As filed with the Securities and Exchange Commission on July 3, 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. 1 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 3 /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)
[] on (date) pursuant to paragraph (b)
[] 60 days after filing pursuant to paragraph (a)(1)
[] On (date) pursuant to paragraph (a)(1)
[X] 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.
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EXPLANATORY NOTE
This post-effective amendment no. 1 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>
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
4
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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 to over 35% 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
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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 to over 35% 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 had primary
responsibility for the day-to-day portfolio management of the Fund since its
inception. 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.
20
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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
<PAGE>
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
<PAGE>
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 June 15, 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, each Investment Adviser or Sub-Adviser evaluates a wide
range of criteria, including the broker's commission rate and execution
capability, the broker's positioning and distribution capabilities, back office
efficiency, ability to handle difficult trades, financial stability, reputation,
prior performance, and 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 June 15, 1997, the Retirement Plan for the Employees of Branch Banking and
Trust Company owned 100% 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, 19971
(b) Establishment and Designation of Series
effective February 5, 1971
(c) Redesignation of Two Existing Series and
Establishment and Designation of Two
Additional Series effective August 13, 1997
(2) By-Laws1
(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
Company2
(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
(7) Not Applicable
(8) (a) Form of Custodian Agreement between
Registrant and United States National Bank of
Oregon2
(b) Form of Custodian Agreement between
Registrant and Fifth Third Bank2
(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
C-1
<PAGE>
(b) Form of Fund Accounting Agreement between the
Registrant and BISYS Fund Services Ohio, Inc.
(c) Form of Transfer Agency Agreement between the
Registrant and BISYS Fund Services Ohio, Inc.
(d) Form of Fund Participation Agreement with
Hartford Life Insurance Company2
(e) Form of Participation Agreement with
Nationwide Life and Annuity Insurance
Company*
(f) Form of Variable Contract Owner Servicing
Agreement
(10) Opinion and Consent of Counsel2
(11) Consent of Independent Auditors
(12) Not Applicable
(13) Purchase Agreement2
(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
(b) Powers of Attorney2
----------
* To be filed by amendment.
1 Filed with Pre-Effective Amendment No. 1 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.
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.1 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 3rd day of July, 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- July 3, 1997
Richard Ille cipal Executive Officer)
________*__________ Treasurer (Prin- July 3, 1997
William Tomko cipal Accounting
Officer), and
Chief Financial Officer
________*__________ Trustee July 3, 1997
Walter Grimm
________*__________ Trustee July 3, 1997
Michael Van Buskirk
________*________ Trustee July 3, 1997
James Woodward
* By: /s/ Jeffrey L. Steele
Jeffrey L. Steele 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.
1(c) Redesignation of Two Existing EX-99.B1c
Series and Establishment and
Designation of Two Additional
Series effective August 13, 1997
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
6 Form of Distribution EX-99.B6
Agreement between Registrant
and BISYS Fund Services
9(a) Form of Management and EX-99.B9a
Administration Agreement
between the Registrant and
BISYS Fund Services
9(b) Form of Fund Accounting EX-99.B9b
Agreement between the
Registrant and BISYS Fund
Services Ohio, Inc.
9(c) Form of Transfer Agency EX-99.B9c
Agreement between the
Registrant and BISYS Fund
Services Ohio, Inc.
11 Consent of Independent EX-99.B11
Auditors
27 Financial Data Schedule EX-27
Pursuant to Rule 483
VARIABLE INSURANCE FUNDS
Redesignation of Two Existing Series and
Establishment and Designation of Two Additional Series
The undersigned, being all of the Trustees of Variable Insurance Funds (the
"Trust"), a Massachusetts business trust, acting pursuant to Section 5.11 of the
Declaration of Trust dated July 20, 1994, as amended and restated February 5,
1997 (the "Declaration of Trust"), hereby (a) redesignate Series of the Trust
designated the "BB&T Growth and Income Variable Insurance Fund" and "BB&T
Capital Manager Variable Insurance Fund" as, respectively, "BB&T Growth and
Income Fund" and "BB&T Capital Manager Fund", and (b) divide the shares of
beneficial interest of the Trust into two additional separate Series (the
"Funds"), each of a single Class, the Funds hereby created having the following
special and relative rights:
1. The Funds shall be designated as follows:
AmSouth Regional Equity Fund; and
AmSouth Equity Income Fund.
2. Each Fund shall be authorized to invest in cash, securities, instruments
and other property as from time to time described in the then current effective
prospectus and registration statement for that Fund under the Securities Act of
1933. Each share of beneficial interest of each Fund ("Share") shall be
redeemable, shall represent a pro rata beneficial interest in the assets of the
Fund, and shall be entitled to receive its pro rata share of net assets
allocable to such shares of the Fund upon liquidation of that Fund, all as
provided in the Declaration of Trust. The proceeds of sales of Shares of each
Fund, together with any income and gain thereon, less any diminution or expenses
thereof, shall irrevocably belong to that Fund, unless otherwise required by
law.
3. Each share of beneficial interest of each Fund shall be entitled to one
vote for each dollar of value invested (or fraction thereof in respect of a
fractional share) on matters which such Shares shall be entitled to vote except
to the extent otherwise required by the Investment Company Act of 1940 or when
the Trustees have determined that the matter affects only the interest of
Shareholders of certain Funds, in which case only the Shareholders of such Funds
shall be entitled to vote thereon. Any matter shall be deemed to have been
effectively acted upon with respect to the Funds if acted upon as provided in
Rule 18f-2 under such Act or any successor rule and in the Declaration of Trust.
<PAGE>
4. The assets and liabilities of the Trust shall be allocated among the
Funds as set forth in Section 5.11 of the Declaration of Trust, except as
described below.
(a) Costs incurred by the Trust on behalf of the Funds in connection
with the organization and registration and public offering of
Shares of the Funds shall be amortized for the Funds over the
lesser of the life of a Fund or the two year period beginning on
the date such costs become payable; costs incurred by the Trust
on behalf of pre-existing Series in connection with the
organization and initial registration and public offering of
shares of those Series shall be amortized for the series over the
lesser of the life of each such Series or the two year period
beginning on the date such costs become payable.
(b) The Trustees may from time to time in particular cases make
specific allocations of assets or liabilities among the Funds and
each allocation of liabilities, expense costs, charges and
reserves by the Trustees shall be conclusive and binding upon the
Shareholders of all Funds for all purposes.
5. The Trustees (including any successor Trustee) shall have the right at
any time and from time to time to reallocate assets and expenses or to change
the designation of any Fund now or hereafter created or to otherwise change the
special and relative rights of any such Fund, provided that such change shall
not adversely affect the rights of the Shareholders of such Fund.
Date: ___________, 1997 _______________________________
James H. Woodward, as Trustee
_______________________________
Michael Van Buskirk, as Trustee
_______________________________
Walter B. Grimm, as Trustee
2
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this ___ day of _____, 1997, between VARIABLE INSURANCE
FUNDS (the "Trust"), a Massachusetts business trust having its principal place
of business at 3435 Stelzer Road, Columbus, Ohio 43219-3035, and AMSOUTH BANK
(the "Investment Adviser"), a national bank having its principal place of
business at 1901 Sixth Avenue North, Birmingham, Alabama 35203.
WHEREAS, the Trust is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Trust desires to retain the Investment Adviser to furnish or
procure investment advisory and administrative services to newly created
investment portfolios of the Trust and may retain the Investment Adviser to
serve in such capacity with respect to certain additional investment portfolios
of the Trust, all as now or hereafter may be identified in Schedule A hereto as
such Schedule may be amended from time to time (individually referred to herein
as a "Fund" and collectively referred to herein as the "Funds") and the
Investment Adviser represents that it is willing and possesses legal authority
to so furnish such services without violation of applicable laws and
regulations;
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 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. Additional investment portfolios may
from time to time be added to those covered by this Agreement by the
parties executing a new Schedule A which shall become effective upon
its execution and shall supersede any Schedule A having an earlier
date.
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 Agreement and Declaration
of Trust, dated as of July 20, 1994 and amended and restated
as of February 5, 1997, and any 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");
<PAGE>
(b) the Trust's By-Laws and any 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 (the "Commission") on July 20, 1994, and all
amendments thereto;
(e) the Trust's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended (the "1933 Act"), and
under the 1940 Act as filed with the Commission and all
amendments thereto (the "Registration Statement"); and
(f) the most recent Prospectus and Statement of Additional
Information of each of the Funds (such Prospectus and
Statement of Additional Information, as presently in effect,
and all amendments and supplements thereto, are herein
collectively called the "Prospectus").
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 or procure a continuous
investment program for the Funds, including investment research and
management with respect to all securities and investments and cash
equivalents in the 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 of the Fund's investment objectives, 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 Commission under the 1940 Act 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;
2
<PAGE>
(c) will not make loans to any person to purchase or carry units
of beneficial interest ("shares") in the Trust or make loans
to the Trust;
(d) will place or cause to be placed orders for the Funds
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 and to the extent
permitted by the 1940 Act, 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, the
Investment Adviser, or any affiliated person of the Trust,
BISYS Fund Services or the Investment Adviser, except to the
extent permitted by the 1940 Act and the Commission;
(e) will maintain all books and records with respect to the
securities transactions of the Funds and will furnish the
Trust's Board of Trustees with such periodic and special
reports as the Board may request;
(f) will treat confidentially and as proprietary information of
the Trust and the Adviser all records and other
information relative to the Trust and the Funds 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 or the Subadvier, as appropriate, which
approval shall not be unreasonably withheld and may not be
withheld where the Subadviser 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 or the
Subadviser, as appropriate;
(g) will maintain its policy and practice of conducting its
fiduciary functions independently. In making investment
recommendations for the Funds, the Subadviser'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 Adviser or the
Subadviser or of its parent or its subsidiaries or
affiliates. In dealing with such customers, the Subadviser
and its parent, subsidiaries, and affiliates will not
inquire or take into consideration whether securities of
those customers are held by the Trust;
3
<PAGE>
(h) will promptly review all (1) current security reports, (2)
summary reports of transactions and (3) current cash
position reports upon receipt thereof from the Trust and
will report any errors or discrepancies in such reports to
the Trust or their designees, and the Adviser within three
(3) business days; and
(i) will use its best efforts to obtain and provide to the
Trust's fund accountant (1) dealer quotations, (2) prices
from a pricing service, (3) matrix prices, or (4) any other
price information believed to be reliable by the Subadviser
with respect to any security held by a Fund, when requested
to do so by the Trust's fund accountant.
4. Services Not Exclusive. The investment management services furnished
by the Subadviser hereunder are not to be deemed exclusive, and the
Subadviser 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 Subadviser hereby agrees that all records
which it maintains for the Funds 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 Subadviser further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act the
following records: (a) completed trade tickets for all portfolio
transactions, (b) broker confirmations for individual and block
trades, (c) credit files relating to (i) money market securities and
their issuers, (ii) repurchase agreement counterparties and (iii)
letter of credit providers, (d) transaction records indicating the
method of allocation with respect to the selection of brokers, and (e)
such other records that may be deemed necessary and appropriate by the
parties to this Agreement.
6. Expenses. During the term of this Agreement, the Subadviser 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 Funds.
7. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, the Adviser will pay the Subadviser and
the Subadviser will accept as full compensation therefor a fee as set
forth on Schedule A hereto. The obligation of the Adviser to pay the
above- described fee to the Subadviser will begin as of the date of
the initial public sale of shares in such Fund.
4
<PAGE>
8. Limitation of Liability. The Subadviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the
Funds or the Adviser 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 Subadviser in the performance of its duties or from
reckless disregard by it of its obligations and duties under this
Agreement. It is further agreed that the Subadviser shall have no
responsibility or liability for the accuracy or completeness of the
Trust's Registration Statement under the 1940 Act and the 1933 Act,
except for information supplied by the Subadviser for inclusion
therein or information known by the Subadviser to be false or
misleading.
9. Duration and Termination. This Agreement will become effective with
respect to each Fund listed on Schedule A 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,
and, unless sooner terminated as provided herein, shall continue in
effect for an initial term of two years. Thereafter, if not
terminated, this Agreement shall continue in effect as to a particular
Fund for successive one-year terms, only so long as such continuance
is specifically approved at least annually
5
<PAGE>
(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 as to
a particular Fund 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), by the Adviser, or by the Subadviser. 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 meanings as ascribed to such terms in the 1940 Act.)
10. Subadviser's Representations. The Subadviser hereby represents and
warrants as follows:
(a) it is willing and possesses all requisite legal authority to
provide the services contemplated by this Agreement without violation
of applicable laws and regulations;
(b) 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;
(c) it shall immediately notify the Trust and the Adviser in the event
(1) that the Commission or any other regulatory authority has censured
the Subadviser; placed limitations upon its activities, functions or
operations; or has commenced proceedings or an investigation that may
result in any of these actions, (2) upon having a reasonable basis for
believing that any Fund has ceased to qualify or might not qualify as
a regulated investment company under Subchapter M of the Internal
Revenue Code, (3) 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. The Subadviser further agrees to notify the Trust and the
Adviser immediately of any material fact known to the Subadviser
respecting or relating to the Subadviser that is not contained in the
Registration Statement or Prospectus for the Trust, or any amendment
or supplement thereto, or of any statement contained therein that
becomes untrue; and
6
<PAGE>
(d) it shall be responsible for making inquiries and for reasonably
ensuring that any employee of the Subadviser, any person or firm that
the Subadviser has employed or with which it has associated, or any
employee thereof has not, to the best of the Subadviser'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 Adviser and the Subadviser 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
Subadviser. The Subadviser agrees that shares of the Funds may be
offered to separate accounts and the general account of Nationwide
Life and Annuity Insurance Company and to separate accounts and the
general accounts of any insurance companies that are affiliated with
Nationwide Life and Annuity Insurance Company. The Subadviser and the
Trust agree that the Subadviser 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.
