As filed with the Securities and Exchange Commission on May 29, 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/
Pre-Effective Amendment No. 2/ X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 2 /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
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
_______________________________________________________________________
Proposed Proposed
Title of Maximum Maximum
Securities Amount Offering Aggregate Amount of
Being Being Price Offering Registration
Registered Registered Per Unit Price Fee
_______________________________________________________________________
Shares of Indefinite* $______ N/A $500
Beneficial
Interest,
No Par Value
* Registrant elects 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.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<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
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
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
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 which currently offers seven separate diversified investment portfolios
(the "Funds"), each with different investment objectives and policies. These
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
(collectively, the "Allocated Funds");
o Variable Insurance Money Market Fund;
o BB&T Growth and Income Fund; and
o BB&T Capital Manager Fund.
Each of the Allocated Funds seeks its investment objective by investing in a
diversified portfolio of certain funds offered by Qualivest Funds, an affiliated
open-end investment company. The BB&T Capital Manager Fund seeks its investment
objective by investing in a diversified portfolio of certain funds offered by
The BB&T Mutual Funds Group, another affiliated open-end investment company. The
Variable Insurance Money Market Fund and the BB&T Growth and Income Fund each
seeks its investment objective by directly investing in portfolio securities
consistent with its investment policies as described herein.
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 Variable Insurance Money Market Fund is not insured or guaranteed by the
U.S. Government. It seeks to maintain a constant net asset value of $1.00 per
Share, but there can be no assurance that net asset value will not vary.
Shares of the Allocated Funds and the Variable Insurance Money Market Fund
currently are sold to a segregated asset account ("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. Shares of the BB&T Capital Manager Fund and the BB&T Growth and
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
<PAGE>
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"). 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
RELEVANT 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 June 1, 1997.
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<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY...........................................................5
Shares Offered...........................................................5
Investment Objectives....................................................5
Investment Policies..................................................... 6
Risk Factors and Special Considerations................................. 7
Investment Advisers..................................................... 7
Other Information...................................................... 7
FUND EXPENSES............................................................... 8
INVESTMENT OBJECTIVES AND POLICIES.......................................... 10
Allocated Funds........................................................ 10
Money Market Fund ..................................................... 11
Growth and Income Fund................................................. 12
Capital Manager Fund................................................... 12
INVESTMENT OBJECTIVES AND POLICIES--UNDERLYING QUALIVEST
FUNDS ...................................................................... 13
Qualivest Equity Funds................................................. 14
Qualivest Income Funds................................................. 17
Qualivest Money Funds.................................................. 20
INVESTMENT OBJECTIVES AND POLICIES--
UNDERLYING BB&T FUNDS....................................................... 20
BB&T Equity Funds...................................................... 20
BB&T Income Funds...................................................... 23
BB&T Money Fund........................................................ 23
INVESTMENT TECHNIQUES AND RISK FACTORS...................................... 24
VALUATION OF SHARES......................................................... 35
PURCHASING SHARES........................................................... 36
REDEEMING SHARES............................................................ 37
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<PAGE>
MANAGEMENT OF THE FUNDS...................................................... 37
Trustees................................................................ 37
Investment Advisers..................................................... 38
Administrator and Distributor........................................... 45
Other Service Providers................................................. 45
Variable Contract Owner Servicing Agents................................ 45
Expenses................................................................ 45
Banking Laws............................................................ 46
TAXATION..................................................................... 46
GENERAL INFORMATION.......................................................... 47
Description of the Trust and Its Shares................................. 47
Performance Information................................................. 48
Miscellaneous........................................................... 49
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<PAGE>
PROSPECTUS SUMMARY
Shares Offered . . . . . . Shares of beneficial interest (the "Shares") of the
Variable Insurance Allocated Conservative Fund (the
"Conservative Fund"), Variable Insurance Allocated
Balanced Fund (the "Balanced Fund"), Variable
Insurance Allocated Growth Fund (the "Growth Fund"),
Variable Insurance Allocated Aggressive Fund (the
"Aggressive Fund") (collectively, the "Allocated
Funds"), Variable Insurance Money Market Fund (the
"Money Market Fund"), BB&T Growth and Income Fund
(the "Growth and Income Fund"), and BB&T Capital
Manager Fund (the "Capital Manager Fund")
(collectively, the "Funds") which are separate
diversified investment portfolios of Variable
Insurance Funds (the "Trust"), a Massachusetts
business trust which is registered as an open-end
management investment company.
Shares of the Allocated Funds and the Money Market
Fund currently are offered to a segregated asset
account (a "Separate Account") of Nationwide Life and
Annuity Insurance Company ("Nationwide"), while
shares of the Growth and Income Fund and Capital
Manager Fund are offered to a separate account (also
a "Separate Account") of Hartford Insurance Company
("Hartford"). Shares also are offered to qualified
pension and retirement plans. Shares of the Funds may
be offered in the future to other separate accounts
of these insurers, 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 Conservative Fund seeks to provide current income
with a secondary objective of long-term capital
appreciation.
The Balanced Fund seeks to provide a balance between
long-term capital appreciation and current income.
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<PAGE>
The Growth Fund seeks to provide capital appreciation
and income growth.
The Aggressive Fund seeks to provide maximum capital
appreciation.
The Money Market Fund seeks current income consistent
with liquidity and stability of principal.
The Growth and Income Fund seeks to provide capital
growth, current income or both.
The Capital Manager Fund seeks to provide capital
appreciation.
Investment Policies . . . The Allocated Funds seek their investment objectives
by investing in diversified portfolios of certain
funds (the "Underlying Qualivest Funds") offered by
Qualivest Funds, an affiliated open-end investment
company. See "INVESTMENT OBJECTIVES AND POLICIES."
The Money Market Fund. Under normal market
conditions, the Money Market Fund will invest in high
quality (i.e., rated within the two highest rating
categories by a nationally recognized statistical
rating organization ("NRSRO")) money market
instruments and other comparable investments.
The Growth and Income Fund. Under normal market
conditions, the Growth and Income Fund will invest at
least 65% of its total assets in stocks, which may
include common stock, preferred stock, warrants, or
debt instruments that are convertible into common
stock.
The Capital Manager Fund seeks its investment
objective by investing in diversified portfolios of
certain funds (the "Underlying BB&T Funds") offered
by The BB&T Mutual Funds Group (the "Group"), another
affiliated open-end investment company. See
"INVESTMENT OBJECTIVES AND POLICIES."
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<PAGE>
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 Advisers . . . Qualivest Capital Management, Inc. ("Qualivest"),
Portland, Oregon, a subsidiary of the United States
National Bank of Oregon ("U.S. Bank"), serves as
investment adviser to the Allocated Funds and the
Money Market Fund.
Branch Banking and Trust Company ("BB&T"), Raleigh,
North Carolina, serves and investment adviser to the
Growth and Income Fund as the Capital Manager Fund.
See "MANAGEMENT OF THE FUNDS - Investment Advisers."
Other Information . .. U.S. Bank (a "Custodian") is the custodian for the
Allocated Funds and the Money Market Fund. Fifth
Third Bank (also a "Custodian", collectively with
U.S. Bank, the "Custodians") is the custodian for the
Growth and Income Fund and the Capital Manager Fund.
BISYS Fund Services ("BISYS" or "Distributor" or
"Administrator") serves as the distributor and
administrator of the Funds. BISYS Fund Services Ohio,
Inc. serves as transfer agent and dividend disbursing
agent and provides certain accounting services for
the Trust.
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<PAGE>
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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Shareholder Money Growth & Capital
Transaction Conservative Balanced Growth Aggressive Market Income Manager
Expenses Fund Fund Fund Fund Fund Fund Fund
------ ------- ------- ------ ------ ------ -----
Maximum Sales Charge
Imposed on Purchases none none none none none none none
Maximum Sales Charge
Imposed on
Reinvested Dividends none none none none none none none
Deferred Sales Charge none none none none none none none
Redemption Fees none none none none none none none
Exchange Fees none none none none none none none
Annual Fund
Operating Expenses
(as percentage of average
net assets annualized)
Management Fees
After Waiver 1 0.05% 0.05% 0.05% 0.05% 0.35% 0.50% 0.10%
Other Expenses 0.48% 0.48% 0.48% 0.48% 0.54% 0.47% 0.46%
----- ----- ----- ----- ----- ----- -----
Total Fund
Operating Expenses
After Waiver 2 0.53% 0.53% 0.53% 0.53% 0.89% 0.97% 0.56%
===== ===== ===== ===== ===== ===== =====
</TABLE>
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1 BB&T has agreed to temporarily waive a portion of its investment
advisory fee for the Growth and Income Fund and the Capital Manager
Fund. Waived fees cannot be recovered at a future date. Absent the
advisory fee waiver, "Management Fees" as a percentage of average
daily net assets would be 0.74% for the Growth and Income Fund and
0.25% for the Capital Manager Fund. See "MANAGEMENT OF THE
FUNDS--Investment Advisers."
2 Absent the waiver of the investment advisory fee, "Total Fund
Operating Expenses" as a percentage of average daily net assets would
be 1.21% for the Growth and Income Fund and 0.71% for the Capital
Manager Fund.
In addition to the expenses shown above, Shareholders of the
Allocated Funds and the Capital Manager Fund will indirectly bear
their pro rata share of fees and expenses incurred by the
Underlying Funds, so that the investment returns of these funds
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<PAGE>
investment returns of these Funds will be net of the expenses of
the Underlying Funds as discussed below under "MANAGEMENT OF THE
FUNDS--Investment Advisers." Based on the expenses for the
following Funds and the Underlying Funds, the average weighted
expense ratio for each of these Funds, expressed as a percentage
of average daily net assets, is estimated to be as follows:
Expense
Ratio
Conservative Fund 1.18%
Balanced Fund 1.27%
Growth Fund 1.32%
Aggressive Fund 1.36%
Capital Manager Fund 1.78%
The purpose of these tables 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, including the pro rata share of the costs and expenses of the
Underlying Funds borne by Shareholders of the Allocated Funds and the Capital
Manager Fund.
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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Money Growth & Capital
Conservative Balanced Growth Aggressive Market Income Manager
Fund Fund Fund Fund Fund Fund Fund
------ ------ ------- ------ ----- ------ -----
1 Year . . . $ 12 $ 13 $ 13 $ 14 $ 9 $ 10 $ 18
3 Years. . . $ 37 $ 40 $ 42 $ 43 $ 28 $ 31 $ 56
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</TABLE>
* This example should not be considered a representation of future
expenses, which may be more or less than those shown. The assumed
5% annual return is hypothetical and should not be considered a
representation of past or future annual return. Actual return may
be greater or less than the assumed amount.
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Funds are designed to achieve different investment objectives and to pursue
these objectives by means of different investment strategies. Shareholders
should be aware that the investments made by the Funds at any given time are not
expected to be the same as those made by other mutual funds for which Qualivest
or BB&T 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.
Allocated Funds
The Conservative Fund. The investment objective of the Conservative Fund is to
seek to provide current income with a secondary objective of long-term capital
appreciation.
The Conservative Fund is designed for investors who want a source of steady
investment income with limited Share price fluctuation, and who are willing to
bear limited investment risk. This fund will concentrate its investments in
Underlying Qualivest Funds that invest primarily in fixed income securities
("Qualivest Income Funds") and Underlying Qualivest Funds that invest primarily
in short-term money market instruments ("Qualivest Money Funds"). However, for
purposes of achieving capital appreciation and investment income, the
Conservative Fund also may invest a portion of its assets in Underlying
Qualivest Funds that invest primarily in equity securities ("Qualivest Equity
Funds").
The Balanced Fund. The investment objective of the Balanced Fund is to seek to
provide a balance between long-term capital appreciation and current income.
The Balanced Fund seeks this objective by broadly diversifying its assets among
most or all of the Underlying Qualivest Funds, with emphasis placed on
investments in the Qualivest Equity Funds and the Qualivest Income Funds. Under
normal market conditions, the Balanced Fund will invest at least 25% of its
total assets in the Qualivest Income Funds. This Fund offers investors greater
potential for capital appreciation than does the Conservative Fund by virtue of
its larger investments in the Qualivest Equity Funds, while also offering
investors the potential for investment income. This Fund may be suitable for
investors seeking capital appreciation in addition to income, and who are
willing to bear some risk of loss and Share price fluctuation inherent in equity
securities.
The Growth Fund. The investment objective of the Growth Fund is to seek to
provide capital appreciation and income growth.
The Growth Fund is designed for investors seeking capital appreciation primarily
through an equity-oriented investment. This Fund focuses on investments in the
Qualivest Equity Funds, although it also will invest in the Qualivest Income
Funds and Qualivest Money Funds. However, this Fund emphasizes the potential
rewards and risks of an investment in equity securities.
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<PAGE>
The Aggressive Fund. The investment objective of the Aggressive Fund is to seek
to provide maximum capital appreciation.
The Aggressive Fund seeks to achieve this objective by investing substantially
all of its assets in those Underlying Qualivest Funds that invest primarily in
equity securities. Under normal market conditions, this Fund's investments will
be most heavily weighted toward the Qualivest Large Companies Value Fund and the
Qualivest Optimized Stock Fund. Accordingly, this Fund is oriented toward those
investors seeking long-term capital appreciation, with the potential for greater
gains but with greater risk of loss.
General
Each Allocated Fund's investments are concentrated in the Underlying Qualivest
Funds, and the investment performance of each Allocated Fund is directly related
to the performance of the Underlying Qualivest Funds. The Allocated Funds will
invest in shares of the Underlying Qualivest Funds which are sold at net asset
value per share with no front-end sales charge or contingent deferred sales
charge. See "INVESTMENT OBJECTIVES AND POLICIES - UNDERLYING QUALIVEST FUNDS"
for a description of the Underlying Qualivest Funds in which the Allocated Funds
invest.
In addition to shares of the Underlying Qualivest Funds, for temporary cash
management purposes, each Allocated 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. See "INVESTMENT TECHNIQUES
AND RISK FACTORS" for a description of these investments.
