director Affairs
Bowman Gray School of Medicine
Winston-Salem, N.C.
J. Ernest Lathem, M.D. Urology Specialist, Prostate/Diagnostics
Director Greenville, S.C.
James H. Maynard Chairman & CEO
Director Investors Management Corporation
Raleigh, N.C.
Joseph A. McAleer, Jr. Chief Executive Officer and Director
Director Krispy Kreme Doughnut Corp.
Winston-Salem, N.C.
Albert O. McCauley Secretary and Treasurer
Director Quick Stop Food Marts, Inc.,
McCauley Moving & Storage of
Fayetteville, Inc.
Fayetteville, N.C.
James Dickson McLean, Jr. Attorney at Law, President
Director McLean, Stacy, Henry & McLean, P.A.
Lumberton, N.C.
Charles E. Nichols Attorney at Law, North Carolina Trust
Center
Greensboro, N.C.
L. Glenn Orr, Jr. Orr Management Company
Director Winston-Salem, N.C.
A. Winniett Peters Standard Commercial Tobacco Company
Director Wilson, N.C.
Richard L. Player, Jr. President
Director Player, Inc.
Fayetteville, N.C.
C. Edward Pleasants, Jr. President, CEO & Director
Director Pleasants Hardware Company
Winston-Salem, N.C.
C-5
<PAGE>
Nido R. Qubein Chief Executive Officer
Director Creative Services, Inc.
High Point, N.C.
A. Tab Williams, Jr. Chairman & CEO
Director A.T. Williams Oil Company
Winston-Salem, N.C.
Set forth below is information as to any other business, vocation or
employment of a substantial nature (other than service in wholly owned
subsidiaries or the parent corporation of AmSouth Bank) in which each
director or senior officer of AmSouth Bank is, or at any time during
the past two fiscal years has been, engaged for his own account or in
the capacity of director, officer, employee, partner or trustee.
Name and Position with Other business, profession, AmSouth Bank vocation,
AmSouth Bank or employment
George W. Barber, Jr. Chairman of the Board, Barber Dairies, Inc.,
Director 39 Barber Ct., Birmingham, Alabama
William D. Biggs Real Estate Investments
Director
William J. Cabaniss, Jr. President, Precision Grinding Inc.,
Director P.O. Box 19925, Birmingham, Alabama
M. Miller Gorrie President and Chief Executive Officer,
Director Brasfield and Gorrie General Contractor Inc.,
729 30th Street South, Birmingham, Alabama
James I. Harrison, Jr. President and Chief Executive Officer,
Director Harco, Inc., 3925 Rice Mine Road,
Tuscaloosa, Alabama
Mrs. H. Taylor Morrisette HTM Investment & Development, Inc.,
Director 3 Taylor Place, Mobile, Alabama
C-6
<PAGE>
C. Dowd Ritter None
Director, Chairman,
President and Chief
Executive Officer
Michael C. Baker None
Senior Executive Vice
President
David B. Edmonds None
Executive Vice President
James W. Emison None
Executive Vice President
Sloan D. Gibson, IV None
Senior Executive Vice
President
O.B. Grayson Hall, Jr. None
Executive Vice President
Kristen M. Hudak None
Senior Executive Vice
President and Chief
Financial Officer
John D. Kottmeyer None
Executive Vice President
and Treasurer
W. Charles Mayer, III None
Director and Senior
Executive Vice President
Candice W. Rogers None
Senior Executive Vice
President
Robert R. Windelspecht None
Executive Vice President
and Controller
Stephen A. Yoder None
Executive Vice President
and General Counsel
C-7
<PAGE>
Item 29. Principal Underwriter
(a) BISYS Fund Services ("BISYS") acts as distributor and
administrator for Registrant. BISYS also distributes the
securities of Qualivest Funds, The Victory Portfolios, The
Highmark Group, The AmSouth Mutual Funds, The Sessions
Group, The Coventry Group, The BB&T Mutual Funds Group, The
American Performance Funds, The ARCH Funds, Inc., MMA Praxis
Mutual Funds, The MarketWatch Funds, The Pacific Capital
Funds, The Parkstone Group of Funds, The Riverfront Funds,
Inc., The Summit Investment Trust, The Fountain Square
Funds, The Kent Group of Funds, The HSBC Funds, The Infinity
Mutual Funds, Inc., The Time Horizon Funds, Pegasus Funds,
The Parkstone Advantage Funds, SBSF Funds, Inc. d.b.a. Key
Mutual Funds, Inc., The Republic Funds and First Choice
Funds Trust, each of which is an investment management
company.
(b) Partners of BISYS Fund Services are as follows:
Positions and Positions and
Name and Principal Offices with Offices with
Business Address BISYS Fund Services Registrant
BISYS Fund Services, Inc. Sole General Partner None
3435 Stelzer Road
Columbus, Ohio 43219-3035
WC Subsidiary Corporation Sole Limited Partner None
3435 Stelzer Road
Columbus, Ohio 43219-3035
(c) Not Applicable
C-8
<PAGE>
Item 30. Location of Accounts and Records
The accounts, books, and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of
1940 and rules promulgated thereunder are in the possession of
Qualivest Capital Management, Inc. 111 S.W. Fifth Avenue, Portland,
Oregon 97204, Branch Banking and Trust Company, 434 Fayetteville Street
Mall, Raleigh, NC 27601, and AmSouth Bank, 1901 Sixth Avenue North,
Birmingham, Alabama 35203 (records relating to their functions as
advisers for Registrant), BISYS Fund Services, 3435 Stelzer Road,
Columbus, Ohio 43219-3035 (records relating to its functions as general
manager, administrator and distributor), and BISYS Fund Services Ohio,
Inc., 3435 Stelzer Road, Columbus, Ohio 43219-3035 (records relating to
its functions as transfer agent).
Item 31. Management Services
Not Applicable
Item 32. Undertakings
(a) Not Applicable
(b) Registrant undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to
six months from the latter of the effective date of Registrant's
Registration Statement under the Securities Act of 1933 or the
date of which shares of the Trust are first offered (other than
for initial capital).
(c) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest Annual Report
to Shareholders, upon request and without charge.
(d) Registrant undertakes to call a meeting of Shareholders for the
purpose of voting upon the question of removal of a Trustee or
Trustees when requested to do so by the holders of at least 10%
of the Registrant's outstanding shares of beneficial interest and
in connection with such meeting to comply with the shareholders
communications provisions of Section 16(c) of the Investment
Company Act of 1940.
C-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No.2 to its Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized in the city of Washington,
D.C. on the 15th day of September, 1997.
VARIABLE INSURANCE FUNDS
By: ________*_________
Richard Ille
President and Chief Executive Officer
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-1A has been signed below by the following
persons on behalf of Variable Insurance Funds in the capacity and on the date
indicated:
Signatures Title Date
________*__________ President (Prin- September 15, 1997
Richard Ille cipal Executive Officer)
________*__________ Treasurer (Prin- September 15, 1997
William Tomko cipal Accounting
Officer), and
Chief Financial Officer
________*__________ Trustee September 15, 1997
Walter Grimm
________*__________ Trustee September 15, 1997
Michael Van Buskirk
________*________ Trustee September 15, 1997
James Woodward
* By: /s/ Keith T. Robinson
Keith T. Robinson as attorney-in-fact, pursuant to powers of attorney
filed as Exhibit 19(b) to Pre-Effective Amendment No.2 to the
Registrant's Registration Statement.
C-10
<PAGE>
EXHIBIT LIST
Exhibit No. Exhibit Name EDGAR Exhibit No.
5(c) Form of Investment EX-99.B5c
Advisory Agreement between
Registrant and AmSouth Bank
5(d) Form of Sub-Advisory EX-99.B5d
Agreement between
AmSouth Bank and Rockhaven Asset
Management, LLC
8(c) Form of Custodian Agreement EX-99.B8c
between Registrant and AmSouth
Bank
9(d) Form of Fund Participation EX-99.B9d
Agreement with
Hartford Life Insurance Company
11 Consent of Independent EX-99.B11
Auditors
27 Financial Data Schedule EX-27
Pursuant to Rule 483
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of _____, 1997 between VARIABLE INSURANCE FUNDS, a
Massachusetts business trust (herein called the "Trust"), and AMSOUTH BANK, an
Alabama banking association with its principal place of business at 1901 Sixth
Avenue, North, Birmingham, Alabama 35203 (herein called the "Investment
Adviser").
WHEREAS, the Trust is registered as an open-end, diversified, management
investment company under the Investment Company Act of 1940, as amended ("1940
Act"); and
WHEREAS, the Trust desires to retain the Investment Adviser to furnish
investment advisory services to certain investment portfolios of the Trust (the
"Funds") and the Investment Adviser represents that it is willing and possesses
legal authority to so furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Trust hereby appoints the Investment Adviser to act as
investment adviser to the Funds identified on Schedule A hereto for the period
and on the terms set forth in this Agreement. The Investment Adviser accepts
such appointment and agrees to furnish the services herein set forth for the
compensation herein provided.
2. Delivery of Documents. The Trust has furnished the Investment Adviser
with copies properly certified or authenticated of each of the following:
(a) the Trust's Amended and Restated Declaration of Trust dated as of
July 20, 1994 and amended and restated as of February 5, 1997, and all
amendments thereto or restatements thereof (such Declaration, as presently in
effect and as it shall from time to time be amended or restated, is herein
called the "Declaration of Trust");
(b) the Trust's By-laws and amendments thereto;
(c) resolutions of the Trust's Board of Trustees authorizing the
appointment of the Investment Adviser and approving this Agreement;
(d) the Trust's Notification of Registration on Form N-8A under the 1940
Act as filed with the Securities and Exchange Commission on July 20, 1994 and
all amendments thereto;
(e) the Trust's Registration Statement on Form N-lA under the Securities
Act of 1933, as amended ("1933 Act"), (File No. 33-21660) and under the 1940 Act
as filed with the Securities and Exchange Commission and all amendments thereto;
and
(f) the Funds' most recent prospectuses and Statement of Additional
Information (such prospectus and Statement of Additional Information, as
presently in effect, and all amendments and supplements thereto are herein
collectively called the "Prospectus").
<PAGE>
The Trust will furnish the Investment Adviser from time to time with
copies of all amendments of or supplements to the foregoing.
3. Management. Subject to the supervision of the Trust's Board of Trustees,
the Investment Adviser will provide a continuous investment program for each
Fund, including investment research and management with respect to all
securities and investments and cash equivalents in said Funds. The Investment
Adviser will determine from time to time what securities and other investments
will be purchased, retained or sold by the Trust with respect to the Funds. The
Investment Adviser will provide the services under this Agreement in accordance
with each Fund's investment objective, policies, and restrictions as stated in
the Prospectus and resolutions of the Trust's Board of Trustees. The Investment
Adviser further agrees that it:
(a) will use the same skill and care in providing such services as it
uses in providing services to fiduciary accounts for which it has investment
responsibilities;
(b) will conform with all applicable Rules and Regulations of the
Securities and Exchange Commission and in addition will conduct its activities
under this Agreement in accordance with any applicable regulations of any
governmental authority pertaining to the investment advisory activities of the
Investment Adviser;
(c) will not make loans to any person to purchase or carry units of
beneficial interest in the Trust or make loans to the Trust;
(d) will place orders pursuant to its investment determinations for the
Trust either directly with the issuer or with any broker or dealer. In placing
orders with brokers and dealers, the Investment Adviser will attempt to obtain
prompt execution of orders in an effective manner at the most favorable price.