13. Governing Law. This Agreement shall be governed by and its provisions
shall be construed in accordance with the laws of the Commonwealth of
Massachusetts.
14. It is expressly agreed that the obligations of the Trust hereunder
shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents or employees of the Trust personally, but shall bind
only the trust property of the Trust. The execution and delivery of
this Agreement has been authorized by the Trustees, and this Agreement
has been signed and delivered by an authorized officer of the Trust,
acting as such, and neither such authorization by the 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
Trust as provided in the Trust's Declaration of Trust.
7
<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] VARIABLE INSURANCE FUNDS
By: _________________________
Title:_______________________
AMSOUTH BANK
[SEAL] By:__________________________
Title: ______________________
8
<PAGE>
Dated: _______, 1997
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 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:_____________________________
A-1
<PAGE>
AMSOUTH BANK
By:________________________________
Name:______________________________
Title:_____________________________
A-2
SUB-ADVISORY AGREEMENT
AGREEMENT made this ___ day of _____, 1997, between AMSOUTH BANK (the
"Adviser"), a national bank having its principal place of business at 1901 Sixth
Avenue North, Birmingham, Alabama 35203, and ROCKHAVEN ASSET MANAGEMENT, LLC
(the "Subadviser"), a limited liability company having its principal place of
business at 100 First Avenue, Suite 1050, Pittsburgh, Pennsylvania 15222.
WHEREAS, VARIABLE INSURANCE FUNDS, 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 "1940 Act");
WHEREAS, the Trust has retained the Adviser to provide or procure
investment advisory services on behalf of certain investment portfolios of the
Trust; and
WHEREAS, the Adviser desires to retain the Subadviser to furnish investment
advisory and administrative services to certain investment portfolios of the
Trust and may retain the Subadviser to serve in such capacity with respect to
certain additional investment portfolios of the Trust, all as now or hereafter
may be identified in Schedule A hereto as such Schedule may be amended from time
to time (individually referred to herein as a "Fund" and collectively referred
to herein as the "Funds") and the Subadviser represents that it is willing and
possesses legal authority to so furnish such services without violation of
applicable laws and regulations;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Adviser hereby appoints the Subadviser to act as
subadviser to the Funds for the period and on the terms set forth
in this Agreement. The Subadviser accepts such appointment and
agrees to furnish the services herein set forth for the
compensation herein provided. Additional investment portfolios
may from time to time be added to those covered by this Agreement
by the parties executing a new Schedule A which shall become
effective upon its execution and shall supersede any Schedule A
having an earlier date.
2. Delivery of Documents. The Trust or the Adviser has furnished
the Subadviser with copies properly certified or authenticated of
each of the following:
(a) the Trust's Amended and Restated Agreement and Declaration
of Trust, dated as of July 20, 1994 and amended and restated
as of February 5, 1997, and any 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");
<PAGE>
(b) the Trust's By-Laws and any amendments thereto;
(c) resolutions of the Trust's Board of Trustees authorizing the
appointment of the Subadviser 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 (the "Commission") on July 20, 1994, and all
amendments thereto;
(e) the Trust's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended (the "1933 Act"), and
under the 1940 Act as filed with the Commission and all
amendments thereto (the "Registration Statement"); and
(f) the most recent Prospectus and Statement of Additional
Information of each of the Funds (such Prospectus and
Statement of Additional Information, as presently in effect,
and all amendments and supplements thereto, are herein
collectively called the "Prospectus").
The Trust or the Adviser will furnish the Subadviser from time to
time with copies of all amendments of or supplements to the
foregoing.
3. Management. Subject to the supervision of the Adviser and the
Trust's Board of Trustees, the Subadviser will provide a
continuous investment program for the Funds, including investment
research and management with respect to all securities and
investments and cash equivalents in the Funds. The Subadviser
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 Subadviser will provide the services
under this Agreement in accordance with each of the Fund's
investment objectives, policies, and restrictions as stated in
the Prospectus and resolutions of the Trust's Board of Trustees.
The Subadviser 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 Commission under the 1940 Act 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 Subadviser;
2
<PAGE>
(c) will not make loans to any person to purchase or carry units
of beneficial interest ("shares") in the Trust or make loans
to the Trust;
(d) will place or cause to be placed orders for the Funds either
directly with the issuer or with any broker or dealer. In
placing orders with brokers and dealers, the Subadviser will
attempt to obtain prompt execution of orders in an effective
manner at the most favorable price. Consistent with this
obligation and to the extent permitted by the 1940 Act, when
the execution and price offered by two or more brokers or
dealers are comparable, the Subadviser may, in its
discretion, purchase and sell portfolio securities to and
from brokers and dealers who provide the Subadviser with
research advice and other services. In no instance will
portfolio securities be purchased from or sold to BISYS Fund
Services, the Adviser, the Subadviser, or any affiliated
person of the Trust, BISYS Fund Services, the Adviser, or
the Subadviser, except to the extent permitted by the 1940
Act and the Commission;
(e) will maintain all books and records with respect to the
securities transactions of the Funds and will furnish the
Trust's Board of Trustees with such periodic and special
reports as the Board may request;
(f) will treat confidentially and as proprietary information of
the Trust and the Adviser all records and other information
relative to the Trust and the Funds 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 or the
Adviser, as appropriate, which approval shall not be
unreasonably withheld and may not be withheld where the
Subadviser 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 or the Adviser, as appropriate;
(g) will maintain its policy and practice of conducting its
fiduciary functions independently. In making investment
recommendations for the Funds, the Subadviser'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 Adviser or the
Subadviser or of its parent or its subsidiaries or
affiliates. In dealing with such customers, the Subadviser
and its parent, subsidiaries, and affiliates will not
inquire or take into consideration whether securities of
those customers are held by the Trust;
3
<PAGE>
(h) will promptly review all (1) current security reports, (2)
summary reports of transactions and (3) current cash
position reports upon receipt thereof from the Trust and
will report any errors or discrepancies in such reports to
the Trust and the Adviser, or their designees, within three
(3) business days; and
(i) will use its best efforts to obtain and provide to the
Trust's fund accountant (1) dealer quotations, (2) prices
from a pricing service, (3) matrix prices, or (4) any other
price information believed to be reliable by the Subadviser
with respect to any security held by a Fund, when requested
to do so by the Trust's fund accountant.
4. Services Not Exclusive. The investment management services
furnished by the Subadviser hereunder are not to be deemed
exclusive, and the Subadviser 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 Subadviser hereby agrees that all
records which it maintains for the Funds 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 Subadviser further
agrees to preserve for the periods prescribed by Rule 31a-2 under
the 1940 Act the following records: (a) completed trade tickets
for all portfolio transactions, (b) broker confirmations for
individual and block trades, (c) credit files relating to (i)
money market securities and their issuers, (ii) repurchase
agreement counterparties and (iii) letter of credit providers,
(d) transaction records indicating the method of allocation with
respect to the selection of brokers, and (e) such other records
that may be deemed necessary and appropriate by the parties to
this Agreement.
6. Expenses. During the term of this Agreement, the Subadviser 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 Funds.
7. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, the Adviser will pay the Subadviser
and the Subadviser will accept as full compensation therefor a
fee as set forth on Schedule A hereto. The obligation of the
Adviser to pay the above-described fee to the Subadviser will
begin as of the date of the initial public sale of shares in such
Fund.
4
<PAGE>
8. Limitation of Liability. The Subadviser shall not be liable for
any error of judgment or mistake of law or for any loss suffered
by the Funds or the Adviser 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 Subadviser in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. It is further agreed
that the Subadviser shall have no responsibility or liability for
the accuracy or completeness of the Trust's Registration
Statement under the 1940 Act and the 1933 Act, except for
information supplied by the Subadviser for inclusion therein or
information known by the Subadviser to be false or misleading.
9. Duration and Termination. This Agreement will become effective
with respect to each Fund listed on Schedule A 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, and, unless sooner
terminated as provided herein, shall continue in effect for an
initial term of two years. Thereafter, if not terminated, this
Agreement shall continue in effect as to a particular Fund for
successive one-year terms, only so long as such continuance is
specifically approved at least annually
5
<PAGE>
(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 as to a particular
Fund 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, by the Adviser, or by the
Subadviser. 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 meanings as
ascribed to such terms in the 1940 Act.)
10. Subadviser's Representations. The Subadviser hereby represents
and warrants as follows:
(a) it is willing and possesses all requisite legal authority to
provide the services contemplated by this Agreement without
violation of applicable laws and regulations;
(b) 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;
(c) it shall immediately notify the Trust and the Adviser in the
event (1) that the Commission or any other regulatory authority
has censured the Subadviser; placed limitations upon its
activities, functions or operations; suspended or revoked its
registration as an investment adviser; or has commenced
proceedings or an investigation that may result in any of these
actions, (2) upon having a reasonable basis for believing that
any Fund has ceased to qualify or might not qualify as a
regulated investment company under Subchapter M of the Internal
Revenue Code, (3) 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. The Subadviser further agrees to notify
the Trust and the Adviser immediately of any material fact known
to the Subadviser respecting or relating to the Subadviser that
is not contained in the Registration Statement or Prospectus for
the Trust, or any amendment or supplement thereto, or of any
statement contained therein that becomes untrue; and
6
<PAGE>
(d) it shall be responsible for making inquiries and for
reasonably ensuring that any employee of the Subadviser, any
person or firm that the Subadviser has employed or with which it
has associated, or any employee thereof has not, to the best of
the Subadviser'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 Adviser and the
Subadviser 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 Subadviser. The Subadviser
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 Subadviser and the Adviser agree that the
Subadviser 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.
13. Governing Law. This Agreement shall be governed by and its
provisions shall be construed in accordance with the laws of the
Commonwealth of Massachusetts.
7
<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:_______________________
ROCKHAVEN ASSET MANAGEMENT, LLC
[SEAL] By:__________________________
Title:_______________________
8
<PAGE>
Dated: _______, 1997
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 it
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:_____________________________
A-1
DISTRIBUTION AGREEMENT
AGREEMENT made this ___ day of ____, 1997, between VARIABLE INSURANCE (the
"Trust"), a Massachusetts business trust having its principal place of business
at 3435 Stelzer Road, Columbus, Ohio 43219-3035, and BISYS Fund Services
("Distributor"), having its principal place of business at 3435 Stelzer Road
Columbus, Ohio 43219-3035.
WHEREAS, the Trust is an open-end management investment company, organized
as a Massachusetts business trust and registered with the Securities and
Exchange Commission (the "Commission") under the Investment Company Act of 1940
(the "1940 Act"); and
WHEREAS, it is intended that Distributor act as the distributor of the
units of beneficial interest ("Shares") of each class of the currently
constituted investment portfolios and any additional investment portfolios of
the Trust identified in Schedule A hereto as such Schedule may be amended from
time to time (such portfolios being referred to individually as a "Fund" and
collectively as the "Funds").
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services as Distributor.
1.1 Distributor will act as agent for the distribution of the Shares
covered by the registration statement and prospectus of the Trust then in effect
under the Securities Act of 1933, as amended (the "Securities Act"). As used in
this Agreement, the term "registration statement" shall mean Parts A (the
prospectus), B (the Statement of Additional Information) and C of each
registration statement that is filed on Form N-1A, or any successor thereto,
with the Commission, together with any amendments thereto. The term "prospectus"
shall mean each form of prospectus and Statement of Additional Information used
by the Funds for delivery to shareholders and prospective shareholders after the
effective dates of the above referenced registration statements, together with
any amendments and supplements thereto.
1.2 Distributor agrees to use appropriate efforts to solicit orders for the
sale of the Shares and will undertake such advertising and promotion as it
believes reasonable in connection with such solicitation. Distributor's
promotional activities may include (a) calling upon and providing assistance to
third-party broker-dealers (including sales training), (b) calling upon and
providing assistance to institutional investors, (c) assisting in the
development and implementation of marketing plans for the Trust's Funds and (d)
providing such additional assistance relating to the marketing of the Trust's
Funds that the Trust and Distributor may, from time to time, deem to be
appropriate. The Trust understands that Distributor is now and may in the future
be
<PAGE>
the distributor of the shares of several investment companies or series
(together, "Companies") including Companies having investment objectives similar
to those of the Trust. The Trust further understands that investors and
potential investors in the Trust may invest in shares of such other Companies.
The Trust agrees that Distributor's duties to such Companies shall not be deemed
in conflict with its duties to the Trust under this paragraph 1.2.
Distributor may finance appropriate activities which it deems reasonable
which are primarily intended to result in the sale of the Shares, including, but
not limited to, advertising, and the compensation of underwriters, dealers and
sales personnel.
1.3 In its capacity as distributor of the Shares, all activities of
Distributor and its partners, agents, and employees shall comply with all
applicable laws, rules and regulations, including, without limitation, the 1940
Act, all rules and regulations promulgated by the Commission thereunder and all
rules and regulations adopted by any securities association registered under the
Securities Exchange Act of 1934.
1.4 Distributor will transmit any orders received by it for purchase or
redemption of the Shares to the transfer agent and custodian for the Funds.
1.5 Whenever in their judgment such action is warranted by unusual market,
economic or political conditions, or by abnormal circumstances of any kind, the
Trust's officers may decline to accept any orders for, or make any sales of, the
Shares until such time as those officers deem it advisable to accept such orders
and to make such sales.
1.6 Distributor will act only on its own behalf as principal if it chooses
to enter into selling agreements with selected dealers or others.
1.7 The Trust agrees at its own expense to execute any and all documents
and to furnish any and all information and otherwise to take all actions that
may be reasonably necessary in connection with the qualification of the Shares
for sale in such states as Distributor may designate.