Money Market Fund
The investment objective of the Money Market Fund is to seek current income
consistent with liquidity and stability of principal. The Money Market Fund
invests in high quality rated money market instruments and other money market
instruments that, although not rated, are deemed to be of comparable high
quality as determined by Qualivest pursuant to guidelines adopted by the Board
of Trustees.
General
The Money Market Fund invests exclusively in United States dollar denominated
instruments which the Fund's investment adviser, acting pursuant to guidelines
adopted by the Board of Trustees, determines present minimal credit risks and
which at the time of acquisition are rated by one or more appropriate NRSROs
(e.g., Standard & Poor's Corporation ("S&P"), Moody's Investors Service, Inc.
("Moody's") and Fitch Investors Service ("Fitch")) within one of the two highest
rating categories for short-term debt obligations or, if unrated, are of
comparable quality. In addition, the Money Market Fund diversifies its
investments so that, with minor exceptions and except for U.S. Government
securities, not more than five percent of its total assets is invested in the
securities of any one issuer, not more than five percent of its total assets is
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<PAGE>
invested in securities of all issuers rated by the NRSRO at the time of
investment in the second highest rating category for short-term debt obligations
or in unrated securities deemed to be of comparable quality to securities rated
in the second highest rating categories for short-term debt obligations ("Second
Tier Securities") and not more than the greater of 1% of total assets or one
million dollars is invested in the securities of one issuer that are Second Tier
Securities. In addition, the Money Market Fund will not invest more than 10% of
its net assets in securities that are deemed to be illiquid at the time of
purchase. All securities or instruments in which the Money Market Fund invests
have remaining maturities of 397 calendar days (thirteen months) or less. The
dollar-weighted average maturity of the obligations in the Money Market Fund
will not exceed 90 days.
Subject to the foregoing general limitations, the Money Market Fund expects to
invest in the types of securities discussed below under "INVESTMENT TECHNIQUES
AND RISK FACTORS." These securities include short-term obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
short-term mortgage-related securities, bankers' acceptances, certificates of
deposit and time deposits (including Eurodollar Certificates of Deposit,
Eurodollar Time Deposits ("ETDs"), Canadian Time Deposits ("CTDs"), and Yankee
Certificates of Deposit ("Yankee CDs")), commercial paper (including variable
amount master demand notes), securities issued by other money market investment
companies, debt obligations with remaining maturities of 397 calendar days or
less, taxable obligations issued by municipalities, Guaranteed Investment
Contracts ("GICs"), repurchase agreements, reverse repurchase agreements and
dollar roll agreements.
Growth and Income Fund
The Growth and Income Fund's investment objective is to seek capital growth,
current income or both, primarily through investment in stocks. Under normal
market conditions, the Growth and Income Fund will invest at least 65% of its
total assets in stocks, which for this purpose may be either common stock,
preferred stock, warrants, or debt instruments that are convertible to common
stock. The remainder of the Fund's assets, if not invested in stocks, will be
invested as described under "INVESTMENT TECHNIQUES AND RISK FACTORS."
Equity securities purchased by the Growth and Income Fund will be either traded
on a domestic securities exchange or quoted in the NASDAQ/NYSE system. While
some stocks may be purchased primarily to achieve the Growth and Income Fund's
investment objective for income, most stocks will be purchased by the Growth and
Income Fund primarily in furtherance of its investment objective for growth. The
Growth and Income Fund will favor stocks of issuers which over a five year
period have achieved cumulative income in excess of the cumulative dividends
paid to shareholders.
Capital Manager Fund
The investment objective of the Capital Manager Fund is to seek capital
appreciation. Under normal market conditions, it invests primarily in a group of
diversified Underlying BB&T Funds that invest primarily in equity securities.
However, it may also invest a portion of its assets in Underlying BB&T Funds
that invest primarily in fixed income securities or money market instruments.
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<PAGE>
The Capital Manager Fund's net asset value will fluctuate with changes in the
equity markets and the value of the Underlying BB&T Funds in which it invests.
The Capital Manager Fund's investment return is diversified by its investment in
the Underlying BB&T Funds, which invest in growth and income stocks, foreign
securities, debt securities, and cash and cash equivalents.
The allocation of the Capital Manager Fund's among the Underlying BB&T Funds
will be made by BB&T under the supervision of the Board of Trustees. BB&T will
make allocation decisions according to its outlook for the economy, financial
markets, and relative market valuation of the Underlying BB&T Funds. There is no
assurance that the Capital Manager Fund will achieve its stated objective.
For temporary cash management and liquidity purposes, the Capital Manager Fund
may also hold cash and 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. The Capital Manager Fund and the Underlying BB&T
Funds are permitted for temporary defensive purposes to invest up to 100% of
their assets in short-term fixed income securities. Such securities include
obligations of the U.S. Government and its agencies and instrumentalities,
commercial paper, bank certificates of deposit, repurchase agreements, bankers'
acceptances, variable amount master demand notes, and bank money market deposit
accounts. To the extent the Capital Manager Fund or an Underlying BB&T Fund is
engaged in a temporary defensive position, it will not be pursuing its
investment objective. See "INVESTMENT TECHNIQUES AND RISK FACTORS" for a
description of these investments.
The investments of the Capital Manager Fund are concentrated in the Underlying
BB&T Funds, so the Capital Manager Fund's performance is directly related to the
performance of the Underlying BB&T Funds. The Capital Manager Fund will invest
in shares of the Underlying BB&T Funds which are sold at net asset value per
share with no front-end sales charge or contingent deferred sales charge. See
"INVESTMENT OBJECTIVES AND POLICIES - UNDERLYING BB&T FUNDS" for a description
of the Underlying BB&T Funds in which the Capital Manager Fund invests.
* * * *
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.
INVESTMENT OBJECTIVES AND POLICIES--UNDERLYING QUALIVEST FUNDS
The following is a description of the investment objectives and policies of the
Underlying Qualivest Funds. Additional investment practices are described in
"INVESTMENT TECHNIQUES AND RISK FACTORS," in the Statement of Additional
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Information, and the Prospectus for each of the Underlying Qualivest Funds.
Qualivest Equity Funds
Qualivest Large Companies Value Fund and Qualivest Small Companies Value Fund
Qualivest Large Companies Value Fund (the "Qualivest Large Companies Fund"). The
investment objective of the Qualivest Large Companies Fund is to seek long-term
capital appreciation. It invests primarily in common stocks and securities
convertible into common stocks of large capitalization companies. For purposes
of this policy, large capitalization companies are those with capitalization of
$1 billion or more at the time of purchase.
Qualivest Small Companies Value Fund (the "Qualivest Small Companies Fund"). The
investment objective of the Qualivest Small Companies Fund is to seek capital
appreciation. It invests primarily in common stocks and securities convertible
into common stocks of small-sized companies. For purposes of this policy,
small-sized companies are those with capitalization of less than $1 billion at
the time of purchase. Smaller capitalization stocks may be quite volatile and
subject to wide fluctuations in both the short and medium term.
Each of these Underlying Qualivest Funds seeks to achieve its investment
objective by following flexible investment policies emphasizing investment in
common stock and securities convertible into common stocks (without regard to
rating by an NRSRO) that are, in Qualivest's opinion, undervalued relative to
other securities at the time of purchase. In analyzing different securities,
Qualivest will consider various investment oriented ratios as significant
factors in assessing relative value, including market price to book value,
market price to earnings, and market price to assets. Also considered are
estimated liquidating value, earnings growth rate, and cash flow. If, in
Qualivest's opinion, a stock has reached a fully valued position, it will, under
most circumstances, be sold and replaced by securities which are deemed to be
undervalued in the marketplace.
Under normal market conditions, each of these Underlying Qualivest Funds will
invest primarily in common stocks and securities convertible into common stocks
of companies believed by Qualivest to be characterized by sound management and
the potential for long-term capital appreciation. Qualivest also may consider
income and payment of dividends in selecting securities for the Qualivest Large
Companies Fund. Under normal market conditions, the Qualivest Large Companies
Fund intends to invest at least 65% of its total assets in common stocks and
securities convertible into common stocks of companies with a market
capitalization of at least $1 billion at the time of purchase. In addition,
under normal market conditions, the Qualivest Small Companies Fund will invest
at least 65% of its total assets in common stocks of companies with a market
capitalization of less than $1 billion at the time of purchase. If the Qualivest
Large Companies Fund owns securities issued by a company whose market
capitalization falls below $1 billion, or the Qualivest Small Companies Fund
owns securities issued by a company whose market capitalization increases above
$1 billion, Qualivest may, but it is not required to, sell such securities.
However, Qualivest will sell such securities if, in its judgment, market
conditions warrant such a sale, or if the Qualivest Large Companies Fund or
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Qualivest Small Companies Fund would no longer be primarily invested in common
stocks and securities convertible into common stocks issued by large
capitalization companies and small-sized companies, respectively.
Each of these Underlying Qualivest Funds may also invest up to 35% of the value
of its total assets in preferred stocks, notes, units of real estate investment
trusts, asset-backed and mortgage-related securities, warrants, and short-term
obligations (with maturities of 12 months or less) consisting of 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. Each
of these Underlying Qualivest Funds may also hold securities of other investment
companies and depositary or custodial receipts representing beneficial interests
in any of the foregoing securities.
Each of these Underlying Funds may invest in corporate debt securities such as
debt obligations with a maturity of at least one year from the date of issue
("bonds") and notes which are rated at the time of purchase within the four
highest rating groups assigned by an NRSRO (e.g., in the case of Moody's, Aaa,
Aa, A and Baa, and in the case of S&P, AAA, AA, A and BBB), which are considered
to be investment grade or, if unrated, which Qualivest deems to present
attractive opportunities and are of comparable quality. For a description of
NRSROs and their rating symbols, see the Appendix to the Statement of Additional
Information. For a discussion of debt securities rated within the fourth highest
rating group assigned by an NRSRO, see "INVESTMENT TECHNIQUES AND RISK FACTORS
- -- Medium Grade Securities" herein.
Subject to the foregoing policies, each of these Underlying Qualivest Funds may
also invest up to 25% of its total assets in foreign securities either directly
or through the purchase of American Depositary Receipts and may also invest in
securities issued by foreign branches of U.S. banks and foreign banks, in
Canadian Commercial paper, and in Europaper (U.S. dollar denominated commercial
paper of a foreign issuer). For a discussion of risks associated with foreign
securities, see "INVESTMENT TECHNIQUES AND RISK FACTORS" herein.
Qualivest International Opportunities Fund and Qualivest Optimized Stock Fund
Qualivest International Opportunities Fund (the "Qualivest International Fund").
The investment objective of the Qualivest International Fund is to seek capital
appreciation. It invests primarily in common stocks and securities convertible
into common stocks of companies that are organized under the laws of countries
other than the U.S.
Qualivest Optimized Stock Fund (the "Qualivest Optimized Fund"). The investment
objective of the Qualivest Optimized Fund is to seek capital appreciation and
current income.
The Qualivest International Fund and the Qualivest Optimized Fund each seeks to
achieve its investment objective by investing primarily in common stocks and
securities convertible into common stocks (without regard to NRSRO rating) of
companies whose securities are listed on a specific securities index. While the
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performance of the Optimized Fund may be expected to approximate the performance
of the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500 Index"),
Qualivest seeks to outperform the S&P 500 Index through limited management of
the Qualivest Optimized Fund's portfolio.
Under normal market conditions, at least 80% of the total assets of the
Qualivest International Fund will be invested in common stocks and securities
convertible into common stocks of foreign companies whose securities are listed
on the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East)
Index (the "EAFE Index"). The Qualivest International Fund will invest in the
securities of issuers from at least three countries other than the U.S.
Investments are selected for inclusion in the Qualivest International Fund's
portfolio primarily on the basis of market capitalization and industry
weightings, and to create an aggregate country weighting similar to that of the
EAFE Index. While Qualivest anticipates that substantially all of the Qualivest
International Fund's assets will be so invested, Qualivest may invest up to 20%
of its total assets in common stocks and securities convertible into common
stocks of large capitalization U.S. companies that Qualivest deems to present
attractive investment opportunities due to such companies' foreign business
operations.
Under normal market conditions, at least 80% of the Qualivest Optimized Fund's
total assets will be invested in common stocks and securities convertible into
common stocks of companies whose securities are listed on the S&P 500 Index.
While Qualivest anticipates that substantially all of the Qualivest Optimized
Fund's assets will be so invested, Qualivest may invest up to 20% of its total
assets as described below.
The Qualivest Optimized Fund does not intend to mirror the performance of the
S&P 500 Index; rather, it seeks to optimize its investments in S&P 500 Index
companies and outperform the S&P 500 Index over time by investing in securities
that, on the basis of computerized modelling and performance optimization
strategies implemented by Qualivest, demonstrate attributes that indicate
performance superior to that of the S&P 500 Index as a whole. The S&P 500 Index
is composed of 500 common stocks chosen by S&P on a statistical basis to be
included in the index. Because of the market-value weighting, the largest
companies in the S&P 500 Index typically account for a disproportionate share of
the index. Qualivest believes that an investment in securities of companies
listed on the S&P 500 Index may be optimized by selecting those securities whose
growth and value characteristics indicate that their performance, relative to
the other securities listed on the S&P 500 Index, will exceed the extent to
which the S&P 500 Index reflects their performance. Qualivest intends to utilize
computer modelling and other strategies to identify those stocks that, in light
of its assessment of general economic conditions, Qualivest believes will
achieve capital appreciation and current income superior to the performance of a
portfolio that merely seeks to replicate the S&P 500 Index.
Each of the Qualivest International Fund and the Qualivest Optimized Fund may
also invest up to 20% of the value of its total assets in short-term obligations
(with maturities of 12 months or less) consisting of 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. These Underlying
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Qualivest Funds may also each hold securities of other investment companies and
depositary or custodial receipts representing beneficial interests in any of the
foregoing securities.