Consistent with this obligation, when the execution and price offered by two or
more brokers or dealers are comparable, the Investment Adviser may, in its
discretion, purchase and sell portfolio securities to and from brokers and
dealers who provide the Investment Adviser with research advice and other
services. In no instance will portfolio securities be purchased from or sold to
BISYS Fund Services, AmSouth Bank, or any affiliated person of either the Trust,
BISYS Fund Services, or AmSouth Bank, except to the extent permitted by the 1940
Act and the Securities and Exchange Commission;
(e) will maintain all books and records with respect to the Trust's
securities transactions and will furnish the Trust's Board of Trustees such
periodic and special reports as the Board may request;
(f) will treat confidentially and as proprietary information of the Trust
all records and other information relative to the Trust and prior, present, or
potential interestholders, and will not use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Trust, which
approval shall not be unreasonably withheld and may not be withheld where the
Investment Adviser may be exposed to civil or criminal contempt proceedings for
failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust; and
<PAGE>
(g) will maintain its policy and practice of conducting its fiduciary
functions independently. In making investment recommendations for the Trust, the
Investment Adviser's personnel will not inquire or take into consideration
whether the issuers of securities proposed for purchase or sale for the Trust's
account are customers of the Investment Adviser or of its parent or its
subsidiaries or affiliates. In dealing with such customers, the Investment
Adviser and its parent, subsidiaries, and affiliates will not inquire or take
into consideration whether securities of those customers are held by the Trust.
4. Services Not Exclusive. The investment management services furnished by
the Investment Adviser hereunder are not to be deemed exclusive, and the
Investment Adviser shall be free to furnish similar services to others so long
as its services under this Agreement are not impaired thereby.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Investment Adviser hereby agrees that all records which
it maintains for the Trust are the property of the Trust and further agrees to
surrender promptly to the Trust any of such records upon the Trust's request.
The Investment Adviser further agrees to preserve for the periods prescribed by
Rule 31a-2 under the 1940 Act the records required to be maintained by Rule
31a-1 under the 1940 Act.
6. Expenses. During the term of this Agreement, the Investment Adviser will
pay all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities (including brokerage commissions, if
any) purchased for the Trust.
7. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, each of the Funds will pay the Investment Adviser
and the Investment Adviser will accept as full compensation therefor a fee
computed daily and paid monthly at the applicable annual rate set forth on
Schedule A hereto. Each Fund's obligation to pay the above-described fee to the
Investment Adviser will begin as of the date of the initial public sale of
shares in that Fund. The fee attributable to each Fund shall be the obligation
of that Fund and not of any other Fund.
If in any fiscal year the aggregate expenses of any of the Funds exceed
any applicable expense limitation, the Investment Adviser will reimburse the
Fund for a portion of such excess expenses equal to such excess times the ratio
of the fees otherwise payable by the Fund to the Investment Adviser hereunder to
the aggregate fees otherwise payable by the Fund to the Investment Adviser
hereunder and to BISYS Fund Services under the Administration Agreement between
BISYS Fund Services and the Trust. The obligation of the Investment Adviser to
reimburse the Funds hereunder is limited in any fiscal year to the amount of its
fee hereunder for such fiscal year, provided, however, that notwithstanding the
foregoing, the Investment Adviser shall reimburse the Funds for such proportion
of such excess expenses regardless of the amount of fees paid to it during such
fiscal year to the extent that the securities regulations of any state having
jurisdiction over the Trust so require. Such expense reimbursement, if any, will
be estimated daily and reconciled and paid on a monthly basis.
<PAGE>
8. Limitation of Liability. The Investment Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Funds in connection with the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Investment Adviser in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement.
9. Duration and Termination. This Agreement will become effective as to a
particular Fund as of the date first written above (or , if a particular Fund is
not in existence on that date, on the date a registration statement relating to
that Fund becomes effective with the Commission), provided that it shall have
been approved by vote of a majority of the outstanding voting securities of such
Fund, in accordance with the requirements under the 1940 Act. Unless sooner
terminated, this Agreement shall continue in effect for an initial term of two
years and thereafter shall continue in effect for successive periods of one
year, provided such continuance is specifically approved at least annually (a)
by the vote of a majority of those members of the Trust's Board of Trustees who
are not parties to this Agreement or interested persons of any party to this
Agreement, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the vote of a majority of the Trust's Board of Trustees or
by the vote of a majority of all votes attributable to the outstanding Shares of
such Fund. Notwithstanding the foregoing, this Agreement may be terminated at
any time on sixty days' written notice, without the payment of any penalty, by
the Trust (by vote of the Trust's Board of Trustees or by vote of a majority of
the outstanding voting securities of such Fund) or by the Investment Adviser.
This Agreement will immediately terminate in the event of its assignment. (As
used in this Agreement, the terms "majority of the outstanding voting
securities," "interested persons" and "assignment" shall have the same meaning
of such terms in the 1940 Act.)
10. Investment Adviser's Representations. The Investment Adviser hereby
represents and warrants as follows:
<PAGE>
(a) it will manage each Fund so that each Fund will qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code and
will comply with the diversification requirements of Section 817(h) of the
Internal Revenue Code and the regulations issued thereunder, and any other rules
and regulations pertaining to investment vehicles underlying variable annuity or
variable life insurance contracts;
(b) It shall immediately notify the Trust upon having a reasonable basis
for believing that any Fund has ceased to comply with the diversification
provisions of Section 817(h) of the Internal Revenue Code or the regulations
thereunder; and
(c) it shall be responsible for making inquiries and for reasonably
ensuring that any employee of the Investment Adviser, any person or firm that
the Investment Adviser has employed or with which it has associated, or any
employee thereof has not, to the best of the Investment Adviser's knowledge, in
any material connection with the handling of Trust assets: (i) been convicted,
in the last ten (10) years, of any felony or misdemeanor arising out of conduct
involving embezzlement, fraudulent conversion, or misappropriation of funds or
securities, or involving violations of Sections 1341, 1342, or 1343 of Title 18,
United States Code; or (ii) been found by any state regulatory authority, within
the last ten (10) years, to have violated or to have acknowledged violation of
any provision of any state insurance law involving fraud, deceit, or knowing
misrepresentation; or (iii) been found by any federal or state regulatory
authorities, within the last ten (10) years, to have violated or to have
acknowledged violation of any provisions of federal or state securities laws
involving fraud, deceit or knowing misrepresentation.
11. Insurance Company Offerees. All parties acknowledge that the Trust will
offer its shares so that it may serve as an investment vehicle for variable
annuity contracts and variable life insurance policies issued by insurance
companies, as well as to qualified pension and retirement plans. The Trust and
the Investment Adviser agree that shares of the Funds may be offered only to the
separate accounts and general accounts of insurance companies that are approved
in writing by the Investment Adviser. The Investment Adviser agrees that shares
of the Funds may be offered to separate accounts and the general account of
Hartford Life Insurance Company and to separate accounts and the general
accounts of any insurance companies that are affiliated with Hartford Life
Insurance Company. The Investment Adviser and the Trust agree that the
Investment Adviser shall be under no obligation to investigate insurance
companies to which the Trust offers or proposes to offer its shares.
12. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
<PAGE>
13. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by the law of The Commonwealth of Massachusetts.
The names "Variable Insurance Funds" and "Trustees of Variable Insurance
Funds" refer respectively to the Trust created and the Trustees, as trustees but
not individually or personally, acting from time to time under the Declaration
of Trust to which reference is hereby made and a copy of which is on file at the
office of the Secretary of State of The Commonwealth of Massachusetts and
elsewhere as required by law, and to any and all amendments thereto so filed or
hereafter filed. The obligations of "Variable Insurance Funds" entered into in
the name or on behalf thereof by any of the Trustees, representatives or agents
are made not individually, but in such capacities, and are not binding upon any
of the Trustees, interestholders or representatives of the Trust personally, but
bind only the assets of the Trust, and all persons dealing with any Fund must
look solely to the assets of the Trust belonging to such Fund for the
enforcement of any claims against the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
VARIABLE INSURANCE FUNDS
Seal By: _______________________
Name: _______________________
Title: _______________________
AMSOUTH BANK
Seal
By: _______________________
Name: _______________________
Title:_______________________
A-1
Dated: _______, 1997
<PAGE>
Schedule A
to the Investment Advisory Agreement
between Variable Insurance Funds and AmSouth Bank
NAME OF FUND COMPENSATION
AmSouth Regional Equity Fund Annual rate of sixty one-hundredths of one
percent (.60%) of the average daily net
assets of such Fund.
AmSouth Equity Income Annual rate of sixty one-hundredths of one
percent (.60%) of the average daily net
assets of such Fund.
_________________________________
All fees are computed daily and paid monthly.
VARIABLE INSURANCE FUNDS
By:_______________________________
Name:_____________________________
Title:____________________________
AMSOUTH BANK
By:_______________________________
Name:_____________________________
Title:____________________________
SUB-ADVISORY AGREEMENT
AGREEMENT dated as of _______, 1997 between AmSouth Bank, an Alabama
banking association with its principal place of business in Alabama (herein
called the "Investment Adviser") and Rockhaven Asset Management, LLC, a Delaware
limited liability corporation with its principal place of business in
Pennsylvania (herein called the "Sub-Adviser").
WHEREAS, Variable Insurance Funds (the "Trust"), a Massachusetts business
trust having its principal place of business at 3435 Stelzer Road, Columbus,
Ohio 43219-3035, is registered as an open-end, management investment company
under the Investment Company Act of 1940, as amended (the "40 Act");
WHEREAS, the Trust has retained the Investment Adviser to provide or
procure investment advisory services on behalf of certain investment portfolios
of the Trust; and
WHEREAS, the Investment Adviser wishes to retain the Sub-Adviser to assist
the Investment Adviser in providing investment advisory services in connection
with such portfolios of the Trust as now or hereafter may be identified on
Schedule A hereto as such Schedule may be amended from time to time with the
consent of the parties hereto (each herein called a "Fund").
WHEREAS, the Sub-Adviser is willing to provide such services to the
Investment Adviser upon the terms and conditions and for the compensation set
forth below.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, it is agreed between
the parties hereto as follows:
1. Appointment. The Investment Adviser hereby appoints the Sub-Adviser its
sub-adviser with respect to the Fund as provided for in the Investment Advisory
Agreement between the Investment Adviser and the Trust dated as of _______, 1997
(such Agreement or the most recent successor advisory agreement between such
parties is herein called the "Advisory Agreement"). The Sub-Adviser accepts such
appointment and agrees to render the services herein set forth for the
compensation herein provided.
2. Delivery of Documents. The Investment Adviser shall provide to the
Sub-Adviser copies of the Trust's most recent prospectus and statement of
additional information (including supplement thereto) which relate to any class
of shares representing interests in the Fund (each such prospectus and statement
of additional information as presently in effect, and as they shall from time to
time be amended and supplemented, is herein respectively called a "Prospectus"
and a "Statement of Additional Information").