1.8 The Trust shall furnish from time to time, for use in connection with
the sale of the Shares, such information with respect to the Funds and the
Shares as Distributor may reasonably request; and the Trust warrants that the
statements contained in any such information shall fairly show or represent what
they purport to show or represent. The Trust shall also furnish Distributor upon
request with: (a) unaudited semi-annual statements of the Funds' books and
accounts prepared by the Trust, (b) a monthly itemized list of the securities in
the Funds, (c)monthly balance sheets as soon as practicable after the end of
2
<PAGE>
each month, and (d) from time to time such additional information regarding the
financial condition of the Funds as Distributor may reasonably request.
1.9 The Trust represents to Distributor that, with respect to the Shares,
all registration statements and prospectuses filed by the Trust with the
Commission under the Securities Act have been carefully prepared in conformity
with requirements of said Act and rules and regulations of the Commission
thereunder. The registration statement and prospectus contain all statements
required to be stated therein in conformity with said Act and the rules and
regulations of said Commission and all statements of fact contained in any such
registration statement and prospectus are true and correct. Furthermore, neither
any registration statement nor any prospectus includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading to a purchaser of the
Shares. The Trust may, but shall not be obligated to, propose from time to time
such amendment or amendments to any registration statement and such supplement
or supplements to any prospectus as, in the light of future developments, may,
in the opinion of the Trust's counsel, be necessary or advisable. If the Trust
shall not propose such amendment or amendments and/or supplement or supplements
within fifteen days after receipt by the Trust of a written request from
Distributor to do so, Distributor may, at its option, terminate this Agreement.
The Trust shall not file any amendment to any registration statement or
supplement to any prospectus without giving Distributor reasonable notice
thereof in advance; provided, however, that nothing contained in this Agreement
shall in any way limit the Trust's right to file at any time such amendments to
any registration statement and/or supplements to any prospectus, of whatever
character, as the Trust may deem advisable, such right being in all respects
absolute and unconditional.
1.10 The Trust authorizes Distributor and dealers to use any prospectus in
the form furnished from time to time in connection with the sale of the Shares.
The Trust agrees to indemnify, defend and hold Distributor, its several partners
and employees, and any person who controls Distributor within the meaning of
Section 15 of the Securities Act free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending such claims, demands or liabilities and any counsel fees incurred
in connection therewith) which Distributor, its partners and employees, or any
such controlling person, may incur under the Securities Act or under common law
or otherwise, arising out of or based upon any untrue statement, or alleged
untrue statement, of a material fact contained in any registration statement or
any prospectus or arising out of or based upon any omission, or alleged
omission, to state a material fact required to be stated in either any
registration statement or any prospectus or necessary to make the statements in
3
<PAGE>
either thereof not misleading. Provided, however, that the Trust's agreement to
indemnify Distributor, its partners or employees, and any such controlling
person shall not be deemed to cover any claims, demands, liabilities or expenses
arising out of any statements or representations as are contained in any
prospectus and in such financial and other statements as are furnished in
writing to the Trust by Distributor and used in the answers to the registration
statement or in the corresponding statements made in the prospectus, or arising
out of or based upon any omission or alleged omission to state a material fact
in connection with the giving of such information required to be stated in such
answers or necessary to make the answers not misleading; and further provided
that the Trust's agreement to indemnify Distributor and the Trust's
representations and warranties herein before set forth in paragraph 1.9 shall
not be deemed to cover any liability to the Trust or its Shareholders to which
Distributor would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
Distributor's reckless disregard of its obligations and duties under this
Agreement. The Trust's agreement to indemnify Distributor, its partners and
employees and any such controlling person, as aforesaid, is expressly
conditioned upon the Trust being notified of any action brought against
Distributor, its partners or employees, or any such controlling person, such
notification to be given by letter or by telegram addressed to the Trust at its
principal office in Columbus, Ohio and sent to the Trust by the person against
whom such action is brought, within 10 days after the summons or other first
legal process shall have been served. The failure to so notify the Trust of any
such action shall not relieve the Trust from any liability which the Trust may
have to the person against whom such action is brought by reason of any such
untrue, or allegedly untrue, statement or omission, or alleged omission,
otherwise than on account of the Trust's indemnity agreement contained in this
paragraph 1.10. The Trust will be entitled to assume the defense of any suit
brought to enforce any such claim, demand or liability, but, in such case, such
defense shall be conducted by counsel of good standing chosen by the Trust and
approved by Distributor, which approval shall not be unreasonably withheld. In
the event the Trust elects to assume the defense of any such suit and retain
counsel of good standing approved by Distributor, the defendant or defendants in
such suit shall bear the fees and expenses of any additional counsel retained by
any of them; but in case the Trust does not elect to assume the defense of any
such suit, or in case Distributor reasonably does not approve of counsel chosen
by the Trust, the Trust will reimburse Distributor, its partners and employees,
or the controlling person or persons named as defendant or defendants in such
suit, for the fees and expenses of any counsel retained by Distributor or them.
The Trust's indemnification agreement contained in this paragraph 1.10 and the
Trust's representations and warranties in this Agreement shall remain operative
and in full force and effect regardless of any investigation made by or on
4
<PAGE>
behalf of Distributor, its partners and employees, or any controlling person,
and shall survive the delivery of any Shares.
This Agreement of indemnity will inure exclusively to Distributor's
benefit, to the benefit of its several partners and employees, and their
respective estates, and to the benefit of the controlling persons and their
successors. The Trust agrees promptly to notify Distributor of the commencement
of any litigation or proceedings against the Trust or any of its officers or
Trustees in connection with the issue and sale of any Shares.
1.11 Distributor agrees to indemnify, defend and hold the Trust, its
several officers and Trustees and any person who controls the Trust within the
meaning of Section 15 of the Securities Act free and harmless from and against
any and all claims, demands, liabilities and expenses (including the costs of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Trust, its officers or Trustees
or any such controlling person, may incur under the Securities Act or under
common law or otherwise, but only to the extent that such liability or expense
incurred by the Trust, its officers or Trustees or such controlling person
resulting from such claims or demands, shall arise out of or be based upon any
untrue, or alleged untrue, statement of a material fact contained in information
furnished in writing by Distributor to the Trust and used in the answers to any
of the items of the registration statement or in the corresponding statements
made in the prospectus, or shall arise out of or be based upon any omission, or
alleged omission, to state a material fact in connection with such information
furnished in writing by Distributor to the Trust required to be stated in such
answers or necessary to make such information not misleading. Distributor's
agreement to indemnify the Trust, its officers and Trustees, and any such
controlling person, as aforesaid, is expressly conditioned upon Distributor
being notified of any action brought against the Trust, its officers or
Trustees, or any such controlling person, such notification to be given by
letter or telegram addressed to Distributor at its principal office in Columbus,
Ohio, and sent to Distributor by the person against whom such action is brought,
within 10 days after the summons or other first legal process shall have been
served. Distributor shall have the right of first control of the defense of such
action, with counsel of its own choosing, satisfactory to the Trust, if such
action is based solely upon such alleged misstatement or omission on
Distributor's part, and in any other event the Trust, its officers or Trustees
or such controlling person shall each have the right to participate in the
defense or preparation of the defense of any such action. The failure to so
notify Distributor of any such action shall not relieve Distributor from any
liability which Distributor may have to the Trust, its officers or Trustees, or
to such controlling person by reason of any such untrue or alleged untrue
statement, or omission or alleged omission, otherwise than on account of
5
<PAGE>
Distributor's indemnity agreement contained in this paragraph 1.11.
1.12 No Shares shall be offered by either Distributor or the Trust under
any of the provisions of this Agreement and no orders for the purchase or sale
of Shares hereunder shall be accepted by the Trust if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the
Securities Act or if and so long as a current prospectus as required by Section
10(b)(2) of said Act is not on file with the Commission; provided, however, that
nothing contained in this paragraph 1.12 shall in any way restrict or have an
application to or bearing upon the Trust's obligation to repurchase Shares from
any Shareholder in accordance with the provisions of the Trust's prospectus,
Agreement and Declaration of Trust, or Bylaws.
1.13 The Trust agrees to advise Distributor as soon as reasonably practical
by a notice in writing delivered to Distributor or its counsel:
(a) of any request by the Commission for amendments to the registration
statement or prospectus then in effect or for additional information;
(b) in the event of the issuance by the Commission of any stop order
suspending the effectiveness of the registration statement or
prospectus then in effect or the initiation by service of process on
the Trust of any proceeding for that purpose;
(c) of the happening of any event that makes untrue any statement of a
material fact made in the registration statement or prospectus then in
effect or which requires the making of a change in such registration
statement or prospectus in order to make the statements therein not
misleading; and
(d) of all action of the Commission with respect to any amendment to any
registration statement or prospectus which may from time to time be
filed with the Commission.
For purposes of this section, informal requests by or acts of the
Staff of the Commission shall not be deemed actions of or requests by the
Commission.
1.14 Distributor agrees on behalf of itself and its partners and employees
to treat confidentially and as proprietary information of the Trust all records
and other information relative to the Trust and its prior, present or potential
Shareholders, and not to use such records and information for any purpose other
than performance of its responsibilities and duties hereunder, except,
6
<PAGE>
after prior notification to and approval in writing by the Trust, which approval
shall not be unreasonably withheld and may not be withheld where Distributor 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.
1.15 This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts.
2. Fees.
The Distributor shall perform the services set forth in Section 1 of
this Agreement without compensation.
3. Sale and Payment.
Pursuant to the Amended and Restated Declaration of Trust dated as of
July 20, 1994 and amended and restated as of February 5, 1997, as amended, each
Fund may be divided into separate classes of Shares in which case the Shares of
one or more classes may be subject to a sales load and may be subject to the
imposition of a distribution fee and/or a service fee pursuant to a Distribution
and Shareholder Services Plan.
4. Public Offering Price.
The public offering price of a Share shall be the net asset value of
such Share.
5. Net Asset Value.
The net asset value of all Shares shall be determined in accordance with
the provisions of the Amended and Restated Declaration of Trust and Bylaws of
the Trust and the then-current prospectus of each Fund.
6. Term, Duration and Termination.
This Agreement shall become effective on _______, 1997 and, unless
sooner terminated as provided herein, shall continue until ______, 1999.
Thereafter, if not terminated, this Agreement shall continue automatically for
successive one-year terms, provided that such continuance is specifically
approved at least annually by (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 such party, cast in person at a meeting for the
purpose of voting on such approval and (b) by the vote of the Trust's Board of
Trustees or the vote of a majority of the outstanding voting securities of such
Fund. This Agreement is terminable without penalty, on not less than sixty-days
prior written notice, by the Trust's Board of Trustees, by vote of a majority of
the outstanding voting securities of the Trust or by the Distributor. This
7
<PAGE>
Agreement will also terminate automatically 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 meanings
as ascribed to such terms in the 1940 Act.)
7. Limitation of Liability of the Trustees and Shareholders.
It is expressly agreed that the obligations of the Trust hereunder shall
not be binding upon any of the Trustees, shareholders, nominees, officers,
agents or employees of the Trust personally, but shall bind only the trust
property of the Trust. The execution and delivery of this Agreement have been
authorized by the Trustees, and this Agreement has been signed and delivered by
an authorized officer of the Trust, acting as such, and neither such
authorization by the 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 Trust as provided in the Trust's Agreement and Declaration of Trust.
8
<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 written
above.
VARIABLE INSURANCE FUNDS BISYS FUND SERVICES
By: BISYS Fund Services, Inc.,
General Partner
By:_________________________ By: ______________________________
Title:______________________ Title:____________________________
Date:_______________________ Date:_____________________________
9
<PAGE>
Dated: _______, 1997
Schedule A
to the
Distribution Agreement
between Variable Insurance Funds and
BISYS Fund Services
Name of Fund
Variable Insurance Money Market Fund
Variable Insurance Allocated Conservative Fund
Variable Insurance Allocated Balanced Fund
Variable Insurance Allocated Growth Fund
Variable Insurance Allocated Aggressive Fund
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:__________________________
BISYS FUND SERVICES
By: BISYS Fund Services, Inc.,
General Partner
By:_____________________________
Name:___________________________
Title:__________________________
A-1
MANAGEMENT AND ADMINISTRATION AGREEMENT
AGREEMENT made this _____ day of ____, 1997, between VARIABLE INSURANCE
FUNDS (the "Trust"), a Massachusetts business trust having its principal place
of business at 3435 Stelzer Road, Columbus, Ohio 43219-3035, and BISYS Fund
Services ("Administrator"), having its principal place of business at 3435
Stelzer Road, Columbus, Ohio 43219-3035.
WHEREAS, the Trust is an open-end management investment company, organized
as a Massachusetts business trust and registered with the Securities and
Exchange Commission (the "Commission") under the Investment Company Act of 1940
(the "1940 Act"); and
WHEREAS, the Trust desires to retain Administrator to furnish management
and administration services to certain investment portfolios of the Trust and
may retain Administrator to serve in such capacity with respect to additional
investment portfolios of the Trust, all as now or hereafter may be identified in
Schedule A hereto as such Schedule may be amended from time to time
(individually referred to herein as a "Fund" and collectively referred to herein
as the "Funds").
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services as Manager and Administrator
Subject to the direction and control of the Board of Trustees of the Trust,
Administrator will assist in supervising all aspects of the operations of the
Funds except those performed by any investment adviser for the Funds under its
Investment Advisory Agreement, any custodian for the Funds under its Custodian
Agreement, any transfer agent for the Funds under its Transfer Agency Agreement
and any fund accountant for the Funds under its Fund Accounting Agreement.