The portfolio turnover rate for the Qualivest International Fund and the
Qualivest Optimized Fund is expected to be under 50%, a generally lower turnover
rate than for most other investment companies. Qualivest believes that a lower
turnover rate will reduce securities transaction costs incurred by these
Underlying Qualivest Funds.
* * * *
Consistent with the foregoing, each of the Qualivest Equity Funds will focus its
investments in those companies and types of companies that Qualivest believes
will enable such Underlying Qualivest Fund to achieve its investment objective.
No Qualivest Equity Fund will invest more than 15% of its net assets in
securities that are deemed to be illiquid. During temporary defensive periods as
determined by Qualivest, any of the Qualivest Equity Funds may hold up to 100%
of its total assets in high quality (i.e., rated within the top two rating
categories by an NRSRO) short-term debt obligations, including domestic bank
certificates of deposit, bankers' acceptances and repurchase agreements secured
by bank instruments. However, to the extent that an Qualivest Equity Fund is so
invested, its investment objective may not be achieved during that time.
Qualivest Income Funds
Qualivest Intermediate Bond Fund. The investment objective of the Qualivest
Intermediate Bond Fund is to seek current income consistent with preservation of
capital.
Qualivest Diversified Bond Fund (the "Qualivest Bond Fund"). The investment
objective of the Qualivest Bond Fund is to seek current income consistent with
preservation of capital.
Under normal market conditions, at least 65% of the total assets of the
Qualivest Intermediate Bond Fund and Qualivest Bond Fund will be invested in
bonds, which for this purpose include debt obligations with a maturity of at
least one year from the date of issue. Fixed income or debt securities in which
these Underlying Qualivest Funds may invest can have maturities of up to thirty
years or more. Each of these Underlying Qualivest Funds may invest up to 35% of
its total assets in high quality money market instruments such as commercial
paper (including variable amount master demand notes), certificates of deposit
and bankers' acceptances, variable and floating rate notes, and asset-backed
securities without regard to maturity, except as set forth below. In addition,
these Underlying Qualivest Funds may engage in certain loans of portfolio
securities, repurchase agreements and reverse repurchase agreements, and may
also invest in securities of other investment companies. The Qualivest
Intermediate Bond Fund will maintain a dollar-weighted average maturity of three
to seven years under ordinary market conditions, while the Qualivest Bond Fund
will maintain a dollar-weighted average maturity of approximately seven to
eleven years under ordinary market conditions.
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<PAGE>
Each of these Underlying Qualivest Funds expects to invest in bonds, notes and
debentures of a wide range of U.S. corporate issuers. Such obligations, in the
case of debentures, will represent unsecured promises to pay, in the case of
notes and bonds, may be secured by mortgages on real property or security
interests in personal property and will in most cases differ in their interest
rates, maturities and times of issuance.
Each of these Underlying Qualivest Funds may also invest in corporate debt
securities and convertible debt securities which are rated at the time of
purchase within the four highest rating groups assigned by an NRSRO (e.g., in
the case of Moody's, Aaa, Aa, A and Baa, and in the case of S&P, AAA, AA, A and
BBB), which are considered to be investment grade or, if unrated, which
Qualivest deems to present attractive opportunities and are of comparable
quality. For a description of NRSROs and their rating symbols, see the Appendix
to the Statement of Additional Information. For a discussion of debt securities
rated within the fourth highest rating group assigned by an NRSRO, see
"INVESTMENT TECHNIQUES AND RISK FACTORS -- Medium-Grade Securities" herein.
Each of these Underlying Qualivest Funds may hold short-term obligations (with
maturities of 12 months or less) consisting of domestic and foreign commercial
paper rated at the time of purchase within the top two categories by an NRSRO
(e.g., "A-2" or better by S&P, "Prime-2" or better by Moody's, or "F-2" or
better by Fitch) or, if unrated, which Qualivest deems to present attractive
opportunities and are of comparable quality, including variable amount master
demand notes, bankers' acceptances, certificates of deposit and time deposits of
domestic and foreign branches of U.S. banks and foreign banks, and repurchase
agreements. These Underlying Qualivest Funds may also invest in securities of
other investment companies or in GICs, which are considered to be illiquid
securities.
Each of these Underlying Qualivest Funds may also invest in obligations of the
Export-Import Bank of the United States, in U.S. dollar denominated
international bonds for which the primary trading market is in the U.S. ("Yankee
Bonds"), or for which the primary trading market is abroad ("Eurodollar Bonds"),
and in Canadian Bonds and bonds issued by institutions, such as the World Bank
and the European Economic Community, organized for a specific purpose by two or
more sovereign governments ("Supranational Agency Bonds").
Each of these Underlying Qualivest Funds expects to invest in a variety of U.S.
Treasury obligations, differing in their interest rates, maturities, and times
of issuance, 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 Treasury Obligations"), and mortgage-related
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, such as the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA"), the Federal Farm
Credit Bureau ("FFCB"), the Tennessee Valley Authority ("TVA"), the Federal Home
Loan Bank ("FHLB"), the Federal Land Bank, the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Student Loan Marketing Association ("SLMA") and in
mortgage-related securities issued by nongovernmental entities.
Each of these Underlying Qualivest Funds may invest in mortgage-related
securities which are rated at the time of purchase within the four highest
rating categories assigned by an NRSRO or, if unrated, which Qualivest deems to
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present attractive opportunities and are of comparable quality, and have
mortgage obligations backing such securities. Each of these Underlying Qualivest
Funds also may invest in mortgage-related securities issued by nongovernmental
entities. Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Although
the market for such securities is becoming increasingly liquid, securities
issued by certain private organizations may not be readily marketable. Neither
of these Underlying Qualivest Funds will purchase mortgage-related securities or
any other assets which in Qualivest's opinion are illiquid, if as a result, more
than 15% of the value of its net assets will be illiquid.
Mortgage-related securities in which these Underlying Qualivest Funds may invest
may also include collateralized mortgage obligations ("CMOs"), which are debt
obligations issued generally by finance subsidiaries or trusts that are secured
by mortgage-backed certificates, including, in many cases, certificates issued
by government-related guarantors, including GNMA, FNMA and FHLMC, together with
certain funds and other collateral.
Each of these Underlying Qualivest Funds may invest in asset-backed securities
(unrelated to first mortgage loans), which represent fractional interests in
pools of leases, retail installment loans or revolving credit receivables, both
secured (such as Certificates for Automobile Receivables or "CARS") and
unsecured (such as Credit Card Receivable Securities or "CARDS"). These assets
are generally held by a trust and payments of principal and interest or interest
only are passed through monthly or quarterly to certificate holders and may be
guaranteed up to certain amounts by letters of credit issued by a financial
institution affiliated or unaffiliated with the trustee or originator of the
trust. Asset-backed securities will be purchased only if they meet the rating
requirements set forth above or, if unrated, are deemed to be of comparable
quality by Qualivest with respect to these Underlying Qualivest Funds'
investments in fixed-income securities of U.S. corporations and mortgage-related
securities.
An increase in interest rates will generally reduce the value of the investments
in these Underlying Qualivest Funds, and a decline in interest rates will
generally increase the value of those investments. Depending upon the prevailing
market conditions, Qualivest may purchase debt securities at a discount from
face value, which produces a yield greater than the coupon rate. Conversely, if
debt securities are purchased at a premium over face value, the yield will be
lower than the coupon rate.
* * * *
In making investment decisions for the Qualivest Income Funds, Qualivest will
consider many factors, including current yield, maturity, and yield to maturity.
Qualivest will also monitor the financial condition of the issuers of the
Qualivest Income Funds' portfolio investments and may shorten the average
weighted portfolio maturity of a Qualivest Income Fund, in light of each such
Underlying Qualivest Fund's investment objective of preservation of capital, if
economic or market conditions warrant such action.
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Qualivest Money Funds
Although each Qualivest Money Fund has the same investment adviser and a similar
investment objective, its particular portfolio securities and yield may differ
due to differences in the types of permitted investments, cash flow, and the
availability of particular portfolio investments.
Qualivest U.S. Treasury Money Market Fund (the "Qualivest U.S. Treasury Fund").
The investment objective of the Qualivest U.S. Treasury Fund is to seek current
income consistent with liquidity and stability of principal.
Under normal market conditions, the Qualivest U.S. Treasury Fund invests at
least 65% of its total assets in short-term U.S. Treasury bills, notes, and
bonds and in other obligations backed by the full faith and credit of the U.S.
Treasury. The Qualivest U.S. Treasury Fund may invest up to 35% of its total
assets in other types of high quality rated money market instruments and money
market instruments that, although not rated, are deemed to be of comparable high
quality as determined by Qualivest pursuant to guidelines adopted by the Board
of Trustees of Qualivest Funds.
Qualivest Money Market Fund. The investment objective of the Qualivest Money
Market Fund is to seek current income consistent with liquidity and stability of
principal.
The Qualivest Money Market Fund invests in high quality rated money market
instruments and other money market instruments that, although not rated, are
deemed to be of comparable high quality as determined by Qualivest pursuant to
guidelines adopted by the Board of Trustees of Qualivest Funds.
* * * *
Each of the Qualivest Money Funds is subject to the same restrictions, and may
invest in the same instruments, as discussed above in "INVESTMENT OBJECTIVES AND
POLICIES -Money Market Fund-General."
INVESTMENT OBJECTIVES AND POLICIES--
UNDERLYING BB&T FUNDS
BB&T Equity Funds
BB&T Growth and Income Stock Fund (the "BB&T Growth and Income Fund"). The BB&T
Growth and Income Fund's investment objective is to seek capital growth, current
income or both, primarily through investment in stocks. Under normal market
conditions, the BB&T Growth and Income Fund will invest at least 65% of its
total assets in stocks, which for this purpose may be either common stock,
preferred stock, warrants, or debt instruments that are convertible to common
stock.
Equity securities purchased by the BB&T Growth and Income Fund will be either
traded on a domestic securities exchange or quoted in the NASDAQ/NYSE system.
While some stocks may be purchased primarily to achieve the BB&T Growth and
Income Fund's investment objective for income, most stocks will be purchased by
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the BB&T Growth and Income Fund primarily in furtherance of its investment
objective for growth. The BB&T Growth and Income Fund will favor stocks of
issuers which over a given year period have achieved cumulative income in excess
of the cumulative dividends paid to shareholders.
Stocks such as those in which the BB&T Growth and Income Fund may invest are
more volatile and carry more risk than some other forms of investment. Depending
upon the performance of the BB&T Growth and Income Fund's investments, its net
asset value per share may decrease instead of increase.
BB&T Balanced Fund. The BB&T Balanced Fund's investment objective is to seek
long-term capital growth and to produce current income. The BB&T Balanced Fund
seeks to achieve this objective by investing in a broadly diversified portfolio
of securities, including common stocks, preferred stocks and bonds.
The portion of the BB&T Balanced Fund's assets invested in each type of security
will vary in accordance with economic conditions, the general level of common
stock prices, interest rates and other relevant considerations, including the
risks associated with each investment medium. Thus, although the BB&T Balanced
Fund seeks to reduce the risks associated with any one investment medium by
utilizing a variety of investments, performance will depend upon the additional
factors of timing and the ability of BB&T to judge and react to changing market
conditions. The BB&T Balanced Fund may invest in short-term obligations in order
to acquire interest income combined with liquidity. For temporary defensive
purposes, as determined by BB&T, these investments may constitute 100% of the
BB&T Balanced Fund's portfolio and, in such circumstances, will constitute a
temporary suspension of the BB&T Balanced Fund's attempt to achieve its
investment objective.
The BB&T Balanced Fund's equity securities will generally consist of common
stocks but may also consist of other equity-type securities such as warrants,
preferred stocks and convertible debt instruments. The Fund's equity investments
will be in companies with a favorable outlook and which are believed by BB&T to
be undervalued.
The BB&T Balanced Fund's debt securities will consist of securities such as
bonds, notes, debentures and money market instruments. The BB&T Balanced Fund
may also invest in CMOs. The average dollar-weighted maturity of debt securities
held by the BB&T Balanced Fund will vary according to market conditions and
interest rate cycles and will range between 1 year and 30 years under normal
market conditions.
It is a fundamental policy of the BB&T Balanced Fund that it will invest at
least 25% of its total assets in fixed-income senior securities. For this
purpose, fixed-income senior securities include debt securities, preferred stock
and that portion of the value of securities convertible into common stock,
including convertible preferred stock and convertible debt, which is
attributable to the fixed-income characteristics of those securities.
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BB&T Small Company Growth Fund. The BB&T Small Company Growth Fund's investment
objective is to seek long-term capital appreciation through investment primarily
in a diversified portfolio of equity and equity-related securities of small
capitalization growth companies. The BB&T Small Company Growth Fund will invest
in companies that are considered to have favorable and above average earnings
growth prospects and, as a matter of fundamental policy, at least 65% of its
total assets will be invested in small companies with a market capitalization
under $1 billion at the time of purchase. In making portfolio investments, the
BB&T Small Company Growth Fund will assess characteristics such as financial
condition, revenue, growth, profitability, earnings per share growth and trading
liquidity. The remainder of its assets, if not invested in the securities of
small companies, will be invested in the instruments described below and under
"Investment Techniques and Risk Factors."
Smaller, less seasoned companies may be subject to greater business risk than
larger, established companies. They may be more vulnerable to changes in
economic conditions, specific industry conditions, market fluctuations and other
factors affecting the profitability of companies. Therefore, the stock price of
smaller capitalization companies may be subject to greater price fluctuations
than that of larger, established companies. Due to these and other risk factors,
the price movement of the securities held by this Underlying BB&T Fund may be
volatile and the net asset value of a share may fluctuate more than that of a
share of a fund that invests in larger established companies.
BB&T International Equity Fund. The BB&T International Equity Fund's investment
objective is to seek long-term capital appreciation through investment primarily
in equity securities of foreign issuers. During normal market conditions, the
BB&T International Equity Fund will normally invest at least 80%, and, in any
event, at least 65%, of the value of its total assets in equity securities.