<PAGE>
3. Sub-Advisory Services to the Funds.
(a) Subject to the supervision of the Investment Adviser, the
Sub-Adviser will supervise the day-to-day operations of the Fund and perform the
following services: (i) provide investment research and credit analysis
concerning the Fund's investments; (ii) conduct a continual program of
investment of the Fund's assets; (iii) place orders for all purchases and sales
of the investments made for the Fund; (iv) maintain the books and records
required in connection with its duties hereunder; and (v) keep the Investment
Adviser informed of developments materially affecting the Fund.
(b) The Sub-Adviser will use the same skill and care in providing such
services as it uses in providing services to fiduciary accounts for which it has
investment responsibilities; provided that, notwithstanding this Paragraph 3(b),
the liability of the Sub-Adviser for actions taken and non-actions with respect
to the performance of services under this Agreement shall be subject to the
limitations set forth in Paragraph 11(a) of this Agreement.
(c) The Sub-Adviser will communicate to the Investment Adviser and to
the Trust's custodian and Fund accountants as instructed by the Investment
Adviser on each day that a purchase or sale of a security is effected for the
Fund (i) the name of the issuer, (ii) the amount of the purchase or sale, (iii)
the name of the broker or dealer, if any, through which the purchase or sale
will be affected, (iv) the CUSIP number of the security, if any, and (v) such
other information as the Investment Adviser may reasonably require for purposes
of fulfilling its obligations to the Trust under the Advisory Agreement.
(d) The Sub-Adviser will provide the services rendered by it hereunder
in accordance with the Fund's investment objectives, policies and restrictions
as stated in the Prospectus and Statement of Additional Information.
(e) The Sub-Adviser will maintain records of the information set forth
in Paragraph 3(c) hereof with respect to the securities transactions of the Fund
and will furnish the Trust's Board of Trustees with such periodic and special
reports as the Board may reasonably request.
(f) The Sub-Adviser will promptly review all (1) reports of current
security holdings in the Fund, (2) summary reports of transactions and pending
maturities (including the principal, cost and accrued interest on each portfolio
security in maturity date order) and (3) current cash position reports
(including cash available from portfolio sales and maturities and sales of the
Fund's shares less cash needed for redemptions and settlement of portfolio
purchases), all within a reasonable time after receipt thereof from the Trust
and will report any errors or discrepancies in such reports to the Trust or its
designee within three (3) business days after discovery of such discrepancies.
4. Brokerage. The Sub-Adviser may place orders pursuant to its investment
determinations for the Fund either directly with the issuer or with any broker
or dealer. In placing orders, the Sub-Adviser will consider the experience and
skill of the firm's securities traders, as well as the firm's financial
responsibility and administrative efficiency. The Sub-Adviser will attempt to
obtain the best price and the most favorable execution of its orders. Consistent
with these obligations, the Sub-Adviser may, subject to the approval of the
Board of Trustees of the Trust, select brokers on the basis of the research,
statistical and pricing services they provide to the Fund. A commission paid to
such brokers may be higher than that which another qualified broker would have
charged for effecting the same transaction, provided that the Sub-Adviser
determines in good faith that such transaction is reasonable in terms either of
the transaction or the overall responsibility of the Sub-Adviser to the Fund and
its other clients and that the total commissions paid by the Fund will be
reasonable in relation to the benefits in the Fund over the long term. In no
instance will portfolio securities be purchased from or sold to the Trust's
principal distributor, the Investment Adviser or any affiliate thereof (as the
term "affiliate" is defined in the 40 Act), except to the extent permitted by
SEC exemptive order or by applicable law.
<PAGE>
5. Compliance with Laws: Confidentiality: Conflicts of Interest.
(a) The Sub-Adviser agrees that it will comply with all applicable laws,
rules and regulations of all federal and state regulatory agencies having
jurisdiction over the Sub-Adviser in performance of its duties hereunder (herein
called the "Rules").
(b) The Sub-Adviser will treat confidentially and as proprietary
information of the Trust all records and information relative to the Trust and
prior, present or potential shareholders, and will not use such records and
information for any purpose other than performance of its responsibilities and
duties hereunder, except after prior notification to and approval in writing by
the Trust, which approval shall not be unreasonably withheld and may not be
withheld where the Sub-Adviser may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by the Trust.
(c) The Sub-Adviser will maintain a policy and practice of conducting
sub-advisory services hereunder independently of the banking operations of its
affiliates. In making investment recommendations for the Fund, the Sub-Adviser's
personnel will not inquire or take into consideration whether the issuers of
securities proposed for purchase or sale for the Fund's account are bank
customers of the Sub-Adviser's affiliates unless so required by applicable law.
In dealing with their bank customers, affiliates of Sub-Adviser will not inquire
or take into consideration whether securities of those customers are held by the
Fund.
6. Control by Trust's Board of Trustees. Any recommendations concerning
the Fund's investment program proposed by the Sub-Adviser to the Fund and the
Investment Adviser pursuant to this Agreement, as well as any other activities
undertaken by the Sub-Adviser on behalf of the Fund pursuant thereto shall at
all times be subject to any applicable directives of the Board of Trustees of
the Trust.
7. Services Not Exclusive. The Sub-Adviser's services hereunder are not
deemed to be exclusive, and the Sub-Adviser shall be free to render similar or
dissimilar services to others so long as its services under this Agreement are
not impaired thereby.
8. Books and Records. In compliance with the requirements of Rule 31a-3 of
the Rules, and any other applicable Rule, the Sub-Adviser hereby agrees that all
records which it maintains for the Trust are the property of the Trust and
further agrees to surrender promptly to the Trust any such records upon the
Trust's request. The Sub-Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 and any other applicable Rule, the records required to
be maintained by the Sub-Adviser hereunder pursuant to Rule 31a-1 and any other
applicable Rule.
<PAGE>
9. Expenses. During the term of this Agreement, the Sub-Adviser will bear
all expenses incurred by it in connection with the performance of its services
under this Agreement other than the cost of securities (including brokerage
commissions, if any) purchased for the Fund. Notwithstanding the foregoing, the
Sub-Adviser shall not bear expenses related to the operation of the Trust or any
Fund including, but not limited to, taxes, interest, brokerage fees and
commissions and any extraordinary expense items.
10. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, the Investment Adviser will pay the Sub-Adviser and
the Sub-Adviser will accept as full compensation therefor a fee computed daily
and paid monthly in arrears on the first business day of each month equal to the
lesser of (i) the fee at the applicable annual rates set forth on Schedule A
hereto or (ii) such fee as may from time to time be agreed upon in writing by
the Investment Adviser and the Sub-Adviser. If the fee payable to the
Sub-Adviser pursuant to this paragraph begins to accrue after the beginning of
any month or if this Agreement terminates before the end of any month, the fee
for the period from such date to the end of such month or from the beginning of
such month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs. For purposes of calculating fees, the
value of a Fund's net assets shall be computed in the manner specified in the
Prospectus and the Trust's Declaration of Trust for the computation of the value
of the Fund's net assets in connection with the determination of the net asset
value of the Fund's shares. Payment of said compensation shall be the sole
responsibility of the Investment Adviser and shall in no way be an obligation of
the Fund or of the Trust.
11. Limitation of Liability.
(a) The Sub-Adviser shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Investment Adviser, the Trust or
the Fund in connection with the matters to which Agreement relates, except that
Sub-Adviser shall be liable to the Investment Adviser for a loss resulting from
a breach of fiduciary duty by Sub-Adviser under the 40 Act with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of Sub-Adviser in the
performance of its duties or from reckless disregard by it of its obligations or
duties under this Agreement. In no case shall the Sub-Adviser be liable for
actions taken or non-actions with respect to the performance of services under
this Agreement based upon specific information, instructions or requests given
or made to the Sub-Adviser by the Investment Adviser.
(b) The Investment Adviser shall be responsible at all times for
supervising the Sub-Adviser, and this Agreement does not in any way limit the
duties and responsibilities that the Investment Adviser has agreed to under the
Advisory Agreement.
<PAGE>
12. Duration and Termination. This Agreement shall become effective as of
the date hereof provided that it shall have been approved by vote of a majority
of the outstanding voting securities of the Fund and, unless sooner terminated
as provided herein, shall continue with respect to the Fund for an initial term
of two years. Thereafter, if not terminated, this Agreement shall continue in
effect for successive 12-month periods, provided such continuance is
specifically approved at least annually (a) by the vote of a majority of those
members of the Board of Trustees of the Trust who are not parties to this
Agreement or interested persons of the Trust or any such party, cast in person
at a meeting called for the purpose of voting on such approval, and (b) by the
Board of Trustees of the Trust or by vote of a majority of the outstanding
voting securities of the Fund; provided, however, that this Agreement may be
terminated with respect to the Fund (i) by the Trust at any time without the
payment of any penalty by the Board of Trustees of the Trust, (ii) by vote of a
majority of the outstanding voting securities of the Fund, (iii) by the
Investment Adviser on 60 days written notice to the Sub-Adviser or (iv) by the
Sub-Adviser on 60 days written notice to the Investment Adviser. This Agreement
will also immediately terminate in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities",
"interested person" and "assignment" shall have the same meaning as such terms
have in the 40 Act.)
13. Sub-Adviser's Representations. The Sub-Adviser hereby represents and
warrants as follows:
(a) it will manage each Fund so that each Fund will qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code and
will comply with the diversification requirements of Section 817(h) of the
Internal Revenue Code and the regulations issued thereunder, and any other rules
and regulations pertaining to investment vehicles underlying variable annuity or
variable life insurance policies;
(b) it shall immediately notify the Trust and the Investment Adviser
upon having a reasonable basis for believing that any Fund has ceased to comply
with the diversification provisions of Section 817(h) of the Internal Revenue
Code or the Regulations thereunder; and
(c) it shall be responsible for making inquiries and for reasonably
ensuring that any employee of the Sub-Adviser, any person or firm that the
Sub-Adviser has employed or with which it has associated, or any employee
thereof has not, to the best of the Sub-Adviser's knowledge, in any material
connection with the handling of Trust assets: (i) been convicted, in the last
ten (10) years, of any felony or misdemeanor arising out of conduct involving
embezzlement, fraudulent conversion, or misappropriation of funds or securities,
or involving violations of Sections 1341, 1342, or 1343 of Title 18, United
States Code; or (ii) been found by any state regulatory authority, within the
last ten (10) years, to have violated or to have acknowledged violation of any
provision of any state insurance law involving fraud, deceit, or knowing
misrepresentation; or (iii) been found by any federal or state regulatory
authorities, within the last ten (10) years, to have violated or to have
acknowledged violation of any provisions of federal or state securities laws
involving fraud, deceit or knowing misrepresentation.