Administrator will maintain office facilities (which may be in the offices
of Administrator or an affiliate but shall be in such location as the Trust
shall reasonably determine); furnish statistical and research data, clerical and
certain bookkeeping services and stationery and office supplies; prepare the
periodic reports to the Commission on Form N-SAR or any replacement forms
therefor; compile data for, assist the Trust or its designee in the preparation
of, and file, all the Funds' federal and state tax returns and required tax
filings other than those required to be made by the Funds' custodian and
transfer agent; prepare compliance filings pursuant to state securities laws
with the advice of the Trust's counsel; assist to the extent requested by the
Trust with the Trust's preparation of its Annual and Semi-Annual Reports to
Shareholders and its Registration Statements (on Form N-1A or any replacement
<PAGE>
therefor); compile data for and prepare for filing Notices to the Commission
required pursuant to Rule 24f-2 under the 1940 Act; keep and maintain the
financial accounts and records of the Funds, including calculation of daily
expense accruals; in the case of money market funds, periodic review of the
amount of the deviation, if any, of the current net asset value per share
(calculated using available market quotations or an appropriate substitute that
reflects current market conditions) from each money market fund's amortized cost
price per share; and generally assist in all aspects of the operations of the
Funds. In compliance with the requirements of Rule 31a-3 under the 1940 Act,
Administrator 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. Administrator 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.
Administrator may delegate some or all of its responsibilities under this
Agreement.
Administrator may, at its expense, subcontract with any entity or person
concerning the provision of the services contemplated hereunder; provided,
however, that Administrator shall not be relieved of any of its obligations
under this Agreement by the appointment of such subcontractor and provided
further, that Administrator shall be responsible, to the extent provided in
Section 4 hereof, for all acts of such subcontractor as if such acts were its
own.
2. Fees; Expenses; Expense Reimbursement
In consideration of services rendered and expenses assumed pursuant to this
Agreement, each of the Funds will pay Administrator on the first business day of
each month, or at such time(s) as Administrator shall request and the parties
hereto shall agree, a fee computed daily and paid as specified below calculated
at the applicable annual rate set forth on Schedule A hereto. The fee for the
period from the day of the month this Agreement is entered into until the end of
that month shall be prorated according to the proportion which such period bears
to the full monthly period. Upon any termination of this Agreement before the
end of any month, the fee for such part of a month shall be prorated according
to the proportion which such period bears to the full monthly period and shall
be payable upon the date of termination of this Agreement.
For the purpose of determining fees payable to Administrator, the value of
the net assets of a particular Fund shall be computed in the manner described in
the Trust's Amended and Restated Declaration of Trust ("Declaration of Trust")
or in the Prospectus or Statement of Additional Information respecting that Fund
as from time to time is in effect for the computation of the value of such net
2
<PAGE>
assets in connection with the determination of the liquidating value of the
shares of such Fund.
Administrator will from time to time employ or associate with itself such
person or persons as Administrator may believe to be particularly fitted to
assist it in the performance of this Agreement. Such person or persons may be
partners, officers, or employees who are employed by both Administrator and the
Trust. The compensation of such person or persons shall be paid by Administrator
and no obligation may be incurred on behalf of the Funds in such respect. Other
expenses to be incurred in the operation of the Funds including taxes, interest,
brokerage fees and commissions, if any, fees of Trustees who are not partners,
officers, directors, shareholders or employees of the Administrator or
distributor for the Funds, Commission fees and state Blue Sky qualification and
renewal fees and expenses, investment advisory fees, custodian fees, transfer
and dividend disbursing agents' fees, fund accounting fees including pricing of
portfolio securities, service organization fees, certain insurance premiums,
outside and, to the extent authorized by the Trust, inside auditing and legal
fees and expenses, costs of maintenance of corporate existence, typesetting and
printing prospectuses for regulatory purposes and for distribution to current
shareholders of the Funds, costs of shareholders' and Trustees' reports and
meetings and any extraordinary expenses will be borne by the Funds.
If in any fiscal year the aggregate expenses of a particular Fund exceed
any applicable expense limitation, Administrator will reimburse such Fund for a
portion of such excess expenses equal to such excess times the ratio of the fees
respecting such Fund otherwise payable to Administrator hereunder to the
aggregate fees respecting such Fund otherwise payable to Administrator hereunder
and to any investment adviser under its Investment Advisory Agreement with the
Trust. The expense reimbursement obligation of Administrator is limited to the
amount of its fees hereunder for such fiscal year; provided, however, that
notwithstanding the foregoing, Administrator shall reimburse a particular Fund
for such proportion of such excess expenses regardless of the amount of fees
paid to it during such fiscal year to the extent required by any applicable
regulation. Such expense reimbursement, if any, will be estimated daily and
reconciled and paid on a monthly basis.
3. Proprietary and Confidential Information
Administrator agrees on behalf of itself and its partners and employees to
treat confidentially and as proprietary information of the Trust all records and
other information relative to the Trust and prior, present, or potential
shareholders, and not to 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
3
<PAGE>
not be unreasonably withheld and may not be withheld where Administrator 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.
4. Limitation of Liability
Administrator shall not be liable for any loss suffered by the Funds in
connection with the matters to which this Agreement relates, except for a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though also a
partner, employee, or agent of Administrator, who may be or become an officer,
Trustee, employee, or agent of the Trust or the Funds shall be deemed, when
rendering services to the Trust or the Funds, or acting on any business of that
party, to be rendering such services to or acting solely for that party and not
as a partner, employee, or agent or one under the control or direction of
Administrator even though paid by it.
5. Term
This Agreement shall become effective as of the date first written above
(or, if a particular Fund is not in existence on such date, on the date an
amendment to Schedule A to this Agreement relating to that Fund is executed) and
shall continue until ___________, and unless sooner terminated as provided
herein, thereafter shall be renewed automatically for successive two-year terms,
unless written notice not to renew is given by the non-renewing party to the
other party at least 60 days prior to the expiration of the then-current term.
This Agreement will terminate automatically 90 days after: (1) the effective
date of the repeal or modification of the Glass-Steagall Act permitting banks or
bank affiliates to underwrite or distribute shares of mutual funds; or (2) a
change of control of, or assignment of this Agreement (within the meaning of
section 2(a)(4) of the 1940 Act) by, the Administrator; provided, however, that
the Fund may, at its sole option, elect to waive said automatic termination or
to specify a termination date which is later than 90 days but not to exceed the
expiration of the then-current contract term. This Agreement is terminable with
respect to a particular Fund through delivery of written notice of nonrenewal in
the manner described above prior to the end of the initial or a subsequent
two-year term; upon mutual agreement of the parties hereto; or for "cause" by
the party alleging "cause," in any case on not less than 60 days notice by the
Trust's Board of Trustees or by Administrator. Written notice not to renew may
be given for any reason, with or without "cause" (as defined below).
4
<PAGE>
For purposes of this Agreement, "cause" shall mean (a) willful misfeasance,
bad faith, gross negligence or reckless disregard on the part of the party to be
terminated with respect to its obligations and duties set forth herein; (b) a
final, unappealable judicial, regulatory or administrative ruling or order in
which the party to be terminated has been found guilty of criminal or unethical
behavior in the conduct of its business; (c) financial difficulties on the part
of the party to be terminated which is evidenced by the authorization or
commencement of, or involvement by way of pleading, answer, consent, or
acquiescence in, a voluntary or involuntary case under Title 11 of the United
States Code, as from time to time is in effect, or any applicable law, other
than said Title 11, of any jurisdiction relating to the liquidation or
reorganization of debtors or to the modification or alteration of the rights of
creditors; or (d) any circumstance which substantially impairs the performance
of the obligations and duties of the party to be terminated, or the ability to
perform those obligations and duties, as contemplated herein. Notwithstanding
the foregoing, the absence of either or both an annual review or ratification of
this Agreement by the Board of Trustees shall not, in and of itself, constitute
"cause" as used herein.
If, for any reason other than "cause" as defined above, Administrator is
replaced as fund manager and administrator, or if a third party is added to
perform all or a part of the services provided by Administrator under this
Agreement (excluding any sub-administrator appointed by Administrator as
provided in Section 1 hereof), then the Trust shall make a one-time cash
payment, as liquidated damages, to Administrator equal to the balance due
Administrator for the remainder of the term of this Agreement, assuming for
purposes of calculation of the payment that the asset level of the Trust on the
date Administrator is replaced, or a third party is added, will remain constant
for the balance of the contract term.
6. Governing Law and Matters Relating to the Trust as a Massachusetts
Business Trust
This Agreement shall be governed by the law of the Commonwealth of
Massachusetts. It is expressly agreed that the obligations of the Trust
hereunder shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents or employees of the Trust personally, but shall bind only the
trust property of the Trust. The execution and delivery of this Agreement have
been authorized by the Trustees, and this Agreement has been signed and
delivered by an authorized officer of the Trust, acting as such, and neither
such authorization by the 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 Trust as provided in the Trust's Agreement and Declaration of
Trust.
5
<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 written
above.
VARIABLE INSURANCE FUNDS BISYS FUND SERVICES
By: BISYS Fund Services, Inc.,
General Partner
By: __________________________ By:____________________________
Title:________________________ Title:_________________________
6
<PAGE>
Dated: ______, 1997
Schedule A
to the
Management and Administration Agreement
between Variable Insurance Funds and
BISYS Fund Services
NAME OF FUND COMPENSATION*
Variable Insurance Money Market Fund Annual rate of
thirteen one-
hundredths of one
percent (.13%) of each
Fund's average
daily net assets.
BB&T Growth and Income Fund Annual rate of twenty
AmSouth Regional Equity Fund one-hundredths of one
AmSouth Equity Income Fund percent (.20%) of each
Fund's average
daily net assets.
Variable Insurance Allocated Annual rate of seven
Conservative Fund one-hundredths of one
Variable Insurance Allocated Balanced percent (0.07%) of
Fund each Fund's average
Variable Insurance Allocated Growth daily net assets.
Fund
Variable Insurance Allocated
Aggressive Fund
BB&T Capital Manager Fund
- -----------------------------
*All fees are computed daily and paid periodically.
VARIABLE INSURANCE FUNDS
By:________________________________
Title:_____________________________
BISYS FUND SERVICES
By:________________________________
Title:_____________________________
FUND ACCOUNTING AGREEMENT
AGREEMENT made this _____ day of _____, 1997, between VARIABLE INSURANCE
FUNDS (the "Trust"), a Massachusetts business trust having its principal place
of business at 3435 Stelzer Road, Columbus, Ohio 43219-3035, and BISYS Fund
Services Ohio, Inc. ("BISYS Ohio"), a corporation organized under the laws of
the State of Ohio and having its principal place of business at 3435 Stelzer
Road, Columbus, Ohio 43219-3035.
WHEREAS, the Trust desires that BISYS Ohio perform certain fund accounting
services for each investment portfolio of the Trust identified on Schedule A
hereto, as such Schedule shall be amended from time to time (individually
referred to herein as the "Fund" and collectively as the "Funds"); and
WHEREAS, BISYS Ohio is willing to perform such services on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services as Fund Accountant. BISYS Ohio will keep and maintain the
following books and records of each Fund pursuant to Rule 31a-1 (the "Rule")
under the Investment Company Act of 1940 (the "1940 Act"):
(a) Journals containing an itemized daily record
in detail of all purchases and sales of
securities, all receipts and disbursements of
cash and all other debits and credits, as
required by subsection (b)(1) of the Rule;
(b) General and auxiliary ledgers reflecting all
asset, liability, reserve, capital, income
and expense accounts, including interest
accrued and interest received, as required by
subsection (b)(2)(i) of the Rule;
(c) Separate ledger accounts required by
subsection (b)(2)(ii) and (iii) of the Rule;
and
(d) A monthly trial balance of all ledger
accounts (except shareholder accounts) as
required by subsection (b)(8) of the Rule.
In addition to the maintenance of the books and records specified above,
BISYS Ohio shall perform the following accounting services daily for each Fund:
(a) Calculate the net asset value per share;
<PAGE>
(b) Calculate the dividend and capital gain
distribution, if any;
(c) Determine each Fund's net income;
(d) Reconcile cash movements with the Funds' custodian;
(e) Obtain security market quotes from independent
pricing services or, if such quotes are unavailable,
obtain such prices from the Funds' investment
adviser, and in either case calculate the market
value of each Fund's investments;
(f) Verify and reconcile with the Funds' custodian all
daily trade activity;
(g) Compute each Fund's income and capital gains,
dividend payables, dividend factors, 7-day yields,
7-day effective yields and 30-day yields, and
weighted average portfolio maturity;
(h) Review daily the calculation of the net asset value
and dividend factor (if any) of each Fund prior to
release to shareholders, check and confirm the net
asset values and dividend factors for reasonableness
and deviations and distribute net asset values and
yields to NASDAQ;
(i) Determine monthly outstanding receivables and
payables for security trades;
(j) Determine monthly outstanding receivables and
payables for Fund share transactions;
(k) Report to the Trust the daily market pricing of
securities in any money market Funds, with the
comparison to the amortized cost basis;
(l) Determine unrealized appreciation on securities held
in variable net asset value Funds;
(m) Amortize premiums and accrete discounts on securities
purchased at a price other than face value, if
applicable;
(n) Update the fund accounting system to reflect rate
changes, as received from the Funds' investment
adviser, on variable interest rate instruments;
(o) Record income collected as reported to BISYS Ohio by
the Funds' custodian;
2
<PAGE>
(p) Post Fund income and expense transactions to
appropriate categories;
(q) Accrue for expense of each Fund according to the
instructions from the Trust;
(r) Determine monthly the outstanding receivables and
payables for all income and expense accounts;
(s) Provide accounting reports in connection with the
Trust's regular annual audit and other audits and
examinations by regulatory agencies;
(t) Provide the following reports:
Account Valuation Balances;
Amortization/Accretion by State;
Broker Commissions Paid on Portfolio Transactions;
Broker Volumes;
Cash Disbursements Journal;
Cash Receipts Journal; Current Cash Report; Earned
Amortization/Accretion; Earned Income; Expense
Summary; General Ledger Trial Balance; Investment
Income Detail; Investment Income Summary; Investment
Restrictions Reports; Maturity Schedule; Options -
Closed Positions; Options - Open Positions; Pricing
Exception Report;
Portfolio Transactions with Entities Acting as
Principals;
Portfolio Turnover;
Purchase Journal;
Sales Journal;
Schedule of Investments;
BISYS Ohio may provide additional special reports upon the
request of the Trust or the Funds' investment adviser(s),
which may result in an additional charge the amount of which
shall be agreed upon between the parties; and
(u) Provide such other similar services with respect to a
Fund as may be reasonably requested by the Trust,
which may result in an additional charge the amount
of which shall be agreed upon between the parties.