Equity securities include common stock and preferred stock (including
convertible preferred stock), bonds, notes and debentures convertible into
common or preferred stock; stock purchase warrants and rights; equity interests
in trusts and partnerships; and depository receipts of companies.
During normal market conditions, the BB&T International Equity Fund will
normally invest at least 90%, and, in any event, at least 65%, of the value of
its total assets in securities of foreign issuers. It will pursue investments in
non-dollar denominated stocks primarily in countries included in the EAFE Index
and may also invest its assets in countries with emerging economies or
securities markets. This Underlying BB&T Fund will be diversified across
countries, industry groups and companies with investment at all times in at
least three foreign countries.
When choosing securities, a value investment style is employed so that the
investment sub-adviser targets equity securities that are believed to be
undervalued. The investment sub-adviser will emphasize stocks with
price/earnings ratios below average for a security's earnings trend and its
price momentum will also be factors considered in security selection. The
investment sub-adviser will also consider macroeconomic factors such as the
prospects for relative economic growth among certain foreign countries, expected
levels of inflation, government policies influencing business conditions, and
the outlook for currency relationships.
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BB&T Income Funds
BB&T Short-Intermediate U.S. Government Income Fund (the "BB&T
Short-Intermediate Fund") and BB&T Intermediate U.S. Government Bond Fund (the
"BB&T Intermediate Bond Fund"). The investment objective of the BB&T
Short-Intermediate Fund and the BB&T Intermediate Bond Fund is to seek current
income consistent with the preservation of capital. The BB&T Short-Intermediate
Fund will invest primarily in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, some of which may be subject to
repurchase agreements, or in high grade CMOs. At least 65% of the BB&T
Short-Intermediate Fund's assets will be invested in such U.S. Government
securities. The dollar-weighted average portfolio maturity of the BB&T
Short-Intermediate Fund will be from two to five years. The BB&T Intermediate
Bond Fund will also invest primarily in such U.S. Government securities, and at
least 65% of its total assets will be invested in bonds. Bonds for this purpose
will include both bonds (maturities of ten years or more) and notes (maturities
of one to ten years) of the U.S. Government. The dollar-weighted average
portfolio maturity of the BB&T Intermediate Bond Fund will be from five to ten
years. CMOs will be considered bonds for this purpose if their expected average
life is comparable to the maturity of other bonds eligible for purchase by the
BB&T Income Funds. The BB&T Income Funds may also invest in short-term
obligations, commercial bonds and the shares of other investment companies.
Bonds, notes, and debentures in which the BB&T Income Funds may differ in
interest rates, maturates and times of issuance. Mortgage-related securities
purchased by the BB&T Income Funds will be either (i) issued by U.S.
Government-owned or sponsored corporations or (ii) rated in the highest category
by an NRSRO at the time of purchase, (for example, rated Aaa by Moody's or AAA
by S&P), or, if not rated, are of comparable quality as determined by BB&T. The
applicable ratings are described in the Appendix to the Statement of Additional
Information.
BB&T Money Fund
BB&T U.S. Treasury Money Market Fund (the "BB&T U.S. Treasury Fund"). The
investment objective of the BB&T U.S. Treasury Fund is to seek current income
with liquidity and stability of principal through investing exclusively in
short-term U.S. dollar-denominated obligations issued or guaranteed by the U.S.
Treasury, some of which may be subject to repurchase agreements.
All instruments in which the BB&T U.S. Treasury Fund invests are valued based on
the amortized cost valuation technique pursuant to Rule 2a-7 under the
Investment Company Act of 1940 (the "1940 Act"). All instruments in which the
Fund invests will have remaining maturities of 397 days or less, although
instruments subject to repurchase agreements and certain variable or floating
rate obligations may bear longer maturities. The dollar-weighted average
maturity of the securities in the BB&T U.S. Treasury Fund will not exceed 90
days. Obligations purchased by the BB&T U.S. Treasury Fund are limited to U.S.
dollar-denominated obligations which BB&T, pursuant to guidelines established by
the Board of Trustees of the Group has determined present minimal credit risks.
See "VALUATION OF SHARES" herein and the Statement of Additional Information for
further explanation of the amortized cost valuation method.
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INVESTMENT TECHNIQUES AND RISK FACTORS
Like any investment program, an investment in a Fund entails certain risks. The
Share price of each Allocated Fund and the Capital Manager Fund will fluctuate
in response to changes in the share price of one or more of the Underlying
Funds, which are permitted to engage in a wide range of investment techniques.
U.S. Government Obligations
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the GNMA, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of the FNMA, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the SLMA, are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the FFCB or the FHLMC, are
supported only by the credit of the instrumentality. 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. 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.
The Growth and Income Fund, BB&T Short-Intermediate, BB&T Intermediate Bond,
BB&T Growth and Income, BB&T Balanced, and BB&T Small Company Growth Funds may
also invest in "zero coupon" U.S. Government securities. These securities tend
to be more volatile than other types of U.S. Government securities. Zero coupon
securities are debt instruments that do not pay current interest and are
typically sold at prices greatly discounted from par value. The return on a zero
coupon obligation, when held to maturity, equals the difference between the par
value and the original purchase price.
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 Money Market Fund, the Growth and Income Fund, the
Underlying Qualivest Funds (except the Qualivest Optimized Fund and the
Qualivest International Fund), and the Underlying BB&T Funds (except the BB&T
International Equity Fund) 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.
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Early repayment of principal on mortgage-related securities may expose a Fund or
an Underlying 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 or an
Underlying 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 or an Underlying Fund may invest in other asset-backed
securities that may be developed in the future.
The Growth and Income Fund, the Qualivest Income Funds and the Underlying BB&T
Funds (except the BB&T U.S. Treasury Fund and the BB&T International Equity
Fund) may invest in Collateralized Mortgage Obligations. CMOs may include
stripped mortgage securities. Such securities are derivative multi-class
mortgage securities issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Stripped
mortgage securities are usually structured with two classes that receive
different proportions of the interest and principal distributions on a pool of
mortgage assets. A common type of stripped mortgage security will have one class
receiving all of the interest from the mortgage assets (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the securities' yield to maturity. Generally,
the market value of the PO class is unusually volatile in response to changes in
interest rates. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Fund or an Underlying Fund may fail to
fully recoup its initial investment in these securities even if the security is
rated in the highest rating category.
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Certain issuers of asset-backed securities are considered to be investment
companies under the 1940 Act. The Funds and Underlying 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.
Bankers' Acceptances
The Money Market Fund, the Growth and Income Fund, and the Underlying 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 Money Market Fund, the Growth and Income Fund, and the Underlying 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.
The Money Market Fund and Underlying Qualivest Funds may also invest in
Eurodollar Certificates of Deposit ("ECDs"), which are U.S. dollar denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the U.S.; ETDs, which are U.S. dollar denominated deposits in a foreign
branch of a U.S. bank or a foreign bank; CTDs, which are essentially the same as
ETDs, except they are issued by Canadian offices of major Canadian banks; and
Yankee CDs, which are certificates of deposit issued by a U.S. branch of a
foreign bank denominated in U.S. dollars and held in the U.S.
The Money Market Fund and the Qualivest Money Funds each will invest no more
than 10% of its net assets in time deposits with maturities in excess of seven
days which are subject to penalties upon early withdrawal. Such time deposits
include ETDs and CTDs but do not include certificates of deposit.
Commercial Paper
Each of the Funds and the Underlying Funds (except for the BB&T U.S. Treasury
Fund) 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 F-2 or better by Fitch) or, if
not rated, determined to be of comparable quality to instruments that are so
rated. The Qualivest Equity Funds may invest in such instruments if rated in the
four highest categories assigned by an NRSRO or, if not rated, found by
Qualivest pursuant to guidelines adopted by the Board of Trustees of Qualivest
Funds to be of comparable quality. The Money Market Fund, Growth and Income
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Fund and Income Fund, each Underlying Qualivest Fund (except the Qualivest U.S.
Treasury Fund), BB&T Balanced Fund, BB&T Growth and Income Fund, and BB&T Small
Companies Growth Fund 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 and the Underlying Funds (except the BB&T U.S. Treasury Fund)
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 and
the Underlying 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. Qualivest, BB&T, 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. 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.
Put and Call Options
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 on securities. The Growth and Income
Fund, each Qualivest Equity Fund, other than the Optimized Fund, and the BB&T
International Equity Fund may purchase put and call options on foreign
currencies, subject to its applicable investment policies, for the purposes of
hedging against market risks related to its portfolio securities and adverse
movements in exchange rates between currencies, respectively. The Growth and
Income Fund and each of these Underlying Funds may also engage in writing
covered call options (options on securities or currencies owned by the
particular Fund or Underlying Fund). When a portfolio security or currency
subject to a call option is sold, the Growth and Income Fund or Underlying 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 or Underlying Fund previously has written. If
the Growth and Income Fund or Underlying 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 Growth and Income Fund or that
Underlying Fund delivers the underlying security or currency upon exercise. In
addition, upon the exercise of a call option by the holder thereof, the Fund or
Underlying Fund will forego the potential benefit represented by market
appreciation over the exercise price. Under normal conditions, it is not
expected that the Growth and Income Fund or any Underlying Fund will cause the
underlying value of portfolio securities and/or currencies subject to such
options to exceed 25% of its total assets. The Growth and Income Fund, the BB&T
Small Company Growth Fund, and the BB&T International Equity Fund will not
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purchase put and call options when the aggregate premiums on outstanding options
exceed 5% of its net assets at the time of purchase.
A Qualivest Equity Fund, Qualivest Income Fund, and the BB&T International
Equity Fund, as part of its option transactions, also may purchase index put and
call options and write index options. As with options on individual securities,
a Fund or Underlying Fund will write only covered index call options. Options on
securities indices are similar to options on a security except that, rather than
the right to take or make delivery of a security at a specified price, an option
on a securities index gives the holder the right to receive, upon exercise of
the option, an amount of cash 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.
Price movements in securities which an Underlying Fund owns or intends to
purchase may not correlate perfectly with movements in the level of an index
and, therefore, an Underlying Fund bears the risk of a loss on an index option
that it not completely offset by movements in the price of such securities.
Because index options are settled in cash, a call writer cannot determine the
amount of its settlement obligations in advance and, unlike call writing on
specific securities, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities. An
Underlying Fund will segregate assets or otherwise cover index options that
would require it to pay cash upon exercise.
Foreign Securities
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
the Growth and Income Fund or an Underlying Fund will be affected by changes in
currency exchange rates and in exchange control regulations, and costs will be
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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 the value of the Growth and Income Fund's or the Underlying Fund's
assets.
For many foreign securities, U.S. dollar denominated American Depositary
Receipts ("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, the Growth and Income Fund and the
Underlying Funds can avoid currency risks during the settlement period for
either purchase or sales.
Subject to its applicable investment policies, each Qualivest Equity Fund other
than the Optimized Fund may invest in debt securities denominated in the
European Currency Unit ("ECU") which is a "basket" consisting of specified
amounts of the currencies of certain of the member states of the European
Community. The specific amounts of currencies comprising the ECU may be adjusted
by the Council of Ministers of the European Community to reflect changes in
relative values of the underlying currencies. Such adjustments may adversely
affect holders of ECU denominated obligations or the marketability of such
securities.
The Growth and Income Fund, the BB&T Balanced Fund, the BB&T Growth and Income
Fund and the BB&T Small Company Growth Fund may invest in foreign securities
through the purchase of ADRs or the purchase of securities on the New York Stock
Exchange ("NYSE"). However, the BB&T Growth and Income Fund and the BB&T
Balanced Fund 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 such Underlying
Fund would exceed 25% of the value of its total assets.
From time to time the BB&T International Equity Fund may invest more than 25% of
its total assets in the securities of issuers located in Japan. Investments of
25% of more of the BB&T International Equity Fund's total assets in this or any
other country will make this Underlying Fund's performance more dependent upon
the political and economic circumstances of a particular country than a mutual
fund that is more widely diversified among issuers in different countries. For
example, in the past events, in the Japanese economy as well as social
developments and natural disasters have affected Japanese securities and
currency markets, and have periodically disrupted the relationship of the
Japanese yen with other currencies and with the U.S. dollar.
The Qualivest Equity Funds (except the Qualivest Optimized Fund) and the BB&T
International Equity Fund may invest in both sponsored and unsponsored ADRs, and
the BB&T International Equity Fund may invest in European Depository Receipts
("EDRs"), Global Depository Receipts ("GDRs") and other similar global
instruments. EDRs, which are sometimes referred to as Continental Depository
Receipts, are receipts issued in Europe, typically by foreign banks and trust
companies, that evidence ownership of either foreign or domestic underlying
securities. GDRs are depository receipts structured like global debt issues to
facilitate trading on an international basis.
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Unsponsored ADR, EDR and GDR 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, EDRs, and GDRs, and the prices of unsponsored depository
receipts may be more volatile than if such instruments were sponsored by the
issuer.
The BB&T International Equity Fund may invest its assets in countries with
emerging economies or securities markets. Political and economic structures in
many of these countries may be undergoing significant evolution and rapid
development, and these countries may lack the social, political and economic
stability characteristics of more developed countries. Some of these countries
may have in the past failed to recognize private property rights and have at
time nationalized or expropriated the assets of private companies. As a result,
the risks described above, including the risks of nationalization or
expropriation of assets, may be heightened. In addition, unanticipated political
or social developments may affect the value of investments in these countries
and the availability to the BB&T International Equity Fund of additional
investments in emerging market countries. The small size and inexperience of the
securities markets in certain of these countries and the limited volume of
trading in securities in these countries may make investments in the countries
illiquid and more volatile than investments in Japan or most Western European
countries. There may be little financial or accounting information available
with respect to issuers located in certain emerging market countries, and it may
be difficult as result to access the value or prospects of an investment in such
issuers. The BB&T International Equity Fund intends to limit its investment in
countries with emerging economies or securities markets to 20% of its total
assets.