<PAGE>
14. Insurance Company Offerees. All parties acknowledge that the Trust
will offer its shares so that it may serve as an investment vehicle for variable
annuity contracts and variable life insurance policies issued by insurance
companies, as well as to qualified pension and retirement plans. The Investment
Adviser and the Sub-Adviser agree that shares of the Funds may be offered only
to the separate accounts and general accounts of insurance companies that are
approved in writing by the Sub-Adviser. The Sub-Adviser agrees that shares of
the Funds may be offered to separate accounts and the general account of
Hartford Life Insurance Company and to separate accounts and the general
accounts of any insurance companies that are affiliated with Hartford Life
Insurance Company. The Sub-Adviser and the Investment Adviser agree that the
Sub-Adviser shall be under no obligation to investigate insurance companies to
which the Trust offers or proposes to offer its shares.
15. Amendment of this Agreement. No provision of this Agreement may be
changed, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, discharge or
termination is sought.
16. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any provisions
hereof or otherwise affect their construction or effect. If any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this Agreement shall not be effected thereby.
This Agreement shall be binding upon and shall inure to the benefit of the
parties herein and their respective successors and shall be governed by
Massachusetts law.
The names "Variable Insurance Funds" and "Trustees of Variable Insurance
Funds" refer respectively to the Trust created and the Trustees, as trustees
but not individually or personally, acting from time to time under an Amended
and Restated Declaration of Trust dated as of July 20, 1994 and amended and
restated as of February 5, 1997, to which reference is hereby made and a copy of
which is on file at the office of the Secretary of State of The Commonwealth of
Massachusetts and elsewhere as required by law, and to any and all amendments
thereto so filed or hereafter filed. The obligations of "Variable Insurance
Funds" entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually, but in such capacities, and
are not binding upon any of the Trustees, shareholders or representatives of the
Trust personally, but bind only the assets of the Trust, and all persons dealing
with any series of shares of the Trust must look solely to the assets of the
Trust belonging to such series for the enforcement of any claims against the
Trust.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
(SEAL) AmSouth Bank
By: _______________________________
Title: ____________________________
(SEAL) Rockhaven Asset Management, LLC
By: _______________________________
Title: ____________________________
Dated: _______, 1997
<PAGE>
Schedule A
to the Subadvisory Agreement
between AmSouth Bank and
Rockhaven Asset Management, LLC
NAME OF FUND COMPENSATION
AmSouth Equity Income Fund Annual rate of thirty-six
one-hundredths of one percent (.36%)
of the average daily net assets of such
Fund; provided that if AmSouth Bank
waives some or all of its investment
advisory fee, Rockhaven Asset
Management, LLC shall waive its fee so
that if shall receive no more than
sixty percent (60%) of the net
investment advisory fee paid to
AmSouth Bank.
All fees are computed daily and paid monthly.
AmSouth Bank
By:
Name:
Title:
Rockhaven Asset Management, LLC
By:__________________________
Name:________________________
Title:_______________________
CUSTODY AGREEMENT
This Agreement is entered into as of ______, 1997 between Variable
Insurance Funds (the "Fund"), a Massachusetts business trust, having its
principal office and place of business at 3435 Stelzer Road, Columbus, Ohio
43219-3035 and AmSouth Bank (the "Bank"), an Alabama banking association with
its principal place of business at 1901 6th Avenue, North, Birmingham, Alabama
35203.
In consideration of the mutual promises set forth below, the Fund and the Bank
agree as follows:
1. Definitions.
Whenever used in this Agreement or in any Schedules to this Agreement, the
words and phrases set forth below shall have the following meanings, unless the
context otherwise requires:
1.1 "Authorized Person" shall be deemed to include the President, and any
Vice President, the Secretary, the Assistant Secretary, the Treasurer and any
Assistant Treasurer of the Fund, or any other person, including persons employed
by the Investment Manager, whether or not any such person is an officer of the
Fund, duly authorized by the Board of Trustees of the Fund to give Oral
Instructions and Written Instructions on behalf of the Fund and listed in
Schedule C, Part II or such other certification as may be received by the Bank
from time to time.
1.2 "Book-Entry System" shall mean the Federal Reserve/Treasury book-entry
system for United States and federal agency securities, its successor or
successors and its nominee or nominees.
1.3 "Declaration of Trust" shall mean the Declaration of Trust of the Fund
as now in effect and as the same may be amended from time to time.
1.4 "Depository" shall mean The Depository Trust Company ("DTC"), a
clearing agency registered with the Securities and Exchange Commission under
Section 17(a) of the Securities Exchange Act of 1934, as amended, its successor
or successors and its nominee or nominees, in which the Bank is hereby
specifically authorized to make deposits. The term "Depository" shall further
mean and include any other person to be named in Written Instructions authorized
to act as a depository under the 1940 Act, its successor or successors and its
nominee or nominees.
1.5 "Money Market Security" shall be deemed to include, without limitation,
debt obligations issued or guaranteed as to interest and principal by the
Government of the United States or agencies or instrumentalities thereof, and
repurchase and reverse repurchase agreements with respect to any of the
foregoing types of securities, commercial paper, bank certificates of deposit,
bankers' acceptances and short-term corporate obligations, where the purchase or
sale of such securities normally requires settlement in federal funds on the
same day as such purchase or sale.
1.6 "Prospectus" shall mean the Series' current prospectuses and statement
of additional information relating to the registration of the Series' Shares
under the Securities Act of 1933, as amended.
<PAGE>
1.7 "Security" or "Securities" shall be deemed to include bonds,
debentures, notes, stocks, shares, evidences of indebtedness, and other
securities and investments from time to time owned by each Series.
1.8 "Shares" refers to the shares of beneficial interest of a Series of the
Trust.
1.9 "Series" refers to Funds shown on Schedule A, attached hereto and made
a part hereof by this reference, and any such other Series as may from time to
time be created and designated in accordance with the provisions of the
Declaration of Trust.
1.10 "Transfer Agent" shall mean the person which performs the transfer
agent, dividend disbursing agent and shareholder servicing agent functions for
the Fund.
1.11 "Written Instructions" shall mean a written or electronic
communication actually received by the Bank from an Authorized Person or from a
person reasonably believed by the Bank to be an Authorized Person by telex or
any other such system whereby the receiver of such communication is able to
verify through codes or otherwise with a reasonable degree of certainty the
authenticity of the sender of such communication.
1.12 The "1940 Act" refers to the Investment Company Act of 1940, and the
rules and regulations thereunder, all as amended from time to time.
2. Appointment of Custodian.
2.1 The Fund hereby constitutes and appoints the Bank as custodian of all
the securities and moneys owned by or in the possession of the Fund during the
period of this Agreement.
2.2 The Bank hereby accepts appointment as custodian for the Fund and
agrees to perform the duties thereof as hereinafter set forth.
3. Compensation.
3.1 The Fund will compensate the Bank for its services rendered under this
Agreement in accordance with the fees set forth in the Fee Schedule attached as
Schedule B and made a part of this Agreement by this reference.
3.2 The parties to this Agreement will agree upon the compensation for
acting as Custodian for any Series hereafter established and designated, and at
the time that the Bank commences serving as such for said Series, such agreement
shall be reflected in a Fee Schedule for the Fund, which shall be attached to
Schedule B of this Agreement.
3.3 Any compensation agreed to hereunder may be adjusted from time to time
by not less than 90 days advance written notice of such fee increase from Bank
to Fund. Any such increase shall take effect upon approval of the Board of
Trustees of the Fund.
<PAGE>
3.4 The Bank will bill the Fund as soon as practicable after the end of the
month, and said billings will be detailed in accordance with the Fee Schedule.
The Fund will pay to the Bank the amount of such billing within 45 days after
receipt. In the event such bill is not promptly paid, the Bank may charge
against any money specifically allocated to the Fund such compensation and any
expenses incurred by the Bank in the performance of its duties pursuant to such
agreement. The Bank shall also be entitled to charge against any money held by
it and specifically allocated to the Fund the amount of any loss, damage,
liability or expense incurred with respect to such Fund, including counsel fees,
for which it shall be entitled to reimbursement under provision 10.4 of this
Agreement.
The expenses which the Bank may charge against such account include, but
are not limited to, the expenses of Sub-Custodians and foreign branches of the
Bank incurred in settling transactions outside of Birmingham or New York City
involving the purchase and sale of Securities of the Fund.
4. Custody of Cash and Securities.
4.1 Receipt and Holding of Assets. The Fund will deliver or cause to be
delivered to the Bank all securities and moneys owned by it, including cash
received from the issuances of its Shares, at any time during the period of this
Agreement and shall specify the Series to which the Securities and moneys are to
be specifically allocated. The Bank shall physically segregate and keep apart on
its books, the assets of each Series, including separate identification of
securities held in the Book-Entry System. The Bank will not be responsible for
such securities and moneys until actually received by it. The Fund shall
instruct the Bank from time to time in its sole discretion, by means of Written
Instructions as to the manner in which and in what amounts Securities and moneys
of a Series are to be deposited on behalf of such Series in the Book-Entry
System or the Depository and specifically allocated on the books of the Bank to
such Series. Securities and moneys of the Fund deposited in the Book-Entry
System or the Depository will be represented in accounts which include only
assets held by the Bank for customers, including but not limited to accounts in
which the Bank acts in a fiduciary or representative capacity.
4.2 Accounts and Disbursement. The Bank shall establish and maintain a
separate account for each Series and shall credit to the separate account of
each Series all moneys received by it for the account of such Series and shall
disburse the same only:
4.2.1 In payment for securities purchased for such Series, as provided in
Section 5 hereof;
4.2.2 In payment of dividends or distributions with respect to the Shares
of such Series;
4.2.3 In payment of original issue or other taxes with respect to the
Shares of such Series;
<PAGE>
4.2.4 In payment for Shares which have been redeemed by such Series;
4.2.5 Pursuant to Written Instructions, setting forth the name of such
Series, the name and address of the person to whom the payment is to be made,
the amount to be paid and the purpose for which payment is to be made; or
4.2.6 In payment of fees and in reimbursement of the expenses and
liabilities of the Bank attributable to such Series.
4.3 Confirmations and Statements. Promptly after the close of business each
day, the Bank shall make available to the Fund information with respect to all
transfers to and from the account of a Series during that day. The Bank need not
send written confirmation or a summary of all such transfers to or from the
account of each Series. Provided, however, that upon the written request of
Fund, Bank shall provide within 5 business days of such written request a copy
of any confirmations which include transactions of the Fund. Where securities
purchased by a Series are in a fungible bulk of Securities registered in the
name of the Bank (or its nominee) or shown on the Bank's account on the books of
the Depository or the Book-Entry System, the Bank shall by book entry or
otherwise identify the quantity of those securities belonging to such Series. At
least monthly, the Bank shall furnish the Fund with a detailed statement of the
Securities and moneys held for each Series under this Agreement.
4.4 Registration of Securities and Physical Separation.
All Securities held for a Series which are issued or issuable only in
bearer form, except such Securities as are held in the Book-Entry System, shall
be held by the Bank in that form; all other Securities held for a Series may be
registered, in the name of any duly appointed registered nominee of the Bank as
the Bank may from time to time determine, or in the name of the Book-Entry
System or the Depository of their successor or successors, or their nominee or
nominees. When a reference is made in this Agreement to an action to be taken by
Bank it is understood by the parties that the action may be taken directly or,
in the case of book-entry securities, through the appropriate depository. The
Fund agrees to furnish to the Bank appropriate instruments to enable the Bank to
hold or deliver in proper form for transfer, or to register in the name of its
registered nominee or in the name of the Book-Entry System or the Depository,
any Securities which it may hold for the account of a Series. The Bank (or its
sub-custodians) shall hold all such Securities specifically allocated to a
Series which are not held in the Book-Entry System or the Depository in a
separate account for such series in the name of such Series physically
segregated at all times from those of any other person or persons.