3
<PAGE>
BISYS Ohio shall also perform the following additional accounting
services for each Fund:
(a) Provide monthly a download (and hard copy thereof) of
the Financial Statement Package, upon request of the
Trust. The download will include the following items:
Schedule of Investments;
Statement of Assets and Liabilities;
Statement of Operations;
Statement of Changes in Net Assets;
Condensed Financial Information;
(b) Provide monthly broker security transaction reports;
(c) Provide monthly security transaction reports; and
(d) Provide accounting information for the following:
(i) federal and state income tax returns and
federal excise tax returns;
(ii) the Trust's semi-annual reports with the
Securities and Exchange Commission ("SEC") on
Form N-SAR;
(iii) the Trust's annual, semi-annual and quarterly
(if any) shareholder reports;
(iv) registration statements on Form N-1A and
other filings relating to the registration of
shares;
(v) the Trust's administrator's monitoring of the
Trust's status as a regulated investment
company under Subchapter M of the Internal
Revenue Code, as amended;
(vi) annual audit by the Trust's auditors; and
(vii) examinations performed by the SEC.
2. Subcontracting. BISYS Ohio may, at its expense, subcontract with any
entity or person concerning the provision of the services contemplated
hereunder; provided, however, that BISYS Ohio shall not be relieved of any of
its obligations under this Agreement by the appointment of such subcontractor
and provided further, that BISYS Ohio shall be responsible, to the extent
provided in Section 7 hereof, for all acts of such subcontractor as if such acts
were its own.
3. Compensation. The Trust shall pay BISYS Ohio for the services to be
provided by BISYS Ohio under this Agreement in accordance with, and in the
manner set forth in, Schedule B hereto.
4
<PAGE>
4. Reimbursement of Expenses. In addition to paying BISYS Ohio the fees
described in Section 3 hereof, the Trust agrees to reimburse BISYS Ohio for
BISYS Ohio's out-of-pocket expenses in providing services hereunder, including
without limitation the following:
(a) All freight and other delivery and bonding charges incurred
by BISYS Ohio in delivering materials to and from the Trust;
(b) All direct telephone, telephone transmission and telecopy or
other electronic transmission expenses incurred by BISYS
Ohio in communication with the Trust, the Funds' investment
advisor or custodian, dealers or others as required for
BISYS Ohio to perform the services to be provided hereunder;
(c) Costs of pricing the portfolio securities of each Fund;
(d) The cost of microfilm or microfiche of records or other
materials; and
(e) Any expenses BISYS Ohio shall incur at the written direction
of an officer of the Trust thereunto duly authorized.
5. Effective Date. This Agreement shall become effective with respect to a
Fund as of the date first written above (or, if a particular Fund is not in
existence on that date, on the date an amendment to Schedule A to this Agreement
relating to the Fund is executed) (the "Effective Date").
6. Term. This Agreement shall continue in effect with respect to a Fund,
unless earlier terminated by either party hereto as provided hereunder, until
____________, and thereafter shall be renewed automatically for successive
one-year terms unless written notice not to renew is given by the non-renewing
party to the other party at least 60 days prior to the expiration of the
then-current term; provided, however, that after such termination for so long as
BISYS Ohio, with the written consent of the Trust, in fact continues to perform
any one or more of the services contemplated by this Agreement or any schedule
or exhibit hereto, the provisions of this Agreement, including without
limitation the provisions dealing with indemnification, shall continue in full
force and effect. Compensation due BISYS Ohio and unpaid by the Trust upon such
termination shall be immediately due and payable upon and notwithstanding such
termination. BISYS Ohio shall be entitled to collect from the Trust, in addition
to the compensation described under Section 3 hereof, the amount of all of BISYS
Ohio's cash disbursements for services in connection with BISYS Ohio's
activities in effecting such termination, including without limitation, the
delivery to the Trust and/or its designees of the Trust's property, records,
5
<PAGE>
instruments and documents, or any copies thereof. Subsequent to such
termination, for a reasonable fee, BISYS Ohio will provide the Trust with
reasonable access to any Trust documents or records remaining in its possession.
Written notice not to renew may be given for any reason, with or without "cause"
(as defined below). This Agreement is terminable with respect to a particular
Fund through a failure to renew the Agreement at the end of a one-year term;
upon mutual agreement of the parties hereto; or for "cause" (as defined below)
by the party alleging "cause," in any case on not less than 60 days' notice by
the Trust's Board of Trustees or by BISYS Ohio. This Agreement will terminate
automatically 90 days after: (1) the effective date of the repeal or
modification of the Glass-Steagall Act permitting banks or bank affiliates to
underwrite or distribute shares of mutual funds; or (2) a change of control of,
or assignment of this Agreement (within the meaning of section 2(a)(4) of the
1940 Act), by BISYS Ohio; provided, however, that the Fund may, at its sole
option, elect to waive said automatic termination or to specify a termination
date which is later than 90 days but not to exceed the expiration of the
then-current contract term.
For purposes of this Agreement, "cause" shall mean (a) willful misfeasance,
bad faith, gross negligence or reckless disregard on the part of the party to be
terminated with respect to its obligations and duties set forth herein; (b) a
final, unappealable judicial, regulatory or administrative ruling or order in
which the party to be terminated has been found guilty of criminal or unethical
behavior in the conduct of it business; (c) financial difficulties on the part
of the party to be terminated which is evidenced by the authorization or
commencement of, or involvement by way of pleading, answer, consent, or
acquiescence in, a voluntary or involuntary case under Title 11 of the United
State Code, as from time to time is in effect, or any applicable law, other than
said Title 11, of any jurisdiction relating to the liquidation or reorganization
of debtors or to the modification or alteration of the rights of creditors; or
(d) any circumstance which substantially impairs the performance of the
obligations and duties of the party to be terminated, or the ability to perform
those obligations and duties as contemplated herein.
If, for any reason other than "cause" as defined above, or the 90-day
automatic termination provision described above, BISYS Ohio is replaced as Fund
Accountant, or if a third party is added to perform all or a part of the
services provided by BISYS Ohio under this Agreement (excluding any
sub-accountant appointed by BISYS Ohio as provided in Section 2 hereof), then
the Trust shall make a one-time cash payment, as liquidated damages, to BISYS
Ohio equal to the balance due BISYS Ohio for the remainder of the term of this
Agreement, assuming for purposes of calculation of the payment that the asset
level of the Trust on the date BISYS Ohio is replaced, or a third party is
added, will remain constant for the balance of the contract term.
6
<PAGE>
7. Standard of Care; Reliance on Records and Instructions; Indemnification.
BISYS Ohio shall use its best efforts to insure the accuracy of all services
performed under this Agreement, but shall not be liable to the Trust for any
action taken or omitted by BISYS Ohio in the absence of bad faith, willful
misfeasance, negligence or from reckless disregard by it of its obligations and
duties. A Fund agrees to indemnify and hold harmless BISYS Ohio, its employees,
agents, directors, officers and nominees from and against any and all claims,
demands, actions and suits, whether groundless or otherwise, and from and
against any and all judgments, liabilities, losses, damages, costs, charges,
counsel fees and other expenses of every nature and character arising out of or
in any way relating to BISYS Ohio's actions taken or nonactions with respect to
the performance of services under this Agreement with respect to such Fund or
based, if applicable, upon reasonable reliance on information, records,
instructions or requests with respect to such Fund given or made to BISYS Ohio
by a duly authorized representative of the Trust; provided that this
indemnification shall not apply to actions or omissions of BISYS Ohio in cases
of its own bad faith, willful misfeasance, negligence or from reckless disregard
by it of its obligations and duties, and further provided that prior to
confessing any claim against it which may be the subject of this
indemnification, BISYS Ohio shall give the Trust written notice of and
reasonable opportunity to defend against said claim in its own name or in the
name of BISYS Ohio.
8. Record Retention and Confidentiality. BISYS Ohio shall keep and maintain
on behalf of the Trust all books and records which the Trust and BISYS Ohio is,
or may be, required to keep and maintain pursuant to any applicable statutes,
rules and regulations, including without limitation Rules 31a-1 and 31a-2 under
the 1940 Act, relating to the maintenance of books and records in connection
with the services to be provided hereunder. BISYS Ohio further agrees that all
such books and records shall be the property of the Trust and to make such books
and records available for inspection by the Trust or by the Securities and
Exchange Commission at reasonable times and otherwise to keep confidential all
books and records and other information relative to the Trust and its
shareholders; except when requested to divulge such information by
duly-constituted authorities or court process.
9. Uncontrollable Events. BISYS Ohio assumes no responsibility hereunder,
and shall not be liable, for any damage, loss of data, delay or any other loss
whatsoever caused by events beyond its reasonable control.
10. Reports. BISYS Ohio will furnish to the Trust and to its properly
authorized auditors, investment advisers, examiners, distributors, dealers,
underwriters, salesmen, insurance companies and others designated by the Trust
in writing, such reports and at such times as are prescribed pursuant to the
terms and the conditions of this Agreement to be provided or completed by BISYS
7
<PAGE>
Ohio, or as subsequently agreed upon by the parties pursuant to an amendment
hereto. The Trust agrees to examine each such report or copy promptly and will
report or cause to be reported any errors or discrepancies therein no later than
three business days from the receipt thereof. In the event that errors or
discrepancies, except such errors and discrepancies as may not reasonably be
expected to be discovered by the recipient within three days after conducting a
diligent examination, are not so reported within the aforesaid period of time, a
report will for all purposes be accepted by and binding upon the Trust and any
other recipient, and BISYS shall have no liability for errors or discrepancies
therein and shall have no further responsibility with respect to such report
except to perform reasonable corrections of such errors and discrepancies within
a reasonable time after requested to do so by the Trust.
11. Rights of Ownership. All computer programs and procedures developed to
perform services required to be provided by BISYS Ohio for this Agreement are
the property of BISYS Ohio. All records and other data except such computer
programs and procedures are the exclusive property of the Trust and all such
other records and data will be furnished to the Trust in appropriate form as
soon as practicable after termination of this Agreement for any reason.
12. Return of Records. BISYS Ohio may at its option at any time, and shall
promptly upon the Trust's demand, turn over to the Trust and cease to retain
BISYS Ohio's files, records and documents created and maintained by BISYS Ohio
pursuant to this Agreement which are no longer needed by BISYS Ohio in the
performance of its services or for its legal protection. If not so turned over
to the Trust, such documents and records will be retained by BISYS Ohio for six
years from the year of creation. At the end of such six-year period, such
records and documents will be turned over to the Trust unless the Trust
authorizes in writing the destruction of such records and documents.
13. Representations of the Trust. The Trust certifies to BISYS Ohio that:
(1) as of the close of business on the Effective Date, each Fund that is in
existence as of the Effective Date has authorized unlimited shares, and (2) this
Agreement has been duly authorized by the Trust and, when executed and delivered
by the Trust, will constitute a legal, valid and binding obligation of the
Trust, enforceable against the Trust in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting the rights and remedies of creditors and secured parties.
14. Representations of BISYS Ohio. BISYS Ohio represents and warrants that:
(1) the various procedures and systems which BISYS Ohio has implemented with
regard to safeguarding from loss or damage attributable to fire, theft, or any
other cause the records, and other data of the Trust and BISYS Ohio's records,
data,
8
<PAGE>
equipment facilities and other property used in the performance of its
obligations hereunder are adequate and that it will make such changes therein
from time to time as are required for the secure performance of it obligations
hereunder, and (2) this Agreement has been duly authorized by BISYS Ohio and,
when executed and delivered by BISYS Ohio, will constitute a legal, valid and
binding obligation of BISYS Ohio, enforceable against BISYS Ohio in accordance
with its terms, subject to bankruptcy, insolvency, reorganization, moratorium
and other laws of general application affecting the rights and remedies of
creditors and secured parties.
15. Insurance. BISYS Ohio shall notify the Trust should any of its
insurance coverage be canceled or reduced. Such notification shall include the
date of change and the reasons therefor. BISYS Ohio shall notify the Trust of
any material claims against it with respect to services performed under this
Agreement, whether or not they may be covered by insurance, and shall notify the
Trust from time to time as may be appropriate of the total outstanding claims
made by BISYS Ohio under its insurance coverage.
16. Information Furnished by the Trust and Funds. The Trust has furnished
to BISYS Ohio the following:
(a) Copies of the Amended and Restated Declaration of Trust of the
Trust and of any amendments thereto.
(b) Copies of the following documents:
1. The Trust's Bylaws and any amendments thereto;
2. Resolutions of the Board of Trustees covering the
approval of this Agreement, authorization of a
specified officer of the Trust to execute and deliver
this Agreement and authorization for specified officers
of the Trust to instruct BISYS Ohio thereunder.
(c) A list of all the officers of the Trust, together with specimen
signatures of those officers who are authorized to instruct BISYS
Ohio in all matters.
(d) Two copies of the Prospectuses and Statements of Additional
Information for each Fund.
17. Information Furnished by BISYS Ohio. BISYS Ohio has furnished to the
Trust the following:
(a) BISYS Ohio's Articles of Incorporation.
(b) BISYS Ohio's Bylaws and any amendments thereto.