Foreign Currency Transactions
The value of the assets of the Growth and Income Fund, a Qualivest Equity Fund
(other than the Optimized Fund) or the BB&T International Equity 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 an
Underlying Fund may incur costs in connection with conversions between various
currencies. An Underlying 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. These
Underlying Funds may enter into forward currency contracts in order to hedge
against adverse movements in exchange rates between currencies.
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, an Underlying 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. An Underlying Fund may also hedge its foreign currency
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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 an Underlying 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 Underlying 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 Underlying Fund is
obligated to deliver.
If an Underlying 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 an Underlying 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 Underlying 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.
Repurchase Agreements
Securities held by the Money Market Fund, the Growth and Income Fund, or an
Underlying Fund (other than the Qualivest U.S. Treasury Fund) may be subject to
repurchase agreements. Under the terms of a repurchase agreement, a Fund or an
Underlying 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 or an Underlying 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 Money Market Fund, the Growth and Income Fund, and each Underlying Fund may
borrow funds by entering into reverse repurchase agreements, and the Money
Market Fund and the Underlying Qualivest Funds may also enter into dollar roll
agreements in accordance with applicable investment restrictions. Pursuant to
such reverse repurchase agreements, a Fund or Underlying 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 or
Underlying 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 or an Underlying 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 or an Underlying 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 or Underlying Fund is
delayed or prevented from completing the transaction.
Futures Contracts
The Growth and Income Fund, each Qualivest Equity Fund and Qualivest Income
Fund, the BB&T Small Company Growth Fund, and the BB&T International Equity Fund
may also enter into contracts for the future delivery of securities or foreign
currencies and futures contracts based on a specific security, class of
securities, foreign currency or an index, purchase or sell options on any such
futures contracts and engage in related closing transactions. A futures contract
on a securities index in an agreement obligating either party to pay, and
entitling the other party to receive, while the contract is outstanding, cash
payments based on the level of a specified securities index. Each of these Funds
and Underlying Funds may engage in such futures contracts in an effort to hedge
against market risks and to manage its cash position, but not for leveraging
purposes.
Aggregate initial margin deposits for futures contracts, and premiums paid for
related options, may not exceed 5% of a Qualivest Equity Fund's or Qualivest
Income Fund's total assets, and the value of securities that are the subject of
such futures and options (both for receipt and delivery) may not exceed 33 1/3%
of the market value of an Underlying Qualivest Fund's total assets. The value of
each of the Growth and Income, the BB&T Small Company Growth, and the BB&T
International Equity Funds' contracts may equal or exceed 100% of its total
assets, although each will not purchase or sell a futures contract unless
immediately afterwards the aggregate amount of margin deposits on its existing
futures positions plus the amount of premiums paid for related futures options
entered into for other than bona fide hedging purposes is 5% or less of its net
assets. Futures transactions will be limited to the extent necessary to maintain
the qualification of each Fund and Underlying Fund as a regulated investment
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company.
When-Issued and Delayed-Delivery Transactions
Each of the Money Market Fund, the Growth and 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. In addition, the Growth and Income Fund
and the BB&T Small Company Growth Fund may sell, and the BB&T International
Equity Fund may purchase and sell, securities on a "forward commitment" 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 or Underlying Fund will not pay for such securities or start
earning interest on them until they are received. When a Fund or Underlying 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 or Underlying 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 Growth and Income Fund and all
Underlying Funds (except the Qualivest Money Fund) may from time to time lend
portfolio securities to broker-dealers, banks or institutional borrowers of
securities. The Underlying Qualivest Funds must receive 102% and the Growth and
Income and the Underlying BB&T 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 lending Fund or Underlying 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 or
Underlying Fund, the lender could experience delays in recovering its securities
and possible capital losses. The Growth and Income Fund and the Underlying Funds
will only enter into loan arrangements with broker-dealers, banks or other
institutions determined to be creditworthy under guidelines established by the
relevant Board of Trustees that permit the Growth and Income Fund, the eligible
Underlying Qualivest Funds, and the BB&T International Equity Fund to loan up to
33 1/3% of the value of its total assets. The remaining Underlying BB&T Funds
may lend only up to 30% of each such Underlying Fund's assets.
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Short-Term Obligations
The Growth and Income Fund and the Underlying BB&T Funds (except the BB&T U.S.
Treasury Fund) 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, the Growth
and Income Fund and each of the eligible Underlying BB&T Funds will limit its
investment in short-term obligations to 35% of its total assets. Pending
investment or to meet anticipated redemption requests, the BB&T International
Equity Fund may also invest without limitation in short-term obligations. For
temporary defensive purposes, as determined by BB&T (or an Underlying Fund's
sub-adviser), these investments may constitute 100% of the Growth and Income
Fund's or a BB&T Underlying Fund's portfolio and, in such circumstances, will
constitute a temporary suspension of their attempts to achieve their investment
objectives.
Short-Term Trading
In order to generate income, the Growth and Income Fund and the Underlying BB&T
Funds (except the BB&T U.S. Treasury Fund) 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 BB&T (or an Underlying
Fund's sub-adviser) 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.
Medium-Grade Securities
Each of the Qualivest Income Funds, the Qualivest Large Companies Fund and the
Qualivest Small Companies Fund 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.
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 one of
the eligible Underlying Qualivest Funds to fall below BBB or Baa, as the case
may be, Qualivest will consider such an event in determining whether an
Underlying Qualivest Fund should continue to hold that security. In no event,
however, would an Underlying Qualivest Fund be required to liquidate any such
portfolio security where the Underlying Fund would suffer a loss on the sale of
such security.
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Securities Issued by Other Investment Companies
Each of the Growth and Income Fund, Qualivest Equity Funds, Qualivest Income
Funds, and the Underlying BB&T Funds (except the BB&T U.S. Treasury Fund) may
invest up to 10% of its total assets, and each of the Money Market Fund and the
Qualivest Money Funds may invest up to 25% of its total assets, in shares of
money market mutual funds for cash management purposes. The Qualivest U.S.
Treasury Fund expects to make such purchase only in money market funds that
restrict their investments to U.S. Government securities. In addition, the BB&T
International Equity Fund may purchase shares of investment companies investing
primarily in foreign securities, including so-called "country funds," which have
portfolios consisting exclusively of securities of issuers located in one
country. A Fund or Underlying Fund will incur additional expenses due to the
duplication of expense as a result of investing in other investment companies.
Restricted Securities
Securities in which the Money Market Fund, the Growth and Income Fund, and the
Underlying 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 and
Underlying 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, Qualivest, BB&T, or a sub-adviser of an Underlying BB&T
Fund 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.
VALUATION OF SHARES
The net asset value of the Money Market Fund is determined and its Shares are
priced as of 12:00 noon Pacific Time and as of the close of regular trading on
the NYSE on each Business Day (also "Valuation Times"). The net asset value of
the other Funds is determined and their Shares are priced as of the closing of
the NYSE (generally 4:00 p.m. Eastern Time/1:00 p.m. Pacific Time) on each
Business Day ("Valuation Time"). As used herein, Business Day is a day on which
the 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, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
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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 except the Money Market Fund will
fluctuate as the value of the investment portfolio of a Fund changes.
The securities in each Fund other than the Money Market 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. The assets in the Money Market Fund are valued using the amortized cost
method. 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 Accounts to serve as an investment medium for the Variable
Contracts issued by insurance companies, 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 Nationwide or
Hartford 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 a Valuation Time on
any Business Day will be executed at the net asset value determined as of the
next Valuation Time on the date of receipt. An order received after the final
Valuation Time on any Business Day will be executed at the net asset value
determined as of the next 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
fund 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 any
of the other Funds. Exchanges are treated as a redemption of Shares and a
purchase of Shares of one or more of the other Funds 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 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.
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.
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Investment Advisers
Qualivest. Qualivest Capital Management, Inc., P.O. Box 2758, Portland, Oregon
97208, is the investment adviser of the Allocated Funds and the Money Market
Fund. Qualivest, a registered investment adviser, is an affiliate of U.S. Bank,
which is a wholly owned subsidiary of U.S. Bancorp. U.S. Bancorp is
super-regional financial services holding company organized under the laws of
Oregon in 1968. U.S. Bank, headquartered in Portland, is a national banking
association, chartered in 1891. It offers a wide variety of full-service and
commercial banking operations in over 200 locations in Oregon. Other services of
U.S. Bancorp and its subsidiaries include mortgage banking, lease financing,
consumer financing, commercial finance, international banking, investment
advisory, insurance agency and credit life insurance services, brokerage and
venture capital. As of October 31, 1996, Qualivest had under management nearly
$10 billion in assets. It also is investment adviser to Tax-Free Trust of
Oregon, a tax-free municipal bond fund, whose assets were approximately $304
million at that date, as well as the Qualivest Funds, an open-end management
investment company offering multiple series of shares, whose assets were
approximately $1.8 billion at that date.
Qualivest invests the assets of each Fund advised by it according to the Fund's
investment objective and policies set forth above and pursuant to guidelines
established by the Board of Trustees for each such Fund. Allocation decisions
for the Allocated Funds are made by the Qualivest Investment Strategy Committee
(the "Committee"). Timothy Leach, President and Chief Investment Officer of
Qualivest, acts as Chairman of the Committee. For the services provided and
expenses assumed pursuant to its investment advisory agreement with the Trust,
Qualivest receives a fee from each Fund advised by it, computed daily and paid
monthly, at an annual rate of 0.05% of each Allocated Fund's average daily net
assets, and 0.35% of the Money Market Fund's average daily net assets. Each
Allocated Fund, as a Shareholder in an Underlying Qualivest Fund, also will
indirectly bear its proportionate share of any investment advisory fees and
other expenses paid by the Underlying Qualivest Fund. The ratios of operating
expenses to average daily net assets of the Underlying Qualivest Funds for the
period ended July 31, 1996 were as follows: Qualivest Large Companies Fund --
0.93%; Qualivest Small Companies Fund -- 1.08%; Qualivest International Fund --
0.81%; Qualivest Optimized Fund -- 0.60%; Qualivest Intermediate Bond Fund --
0.76%; Qualivest Bond Fund -- 0.61%; Qualivest U.S. Treasury Fund -- 0.31%; and
Qualivest Money Market Fund -- 0.51%.
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with each of the Underlying Qualivest Funds' investment objective,
policies and restrictions, Qualivest has agreed in its Investment Advisory
Agreement with the Trust to provide or arrange for the provision of a continuous
investment program for each Underlying Qualivest Fund, including investment
research and management with respect to the Underlying Qualivest Funds'
portfolio securities, investments and cash. Qualivest has implemented a team
approach to the management of the Underlying Qualivest Funds, under which a
"Lead Manager" has primary portfolio management responsibility for an Underlying
Qualivest Fund and is assisted by a "Co-Manager."
John R. Dozier, who joined U.S. Bank in 1976 and Qualivest at the time of its
inception as a registered investment adviser in 1984, is the Equity Manager
primarily responsible for managing the Qualivest Large Companies Fund. Mr.
Dozier has twenty-six years of investment management
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experience and received a Bachelor of Arts degree in Economics from Claremont
Men's College. John R. Swank, an Equity Manager with twenty years of experience
in portfolio management, including seventeen years of combined employment by
U.S. Bank and Qualivest, assists Mr. Dozier in managing the Qualivest Large
Companies Fund. Mr. Swank has a Bachelor of Science degree in Finance and a
Master of Business Administration degree, both from Long Beach State University.
He is also a Chartered Financial Analyst.
Dale E. Benson, an Equity Manager at Qualivest, has primary responsibility for
management of the Qualivest Small Companies Fund. Mr. Benson has twenty-four
years of investment management experience and has been employed by U.S. Bank
since 1973 and by Qualivest since its inception. He received a Bachelor of Arts
degree from Pacific Lutheran University and a Doctorate in History from the
University of Maine. Mr. Benson is also a Chartered Financial Analyst. Frank
Magdlen assists Mr. Benson in managing the Qualivest Small Companies Fund. Mr.
Magdlen, who also is a Chartered Financial Analyst, analyzes closely held
companies for Qualivest and has twenty-three years of investment experience. He
received a Bachelor of Arts degree in Finance from the University of Portland
and a Master of Business Administration degree from the University of Southern
California. Mr. Magdlen has been employed by U.S. Bank since 1979 and by
Qualivest since 1984.
Daniel J. Rauchle has primary responsibility for managing the Qualivest
International Fund. Prior to joining Qualivest as an Equity Manager, Mr. Rauchle
was an independent consultant to small business and financial institutions
specializing in finance and investments. Mr. Rauchle received his Bachelor of
Business Administration, Master of Business Administration, and Juris Doctor
degrees from the University of Wisconsin. Timothy Leach, President and Chief
Investment Officer of Qualivest, assists Mr. Rauchle in managing the Qualivest
International Fund. He has fourteen years of investment management experience,
both at Qualivest and at other investment management organizations, and is
responsible for the management of Qualivest. Mr. Leach has a Bachelor of Science
degree in Business Management and Agricultural Science and a Master of Business
Administration degree from the University of California, Berkeley. Mr. Leach has
primary responsibility for managing the Qualivest Optimized Fund, and Mr.
Rauchle assists Mr. Leach in managing that Underlying Qualivest Fund.
Portfolio management of the Qualivest Intermediate Bond Fund is the primary
responsibility of Curry A. Garvin, a Fixed-Income Manager who has been employed
by U.S. Bank since 1981 and by Qualivest since 1985. Mr. Garvin, who is a
Chartered Financial Analyst, received a Bachelor of Science degree in Finance
from the University of Oregon. John McCune, a Fixed-Income Manager with ten
years of investment management experience, assists Mr. Garvin in managing the
Qualivest Intermediate Bond Fund. Mr. McCune joined the Qualivest team in 1996
as part of the U.S. Bancorp/West One Bancorp merger. Prior to 1996, Mr. McCune
had been employed as a Senior Portfolio Manager at West One Bancorp and AMR
Corporation. Mr. McCune received a Bachelor of Science degree in Finance from
Brigham Young University and a Master of Business Administration degree from the
University of California at Los Angeles. Mr. McCune has primary responsibility
for managing the Qualivest Bond Fund, and Mr. Garvin assists Mr. McCune in
managing that Underlying Qualivest Fund.