4.5 Collection of Income and Other Matters Affecting Securities. Unless
otherwise instructed to the contrary by Written Instructions, the Bank shall
with respect to all Securities held for a Series in accordance with this
Agreement:
4.5.1 Collect all income due or payable and credit such income promptly on
the contractual settlement date, whether or not actually received, to the
account of the appropriate Series, except for income from foreign issues. Income
which has not been collected after reasonable effort, within a time agreed upon
between the parties, shall be repaid to the Bank pending final collection at
such date as may be mutually agreed upon by the Trust and the Bank;
<PAGE>
4.5.2 Present for payment and collect the amount payable upon all
Securities which may mature or be called, redeemed or retired, or otherwise
become payable. Bank shall make a good faith effort to inform Fund of any call,
redemption or retirement date with respect to securities which are owned by a
Series and held by the Bank or its nominee. Notwithstanding the foregoing, the
Bank shall have no responsibility to the Fund or a Series for monitoring or
ascertaining of any call, redemption or retirement date with respect to
securities which are held by a Series and held by Bank or its nominee. Nor shall
the Bank have any responsibility or liability to the Fund or to a Series for any
loss by a Series for any missed payment or other default resulting therefrom
unless the Bank received timely general notification, which shall not be less
than 5 business days, from the Fund or the Series specifying the time, place and
manner for the presentment of any put bond owned by a Series and held by the
Bank or its nominee. The Bank shall not be responsible and assumes no liability
to the Fund or a Series for the accuracy or completeness of any notification the
Bank shall provide to the Fund or a series with respect to put securities;
4.5.3 Execute any necessary declarations or certificates of ownership under
the Federal income tax laws or the laws or regulations of any other taxing
authority now or hereafter in effect; and
4.5.4 Hold for the account of each Series all rights and other Securities
issued with respect to any Securities held by the Bank hereunder for such
Series.
4.6 Delivery of Securities and Evidence of Authority. Upon receipt of
Written Instructions, the Bank shall:
4.6.1 Execute and deliver or cause to be executed and delivered to such
persons as may be designated in such Written Instructions, proxies, consents,
authorization, and any other instruments whereby the authority of the Fund as
owner of any Securities may be exercised;
4.6.2 Deliver or cause to be delivered any Securities held for a Series in
exchange for other Securities or cash issued or paid in connection with the
liquidation, reorganization, refinancing, merger, consolidation or
recapitalization of any corporation, or the exercise of any conversion
privilege;
4.6.3 Deliver or cause to be delivered any Securities held for a Series to
any protective committee, reorganization committee or other person in connection
with the reorganization, refinancing, merger, consolidation or recapitalization
or sale of assets of any corporation, and receive and hold under the terms of
this Agreement in the separate (bookkeeping) account for each Series such
certificates of deposit, interim receipts or other instruments or documents as
may be issued to it to evidence such delivery;
<PAGE>
4.6.4 Make or cause to be made such transfers or exchanges of the assets
and take such steps as shall be stated in said Written Instructions to be for
the purpose of effectuating any duly authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of the Fund;
4.6.5 Deliver Securities owned by any Series upon sale of such Securities
for the account of such Series pursuant to Section 5;
4.6.6 Deliver Securities owned by any Series upon the receipt of payment in
connection with any repurchase agreement related to such Securities entered into
by such Series;
4.6.7 Deliver Securities owned by any Series to the issuer thereof or its
agent when such Securities are called, redeemed, retired or otherwise become
payable; provided, however, that in any such case the cash or other
consideration is be delivered to the Bank.
4.6.8 Deliver Securities owned by any Series in connection with any loans
of Securities made by such Series but only against receipt of adequate
collateral as agreed upon from time to time by the Bank and the Fund which may
be in any form permitted under the 1940 Act or any interpretations thereof
issued by the Securities and Exchange Commission or its staff;
4.6.9 Deliver Securities owned by any Series for delivery as security in
connection with any borrowings by such Series requiring a pledge of Series
assets, but only against receipt of amount borrowed;
4.6.10 Deliver Securities owned by any Series upon receipt of instructions
from such Series for delivery to the Transfer Agent or to the holders of Shares
of such Series in connection with distributions in kind, as may be described
from time to time in the Series' Prospectus, in satisfaction of requests by
holders of Shares for repurchase or redemption; and
4.6.11 Deliver Securities owned by any Series for any other proper business
purpose, but only upon receipt of, in addition to Written Instructions, a
certified copy of a resolution of the Board of Trustees signed by an Authorized
Person and certified by the Secretary or Assistant Secretary of the Fund,
specifying the Securities to be delivered, setting forth the purpose for which
such delivery is to be made, declaring such Purpose to be a proper business
purpose, and naming the person or persons to whom delivery of such Securities
shall be made.
4.7 Endorsement and Collection of Checks, Etc. The Bank is hereby
authorized to endorse and collect all checks, drafts or other orders for the
payment of money received by the Bank for the account of a Series.
5. Purchase and Sale of Investments of the Series.
5.1 Promptly after each purchase of Securities for a Series, the Fund shall
deliver to the Bank Written Instructions specifying with respect to each
purchase: (1) the name of the Series to which such Securities are to be
specifically allocated; (2) the name of the issuer and the title of the
Securities; (3) the number of shares or the principal amount purchased and
<PAGE>
accrued interest, if any; (4) the date of purchase and settlement; (5) the
purchase price per unit; (6) the total amount payable upon such purchase; (7)
the name of the person from whom or the broker through whom the purchase was
made, if any; (8) whether or not such purchase is to be settled through the
Book-Entry System or the Depository; and (9) whether the Securities purchased
are to be deposited in the Book-Entry System or the Depository. The Bank shall
receive all Securities purchased by or for a Series and upon receipt of such
Securities shall pay out of the moneys held for the account of such Series the
total amount payable upon such purchase, provided that the same conforms to the
total amount payable as set forth in such Written Instructions.
5.2 Promptly after each sale of Securities of a Series, the Fund shall
deliver to the Bank Written Instructions specifying with respect to such sale:
(1) the name of the Series to which the Securities sold were specifically
allocated; (2) the name of the issuer and the title of the Securities; (3) the
number of shares or principal amount sold, and accrued interest, if any; (4) the
date of sale; (5) the sale price per unit; (6) the total amount payable to the
Series upon such sale; (7) the name of the broker through whom or the person to
whom the sale was made; and (8) whether or not such sale is to be settled
through the Book-Entry System or the Depository. The Bank shall deliver or cause
to be delivered the Securities to the broker or other person designated by the
Fund upon receipt of the total amount payable to such Series upon such sale,
provided that the same conforms to the total amount payable to such Series as
set forth in such Written Instructions. Subject to the foregoing, the Bank may
accept payment in such form as shall be reasonably satisfactory to it, and may
deliver Securities and arrange for payment in accordance with the customs
prevailing among dealers in Securities.
6. Payment of Dividends or Distributions.
6.1 The Fund shall furnish to the Bank the resolution of the Board of
Trustees of the Fund certified by the Secretary or Assistant Secretary (i)
authorizing the declaration of dividends or distribution with respect to a
Series on a specified periodic basis and authorizing the Bank to rely on Written
Instructions specifying the date of the declaration of such dividend or
distribution, the date of payment thereof, the record date as of which
shareholders entitled to payment shall be determined, the amount payable per
share to the shareholders of record as of the record date and the total amount
payable per share to the shareholders of record as of the record date and the
total amount payable to the Transfer Agent on the payment date, or (ii) setting
forth the date of declaration of any dividend or distribution by a Series, the
date of payment thereof, the record date as of which shareholders entitled to
payment shall be determined, the amount payable per share to the shareholders of
record as of the record date and the total amount payable to the Transfer Agent
on the payment date.
6.2 Upon the payment date specified in such resolution or Written
Instructions the Bank shall pay out the moneys specifically allocated to and
held for the account of the appropriate Series the total amount payable to the
Transfer Agent of the Fund.
<PAGE>
7. Sale and Redemption of Shares of a Series.
7.1 Whenever the Fund shall sell or redeem any Shares of a Series, the Fund
shall deliver or cause to be delivered to the Bank Written Instructions duly
specifying:
7.1.1 The name of the Series whose Shares were sold or redeemed;
7.1.2 The number of Shares sold or redeemed, trade date, and price;
and
7.1.3 The amount of money to be received or paid by the Bank for the
sale or redemption of such Shares.
7.2 Upon receipt of such money from the Transfer Agent, the Bank shall
credit such money to the separate account of the Series.
7.3 Upon issuance of any Shares of a Series in accordance with the
foregoing provisions of this Section 7, the Bank shall pay, out of the moneys
specifically allocated and held for the account of such Series, all original
issue or other taxes required to be paid in connection with such issuance upon
the receipt of Written Instructions specifying the amount to be paid.
7.4 Upon receipt from the Transfer Agent of advice setting forth the number
of Shares of a Series received by the Transfer Agent for redemption and that
such Shares are valid and in good form for redemption, the Bank shall make
payment to the Transfer Agent out of the moneys specifically allocated to and
held for the account of the Series.
8. Indebtedness.
8.1 The Fund will cause to be delivered to the Bank by any bank (excluding
the Bank) from which the Fund borrows money for temporary administrative or
emergency purposes using Securities as collateral for such borrowings, a notice
or undertaking in the form currently employed by any such bank setting forth the
amount which such bank will loan to the Fund against delivery of a stated amount
of collateral. The Fund shall promptly deliver to the Bank Written Instructions
stating with respect to each such borrowing: (1) the name of the Series for
which the borrowing is to be made; (2) the name of the bank; (3) the amount and
terms of the borrowing, which may be set forth by incorporating by reference an
attached promissory note, duly endorsed by the Fund, or other loan agreement;
(4) the time and date, if known, on which the loan is to be entered into (the
"borrowing date"); (5) the date on which the loan becomes due and payable; (6)
the total amount payable to the Fund for the separate account of the Series on
the borrowing date; (7) the market value of Securities to be delivered as
collateral for such loan, including the name of the issuer, the title and the
number of shares or the principal amount of any particular Securities; (8)
whether the Bank is to deliver such collateral through the Book-Entry System or
the Depository; and (9) a statement that such loan is in conformance with the
1940 Act and the Series' Prospectus.
<PAGE>
8.2 Upon receipt of the Written Instructions referred to above, the Bank
shall deliver on the borrowing date the specified collateral and the executed
promissory note, if any, against delivery by the lending bank of the total
amount of the loan payable, provided that the same conforms to the total amount
payable as set forth in the Written Instructions. The Bank may, at the option of
the lending bank keep such collateral in its possession, but such collateral
shall be subject to all rights therein given the lending bank by virtue of any
promissory note or loan agreement. The Bank shall deliver as additional
collateral in the manner directed by the Fund from time to time such Securities
specifically allocated to such Series as may be specified in Written
Instructions to collateralize further any transaction described in this Section
8. The Fund shall cause all Securities released from collateral status to be
returned directly to the Bank, and the Bank shall receive from time to time such
return of collateral as may be tendered to it. In the event that the Fund fails
to specify in Written Instructions all of the information required by this
Section 8, the Bank shall not be under any obligation to deliver any Securities.