9
<PAGE>
(c) Certified copies of actions of BISYS Ohio covering the following
matters:
1. Approval of this Agreement, and authorization of a
specified officer of BISYS Ohio to execute and deliver
this Agreement;
2. Authorization of BISYS Ohio to act as fund accountant
for the Trust and to provide accounting services for
the Trust.
18. Amendments to Documents. The Trust shall furnish BISYS Ohio written
copies of any amendments to, or changes in, any of the items referred to in
Section 16 hereof forthwith upon such amendments or changes becoming effective.
In addition, the Trust agrees that no amendments will be made to the
Prospectuses or Statements of Additional Information of the Trust which might
have the effect of changing the procedures employed by BISYS Ohio in providing
the services agreed to hereunder or which amendment might affect the duties of
BISYS Ohio hereunder unless the Trust first obtains BISYS Ohio's approval of
such amendments or changes.
19. Compliance with Law. Except for the obligations of BISYS Ohio set forth
in Section 8 hereof, the Trust assumes full responsibility for the preparation,
contents and distribution of each prospectus of the Trust as to compliance with
all applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), the 1940 Act and any other laws, rules and regulations of
governmental authorities having jurisdiction. BISYS Ohio shall have no
obligation to take cognizance of any laws relating to the sale of the Trust's
shares. The Trust represents and warrants that no shares of the Trust will be
offered to the public until the Trust's registration statement under the
Securities Act and the 1940 Act has been declared or becomes effective.
20. Notices. Any notice provided hereunder shall be sufficiently given when
sent by registered or certified mail to the party required to be served with
such notice, at the following address: 3435 Stelzer Road, Columbus, Ohio
43219-3035, or at such other address as such party may from time to time specify
in writing to the other party pursuant to this Section.
21. Headings. Paragraph headings in this Agreement are included for
convenience only and are not to be used to construe or interpret this Agreement.
22. Assignment. This Agreement and the rights and duties hereunder shall
not be assignable with respect to a Fund by either of the parties hereto except
by the specific written consent of the other party.
10
<PAGE>
23. Governing Law. This Agreement shall be governed by and provisions shall
be construed in accordance with the laws of the Commonwealth of Massachusetts.
24. Limitation of Liability of the Trustees and Shareholders. It is
expressly agreed that the obligations of the Trust hereunder shall not be
binding upon any of the Trustees, shareholders, nominees, officers, agents or
employees of the Trust personally, but shall bind only the trust property of the
Trust. The execution and delivery of this Agreement have been authorized by the
Trustees, and this Agreement has been signed and delivered by an authorized
officer of the Trust, acting as such, and neither such authorization by the
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 Trust as provided in
the Trust's Amended and Restated Declaration of Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
VARIABLE INSURANCE FUNDS
By:_________________________________
BISYS FUND SERVICES OHIO, INC.
By:_________________________________
11
<PAGE>
Dated: ________, 1997
Schedule A
to the Fund Accounting Agreement
between Variable Insurance Funds and
BISYS Fund Services Ohio, Inc.
NAME OF FUND
Variable Insurance Money Market Fund
Variable Insurance Allocated Conservative Fund
Variable Insurance Allocated Balanced Fund
Variable Insurance Allocated Growth Fund
Variable Insurance Allocated Aggressive Fund
BB&T Growth and Income Fund
BB&T Capital Manager Fund
AmSouth Regional Equity Fund
AmSouth Equity Income Fund
VARIABLE INSURANCE FUNDS
By:_______________________________
BISYS FUND SERVICES OHIO, INC.
By:________________________________
A-1
<PAGE>
Dated: _________, 1997
Schedule B
to the Fund Accounting Agreement
between Variable Insurance Funds and
BISYS Fund Services Ohio, Inc.
BISYS Fund Services Ohio, Inc. shall be entitled to receive a fee from each
Fund in accordance with the following schedule:
Funds Average Daily Net Assets Fee Amount
Funds-of-Funds: All assets Greater of
$10,000 or .01%
Non-Funds-of-Funds: All Assets Greater of
$30,000 or .03%
Multiple Classes of Shares:
Funds which have two or more classes of shares each having different net
asset values or paying different daily dividends are subject to the following
additional annual fee per additional class:
Fund Additional Per Class Fee
Funds-of-Funds $2,000
Non-Funds-of-Funds $10,000
VARIABLE INSURANCE FUNDS
BY:_______________________________
BISYS FUND SERVICES OHIO, INC.
BY:_______________________________
B-1
TRANSFER AGENCY AGREEMENT
AGREEMENT made this ____ day of _____, 1997, between VARIABLE INSURANCE
FUNDS (the "Trust"), a Massachusetts business trust having its principal place
of business at 3435 Stelzer Road, Columbus, Ohio 43219-3035, and BISYS FUND
SERVICES OHIO, INC. ("BISYS Ohio"), an Ohio corporation having its principal
place of business at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
WHEREAS, the Trust desires that BISYS Ohio perform certain services for the
Trust, and for each of its investment portfolios (see Schedule A, as such
Schedule may be amended from time to time) denominated as funds and whose shares
of beneficial interest comprise from time to time the shares of the Trust
(individually referred to herein as a "Fund" and collectively as the "Funds");
and
WHEREAS, BISYS Ohio is willing to perform such services on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services. BISYS Ohio shall perform for the Trust the transfer agent
services set forth in Schedule B hereto.
BISYS Ohio also agrees to perform for the Trust such special services
incidental to the performance of the services enumerated herein as agreed to by
the parties from time to time. BISYS Ohio shall perform such additional services
as are provided on an amendment to Schedule B hereof, in consideration of such
fees as the parties hereto may agree.
BISYS Ohio may, in its discretion, appoint in writing other parties
qualified to perform transfer agency services reasonably acceptable to the Trust
(individually, a "Sub-transfer Agent") to carry out some or all of its
responsibilities under this Agreement with respect to a Fund; provided, however,
that the Sub-transfer Agent shall be the agent of BISYS Ohio and not the agent
of the Trust or such Fund, and that BISYS Ohio shall be fully responsible for
the acts of such Sub-transfer Agent and shall not be relieved of any of its
responsibilities hereunder by the appointment of such Sub-transfer Agent.
2. Fees. The Trust shall pay BISYS Ohio for the services to be provided by
BISYS Ohio under this Agreement in accordance with, and in the manner set forth
in, Schedule C hereto. BISYS Ohio may increase the fees it charges pursuant to
the fee schedule; provided, however, that BISYS Ohio may not increase such fees
until the expiration of the Initial Term of this Agreement (as defined below),
unless the Trust otherwise agrees to such change in writing. Fees for any
additional services to be provided by BISYS Ohio pursuant to an amendment to
<PAGE>
Schedule B hereto shall be subject to mutual agreement at the time such
amendment to Schedule B is proposed.
3. Reimbursement of Expenses. In addition to paying BISYS Ohio the fees
described in Section 2 hereof, the Trust agrees to reimburse BISYS Ohio for
BISYS Ohio's out-of-pocket expenses in providing services hereunder, including
without limitation, the following:
(a) All freight and other delivery and bonding charges incurred by
BISYS Ohio in delivering materials to and from the Trust and in
delivering all materials to shareholders;
(b) All direct telephone, telephone transmission and telecopy or
other electronic transmission expenses incurred by BISYS Ohio in
communication with the Trust, the Trust's investment adviser or
custodian, dealers, shareholders or others as required for BISYS
Ohio to perform the services to be provided hereunder;
(c) Costs of postage, couriers, stock computer paper, statements,
labels, envelopes, checks, reports, letters, tax forms, proxies,
notices or other form of printed material which shall be required
by BISYS Ohio for the performance of the services to be provided
hereunder;
(d) The cost of microfilm or microfiche of records or other
materials; and,
(e) Any expenses BISYS Ohio shall incur at the written direction of
an officer of the Trust thereunto duly authorized.
4. Effective Date. This Agreement shall become effective as of the date
first written above (the "Effective Date").
5. Term. This Agreement shall continue in effect, unless earlier terminated
by either party hereto as provided hereunder, until _____________ (the "Initial
Term"). Thereafter, this Agreement shall continue in effect unless either party
hereto terminates this Agreement by giving 90 days' written notice to the other
party, whereupon this Agreement shall terminate automatically upon the
expiration of said 90 days; provided, however, that after such termination, for
so long as BISYS Ohio, with the written consent of the Trust, in fact continues
to perform any one or more of the services contemplated by this Agreement or any
Schedule or exhibit hereto, the provisions of this Agreement, including without
limitation the provisions dealing with indemnification, shall continue in full
force and effect. This Agreement also will terminate automatically 90 days
after: (1) the effective date of the repeal or modification of the
2
<PAGE>
Glass-Steagall Act permitting banks or bank affiliates to underwrite or
distribute shares of mutual funds; or (2) a change of control of, or assignment
of this Agreement (within the meaning of section 2(a)(4) of the Investment
Company Act of 1940, as amended (the "1940 Act")) by, the Administrator;
provided, however, that the Fund may, at its sole option, elect to waive said
automatic termination or to specify a termination date which is later than 90
days but not to exceed the expiration of the then-current contract term. Fees
and out-of-pocket expenses incurred by BISYS Ohio but unpaid by the Trust upon
such termination shall be immediately due and payable upon and notwithstanding
such termination. BISYS Ohio shall be entitled to collect from the Trust, in
addition to the fees and disbursements provided by Sections 2 and 3 hereof, the
amount of all of BISYS Ohio's cash disbursements and a reasonable fee (which fee
shall be not less than one hundred and two percent (102%) of the sum of the
actual costs incurred by BISYS Ohio in performing such service) for services in
connection with BISYS Ohio's activities in effecting such termination, including
without limitation, the delivery to the Trust and/or its distributor or
investment adviser and/or other parties, of the Trust's property, records,
instruments and documents, or any copies thereof. Subsequent to such
termination, BISYS Ohio, for a reasonable fee, will provide the Trust with
reasonable access to any Trust documents or records remaining in its possession.
6. Uncontrollable Events. BISYS Ohio assumes no responsibility hereunder,
and shall not be liable for any damage, loss of data, delay or any other loss
whatsoever caused by events beyond its reasonable control.
7. Legal Advice. BISYS Ohio shall notify the Trust at any time BISYS Ohio
believes that it is in need of the advice of counsel (other than counsel in the
regular employ of BISYS Ohio or any affiliated companies) with regard to BISYS
Ohio's responsibilities and duties pursuant to this Agreement; and after so
notifying the Trust, BISYS Ohio, at its discretion, shall be entitled to seek,
receive and act upon advice of legal counsel of its choosing, such advice to be
at the expense of the Trust or Funds unless relating to a matter involving BISYS
Ohio's willful misfeasance, bad faith, gross negligence or reckless disregard
with respect to BISYS Ohio's responsibilities and duties hereunder and BISYS
Ohio shall in no event be liable to the Trust or any Fund or any shareholder or
beneficial owner of the Trust for any action reasonably taken pursuant to such
advice.
8. Instructions. Whenever BISYS Ohio is requested or authorized to take
action hereunder pursuant to instructions from a shareholder, or a properly
authorized agent of a shareholder ("shareholder's agent"), concerning an account
in a Fund, BISYS Ohio shall be entitled to rely upon any certificate, letter or
other instrument or communication, believed by BISYS Ohio to be genuine and to
3
<PAGE>
have been properly made, signed or authorized by an officer or other authorized
agent of the Trust or by the shareholder or shareholder's agent, as the case may
be, 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 an officer of
the Trust or any other person authorized by the Trust's Board of Trustees or by
the shareholder or shareholder's agent, as the case may be.
As to the services to be provided hereunder, BISYS Ohio may rely
conclusively upon the terms of the Prospectuses and Statement of Additional
Information of the Trust relating to the Funds to the extent that such services
are described therein unless BISYS Ohio receives written instructions to the
contrary in a timely manner from the Trust.
9. Standard of Care; Reliance on Records and Instructions; Indemnification.
BISYS Ohio shall use its best efforts to ensure the accuracy of all services
performed under this Agreement, but shall not be liable to the Trust for any
action taken or omitted by BISYS Ohio in the absence of bad faith, willful
misfeasance, gross negligence or from reckless disregard by it of its
obligations and duties. The Trust agrees to indemnify and hold harmless BISYS
Ohio, its employees, agents, directors, officers and nominees from and against
any and all claims, demands, actions and suits, whether groundless or otherwise,
and from and against any and all judgments, liabilities, losses, damages, costs,
charges, counsel fees and other expenses of every nature and character arising
out of or in any way relating to BISYS Ohio's actions taken or nonactions with
respect to the performance of services under this Agreement or based, if
applicable, upon reasonable reliance on information, records, instructions or
requests given or made to BISYS Ohio by the Trust, the investment adviser and on
any records provided by any fund accountant or custodian thereof; provided that
this indemnification shall not apply to actions or omissions of BISYS Ohio in
cases of its own bad faith, willful misfeasance, negligence or from reckless
disregard by it of its obligations and duties; and further provided that prior
to confessing any claim against it which may be the subject of this
indemnification, BISYS Ohio shall give the Trust written notice of and
reasonable opportunity to defend against said claim in its own name or in the
name of BISYS Ohio.
10. Record Retention and Confidentiality. BISYS Ohio shall keep and
maintain on behalf of the Trust all books and records which the Trust or BISYS
Ohio is, or may be, required to keep and maintain pursuant to any applicable
statutes, rules and regulations, including without limitation Rules 31a-1 and
31a-2 under the 1940 Act, relating to the maintenance of books and records in
connection with the services to be provided hereunder. BISYS Ohio further agrees
that all such books and records shall be the property of the Trust and to make
such books and records available for inspection by the Trust or by the
4
<PAGE>
the Securities and Exchange Commission (the "Commission") at reasonable times
and otherwise to keep confidential all books and records and other information
relative to the Trust and its shareholders, except when requested to divulge
such information by duly-constituted authorities or court process, or requested
by a shareholder or shareholder's agent with respect to information concerning
an account as to which such shareholder has either a legal or beneficial
interest or when requested by the Trust, the shareholder, or shareholder's
agent, or the dealer of record as to such account.