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For the services provided and expenses assumed pursuant to an investment
advisory agreement with the Qualivest Funds, Qualivest receives a fee from each
of the Underlying Qualivest Funds, computed daily and paid monthly, at the
following annual rates of each Underlying Qualivest Fund's average daily net
assets: Qualivest Large Companies Fund -- 0.75%; Qualivest Small Companies Fund
- -- 0.80%; Qualivest International Fund -- 0.60%; Qualivest Optimized Fund --
0.50%; Qualivest Intermediate Bond Fund -- 0.60%; Qualivest Bond Fund -- 0.60%;
Qualivest U.S. Treasury Fund -- 0.35%; and Qualivest Money Market Fund -- 0.35%.
Qualivest may periodically voluntarily reduce all or a portion of its advisory
fee with respect to an Underlying Qualivest Fund to increase the net income of
that Underlying Qualivest Fund available for distribution as dividends. The
voluntary fee reduction will cause the return of that Underlying Qualivest Fund
to be higher than it would otherwise be in the absence of such reduction.
Pending Change of Control of Qualivest On March 20, 1997, U.S. Bancorp, the
indirect corporate parent of Qualivest, and First Bank System, Inc. ("First
Bank"), a financial services holding company headquartered in Minneapolis,
Minnesota, jointly announced the signing of a definitive agreement for First
Bank to acquire U.S. Bancorp. While the merger is subject to a number of
contingencies and regulatory approvals, it is currently anticipated that the
merger will be completed on or about July 30, 1997.
Consummation of the merger may be deemed to effect a change of control of
Qualivest, which would have the effect of terminating the current Investment
Advisory Agreement (the "Current Agreement") between the Trust, on behalf of
each of the Allocated Funds and the Money Market Fund, and Qualivest. However,
after considering various issues related to the proposed merger, including the
fact that the portfolio management personnel and the day-to-day management of
these Funds is not proposed to change, the Trustees approved a new Investment
Advisory Agreement (the "New Agreement") that will come into effect upon
consummation of the merger and any change of control of Qualivest that may be
deemed to result. The New Agreement also has been approved by the initial
shareholder of each of these Funds. The New Agreement is substantially identical
in its terms to the Current Agreement, except for commencement date and the name
of the counterparty. In the event that the merger is not consummated, Qualivest
anticipates that it will continue to serve as the investment adviser of the
Allocated Funds and the Money Market Fund on the current contractual terms.
BB&T. Branch Banking and Trust Company, 434 Fayetteville Street Mall, Raleigh,
N.C. 27601, is the investment adviser of the Growth and Income Fund, the Capital
Manager Fund, and the Underlying BB&T Funds. 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, which merged with Southern
National Corporation, the former parent company of BB&T. As of September 30,
1996, SNC had assets in excess of $21.1 billion. Through its subsidiaries, SNC
operates over 425 banking offices in North Carolina, South Carolina and
Virginia, providing a broad range of financial services to individuals and
businesses.
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In addition to general commercial, mortgage and retail banking services, BB&T
also provides trust, investment, insurance and travel services. BB&T has
provided investment management services through its Trust and Investment
Services Division since 1912. While BB&T has not provided investment advisory
services to registered investment companies other than the Group and the Trust,
it has experience in managing collective investment funds with investment
portfolios and objectives comparable to those of the Group and the Growth and
Income Fund and Underlying Funds of the Trust. BB&T employs an experienced staff
of professional portfolio managers and traders who use a disciplined investment
process that focuses on maximization of risk-adjusted investment returns. BB&T
has managed common and collective investment funds for its fiduciary accounts
for more than 15 years and currently manages assets of more than $4.5 billion.
Subject to the general supervision of the Group's Board of Trustees and in
accordance with the investment objectives and restrictions of a Fund, BB&T (and,
with respect to the BB&T Small Company Growth Fund and the BB&T International
Equity Fund, the sub-advisers discussed below) manages the underlying BB&T
Funds, makes decisions with respect to, and places orders for, all purchases and
sales of its investment securities, and maintains its records relating to such
purchases and sales.
Under an investment advisory agreement between the Trust and BB&T, the Trust
pays BB&T an investment advisory fee, computed daily and payable monthly, at an
annual rate equal to the lessor of: (a) 0.74% of the Growth and Income Fund's
average daily net assets and 0.25% of the Capital Manager 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. As a Shareholder of an Underlying BB&T Fund, the Capital
Manager Fund will also indirectly bear its proportionate share of any investment
advisory fees and other expenses paid by the Underlying BB&T Fund. The ratios of
operating expenses to average daily net assets of the operational Underlying
BB&T Funds for the period ended September 30, 1996 were as follows: BB&T U.S.
Treasury Fund -- 0.75%; BB&T Growth and Income Fund -- 0.86%; BB&T Intermediate
Bond Fund -- 0.87%; BB&T Balanced Fund -- 0.95%; BB&T Short-Intermediate Fund --
0.93%; and BB&T Small Company Growth Fund -- 1.79%. The ratio of estimated
operating expenses to average daily net assets of the BB&T International Equity
Fund, which had not commenced operations as of September 30, 1996, is 1.87%.
Under an investment advisory agreement between the Group and BB&T, the fee
payable to BB&T for investment advisory services provided to the Underlying BB&T
Funds is the lesser of: (a) a fee computed daily and paid monthly at the annual
rate of 0.40% of the BB&T U.S. Treasury Fund's average daily net assets; 0.60%
of each BB&T Income Funds' average daily net assets; 0.74% of the BB&T Growth
and Income Fund's and BB&T Balanced Fund's average daily net assets; and 1.00%
of the BB&T Small Company Growth Fund's and BB&T International Equity Fund's
average daily net assets; or (b) such fee as may from time to time be agreed
upon in writing by the Group and BB&T. A fee agreed to in writing from time to
time by the Group and BB&T may be significantly lower than the fee calculated at
the annual rate and the effect of such lower fee would be to lower a Fund's
expenses and increase the net income of the fund during the period when such
lower fee is in effect.
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For the fiscal year ended September 30, 1996, the Underlying BB&T Funds paid the
following investment advisory fees: the BB&T U.S. Treasury Fund paid 0.40% of
its average daily net assets; each of the BB&T Short-Intermediate, BB&T
Intermediate Bond, BB&T Growth and Income, and BB&T Balanced Funds, after
voluntary fee reductions, paid 0.50% of its average daily net assets; and the
BB&T Small Company Growth Fund paid 1.00% of its average daily net assets. The
BB&T International Equity Fund had not commenced operations as of September 30,
1996.
The persons primarily responsible for the management of certain of the Growth
and Income Fund, the Capital Manager Fund, and the Underlying BB&T Funds (other
than the BB&T Small Company Growth and BB&T International Equity Funds which are
managed by sub-advisers, described below), as well as their previous business
experience, are as follows:
Portfolio Manager Business Experience
Keith F. Karlawish Manager of the BB&T Intermediate Bond Fund and BB&T Short -
Intermediate Fund since September, 1994. From June, 1993 to
September, 1994, Mr. Karlawish was Assistant Manager of the
BB&T Intermediate Bond Fund and the BB&T Short-Intermediate
Fund. From September, 1991 to June, 1993, Mr. Karlawish was
a Financial Analyst Team Leader for Branch Banking and Trust
Co. Mr. Karlawish earned a B.S. in Business Administration
from the University of Richmond, and an MBA from the
University of North Carolina at Chapel Hill.
Richard B. Jones Manager of the Growth and Income Fund since inception,
and BB&T Growth and Income Fund since February 1, 1993.
Since 1987, Mr. Jones has been a portfolio manager in the
BB&T Trust Division. He holds a B.S. in Business
Administration from Miami (Ohio) University and MBA from
Ohio State University.
David R. Ellis Manager of the Capital Manager Fund and BB&T Balanced
Fund since inception of each. Since 1986, Mr. Ellis has been
a portfolio manager in the BB&T Trust Division. He holds a
B.S. degree in Business Administration from the University
of North Carolina at Chapel Hill.
BB&T Sub-Advisers. PNC Equity Advisors Company ("PNC"), a wholly owned
subsidiary of PNC Bank, N.A., serves as the investment sub-adviser to the BB&T
Small Company Growth Fund pursuant to a sub-advisory agreement with BB&T. Under
the sub-advisory agreement, PNC manages the BB&T Small Company Growth Fund,
selects investments and places all orders for purchases and sales of its
portfolio securities, subject to the general supervision of the Group's Board of
Trustees and BB&T and in accordance with the BB&T Small Company Growth Fund's
investment objective, policies and restrictions.
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The person primarily responsible for the management of the BB&T Small Company
Growth Fund is William J. Wykle. Mr. Wykle has served as the Manager of the BB&T
Small Company Growth Fund since its inception. He has been Vice President and
Small Cap Growth Equity Fund portfolio manager for PNC Bank, N.A. since 1992. He
has been a portfolio manager at PNC Bank, N.A. and its predecessor, Provident
National Bank, since 1986. Mr. Wykle has also been an investment manager with
PNC since 1995 and has been the portfolio manager of the Compass Capital
Funds(sm) Small Cap Growth Equity Portfolio since its inception.
PNC Bank, with offices located at 1600 Market Street, Philadelphia, Pennsylvania
19103, is a wholly owned indirect subsidiary of PNC Bank Corp. PNC Bank Corp., a
bank holding company headquartered in Pittsburgh, Pennsylvania, was the 13th
largest bank holding company in the United States based on total assets at
September 30, 1996. PNC Bank Corp. operates banking subsidiaries in
Pennsylvania, Delaware, Florida, Indiana, Kentucky, Massachusetts, New Jersey
and Ohio and conducts certain non-banking operations throughout the United
States. Its major businesses include consumer banking, corporate banking, real
estate banking, mortgage banking and asset management. With $104.5 billion in
discretionary assets under management and $310.9 billion of assets under
administration at September 30, 1996, PNC Bank Corp. is one of the largest bank
money managers as well as one of the largest institutional mutual fund managers
in the United States. Of such amounts at September 30, 1996, PNC Bank had $94
billion in discretionary assets under management and $132.1 billion in assets
under administration. In addition to asset management and trust services, PNC
Bank also provides a wide range of domestic and international commercial banking
and consumer banking services. PNC Bank's origins, and in particular its trust
administration services, date back to the mid-to-late 1800s.
For its services and expenses incurred under the sub-advisory agreement, PNC
Bank is entitled to a fee, payable by BB&T. The fee is computed daily and paid
monthly at the following annual rates (as a percentage of the BB&T Small Company
Growth Fund's average daily net assets), which vary according to the level of
BB&T Small Company Growth Fund assets:
Fund Assets Annual Fee
Up to $50 million............................................. 0.50%
Next $50 million.............................................. 0.45%
Over $100 million............................................. 0.40%
CastleInternational Asset Management Limited ("CastleInternational") serves as
the investment sub-adviser to the BB&T International Equity Fund pursuant to a
sub-advisory agreement with BB&T. Under the sub-advisory agreement,
CastleInternational manages the BB&T International Equity Fund, selects
investments and places all orders for purchases and sales of the its securities,
subject to the general supervision of the Group's Board of Trustees and BB&T and
in accordance with the BB&T International Equity Fund's investment objective,
policies and restrictions.
CastleInternational, formed in 1996, with its primary office at 7 Castle Street,
Edinburgh, Scotland, EH2 3AH, is an indirect wholly owned subsidiary of PNC Bank
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Corp. As of September 30, 1996, CastleInternational had approximately $1.6
billion in discretionary assets under management, including three mutual fund
portfolios, one bank common trust fund and a tax exempt institutional portfolio.
For its services and expenses incurred under the sub-advisory agreement,
CastleInternational is entitled to a fee, payable by BB&T. The fee is computed
daily and paid quarterly at the following annual rates (as a percentage of the
BB&T International Equity Fund's average daily net assets), which vary according
to the level of BB&T International Equity Fund assets:
Fund Assets Annual Fee
Up to $50 million.................................................. 0.50%
Next $50 million................................................... 0.45%
Over $100 million.................................................. 0.40%
The person primarily responsible for the management of the BB&T International
Equity Fund is Gordon Anderson. Mr. Anderson has served as Managing and
Investment Director of CastleInternational Asset Management Limited since 1996.
Prior to joining CastleInternational, Mr. Anderson was the Investment Director
of Dunedin Fund Managers, Ltd. Mr. Anderson has served as the Portfolio Manager
for the Compass Capital Funds (SM) International Equity Portfolio since 1996.
Administrator and Distributor
BISYS Fund Services, 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 following annual rates 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: each Allocated Fund -- 0.07%;
Money Market Fund -- 0.13%; and Growth and Income Fund and Capital Manager Fund
- -- 0.20%. 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.
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Other Service Providers
BISYS Fund Services Ohio, Inc., 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 Fund Services Ohio,
Inc. receives an annual fee of $14 ($16 for the Money Market Fund) 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 Fund Services
Ohio, Inc. receives a fee, computed daily and paid periodically, at an annual
rate equal to the greater of 0.01% of average daily net assets or $10,000 for
each Allocated Fund, and 0.03% of average daily net assets or $30,000 for each
of the Money Market Fund and the Growth and Income Fund. Coopers & Lybrand
L.L.P. serves as independent auditors for the Trust. United States National Bank
of Oregon is the custodian of the Allocated Funds and the Money Market Fund.
Fifth Third Bank is the custodian for the Growth and Income Fund and the Capital
Manager Fund. See "MANAGEMENT OF THE TRUST" in the Statement of Additional
Information for further information.