Collateral returned to the Bank shall be held hereunder as it was prior to being
used as collateral.
9. Persons Having Access to Assets of the Series.
9.1 No Trustee, officer, employee or agent of the Fund, and no officer,
director, employee or agent of the Advisor, shall have physical access to the
assets of the Fund held by the Bank or be authorized or permitted to withdraw
any investments of the Fund, nor shall the Bank deliver any assets of the Fund
to any such person. No officer, director, employee or agent of the Bank who
holds any similar position with the Fund, the Advisor shall have access to the
assets of the Fund.
9.2 The individual employees of the Bank initially duly authorized by the
Board of Directors of the Bank to have access to the assets of the Fund are
listed on Schedule C, Part I, which is attached and made a part of this
Agreement by this reference. The Bank shall advise the Fund of any change in the
individuals authorized to have access to the assets of the Fund by written
notice to the Fund.
9.3 Nothing in this Section 9 shall prohibit any officer, employee or agent
of the Fund, or any officer, director, employee or agent of the Advisor, from
giving Written Instructions to the Bank so long as it does not result in
delivery of or access to assets of the Fund prohibited by this Section 9.
10. Concerning the Bank.
10.1 Standard of Conduct. The Bank shall not be responsible for the title,
validity or genuineness of any property or evidence of title thereto received by
it or delivered by it pursuant to this Agreement and reasonably believed by it
to be valid or genuine and shall be held harmless in acting upon proper
instructions, resolutions, any notice, request, consent, certificate or other
instrument reasonably believed by it to be genuine and to be signed by the
proper party or parties and shall be entitled to receive as conclusive proof of
any fact or matter required to be ascertained by it hereunder, a certificate
signed by the President, a Vice President, the Treasurer, the Secretary or an
Assistant Secretary of the Fund. The Bank may receive and accept a resolution as
conclusive evidence (a) of the authority of any person to act in accordance with
such vote or (b) of any determination or of any action by the Board of Trustees
pursuant to the Declaration of Trust as described in such vote, and such vote
may be considered as in full force and effect until receipt by the Bank of
written notice from the Secretary or an Assistant Secretary to the contrary.
<PAGE>
The Bank shall be entitled to rely on and may act upon advice of counsel
(who shall either be counsel for the Fund, or other counsel selected by the Bank
with expertise in the 1940 Act) on all matters, and shall be without liability
for any action reasonably taken or omitted pursuant to such advice. Provided,
however, that if such reliance involves a potential material loss to the Fund,
the Bank shall advise the Fund of any such actions to be taken in accordance
with such advice of counsel to the Bank.
The Bank shall be held to the exercise of reasonable care in carrying out
the provisions of this Agreement but shall be liable only for its own negligent
or bad faith acts, wilful misconduct, or negligent or wilful failures to act by
the Bank and its agents or Employees. Bank shall have no responsibility for
reviewing or questioning the acts or records of any prior custodian. The Fund
shall indemnify the Bank and hold it harmless from and against all losses,
liabilities, demands, claims, actions, expenses, attorneys' fees, and taxes with
respect to each Series which the Bank may suffer or incur on account of being
Bank hereunder except to the extent that such losses, liabilities, demands,
claims, actions, expenses, attorneys fees or taxes arise from the Bank's own
negligence or bad faith. Notwithstanding the foregoing the Bank shall be liable
to the Fund for any loss or damage resulting from the use of the Book-Entry
System or the Depository arising by reason of any negligence, misfeasance or
misconduct on the part of the Bank or any of its employees or agents.
If a Series requires the Bank to take any action with respect to
Securities, which action involves the payment of money or which action may, in
the opinion of the Bank, result in the Bank or its nominee assigned to such
Series being liable for the payment of money or incurring liability of some
other form, such Series, as a prerequisite to requiring the Bank to take such
action, shall, prior to the Bank taking such action, provide indemnity in
writing to the Bank in an amount and form reasonably satisfactory to it.
10.2 Limit of Duties. Without limiting the generality of the foregoing, the
Bank shall be under no duty or obligation to inquire into, and shall not be
liable for:
10.2.1 The validity of the issue of any Securities purchased by any Series,
the legality of the purchase thereof, the permissibility of the purchase thereof
under the Fund's governing documents, or the propriety of the amount paid
therefor;
10.2.2 The legality of the sale of any Securities by any Series, the
permissibility of such sale under the fund's governing documents, or the
propriety of the amount for which the same are sold;
10.2.3 The legality of the issue or the sale of any Shares, or the
sufficiency of the amount to be received therefor;
10.2.4 The legality of the redemption of any Shares, or the propriety of
the amount to be paid therefor;
<PAGE>
10.2.5 The legality of the declaration or payment of any dividend or other
distribution of any Series;
10.2.6 The legality of any borrowing for temporary or emergency
administrative purposes.
10.3 No Liability until Receipt. The Bank shall not be liable for, or
considered to be the custodian of, any money, whether or not represented by any
check, draft, or other instrument for the payment of money, received by it on
behalf of any Series until the Bank actually receives and collects such money
directly or by the final crediting of the account representing the Fund's
interest in the Book-Entry System or the Depository.
10.4 Collection Where Payment Refused. The Bank shall not be under any duty
or obligation to take action to effect collection of any amount, if the
Securities upon which such amount is payable are in default, or if payment is
refused after due demand or presentation, unless and until (a) it shall be
directed to take such action by Written Instructions and (b) it shall be assured
to its satisfaction of reimbursement of its costs and expenses in connection
with any such action.
10.5 Appointment of Agents and Sub-Custodians. The Bank may appoint one or
more banking institutions, including but not limited to banking institutions
located in foreign countries, to act as Depository or Depositories or as
Sub-Custodian or as Sub-Custodians of Securities and moneys at any time owned by
any Series, upon terms and conditions specified in Written Instructions. The
Bank shall use reasonable care in selecting a Depository and/or Sub-Custodian
located in a country other than the United States ("Foreign Sub-Custodian"), and
shall oversee the maintenance of any Securities or moneys of the Trust by any
Foreign Sub-Custodian in accordance with the provisions of Rule 17f-5 of the
Act.
10.6 No Duty to Ascertain: Authority. The Bank shall not be under any duty
or obligation to ascertain whether any Securities at any time delivered to or
held by it for the Fund and specifically allocated to a Series are such as may
properly be held by the Series and specifically allocated to such Series under
the provisions of the Declaration of Trust and the Series' Prospectus.
10.7 Reliance on Certificates and Instructions. The Bank shall be entitled
to rely upon any Written Instructions or Oral Instructions actually received by
the Bank pursuant to the applicable Sections of this Agreement and reasonably
believed by the Bank to be genuine and to be given by an Authorized Person. The
Fund agrees to forward to the Bank Written Instructions from an Authorized
Person confirming such Oral Instructions in such manner so that such Written
Instructions are received by the Bank, whether by hand delivery, telex, or
otherwise, by the close of business on the same day that such Oral Instructions
are given to the Bank. The Fund agrees that the fact that such confirming
instructions are not received by the Bank shall in no way affect the validity
for the transactions or enforceability of the transactions hereby authorized by
the Fund. The Fund agrees that the Bank shall incur no liability to the Fund in
acting upon Oral Instructions given to the Bank hereunder concerning such
transactions provided such instructions reasonably appear to have been received
from a duly Authorized Person.
<PAGE>
10.8 Inspection of Books and Records. The books and records of the Bank
regarding the Fund shall be open to inspection and audit at reasonable times by
officers and auditors employed by the Fund and by employees of the Securities
and Exchange Commission. The Bank shall provide the Fund, upon request, with any
report obtained by the Bank on the system of internal accounting control of the
Book-Entry System or the Depository and with such reports on its own systems of
internal accounting control as the Fund may reasonably request from time to
time. Provided, however, that in the event that the Fund shall require a report
of internal accounting control produced by the auditors of the Series rather
than of the Bank, then such report shall be prepared at the expense of the
Series, and the Series agrees to pay for the time expended by Bank on such audit
and report at the hourly rate set forth on the Fee agreement.
11. Term and Termination.
11.1 This Agreement shall become effective on the date first set forth
above (the "Effective Date") and shall continue in effect thereafter as the
parties may mutually agree.
11.2 The Bank may terminate this Agreement with respect to the Fund and the
Fund may terminate this Agreement with respect to any Series by giving to the
other party a notice in writing specifying the date of such termination, which
shall be not less than 90 days after the date of receipt of such notice. In the
event such notice is given by the Fund, it shall designate a successor custodian
or custodians, which shall be a person qualified to so act under the 1940 Act.
In the event such notice is given by the Bank, the Fund shall, on or before the
termination date, deliver to the Bank, Written Instructions designating a
successor Custodian or Custodians. In the absence of such designation by the
Fund, the Bank may designate a successor Custodian, which shall be a person
qualified to so act under the 1940 Act. If the Fund fails to designate a
successor Custodian for any Series, the Fund shall upon the date specified in
the notice of termination of this Agreement and upon the delivery by the Bank of
all Securities (other than Securities held in the Book-Entry Systems which
cannot be delivered to the Trust) and moneys then owned by such Series, be
deemed to be its own Custodian and the Bank shall thereby be relieved of all
duties and responsibilities pursuant to this Agreement, other than the duty with
respect to Securities held in the Book-Entry system which cannot be delivered to
the Trust.
11.3 Upon the date set forth in such notice under paragraph (2) of this
Section, this Agreement shall terminate to the extent specified in such notice,
and the Bank shall upon receipt of a notice of acceptance by the successor
Custodian on that date deliver directly to the successor Custodian all
Securities and moneys then held by the Bank and specifically allocated to the
Series specified, after deducting all fees, expenses and other amounts for the
payment or reimbursement of which it shall then be entitled with respect to such
Series.
<PAGE>
12. Additional Services by Bank.
12.1 If allowed by the prospectus, the investment adviser of each Series
may direct that the assets of that Series be invested in deposits in the Bank or
its affiliates bearing a reasonable rate of interest.
12.2 Other Bank Services. Any authorized person may direct the Bank to
utilize other services or facilities provided by the Bank or its affiliates.
Such services shall include, but not be limited to (1) the placing of orders for
the purchase, sale exchange, investment or reinvestment of securities through
any brokerage service conducted by the Bank or its affiliates, or (2) the
purchase of units of any investment company managed or advised by the Bank or
its affiliates and/or for which the Bank or its affiliates act as custodian or
provide investment advice or other services for a fee. The Fund hereby
acknowledges that the Bank or its affiliates will receive fees for such services
in addition to the fees payable under this Agreement. Fee Schedules for such
additional directed services shall be delivered to the Authorized Person before
provision of such services.