11. Reports. BISYS Ohio will furnish to the Trust and to its
properly-authorized auditors, investment advisers, examiners, distributors,
tdealers, underwriters, salesmen, insurance companies and others designated by
the Trust in writing, such reports at such times as are prescribed in Schedule D
attached hereto, or as subsequently agreed upon by the parties pursuant to an
amendment to Schedule D. The Trust agrees to examine each such report or copy
promptly and will report or cause to be reported any errors or discrepancies
therein not later than three business days from the receipt thereof. In the
event that errors or discrepancies, except such errors and discrepancies as may
not reasonably be expected to be discovered by the recipient within three days
after conducting a diligent examination, are not so reported within the
aforesaid period of time, a report will for all purposes be accepted by and be
binding upon the Trust and any other recipient, and BISYS Ohio shall have no
liability for errors or discrepancies therein and shall have no further
responsibility with respect to such report except to perform reasonable
corrections of such errors and discrepancies within a reasonable time after
requested to do so by the Trust.
12. Rights of Ownership. All computer programs and procedures developed to
perform services required to be provided by BISYS Ohio under this Agreement are
the property of BISYS Ohio. All records and other data except such computer
programs and procedures are the exclusive property of the Trust and all such
other records and data will be furnished to the Trust in appropriate form as
soon as practicable after termination of this Agreement for any reason.
13. Return of Records. BISYS Ohio may at its option at any time, and shall
promptly upon the Trust's demand, turn over to the Trust and cease to retain
BISYS Ohio's files, records and documents created and maintained by BISYS Ohio
pursuant to this Agreement which are no longer needed by BISYS Ohio in the
performance of its services or for its legal protection. If not so turned over
to the Trust, such documents and records will be retained by BISYS Ohio for six
years from the year of creation. At the end of such six-year period, such
records and documents will be turned over to the Trust unless the Trust
authorizes in writing the destruction of such records and documents.
5
<PAGE>
14. Bank Accounts. The Trust and the Funds shall establish and maintain
such bank accounts with such bank or banks as are selected by the Trust, as are
necessary in order that BISYS Ohio may perform the services required to be
performed hereunder. To the extent that the performance of such services shall
require BISYS Ohio directly to disburse amounts for payment of dividends,
redemption proceeds or other purposes, the Trust and Funds shall provide such
bank or banks with all instructions and authorizations necessary for BISYS Ohio
to effect such disbursements.
15. Representations of The Trust. The Trust certifies to BISYS Ohio that:
(a) as of the close of business on the Effective Date, each Fund which is in
existence as of the Effective Date has authorized unlimited shares, and (b) by
virtue of its Amended and Restated Declaration of Trust (the "Declaration of
Trust"), shares of each Fund which are redeemed by the Trust may be sold by the
Trust from its treasury, and (c) this agreement has been duly authorized by the
Trust and, when executed and delivered by the Trust, will constitute a legal,
valid and binding obligation of the Trust, enforceable against the Trust in
accordance with its terms, subject to bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting the rights and
remedies of creditors and secured parties.
16. Representations of BISYS Ohio. BISYS Ohio represents and warrants that
it has been in, and shall continue to be in, substantial compliance with all
provisions of law, including Section 17A(c) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), required in connection with the
performance of its duties under this Agreement.
17. Insurance. BISYS Ohio shall notify the Trust should its insurance
coverage with respect to professional liability or errors and omissions coverage
be canceled or reduced. Such notification shall include the date of change and
the reasons therefor. BISYS Ohio shall notify the Trust of any material claims
against it with respect to services performed under this Agreement, whether or
not they may be covered by insurance, and shall notify the Trust from time to
time as may be appropriate of the total outstanding claims made by BISYS Ohio
under its insurance coverage.
18. Information to be Furnished by the Trust and Funds. The Trust has
furnished to BISYS Ohio the following:
(a) Copies of the Declaration of Trust of the Trust and of any
amendments thereto.
(b) Copies of the following documents:
1. The Trust's By-Laws and any amendments thereto;
2. Copies of resolutions of the Board of Trustees covering
the following matters:
6
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A. Approval of this Agreement and authorization
of a specified officer of the Trust to
execute and deliver this Agreement and
authorization for specified officers of the
Trust to instruct BISYS Ohio hereunder; and
B. Authorization of BISYS Ohio to act as
Transfer Agent for the Trust on behalf of the
Funds.
(c) A list of all officers of the Trust, together with specimen
signatures of those officers, who are authorized to instruct
BISYS Ohio in all matters.
(d) Two copies of the following (if such documents are employed by
the Trust):
1. Prospectuses and Statement of Additional Information;
2. Distribution Agreement; and
3. All other forms commonly used by the Trust or its Distributor
with regard to their relationships and transactions with
shareholders of the Funds.
(e) A certificate as to shares of beneficial interest of the Trust
authorized, issued, and outstanding as of the Effective Date of
BISYS Ohio's appointment as Transfer Agent (or as of the date on
which BISYS Ohio's services are commenced, whichever is the later
date) and as to receipt of full consideration by the Trust for
all shares outstanding, such statement to be certified by the
Treasurer of the Trust.
19. Information to be Furnished by BISYS Ohio. BISYS Ohio
has furnished to the Trust the following:
(a) BISYS Ohio's Articles of Incorporation.
(b) BISYS Ohio's Bylaws and any amendments thereto.
(c) Certified copies of actions of BISYS Ohio covering the
following matters:
1. Approval of this Agreement, and authorization of a
specified officer of BISYS Ohio to execute and
deliver this Agreement; and
2. Authorization of BISYS Ohio to act as Transfer
Agent for the Trust.
(d) A copy of the most recent independent accountants' report
relating to internal accounting control systems as filed with
7
<PAGE>
the Commission pursuant to Rule 17Ad-13 under the
Exchange Act.
20. Amendments to Documents. The Trust shall furnish BISYS Ohio written
copies of any amendments to, or changes in, any of the items referred to in
Section 18 hereof forthwith upon such amendments or changes becoming effective.
In addition, the Trust agrees that no amendments will be made to the
Prospectuses or Statement of Additional Information of the Trust which might
have the effect of changing the procedures employed by BISYS Ohio in providing
the services agreed to hereunder or which amendment might affect the duties of
BISYS Ohio hereunder unless the Trust first obtains BISYS Ohio's approval of
such amendments or changes.
21. Reliance on Amendments. BISYS Ohio may rely on any amendments to or
changes in any of the documents and other items to be provided by the Trust
pursuant to Sections 18 and 20 of this Agreement and the Trust hereby
indemnifies and holds harmless BISYS Ohio from and against any and all claims,
demands, actions, suits, judgments, liabilities, losses, damages, costs,
charges, counsel fees and other expenses of every nature and character which may
result from actions or omissions on the part of BISYS Ohio in reasonable
reliance upon such amendments and/or changes. Although BISYS Ohio is authorized
to rely on the above-mentioned amendments to and changes in the documents and
other items to be provided pursuant to Sections 18 and 20 hereof, BISYS Ohio
shall be under no duty to comply with or take any action as a result of any of
such amendments or changes unless the Trust first obtains BISYS Ohio's written
consent to and approval of such amendments or changes.
22. Compliance with Law. Except for the obligations of BISYS Ohio set forth
in Section 10 hereof, the Trust assumes full responsibility for the preparation,
contents and distribution of each prospectus of the Trust as to compliance with
all applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), the 1940 Act, and any other laws, rules and regulations of governmental
authorities having jurisdiction. BISYS Ohio shall have no obligation to take
cognizance of any laws relating to the sale of the Trust's shares. The Trust
represents and warrants that no shares of the Trust will be offered to the
public until the Trust's registration statement under the 1933 Act and the 1940
Act has been declared or becomes effective.
23. Notices. Any notice provided hereunder shall be sufficiently given when
sent by registered or certified mail to the party required to be served with
such notice at the following address: 3435 Stelzer Road, Columbus, Ohio
43219-3035, or at such other address as such party may from time to time specify
in writing to the other party pursuant to this Section.
24. Headings. Paragraph headings in this Agreement are included for
convenience only and are not to be used to construe or interpret this Agreement.
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<PAGE>
25. Assignment. This Agreement and the rights and duties hereunder shall
not be assignable by either of the parties hereto except by the specific written
consent of the other party. This Section 25 shall not limit or in any way affect
BISYS Ohio's right to appoint a Sub-transfer Agent pursuant to Section 1 hereof.
26. Governing Law. This Agreement shall be governed by and provisions shall
be construed in accordance with the laws of the Commonwealth of Massachusetts.
27. Limitation of Liability of the Trustees and Shareholders. It is
expressly agreed that the obligations of the Trust hereunder shall not be
binding upon any of the Trustees, shareholders, nominees, officers, agents or
employees of the Trust personally, but shall bind only the trust property of the
Trust. The execution and delivery of this Agreement have been authorized by the
Trustees, and this Agreement has been signed and delivered by an authorized
officer of the Trust, acting as such, and neither such authorization by the
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 Trust as provided in
the Trust's Declaration of Trust.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
VARIABLE INSURANCE FUNDS
_________________________ By:______________________________
_________________________ BISYS FUND SERVICES OHIO, INC.
By:______________________________
10
<PAGE>
Dated: ________, 1997
Schedule A
to the Transfer Agency Agreement
between Variable Insurance Funds and
BISYS Fund Services Ohio, Inc.
NAME OF FUND
Variable Insurance Money Market Fund
Variable Insurance Allocated Conservative Fund
Variable Insurance Allocated Balanced Fund
Variable Insurance Allocated Growth Fund
Variable Insurance Allocated Aggressive Fund
BB&T Growth and Income Fund
BB&T Capital Manager Fund
AmSouth Regional Equity Fund
AmSouth Equity Income Fund
VARIABLE INSURANCE FUNDS
By:______________________________
BISYS FUND SERVICES OHIO, INC.
By:______________________________
A-1
<PAGE>
Dated: ______, 1997
Schedule B
to the Transfer Agency Agreement
between Variable Insurance Funds and
BISYS Fund Services Ohio, Inc.
TRANSFER AGENCY
SERVICES
1. Shareholder Transactions
a. Process shareholder purchase and redemption orders.
b. Set up account information, including address, taxpayer
identification numbers and wire instructions.
c. Issue confirmations in compliance with Rule 10b-10 under the
Securities Exchange Act of 1934, as amended.
d. Issue periodic statements for shareholders.
e. Process transfers and exchanges.
f. Process dividend payments, including the purchasing of new shares
through dividend reinvestment.
2. Shareholder Information Services
a. Make information available to shareholder servicing unit and
other remote access units regarding trade date, share price,
current holdings, yields, and dividend information.
b. Produce detailed history of transactions through duplicate or
special order statements upon request.
c. Provide mailing labels for distribution of financial reports,
prospectuses, proxy statements, or marketing material to current
shareholders and contractowners.
3. Compliance Reporting
a. Provide reports to the Securities and Exchange Commission, the
National Association of Securities Dealers and the States in
which the Fund is registered.
B-1
<PAGE>
b. Prepare and distribute appropriate Internal Revenue Service forms
for corresponding Fund and shareholder income and capital gains.
c. Issue tax withholding reports to the Internal Revenue Service.
4. Dealer/Load Processing (if applicable)
a. Calculate fees due under 12b-1 plans for distribution and
marketing expenses.
5. Shareholder Account Maintenance.
a. Maintain all shareholder records for each account in the Trust.
b. Issue customer statements on scheduled cycle, providing duplicate
second and third party copies if required.
c. Record shareholder account information changes.
d. Maintain account documentation files for each shareholder.
B-2
<PAGE>
Dated: _______, 1997
Schedule C
to the Transfer Agency Agreement
between Variable Insurance Funds and
BISYS Fund Services Ohio, Inc.
TRANSFER AGENT
FEES
A. Annual Base Fee
1. Each Fund will pay an Annual Base Fee as follows:
a. Each Fund with daily dividends shall pay an Annual Base
Fee of $16 per contractowner account, and each Fund
without daily dividends shall pay an Annual Base Fee of
$14 per contractowner account, subject to minimum fees
in paragraph A.1.b.
b. The Annual Base Fee shall not be less than:
$10,000 for a Fund/Class with less than 100
contractowners;
$18,000 for a Fund/Class with 100 or more
contractowners but less than 500 shareholders; and
$24,000 for a Fund/Class with 500 or more
contractowners.
B. Other Provisions
1. Any Fund which requires additional services shall pay
additional fees as agreed in writing between the parties.
Out-of-Pocket expenses are billed separately.
2. If a Fund requires special reports or specialized processing,
the programming costs or data base management fees for such
services will be agreed upon in writing by the parties.
3. All fees are subject to annual increases as agreed in writing
between the parties.
C-1
<PAGE>
Dated: _______, 1997
Schedule D
to the Transfer Agency Agreement
between Variable Insurance Funds and
BISYS Fund Services Ohio, Inc.
REPORTS
I. Daily Shareholder Activity Journal
II. Daily Fund Activity Summary Report
A. Beginning Balance
B. Dealer Transactions
C. Shareholder Transactions
D. Reinvested Dividends
E. Exchanges
F. Adjustments
G. Ending Balance
III. Daily Wire and Check Registers
IV. Monthly Dealer Processing Reports
V. Monthly Dividend Reports
VI. Annual report by independent public accountants concerning
BISYS Fund Services Ohio, Inc.'s shareholder system and
internal accounting control systems to be filed with the
Securities and Exchange Commission pursuant to Rule 17Ad-13 of
the Securities Exchange Act
of 1934, as amended.