While BISYS Fund Services Ohio, Inc. 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 Fund Services Ohio, Inc. 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.
Expenses
Qualivest, BB&T, 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
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<PAGE>
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.
Qualivest and BB&T 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 the investment adviser of the Funds and the Underlying 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 and Underlying 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.
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
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<PAGE>
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 underlying a Separate Account.
Reference is made to the prospectus for the appropriate 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 seven Funds. 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
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<PAGE>
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.
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 the 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 Accounts and
qualified pension and retirement plans are currently the only Shareholders of
the Fund, although other separate accounts of Nationwide or 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 a 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
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<PAGE>
results. Quotations of yield or total return for a Fund will not take into
account charges or deductions against any Separate Account to which the Fund's
Shares are sold 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 Accounts 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 Qualivest, BB&T, PNC,
CastleInternational, 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 Variable Insurance
Funds 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.
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<PAGE>
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
(800) 257-5872
STATEMENT OF ADDITIONAL INFORMATION
June 1, 1997
This Statement of Additional Information ("SAI") describes the seven 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; and
o BB&T Capital Manager 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 and the BB&T
Capital Manager 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
Page
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.......................................................13
Portfolio Turnover.......................................................15
NET ASSET VALUE...............................................................15
Valuation of the Money Market Fund......................................15
Valuation of Other Funds................................................16
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................. 16
MANAGEMENT OF THE TRUST..................................................... 17
Trustees and Officers....................................................17
Investment Advisers......................................................20
Portfolio Transactions...................................................21
Glass-Steagall Act.......................................................23
Administrator............................................................23
Expenses.................................................................24
Distributor..............................................................24
Custodians, Transfer Agent and Fund Accounting Services..................25
Auditors.................................................................25
Legal Counsel............................................................26
ADDITIONAL INFORMATION........................................................26
Description of Shares....................................................26
Vote of a Majority of the Outstanding Shares............................ 26
Shareholder and Trustee Liability....................................... 27
Additional Tax Information.............................................. 27
Distributions................................................................ 28
Hedging Transactions............................................... .... 29
Other Taxes............................................................. 29
Performance Information................................................. 29
Miscellaneous........................................................... 31
FINANCIAL STATEMENTS......................................................... 31
APPENDIX................................................................. ... i
<PAGE>
The Trust is an open-end management investment company which offers seven
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").
Much of the information contained in this SAI expands upon subjects discussed in
the Prospectuses of the seven Funds described above. Capitalized terms not
defined herein are defined in such Prospectuses. No investment in Shares of 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)
<PAGE>
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."
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 Stock and 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 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.
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.
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<PAGE>
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, 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 the Money Market
Fund, the Growth and Income Fund, and the Underlying Funds 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.
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
3
<PAGE>
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 the Growth and Income Fund and the Underlying
Funds investing in foreign markets. In addition, although the Growth and Income
Fund or Underlying Fund will receive income on foreign securities in such
currencies, the Growth and Income Fund or Underlying Fund 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, the Growth and Income Fund or Underlying Fund
could be required to liquidate portfolio securities to make required
distributions. Similarly, if an exchange rate declines between the time the
Growth and Income 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 Depositary 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 of the ADRs in which the BB&T International Equity Fund and the
Qualivest Equity Funds (except for the Qualivest Optimized Fund) may invest,
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 depositary 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 depositary 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
4
<PAGE>
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.
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 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 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, 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.
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Moreover, no single Fund or Underlying Fund may own more than 3% of the
outstanding shares of a single affiliated money market fund.
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, 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, 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. 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
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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.
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.
When-Issued and Delayed-Delivery Securities. The Money Market Fund, the Growth
and 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 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
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("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.
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," as described in the
Prospectus, 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.
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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 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, 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, or a 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.
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 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, or are
of comparable quality as determined by Qualivest ("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
those 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.
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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 such 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 those 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 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 conducts its own independent credit
analysis of Medium-Grade 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, 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 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.
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
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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 an
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 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.
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
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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:
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(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.
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;
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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
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.
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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 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
As indicated in the Prospectus, 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, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving, and Christmas.
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
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(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.
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. As stated in the Prospectus, 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
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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:
Name, Address, and Age Principal Occupation During
Past 5 Years
James H. Woodward Chancellor, University of North Carolina at
University of North Carolina 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
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Walter B. Grimm* Employee of BISYS Fund Services
3435 Stelzer Road (6/92- present); President,
Columbus, OH 43219 Leigh Investments(investment firm) (7/87-6/92).
Age: 50
* Mr. Grimm is an "interested person" of the Trust as that term is defined in
the 1940 Act.
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 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 $ 3,000
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, and The BB&T Mutual Funds Group.
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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):
Name and Address Position(s) Held Principal Occupation
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
Age: 42 Services (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).
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).
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 1, 1997, the Trustees and officers of the Trust, as a group, owned
less than one percent of the Shares of any Fund of the Trust.
Investment Advisers
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Funds' investment objectives and restrictions, investment
advisory services are provided to the Allocated Funds and the Money Market Fund
by Qualivest, P.O. Box 2758, Portland, Oregon 97208, pursuant to an Investment
Advisory Agreement dated June 1, 1997 (the "Qualivest Investment Advisory
Agreement").
Qualivest is a wholly owned subsidiary of United States National Bank of Oregon,
which in turn is a wholly owned subsidiary of U.S. Bancorp, a publicly held bank
holding company.
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.
Under the Investment Advisory Agreements, Qualivest and BB&T (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
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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.
Unless sooner terminated, each Investment Advisory Agreement continues in effect
as to a particular Fund until June 1, 1999, 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.
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.
Portfolio Transactions
The Investment Advisers 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
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<PAGE>
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 in its best judgment and in a
manner deemed fair and reasonable to Shareholders. In selecting a broker, each
Investment 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 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 informed concerning overall economic, market, political and
legal trends. Under some circumstances, an Investment 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.
Research information so received is in addition to and not in lieu of services
required to be performed by each Investment Adviser and does not reduce the fees
payable to an Investment Adviser by the Trust. Such information may be useful to
an Investment 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 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 or BB&T. 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 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 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 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 or
BISYS, their parents or their subsidiaries or affiliates and, in dealing with
its customers, Qualivest, BB&T, their parents, subsidiaries, and affiliates will
not inquire or take into consideration whether securities of such customers are
held by the Trust.
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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.
The Investment Advisers believe that they possess the legal authority to perform
the services for the Funds contemplated by the Prospectus, this SAI and the
Investment Advisory Agreements 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 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 national bank 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, the Board of
Trustees would review the Trust's relationship with the Investment Advisers 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 and BB&T under the Investment
Advisory Agreements, 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
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<PAGE>
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 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 and Capital Manager 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.
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
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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 as Custody Agreement dated as of June 1, 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.
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.
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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 seven 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.
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' Prospectus 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
25
<PAGE>
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.
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.
26
<PAGE>
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.
27
<PAGE>
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.
28
<PAGE>
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.
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
the Morgan Stanley Capital International EAFE Index and those prepared by Dow
Jones & Co., Inc., Standard & Poor's Corporation, 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.
29
<PAGE>
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.
30
<PAGE>
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 Funds' 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
<PAGE>
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 shares 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.
<PAGE>
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.
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 Funds 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 Funds average daily net assets. BISYS
also serves as Distributor for the Funds shares. BISYS Fund Services
Ohio, Inc., an affiliate of BISYS, serves as the Trusts 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.
<PAGE>
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.
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
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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.
ii
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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.
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
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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.
iv
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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, 19971
(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.
(b) Form of Investment Advisory Agreement between
Registrant and Branch Banking and Trust
Company
(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
Oregon
(b) Form of Custodian Agreement between
Registrant and Fifth Third 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 Company
(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 Counsel
(11) Consent of Independent Auditors
(12) Not Applicable
(13) Purchase Agreement
(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)
(b) Powers of Attorney
- ----------
* To be filed by amendment.
1 Filed with Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on February 5, 1997.
C-2
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant
Not applicable
Item 26. Number of Record Holders
There is one shareholder 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 thier
Officers and Directors
The business of each of the Investment Advisers is summarized under
"MANAGEMENT OF THE TRUST Investment Advisers" in the Prospectus
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. is
currently listed in its investment adviser registration on Form ADV
(File No. 801-22741) and is 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 Wiliams, Jr. Chairman & CEO
Director A.T. Williams Oil Company
Winston-Salem, N.C.
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-6
<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 and Branch Banking and Trust Company, 434 Fayetteville
Street Mall, Raleigh, NC 27601 (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 Funds 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-7
<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 Registration
Statement to be signed on its behalf by the undersigned thereunto duly
authorized in the city of Washington, D.C. on the 28th day of May, 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- May 28, 1997
Richard Ille cipal Executive Officer)
________*__________ Treasurer (Prin- May 28, 1997
William Tomko cipal Accounting
Officer), and
Chief Financial Officer
________*__________ Trustee May 28, 1997
Walter Grimm
________*__________ Trustee May 28, 1997
Michael Van Buskirk
________*________ Trustee May 28, 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-8
<PAGE>
EXHIBIT LIST
Exhibit No. Exhibit Name EDGAR Exhibit No.
5(a) Form of Investment EX-99.B5a
Advisory Agreement between
Registrant and Qualivest
Capital Management Inc.
5(b) Form of Investment EX-99.B5b
Advisory Agreement between
Registrant and Branch
Banking and Trust Company
6 Form of Distribution EX-99.B6
Agreement between Registrant
and BISYS Fund Services
8(a) Form of Custodian Agreement EX-99.B8a
between Registrant and United
States National Bank of Oregon
8(b) Form of Custodian Agreement EX-99.B8b
between Registrant and
Fifth Third Bank
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.
9(d) Form of Fund Participation EX-99.B9d
Agreement with Hartford Life
Insurance Company
9(f) Form of Variable Contract EX-99.B9f
Owner Servicing Agreement
10 Opinion and Consent EX-99.B10
of Counsel
11 Consent of Independent EX-99.B11
Auditors
13 Purchase Agreement EX-99.B13
19(a) Secretary's Certificate EX-99.B19a
Pursuant to Rule 483(b)
19(b) Powers of Attorney EX-99.B19b
27 Financial Data Schedule EX-27
Pursuant to Rule 483
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 QUALIVEST
CAPITAL MANAGEMENT, INC. (the "Investment Adviser"), an Oregon corporation
having its principal place of business at 111 S.W. Fifth Avenue, Portland,
Oregon 97204.
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
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 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 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, which
approval shall not be unreasonably withheld and may not be
withheld where the Investment Adviser may be exposed to
civil or criminal contempt proceedings for failure to
comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust;
(g) will maintain its policy and practice of conducting its
fiduciary functions independently. In making investment
recommendations for the Funds, the Investment Adviser's
personnel will not inquire or take into consideration
whether the issuers of securities proposed for purchase or
sale for the Trust's account are customers of the Investment
Adviser or of its parent or its subsidiaries or affiliates.
In dealing with such customers, the Investment Adviser and
its parent, subsidiaries, and affiliates will not inquire or
take into consideration whether securities of those
customers are held by the Trust;
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 its designee 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 Investment
Adviser 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 Investment Adviser hereunder are not to be deemed exclusive,
and the Investment Adviser shall be free to furnish similar services
to others so long as its services under this Agreement are not
impaired thereby.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Investment Adviser hereby agrees that all
records which it maintains for the 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 Investment Adviser 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 Investment Adviser
will pay all expenses incurred by it in connection with its activities
under this Agreement other than the cost of securities (including
brokerage commissions, if any) purchased for the Funds.
7. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, each of the Funds will pay the Investment
Adviser and the Investment Adviser will accept as full compensation
therefor a fee as set forth on Schedule A hereto. The obligation of
each Fund to pay the above- described fee to the Investment Adviser
will begin as of the date of the initial public sale of shares in such
Fund. The fee attributable to each Fund shall be the obligation of
that Fund and not of any other Fund.
4
<PAGE>
If in any fiscal year the aggregate expenses of any of the Funds
exceed any applicable expense limitation, the Investment Adviser will
reimburse the Fund for a portion of such excess expenses equal to such
excess times the ratio of the fees otherwise payable by the Fund to
the Investment Adviser hereunder to the aggregate fees otherwise
payable by the Fund to the Investment Adviser hereunder and to BISYS
Fund Services under the Management and Administration Agreement
between BISYS Fund Services and the Trust. The obligation of the
Investment Adviser to reimburse the Funds hereunder is limited in any
fiscal year to the amount of its fee hereunder for such fiscal year;
provided, however, that notwithstanding the foregoing, the Investment
Adviser shall reimburse the Funds for such proportion of such excess
expenses regardless of the amount of fees paid to it during such
fiscal year to the extent required by any applicable regulation. Such
expense reimbursement, if any, will be estimated daily and reconciled
and paid on a monthly basis.
8. Limitation of Liability. The Investment Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered
by the Funds in connection with the performance of this Agreement,
except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the
Investment Adviser in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement. It
is further agreed that the Investment Adviser 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 Investment Adviser for
inclusion therein or information known by the Investment Adviser to be
false or misleading. The Trust agrees to indemnify the Investment
Adviser to the full extent permitted by the Trust's Declaration of
Trust.
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 until ______, 1999. 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) or by the Investment Adviser. This Agreement
will immediately terminate in the event of its assignment. (As used in
this Agreement, the terms "majority of the outstanding voting
securities", "interested persons" and "assignment" shall have the same
meanings as ascribed to such terms in the 1940 Act.)