13. Miscellaneous.
13.1 Annexed hereto is Schedule C, Part II setting forth the names of the
present Authorized Persons. The Fund agrees to furnish to the Bank a new
certification in similar form in the event that any such present Authorized
Person ceases to be such an Authorized Person or in the event that other or
additional Authorized Persons are elected or appointed. Until such new
certification shall be received, the Bank shall be fully protected in acting
under the provisions of this Agreement upon Oral Instructions or signatures of
the present Authorized Persons as set forth in the last delivered certification.
13.2 Annexed hereto is Schedule C, Part III setting forth the names of the
present Trustees of the Fund. The Fund agrees to furnish to the Bank a new
certification in similar form in the event any such present Trustee ceases to be
a Trustee of the Fund or in the event that other or additional Trustees are
elected or appointed. Until such new certification shall be received, the Bank
shall be fully protected in acting under the provisions of this Agreement upon
the signature of the officers as set forth in the last delivered certification.
13.3 Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Bank, shall be sufficiently given if addressed
to the Bank and mailed or delivered to it at its offices at:
AmSouth Bank
1901 6th Avenue, North
Birmingham, Alabama 35203
or such other place as the Bank may from time to time designate in writing.
<PAGE>
13.4 Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund, shall be sufficiently given if addressed
to the Fund and mailed or delivered to it at its offices at 3435 Stelzer Road,
Columbus, Ohio 43219-3035 or at such other place as the Fund may from time to
time designate in writing.
13.5 This Agreement may not be amended or modified in any manner except by
a written agreement executed by both parties with the same formality as this
Agreement, and as may be permitted or required by the 1940 Act.
13.6 This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund without the written consent
of the Bank, or by the Bank without the written consent of the Fund authorized
or approved by a resolution of the Board of Trustees of the Fund, and any
attempted assignment without such written consent shall be null and void.
13.7 This Agreement shall be construed in accordance with the laws of the
State of Massachusetts.
13.8 It is expressly agreed to that the obligations of the Fund hereunder
shall not be binding upon any of the Trustees, shareholders, nominees, officers,
agents, or employees of the Fund, personally, but bind only the property of the
Fund, as provided in the Declaration of Trust of the Fund. The execution and
delivery of this Agreement have been authorized by the Trustees of the Fund and
signed by an authorized officer of the Fund, acting as such, and neither such
authorization by such Trustees nor such execution and delivery by such officer
shall be deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the trust property of
the Fund as provided in its Declaration of Trust.
13.9 The captions of the Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
13.10 This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunder duly authorized as of the day
and year first above written.
Variable Insurance Funds
By: _______________________________
Title: ___________________________
Date: _______, 1997
AmSouth Bank
By: _____________________________
Title: __________________________
Date: _______, 1997
<PAGE>
Schedule A - Funds
AmSouth Regional Equity Fund
AmSouth Equity Income Fund
Variable Insurance Funds
By: _______________________________
Title: ___________________________
Date: _______, 1997
AmSouth Bank
By: _____________________________
Title: __________________________
Date: _______, 1997
<PAGE>
Schedule B
Mutual Fund Services
Schedule of Fees
Custody
For custody services the Bank will charge for the first year of services
hereunder a fee equal to .60 b.p (.0060%) of net asset value per annum. This
charge will be reviewed thereafter, but will continue in effect until a
modification of this Schedule B is mutually agreed upon.
Variable Insurance Funds
By: ___________________________
Title: _______________________
Date: _______, 1997
AmSouth Bank
By: __________________________
Title: _______________________
Date: _______, 1997
<PAGE>
Schedule C
Authorized Persons
Part I - Access Persons of Bank
Part II - Authorized Persons of the Fund
Refer to the current resolution of the Board of Trustees of the Fund.
Part III - Trustees
Walter B. Grimm
Michael Van Buskirk
James H. Woodward, Jr.
Variable Insurance Funds
By: _____________________________
Title: __________________________
Date: _______, 1997
AmSouth Bank
By: ___________________________
Title: ________________________
Date: _______, 1997
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made this __ day of ___, 1997, between Variable Insurance
Funds, an open-end management investment company organized as a Massachusetts
business trust (the "Trust"), on behalf of certain of its series as set forth on
Schedule A, as may be amended from time to time (the "Funds"), and HARTFORD LIFE
INSURANCE COMPANY, a life insurance company organized under the laws of the
State of Connecticut (the "Company"), on its own behalf and on behalf of each
segregated asset account of the Company set forth on Schedule A, as may be
amended from time to tune (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Trust has registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and has registered the offer
and sale of its shares under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, the Trust desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Trust is divided into several
series of shams, each series representing an interest in a particular managed
portfolio of securities and other and
WHEREAS, the Trust intends to obtain an order from the Securities and
Exchange Commission granting Participation Insurance Companies and their
separate accounts exemptions from the provisions of Sections 9(a), 13(a) and
15(b) of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to
the extent necessary to permit shares of the Trust to be sold to and held by
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Exemptive Order"); and
WHEREAS, the Company has registered or will register (unless registration
is not required under applicable law) certain variable life insurance policies
and/or variable annuity contracts under the 1933 Act (the "Contracts"); and
WHEREAS, the Company has registered or will register (unless registration
is not required under applicable law) each Account as a unit investment trust
under the 1940 Act; and
WHEREAS, the Company desires to utilize shares of one or more funds as an
investment vehicle of the Accounts;
NOW THEREFORE, in consideration of their mutual promises, the parties agree
as follows:
<PAGE>
ARTICLE I
Sale of -Trust Shares
1.1 The Trust shall make shares of its Funds available to the Accounts at
the net asset value next computed after receipt of such purchase order by the
Trust (or its agent), as established in accordance with the provisions of the
then current prospectus of the Trust Shares of a particular Fund of the Trust
shall be ordered in such quantities and at such times as determined by the
Company to be necessary to meet the requirements of the Contracts. The Trustees
of the Trust (the "Trustees") may refuse to sell shares of any Fund to any
person, or suspend or terminate the offering of shares of any Fund if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Trustees acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Fund.
1.2 The Trust will redeem any full or fractional shares of any Fund when
requested by the Company on behalf of an Account at the net asset value next
computed after receipt by the Trust (or its agent) of the request for
redemption, as established in accordance with the provisions of the then current
prospectus of the Trust. The Trust shall make payment for such shares in the
manner established from time to time by the Trust, but in no event shall payment
be delayed for a greater period than is permitted by the 1940 Act.
1.3 For the purposes of Sections 1.1 and 1.2, the Trust hereby appoints the
Company as its agent for the limited purpose of receiving and accepting
purchase, and redemption orders resulting from investment in and payments under
the Contracts. Receipt by the Company shall constitute receipt by the Trust
provided that i) such orders are received by the Company in good order prior to
the time the net asset value of each Portfolio is priced in accordance with its
prospects and ii) the Trust receives notice of such orders by 11:00 am. New York
time on next following Business Day. "Business Day" shall mean any day on which
the New York Stock Exchange is open for trading and on which the Trust
calculates its net asset value pursuant to the rules of the Securities and
Exchange Commission.
1.4 Purchase orders that are transmitted to the Trust in accordance with
Section 1.3 shall be paid no later than 12:00 noon New York time on the same
Business Day that the Trust receives notice of the order. Payments shall be made
in federal funds transmitted by wire.
1.5 Issuance and transfer of the Trust's shares will be by book entry only.
Stock certificates will not be issued to the Company or the Account. Shares
ordered from the Trust will be recorded in appropriate title for each Account or
the appropriate subaccount of each Account.
1.6 The Trust shall furnish prompt notice to the Company of any income
dividends or capital gain distributions payable on the Trust's shares. The
Company hereby elects to receive all such income dividends and capital gain
distributions as arc payable on a Fund's shares in additional shares of that
Fund. The Trust shall notify the Company of the number of shares so issued as
payment of such dividends and distributions.
<PAGE>
1.7 The Trust shall make the net asset value per share for each Fund
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 6 p.m. New York time.
1.8 The Trust agrees that its shares will be sold only to Participating
Insurance Companies and their separate accounts to certain qualified pension and
retirement plans, and to any other eligible purchaser to the extent permitted by
the Exemptive Order. No shares of any Fund will be sold directly to the general
public. The Company agrees that Trust shares will be used only for the purposes
of funding the Contracts and Accounts listed in Schedule A, as amended from time
to time.
1.9 The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and conflicts
of interest corresponding to those contained in Section 2.8 and Article IV of
this Agreement.
ARTICLE II
Obligations of the Parties
2.1 The Trust shall prepare and be responsible for filing with the
Securities and Exchange Commission and any state regulators requiring such
filing all shareholder reports, notices, proxy materials (or similar materials
such as voting instruction solicitation materials), prospectuses and statements
of additional information of the Trust. The Trust shall bear the costs of
registration and qualification of its shares, preparation and filing of the
documents listed in this Section 2.1 and all taxes to which the Trust is subject
on the issuance and transfer of its shares.
2.2 At the option of the Company, the Trust shall either (a) provide the
Company (at the Company's expense) with as many copies of the Trust's current
prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
as the Company shall reasonably request; or (b) provide the Company with a
camera ready copy of such documents in a form suitable for printing. The Trust
shall provide the Company with a copy of its statement of additional information
in a form suitable for duplication by the Company. The Trust (at its expense)
shall provide the Company with copies of any Trust-sponsored proxy materials in
such quantity as the Company shall reasonably require for distribution to
Contract owners.
2.3 The Company shall bear the costs of printing and distributing the
Trust's prospectus, statement of additional information, shareholder reports and
other shareholder communications to owners of and applicants for policies for
which the Trust is serving or is to serve as an investment vehicle. The Company
shall bear the costs of distributing proxy materials (or similar materials such
as voting solicitation instructions) to Contract owners. The Company assumes
sole responsibility for ensuring that such materials are delivered to Contract
owners in accordance with applicable federal and state securities laws
<PAGE>
2.4 The Company shall furnish, or cause to be furnished, to the Trust or
its designee, a copy of each Contract prospectus or statement of additional
information in which the Trust or its investment adviser is named prior to the
filing of such document with the Securities and Exchange Commission. The Company
shall furnish, or shall cause to be furnished, to the Trust or its designee,
each piece of sales literature or other promotional material in which the Trust
or its investment adviser is named at least ten Business Days prior to it use.
No such material shall be used if the Trust or its designee reasonably objects
to such use within ten Business Days after receipt of such material.
2.5 The Company shall not give any information or make any representations
or statements on behalf of the Trust or concerning the Trust or its investment
adviser in correction with the sale of the Contracts other than information or
representations contained in and accurately derived from the registration
statement or prospectus for the Trust shares (as such registration statement and
prospectus may be amended or supplemented from time to time), reports of the
Trust, Trust-sponsored proxy statements, or in sales literature or other
promotional material approved by the Trust or its designee, except as required
by legal process or regulatory authorities or with the written permission of the
Trust or its designee.
2.6 The Trust shall not give any information or make any representations or
statements on behalf of the Company or concerning the Company, the Accounts or
the, Contracts other than information or representations contained in and
accurately derived from the registration statement or prospectus for the
Contracts (as such registration statement and prospectus may be amended or
supplemented from time to time), or in materials approved by the Company for
distribution including sales literature or other promotional materials, except
as required by legal process or regulatory authorities or with the written
permission of the Company.