D-1
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
Variable Contract Owner Servicing Agreement
[Name]
[Address]
[City, State and Zip Code]
Ladies and Gentlemen:
Variable Insurance Funds (the "Trust") is an open-end management investment
company organized as a Massachusetts business trust and registered with the
Securities and Exchange Commission (the "SEC") under the Investment Company Act
of 1940 (the "1940 Act"). On behalf of Variable Contract Owners with contract
value allocated to each of the investment portfolios of the Trust identified in
Schedule A hereto (individually, a "Fund" and collectively, the "Funds"), the
Trustees of the Trust have adopted a Variable Contract Owner Servicing Plan (the
"Plan") which, among other things, authorizes the Trust to enter into this
Agreement with _________________ (the "Participating Organization"), concerning
the provision of support services to the Participating Organization's customers
("Customers") who may from time to time be Variable Contract Owners. The terms
and conditions of this Agreement are as follows:
1. REFERENCE TO PROSPECTUS; DETERMINATION OF NET ASSET VALUE.
1.1 Reference is made to the prospectus for the Shares of each Fund
(individually, a "Prospectus" and collectively, the "Prospectuses") as
from time to time are effective under the Securities Act of 1933 (the
"1933 Act"). Terms defined therein and not otherwise defined herein
are used herein with the meaning so defined.
1.2 For purposes of determining the fees payable to the Participating
Organization under Section 3, the average daily net asset value of a
Fund's Shares will be computed in the manner specified in the Trust's
registration statement (as the same is in effect from time to time) in
connection with the computation of the net asset value of such Fund's
Shares for purposes of purchases and redemptions.
2. SERVICES AS PARTICIPATING ORGANIZATION.
2.1 The Participating Organization is hereby authorized and may from time
to time undertake to perform the following support services to
Customers in connection with investments in the Shares of a Fund: (i)
providing Customers with a service that directly or indirectly invests
<PAGE>
the assets of their accounts in a Fund's Shares pursuant to specific
or pre-authorized instructions; (ii) processing dividend payments from
the Trust on behalf of Customers; (iii) providing information
periodically to Customers showing variable contract value or their
positions in a Fund's Shares; (iv) arranging for bank wire transfers
of funds to or from a Customer's account; (v) responding to inquiries
from Customers relating to the services performed by the Participating
Organization under this Agreement; (vi) providing subaccounting with
respect to a Fund's Shares beneficially owned by Customers or the
information to the Trust necessary for subaccounting; (vii) if
required by law, forwarding communications from the Trust (such as
proxies, Shareholder reports, annual and semi-annual financial
statements, and dividend, distribution, and tax notices) to Customers;
(viii) rendering ongoing advice respecting the suitability of
particular investment opportunities offered by the Trust in light of
the Customer's needs; and (ix) providing such other similar services
as may be reasonably requested to the extent the Participating
Organization is permitted to do so under applicable statutes, rules,
or regulations.
2.2 The Participating Organization will provide such office space and
equipment, telephone facilities, and personnel (which may be any part
of the space, equipment, and facilities currently used in the
Participating Organization's business, or any personnel employed by
the Participating Organization) as may be reasonably necessary or
beneficial in order to provide such support services.
2.3 All orders for a Fund's Shares are subject to acceptance or rejection
by the Trust in its sole discretion, and the Trust may, in its
discretion and without notice, suspend or withdraw the sale of a
Fund's Shares.
2.4 In no transaction shall the Participating Organization act as dealer
for its own account; the Participating Organization shall act solely
for, upon the specific or pre-authorized instructions of, and for the
account of, its Customers. For all purposes of this Agreement, the
Participating Organization will be deemed to be an independent
contractor, and will have no authority to act as agent for the Trust
or BISYS Fund Services (the "Distributor"), the underwriter of the
Trust's Shares, in any matter or in any respect. No person is
authorized to make any representations concerning the Distributor, the
Trust, or a Fund's Shares except those representations contained in
the Fund's then-current Prospectus and the Trust's Statement of
Additional Information and in such printed information as the
Distributor or the Trust may subsequently prepare.
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<PAGE>
2.5 The Participating Organization and its employees will, upon request,
be available during normal business hours to consult with the
Distributor or its designees concerning the performance of the
Participating Organization's responsibilities under this Agreement.
Any person authorized to direct the disposition of monies paid or
payable by the Trust pursuant to Section 3 of this Agreement will
provide to the Distributor and the Trust's Board of Trustees, and the
Trust's Trustees will review at least quarterly, a written report of
the amounts so expended and the purposes for which such expenditures
were made.
In addition, the Participating Organization will furnish to the
Distributor, the Trust or their designees such information as the
Distributor, the Trust or their designees may reasonably request
(including, without limitation, periodic certifications confirming the
rendering of support services described herein), and will otherwise
cooperate with the Distributor, the Trust and their designees
(including, without limitation, any auditors designated by the Trust),
in the preparation of reports to the Trust's Board of Trustees
concerning this Agreement and the monies paid or payable by the Trust
pursuant hereto, as well as any other reports or filings that may be
required by law.
3. FEES.
3.1 In consideration of the services and facilities provided by the
Participating Organization hereunder, the Trust will pay to the
Participating Organization a fee calculated at the applicable annual
rate set forth on Schedule A hereto with respect to the average daily
net asset value of each Fund's Shares which are attributable to
Customers, which fee will be computed daily and paid monthly. The fee
will not be paid to the Participating Organization with respect to (i)
Shares of a Fund that are redeemed or repurchased by the Trust or the
Distributor within seven business days of receipt of confirmation of
such sale, or (ii) a Customer if the amount of such fee on an annual
basis with respect to such Customer shall be less than $1.00.
3.2 The fee rate with respect to any Fund or Funds stated on Schedule A
hereto may be prospectively increased or decreased by the Trust, in
its sole discretion, at any time upon notice to the Participating
Organization.
4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
4.1 By written acceptance of this Agreement, the Participating
Organization represents, warrants, and agrees that: (i) the
Participating Organization will provide to Customers a schedule of the
services it will perform pursuant to this Agreement and a schedule of
3
<PAGE>
any fees that the Participating Organization may charge directly to
Customers for services it performs in connection with investments in
the Trust on the Customer's behalf; and (ii) any and all compensation
payable to the Participating Organization by Customers in connection
with the investment of their assets in the Trust will be disclosed by
the Participating Organization to Customers and will be authorized by
Customers and will not result in an excessive fee to the Participating
Organization.
4.2 The Participating Organization agrees to comply with all requirements
applicable to it by reason of all applicable laws, including state
insurance laws and regulations, federal and state securities laws, the
Rules and Regulations of the SEC and the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD"), including,
without limitation, all applicable requirements of the 1933 Act, the
Securities Exchange Act of 1934, the 1940 Act, and the provisions of
Rule 2830 of the Conduct Rules. The Distributor has furnished the
Participating Organization with a list of the states or other
jurisdictions in which the Distributor believes the Shares of the Fund
have been registered for sale or are otherwise qualified for sale, and
the Participating Organization agrees that it will not engage in any
transaction on behalf of a Customer's account resulting in the
purchase of a Fund's Shares in any jurisdiction in which such Shares
are not registered or otherwise qualified for sale. The Participating
Organization further agrees that it will maintain all records required
by applicable law or otherwise reasonably requested by the Trust or
the Distributor relating to the services provided by it pursuant to
the terms of this Agreement.
4.3 The Participating Organization agrees that under no circumstances
shall the Trust or the Distributor be liable to the Participating
Organization or any other person under this Agreement as a result of
any action by the SEC or the NASD affecting the operation or
continuation of the Plan.
5. EXCULPATION; INDEMNIFICATION.
5.1 The Trust shall not be liable to the Participating Organization and
the Participating Organization shall not be liable to the Trust except
for acts or failures to act which constitute lack of good faith or
gross negligence and for obligations expressly assumed by either party
hereunder. Nothing contained in this Agreement is intended to operate
as a waiver by the Trust or by the Participating Organization of
compliance with any applicable federal or state law, rule, or
regulation and the rules and regulations promulgated by the NASD.
4
<PAGE>
5.2 The Participating Organization will indemnify the Trust and hold it
harmless from any claims or assertions relating to the lawfulness of
the Participating Organization's participation in this Agreement and
the transactions contemplated hereby or relating to any activities of
any persons or entities affiliated with the Participating Organization
performed in connection with the discharge of its responsibilities
under this Agreement. If any such claims are asserted, the Trust shall
have the right to manage its own defense, including the selection and
engagement of legal counsel of its choosing, and all costs of such
defense shall be borne by the Participating Organization.
6. EFFECTIVE DATE; TERMINATION.
6.1 This Agreement will become effective with respect to each Fund on the
date a fully executed copy of this Agreement is received by the Trust
or its designee. Unless sooner terminated with respect to any Fund,
this Agreement will continue with respect to a Fund until ________,
1998 and thereafter will continue automatically for successive annual
periods ending on _______, provided such continuance is specifically
approved at least annually by the vote of a majority of the members of
the Board of Trustees of the Trust who are not "interested persons"
(as such term is defined in the 1940 Act) of the Trust and who have no
direct or indirect financial interest in the Plan relating to such
Fund or any agreement relating to such Plan, including this Agreement,
cast in person at a meeting called for the purpose of voting on such
approval.
6.2 This Agreement will automatically terminate with respect to a Fund in
the event of its assignment (as such term is defined in the 1940 Act).
This Agreement may be terminated with respect to any Fund by the Trust
or by the Participating Organization, without penalty, upon sixty
days' prior written notice to the other party. This Agreement may also
be terminated with respect to any Fund at any time without penalty by
the vote of a majority of the members of the Board of Trustees of the
Trust who are not "interested persons" (as such term is defined in the
1940 Act) of the Trust and who have no direct or indirect financial
interest in the Plan relating to such Fund or any agreement relating
to such Plan, including this Agreement, on sixty days' written notice.
7. GENERAL.
7.1 All notices and other communications to either the Participating
Organization or the Trust will be duly given if mailed, telegraphed or
telecopied to the appropriate address set forth on page 1 hereof, or
at such other address as either party may provide in writing to the
other party.
5
<PAGE>
7.2 The Trust may enter into other similar agreements for the provision of
Shareholder support services with any other person or persons without
the Participating Organization's consent.
7.3 Upon receiving the written consent of the Trust or its designee, the
Participating Organization may, at its expense, subcontract with any
entity or person concerning the provision of the services contemplated
hereunder; provided, however, that the Participating Organization
shall not be relieved of any of its obligations under this Agreement
by the appointment of such subcontractor and provided further, that
the Participating Organization shall be responsible, to the extent
provided in Article 5 hereof, for all acts of such subcontractor as if
such acts were its own.
7.4 This Agreement supersedes any other agreement between the Trust and
the Participating Organization relating to support services in
connection with a Fund's Shares and relating to any other matters
discussed herein. All covenants, agreements, representations, and
warranties made herein shall be deemed to have been material and
relied on by each party, notwithstanding any investigation made by
either party or on behalf of either party, and shall survive the
execution and delivery of this Agreement. The invalidity or
unenforceability of any term or provision hereof shall not affect the
validity or enforceability of any other term or provision hereof. The
headings in this Agreement are for convenience of reference only and
shall not alter or otherwise affect the meaning hereof. This Agreement
may be executed in any number of counterparts which together shall
constitute one instrument and shall be governed by and construed in
accordance with the laws (other than the conflict of laws rules) of
the State of Ohio and shall bind and inure to the benefit of the
parties hereto and their respective successors and assigns.
7.5 The Amended and Restated Declaration of Trust establishing the Trust,
dated July 20, 1994 as amended and restated February 5, 1997, and all
amendments thereto (the "Declaration"), is filed with the Office of
the Secretary of the Commonwealth of Massachusetts and provides that
the obligations of the Trust under this instrument are not binding
upon any of the Trust's Trustees or shareholders individually, but
bind only the estate of the Trust or its Funds, as applicable.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below.
VARIABLE INSURANCE FUNDS
By:____________________________
Title:_________________________
Date:__________________________
The foregoing Agreement is hereby accepted:
[Name of Participating Organization]
By:____________________________
Title:_________________________
Date:__________________________
7
<PAGE>
Dated: _______, 1997
Schedule A
to the Variable Contract Owner Servicing Agreement
between Variable Insurance Funds
and [Participating Organization]
NAME OF FUND COMPENSATION*
Variable Insurance Allocated Balanced Fund
Variable Insurance Allocated Conservative Fund Annual rate of up to twenty-five
Variable Insurance Allocated Growth Fund one hundreds of one percent
Variable Insurance Allocated Aggressive Fund (0.25%) of the average daily net
Variable Insurance Money Market Fund assets of each Fund's Shares
BB&T Growth and Income Fund attributable to Customers of the
BB&T Capital Manager Fund Participating Organization.
AmSouth Regional Equity Fund
AmSouth Equity Income Fund
- --------------------
* All fees are computed daily and paid monthly.
VARIABLE INSURANCE FUNDS [PARTICIPATING ORGANIZATION]
By: __________________________ By: _____________________________
Title:________________________ Title:___________________________
Date:_________________________ Date:____________________________
A-1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Post-Effective Amendment No. 1 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. 1 to the Registration
Statement on Form N-1A (File No. 33-81800).
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
July 3, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000927290
<NAME> VARIABLE INSURANCE FUNDS
<SERIES>
<NUMBER> 01
<NAME> BB&T GROWTH AND INCOME FUND
<S> <C>
<PERIOD-TYPE> 1-MO
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-20-1997
<PERIOD-END> MAY-20-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 115000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 115000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15000
<TOTAL-LIABILITIES> 15000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 100000
<SHARES-COMMON-STOCK> 10000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
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<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 100000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> .97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