2.7 So long as, and to the extent that the Securities and Exchange
Commission interprets the 1940 Act to require pass-through voting privileges for
variable policyowners, the Company will provide pass-through voting privileges
to owners of policies whose cash values are invested, through the Accounts, in
shares of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each Account, the
Company will vote shares of the Trust held by the Account and for which no
timely voting emotions from policyowners are received as well as shares its owns
that are held by that Account, in the same proportion as those shares for which
voting instructions are received. The Company and its agents will in no way
recommend or oppose or interfere with the solicitation of proxies for Trust
shares held by Contract owners without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion.
2.8 The Company shall notify the Trust of any applicable state insurance
laws that restrict the Funds' investments or otherwise affect the operation of
the Trust and shall notify the Trust of any changes in such laws.
<PAGE>
ARTICLE III
Representations and Warranties
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of Connecticut
and that it has legally and validly established each Account as a segregated
asset account under such law on the date set forth in Schedule A.
3.2 The Company represents and warrants that each Account is a "segregated
asset account" for purposes of Section 817, and/or Section 1.817-5 of
regulations promulgated thereunder, of the Internal Revenue Code of 1986, as
amended and (1) has been registered or, prior to any issuance or sale of the
Contracts, will be registered as a unit investment trust in accordance with the
previsions of the 1940 Act or, alternatively (2) has not been registered in
proper reliance upon an exclusion from registration under the 1940 Act.
3.3 The Company represents and warrants that the Contracts or interests in
the Accounts (1) are or, prior to issuance, will be registered as securities
under the 1933 Act or, alternatively (2) are not registered because they are
properly exempt from registration under the 1933 Act or will be offered
exclusively in transactions that are properly exempt from registration under the
1933 Act. The Company further represents and warrants that the Contracts will be
issued and sold in compliance in all material respects with all applicable
federal and state laws, including the Internal Revenue Code of 1986, as amended,
and the sale of the Contracts shall comply in all material respects with state
insurance suitability requirements.
3.4 The Trust represents and warrants that it is duly organized and validly
existing under the laws of the State of Massachusetts.
3.5 The Trust represents and warrants that the Trust shares offered and
sold pursuant to this Agreement will be registered under the 1933 Act and the
Trust shall be registered under the 1940 Act prior to any issuance or sale of
such shares. The Trust shall amend its registration statement under the 1933 Act
and the 1940 Act from time to onto as required in order to effect the continuous
offering of its shares. The Trust shall register and qualify its shares for sale
in accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust.
3.6 The Trust represents and wan-ants that the investments of each
Portfolio will comply with the diversification requirements set forth in Section
817(h) of the Internal Revenue Code of 1986, as amended, and the rules and
regulations thereunder.
<PAGE>
ARTICLE IV
Potential Conflicts
4.1 The parties acknowledge that the Trust's shares may made available for
investment to other Participating Insurance Companies. In such event, the
Trustees will monitor the Trust for the existence of any material irreconcilable
conflict between the interests of the contract owners of all Participating
Insurance Companies. An irreconcilable material conflict may arise for a variety
of reasons, including: (a) an action by any state insurance regulatory
authority, (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting instructions given by
variable annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract owners.
The Trustees shall promptly inform the Company if they determine that an
irreconcilable material conflict exists and the implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Exemptive Order by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised including, bid not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3 If it is determined by a majority of the Trustees, or a majority of its
disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its expense and to the extent reasonably practicable (as determined by the
Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Fund and
reinvesting such assets in a different investment medium, including (but not
limited to) another Fund of the Trust, or submitting the question of whether or
not such segregation should be implemented to a vote of all affected Contract
owners and, as appropriate, segregating the assets of any appropriate group
(i.e., annuity contract owners, life insurance contract owners, or variable
contract owners of ore or more Participating Insurance Companies) that votes in
favor of such segregation, or offering to the affected Contract owners the
option of making such a change; and (b) establishing a new registered management
investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote,. the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however that such withdrawal and termination shall be limited
to the extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested Trustees. Any such withdrawal and
termination must take place within six (6) months after the Trust gives written
notice that this provision is being implemented. Until the end of such six (6)
month period, the Trust shall continue to accept and implement orders by the
Company for the purchase and redemption of shares of the Trust.
<PAGE>
4.5 If a material irreconcilable conflict raises became a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account within six (6) months after the Trustees inform the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of the
Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Company be required to establish a new funding medium for the Contracts if
an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Trustees determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six (6)
months after the Trustees inform the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall be
limited to the extent required by any such material irreconcilable conflict as
determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonable request so that the
Trustees may fully carry out the duties imposed upon them by the Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Exemptive Order) on terms and conditions materially different
from those contained in the Exemptive Order, then the Trust and/or the
Participating Insurance Companies, as appropriate, shall take such steps as may
be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3,
as adopted, to the extent such rules ate applicable.
<PAGE>
ARTICLE V
Indemnification
5.1 Indemnification By the Company. The Company agrees to indemnify and
hold harmless the Trust and each of its Trustees, officers. employees and agents
and each person, if any, who controls the Trust within-the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in a registration statement or
prospectus for the Contracts or in the Contracts themselves or in sales
literature generated or approved by the Company on behalf of the Contracts of
Accounts (or any amendment or supplement to any of the foregoing) (collectively,
"Company Documents" for the purposes of this Article V), or arise out of or are
based upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, provided that this indemnity shall not apply as to any Indemnified
Party if such statement or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from written information
furnished to the Company by or on behalf of the Trust for use in Company
Documents or otherwise for use in connection with the sale of the Contracts or
Trust shares; or
(b) arise out of or result from statements or representations (other than
statements or representations contained in and accurately derived from Trust
Documents as defined in Section 5.2(a) or wrongful conduct of the Company or
persons under its control, with respect to the sale or acquisition of the
Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as defined in Section
5.2(a) or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading if such statement or omission was made in reliance upon and
accurately derived from written information furnished to the Trust by or on
behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide the
services or furnish the materials required under the terms of this Agreement or
(e) arise out of or result from any material breach of any representation
and/or warranty made by the Company in this Agreement or arise out of or result
from any other material breach of this Agreement by the Company.
<PAGE>
5.2 Indemnification By the Trust. The Trust agrees to indemnify and hold
harmless the Company and each of its directors, officers, employees and agents
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Trust) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in the registration statement or
prospectus for the Trust (or any amendment or supplement thereto),
(collectively, "Trust Documents" for the purposes of this Article V), or arise
out of or are based upon the omission or then alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this indemnity shall not apply
as to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and was accurately derived from
written information furnished to the Trust by or on behalf of the Company for
use in Trust Documents or otherwise for use in connection with the sale of the
Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other than
statements or representations contained in and accurately derived from Company
Documents) or wrongful conduct of the Trust or persons under its control, with
respect to the sale or acquisition of the Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Company Documents or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the, statements therein not misleading if such statement or
omission was made in reliance upon and accurately derived from written
information furnished to the Company by or on behalf of the Trust; or
(d) arise out of or result from any failure by the Trust to provide the
services or furnish the materials required under the terms of this Agreement; or
(e) arise out of or result from any material breach of any representation
and/or warranty made by the Trust in this Agreement or arise out of or result
from any other material breach of this Agreement by the Trust.
5.3 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any Losses incurred or assessed against an Indemnified Party that arise from
such Indemnified party's willful misfeasance, bad faith or negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement
<PAGE>
5.4 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified the other party in writing within a reasonable time after
the summons, or other first written notification, giving information of the
nature of the claim shall have been served upon or otherwise received by such
Indemnified Party (or after such Indemnified Party shall have received notice of
service upon or other notification to any designated agent), but failure to
notify the party whom indemnification is sought of any such claim shall not
relieve that party from any liability which it may have to the Indemnified Party
in the absence of Sections 5.1 and 5.2.
5.5 In case any such action is brought against the Indemnified Parties, the
Indemnifying Party shall be entitled to participate, at its own expense, in the
defense of such action. The Indemnifying Party also shall be entitled to assume
the defense thereof, with counsel reasonably satisfactory to the party named in
the action. After notice from the Indemnifying Party to the Indemnified Party of
an election to assume such defense, the Indemnified Party shall bear the fees
and expenses of any additional counsel retained by it, and the Indemnifying
Party will not be liable to the Indemnified Party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
ARTICLE VI
Termination
6.1 This Agreement may be terminated by either party for any reason by one
hundred eighty (180) days advance written notice delivered to the other party.
6.2 Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company and to the extent permitted by applicable law,
continue to make available additional shares of the Trust (or any Fund) pursuant
to the terms and conditions of this Agreement for all Contracts in effect on the
effective date of termination on of this Agreement, provided that the Company
continues to pay the costs set forth in Section 2.3.
6.3 The provisions of Article V shall survive the termination of this
Agreement, and the provision of Article IV and Section 2.8 shall survive the
termination of this Agreement as long as shares of the Trust are held on behalf
of Contract owners in accordance with Section 6.2.
<PAGE>
ARTICLE VII
Notices
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Trust:
Variable Insurance Fund c/o BISYS Fund Services
3435 Stelzer Road, Suite 1000
Columbus, OH 43219-8003
Attention: Rick Ille
If to the Company:
Hartford Life Insurance Company
200 Hopmeadow Street
Simsbury, Connecticut 06089
Attention: Lynda Godkin
General Counsel
ARTICLE VIII
Miscellaneous
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall -constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof in under
and in accordance with the laws of the State of Connecticut.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
<PAGE>
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc., and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with an investigation or inquiry relating
to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
8.8 The parties to this Agreement acknowledge and agree that this Agreement
shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other party.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers to
execute this Participation Agreement as of the date and year first above
written.
VARIABLE INSURANCE FUNDS
By: ___________________________________
Name:___________________________________
Title: ________________________________
HARTFORD LIFE INSURANCE COMPANY
By: ___________________________________
Name: _________________________________
Title: ________________________________
<PAGE>
Schedule A
Separate Accounts, Funds and Associated Contracts
Name of Separate Account Contracts Funded
By Separate Account
HLIC Separate Account Two The Director Variable Annuity
Funds
BB&T Growth and Income Fund
BB&T Capital Manager Fund
AmSouth Regional Equity Fund
AmSouth Equity Income Fund
VARIABLE INSURANCE FUNDS
By:_________________________
Name:_______________________
Title:______________________
HARTFORD LIFE INSURANCE
COMPANY
By:_________________________
Name:_______________________
Title:______________________
Date: September 16, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Post-Effective Amendment No. 2 to the
Registration Statement on Form N-1A (File No. 33-81800) of the Variable
Insurance Funds of our report dated May 22, 1997 on our audit of the financial
statement of the BB&T Growth and Income Fund. We also consent to the reference
to our Firm under the captions "Other Service Providers" in the Prospectuses and
"Auditors" in the Statement of Additional Information relating to the Variable
Insurance Funds in this Post-Effective Amendment No. 2 to the Registration
Statement on Form N-1A (File No. 33-81800).
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
September 15, 1997
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