10. Investment Adviser's Representations. The Investment Adviser 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 in the event (1) that the
Commission has censured the Investment Adviser; 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 Investment Adviser
further agrees to notify the Trust immediately of any material fact
known to the Investment Adviser respecting or relating to the
Investment Adviser 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 Investment Adviser, any person or
firm that the Investment Adviser has employed or with which it has
associated, or any employee thereof has not, to the best of the
Investment Adviser's knowledge, in any material connection with the
handling of Trust assets: (i) been convicted, in the last ten (10)
years, of any felony or misdemeanor arising out of conduct involving
embezzlement, fraudulent conversion, or misappropriation of funds or
securities, or involving violations of Sections 1341, 1342, or 1343 of
Title 18, United States Code; or (ii) been found by any state
regulatory authority, within the last ten (10) years, to have violated
or to have acknowledged violation of any provision of any state
insurance law involving fraud, deceit, or knowing misrepresentation;
or (iii) been found by any federal or state regulatory authorities,
within the last ten (10) years, to have violated or to have
acknowledged violation of any provisions of federal or state
securities laws involving fraud, deceit or knowing misrepresentation.
11. Insurance Company Offerees. All parties acknowledge that the Trust
will offer its shares so that it may serve as an investment vehicle
for variable annuity contracts and variable life insurance policies
issued by insurance companies, as well as to qualified pension and
retirement plans. The Trust and the Investment Adviser agree that
shares of the Funds may be offered only to the separate accounts and
general accounts of insurance companies that are approved in writing
by the Investment Adviser. The Investment Adviser agrees that shares
of the Funds may be offered to separate accounts and the general
account of 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 Investment Adviser and the Trust agree that the
Investment Adviser shall be under no obligation to investigate
insurance companies to which the Trust offers or proposes to offer its
shares.
12. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought.
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. Miscellaneous. It is expressly agreed that the obligations of the
Trust hereunder shall not be binding upon any of the Trustees,
7
<PAGE>
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.
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 above
written.
[SEAL] VARIABLE INSURANCE FUNDS
By:
Title:
QUALIVEST CAPITAL MANAGEMENT, INC.
[SEAL] By:
Title:
9
<PAGE>
Dated: _______, 1997
Schedule A
to the Investment Advisory Agreement
between Variable Insurance Funds and
Qualivest Capital Management, Inc.
NAME OF FUND COMPENSATION
Variable Insurance Money Market Fund Annual rate of thirty
five one-hundredths of
one percent (.35%) of
the average daily net
assets of such Fund.
Variable Insurance Allocated Annual rate of five one-
Conservative Fund hundredths of one
percent (.05%) of the
average daily net assets
of such Fund.
Variable Insurance Allocated Annual rate of five one-
Balanced Fund hundredths of one
percent (.05%) of the
average daily net assets
of such Fund.
Variable Insurance Allocated Growth Annual rate of five one-
Fund hundredths of one
percent (.05%) of the
average daily net assets
of such Fund.
Variable Insurance Allocated Annual rate of five one-
Aggressive hundredths of one
Fund percent (.05%) 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>
QUALIVEST CAPITAL MANAGEMENT, INC.
By:________________________________
Name:______________________________
Title:_____________________________
A-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 BRANCH BANKING
AND TRUST COMPANY (the "Investment Adviser"), a bank having its principal place
of business at 434 Fayettevile Street Mall, Raleigh, North Carolina 27601.
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
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");
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(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 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;
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(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 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, which
approval shall not be unreasonably withheld and may not be
withheld where the Investment Adviser may be exposed to
civil or criminal contempt proceedings for failure to
comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust;
(g) will maintain its policy and practice of conducting its
fiduciary functions independently. In making investment
recommendations for the Funds, the Investment Adviser's
personnel will not inquire or take into consideration
whether the issuers of securities proposed for purchase or
sale for the Trust's account are customers of the Investment
Adviser or of its parent or its subsidiaries or affiliates.
In dealing with such customers, the Investment Adviser and
its parent, subsidiaries, and affiliates will not inquire or
take into consideration whether securities of those
customers are held by the Trust;
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<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 its designee 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 Investment
Adviser 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 Investment Adviser hereunder are not to be
deemed exclusive, and the Investment Adviser shall be free to
furnish similar services to others so long as its services under
this Agreement are not impaired thereby.
5. Books and Records. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Investment Adviser hereby agrees
that all records which it maintains for the 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
Investment Adviser 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 Investment
Adviser will pay all expenses incurred by it in connection with
its activities under this Agreement other than the cost of
securities (including brokerage commissions, if any) purchased
for the Funds.
7. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, each of the Funds will pay the
Investment Adviser and the Investment Adviser will accept as full
compensation therefor a fee as set forth on Schedule A hereto.
The obligation of each Fund to pay the above-described fee to the
Investment Adviser will begin as of the date of the initial
public sale of shares in such Fund. The fee attributable to each
Fund shall be the obligation of that Fund and not of any other
Fund.
4
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If in any fiscal year the aggregate expenses of any of the Funds
exceed any applicable expense limitation, the Investment Adviser
will reimburse the Fund for a portion of such excess expenses
equal to such excess times the ratio of the fees otherwise
payable by the Fund to the Investment Adviser hereunder to the
aggregate fees otherwise payable by the Fund to the Investment
Adviser hereunder and to BISYS Fund Services under the Management
and Administration Agreement between BISYS Fund Services and the
Trust. The obligation of the Investment Adviser to reimburse the
Funds hereunder is limited in any fiscal year to the amount of
its fee hereunder for such fiscal year; provided, however, that
notwithstanding the foregoing, the Investment Adviser shall
reimburse the Funds for such proportion of such excess expenses
regardless of the amount of fees paid to it during such fiscal
year to the extent required by any applicable regulation. Such
expense reimbursement, if any, will be estimated daily and
reconciled and paid on a monthly basis.
8. Limitation of Liability. The Investment Adviser shall not be
liable for any error of judgment or mistake of law or for any
loss suffered by the Funds in connection with the performance of
this Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Investment Adviser in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. It is further agreed
that the Investment Adviser 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 Investment Adviser for
inclusion therein or information known by the Investment Adviser
to be false or misleading. The Trust agrees to indemnify the
Investment Adviser to the full extent permitted by the Trust's
Declaration of Trust.
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 until
______, 1999. 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) or by the Investment Adviser.
This Agreement will immediately terminate in the event of its
assignment. (As used in this Agreement, the terms "majority of
the outstanding voting securities", "interested persons" and
"assignment" shall have the same meanings as ascribed to such
terms in the 1940 Act.)
10. Investment Adviser's Representations. The Investment Adviser
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 in the event (1) that
the Commission or any other regulatory authority has censured the
Investment Adviser; 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
Investment Adviser further agrees to notify the Trust immediately
of any material fact known to the Investment Adviser respecting
or relating to the Investment Adviser 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
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<PAGE>
(d) it shall be responsible for making inquiries and for
reasonably ensuring that any employee of the Investment Adviser,
any person or firm that the Investment Adviser has employed or
with which it has associated, or any employee thereof has not, to
the best of the Investment Adviser's knowledge, in any material
connection with the handling of Trust assets: (i) been convicted,
in the last ten (10) years, of any felony or misdemeanor arising
out of conduct involving embezzlement, fraudulent conversion, or
misappropriation of funds or securities, or involving violations
of Sections 1341, 1342, or 1343 of Title 18, United States Code;
or (ii) been found by any state regulatory authority, within the
last ten (10) years, to have violated or to have acknowledged
violation of any provision of any state insurance law involving
fraud, deceit, or knowing misrepresentation; or (iii) been found
by any federal or state regulatory authorities, within the last
ten (10) years, to have violated or to have acknowledged
violation of any provisions of federal or state securities laws
involving fraud, deceit or knowing misrepresentation.
11. Insurance Company Offerees. All parties acknowledge that the
Trust will offer its shares so that it may serve as an investment
vehicle for variable annuity contracts and variable life
insurance policies issued by insurance companies, as well as to
qualified pension and retirement plans. The Trust and the
Investment Adviser agree that shares of the Funds may be offered
only to the separate accounts and general accounts of insurance
companies that are approved in writing by the Investment Adviser.
The Investment Adviser agrees that shares of the Funds may be
offered to separate accounts and the general account of Hartford
Life Insurance Company and to separate accounts and the general
accounts of any insurance companies that are affiliated with
Hartford Life Insurance Company. The Investment Adviser and the
Trust agree that the Investment Adviser shall be under no
obligation to investigate insurance companies to which the Trust
offers or proposes to offer its shares.
12. Amendment of this Agreement. No provision of this Agreement may
be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which
enforcement of the change, waiver, discharge or termination is
sought.
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. Miscellaneous. 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
7
<PAGE>
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.
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 above
written.
[SEAL] VARIABLE INSURANCE FUNDS
By: _________________________
Title:_______________________
BRANCH BANKING AND TRUST COMPANY
[SEAL] By:__________________________
Title:_______________________
9
<PAGE>
Dated: _______, 1997
Schedule A
to the Investment Advisory Agreement
between Variable Insurance Funds and
Branch Banking and Trust Company
NAME OF FUND COMPENSATION
BB&T Growth and Income Fund Annual rate of seventy-four
one-hundredths of one
percent (.74%) of the
average daily net assets of
such Fund.
BB&T Capital Manager Fund Annual rate of twenty-five
one-hundredths of one
percent (.25%) of the
average daily net assets of
such Fund.
_______________________________________________
All fees are computed daily and paid monthly.
VARIABLE INSURANCE FUNDS
By:________________________________
Name:______________________________
Title:_____________________________
BRANCH BANKING AND TRUST COMPANY
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
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<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
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<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 hereinbefore 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
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<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,
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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
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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.
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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:_____________________________
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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
VARIABLE INSURANCE FUNDS
By:
Name:___________________________
Title:__________________________
BISYS FUND SERVICES
By: BISYS Fund Services, Inc.,
General Partner
By:_____________________________
Name:___________________________
Title:__________________________
A-1
CUSTODIAN AGREEMENT
This Agreement, dated as of ________, 1997, is entered into by and between
VARIABLE INSURANCE FUNDS (hereinafter called the "Trust"), a Massachusetts
business trust having its principal place of business in Columbus, Ohio , and
United States National Bank of Oregon, a national bank having its principal
office in Portland, Oregon (hereinafter called the "Custodian").
In consideration of the mutual covenants herein contained, the Trust and
the Custodian agree as follows:
1. Appointment and Acceptance.
The Trust hereby appoints the Custodian as custodian of all of the
securities and cash of each investment portfolio of the Trust
identified on Schedule A hereto (a "Fund"), and the Custodian agrees
to act as such upon the terms and conditions herein set forth. The
Trust agrees to deliver to the Custodian all securities and cash owned
by a Fund, and all payments of income, payments of principal, or
capital distributions received by a Fund with respect to all
securities owned by such Fund from time to time, and the cash
consideration received by a Fund for such new or treasury units of
beneficial interest of such Fund ("Shares") as may be issued or sold
from time to time. The Custodian shall not by responsible for any
property of the Trust held or received by a Fund and not delivered to
the Custodian.
2. Definitions.
The word "securities" as used herein shall have the meaning stated in
Section 2(a)(36) of the Investment Company Act of 1940, as amended
(the "1940 Act").
The words "proper instructions" as used herein mean a writing signed
or initialled by such one or more person or persons ("Authorized
Persons") and in such manner as the Board of Trustees of the Trust
shall have from time to time authorized and whose authority, names and
signatures have been most recently certified to the Custodian by the
Secretary or an Assistant Secretary of the Trust. Each such writing
shall set forth the transactions involved, including a specific
<PAGE>
statement of the purpose for which action is requested. Payments of
monies or deliveries of securities with respect to a Fund for purposes
not specifically set forth in this Agreement shall be made by the
Custodian only upon receipt of, in addition to proper instructions, a
Resolution specifying the amount of such payment or describing the
securities to be delivered, the purpose of which the payment or
delivery is being made and declaring such purpose to be a proper
purpose of such Fund and naming the person or persons to whom such
payment or delivery is to be made. Oral instructions will be
considered proper instructions if the Custodian reasonably believes
them to have been given by Authorized Persons. The Trust shall cause
all oral instructions to be confirmed in writing. Upon receipt of a
Resolution as to the authorization by the Trustees of the Trust
accompanied by a detailed description of procedures approved by the
Trustees, proper instructions may include communications effected
directly between electromechanical or electric devices provided that
the Trustees and the Custodian are satisfied that such procedures
afford adequate safeguards for a Fund's assets.
The word "Resolution" shall mean a copy of a resolution of the Board
of Trustees (or the executive committee) of the Trust duly certified
by the Secretary or an Assistant Secretary of the Trust.
The word "Depository" as used herein means each of Depository Trust
Company, Federal Reserve Book Entry System, or any other system for
the central handling of securities as more fully described in Section
11 herein.
3. Names, Titles and Signatures.
The Trust will furnish the Custodian with a Resolution indicating the
name(s) and signature(s) of the Authorized Persons from time to time
authorized to act hereunder. In the event that any person named in the
most recent Resolution shall cease to be an Authorized Person, the
Trust will furnish the Custodian with a certificate of the Secretary
or an Assistant Secretary advising it to that effect. In the absence
of such certificate, the Custodian shall be entitled to rely, as
aforesaid, upon the signatures of the Authorized Persons named in the
most recent Resolution.
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4. Accounts.
The Custodian shall maintain an account (or accounts) on behalf of
each Fund, which may be an account (or accounts) used commonly on
behalf of only those customers for whom the Custodian acts in a
fiduciary, advisory, custodian, or other similar capacity. Such
account (or accounts) with respect to a Fund shall be subject only to
draft or order by the Custodian acting pursuant to the terms of this
Agreement, and the Custodian shall hold in such account (or accounts),
subject to the provisions hereof, all cash received by it from or for
the account of such Fund other than cash maintained by such Fund in a
bank account established and used in accordance with Rule 17f-3 under
the 1940 Act. Funds held by the Custodian on behalf of each Fund in
such account (or accounts) shall be at all times identifiable as such
in the Custodian's records.
Funds held by the Custodian on behalf of a Fund may be deposited by it
as Custodian for such Fund in such other banks or trust companies as
it may in its discretion deem necessary or desirable in accordance
with the purposes and terms described herein, provided that every such
other bank or trust company shall be qualified to act as a custodian
under the 1940 Act and further provided that each such bank or trust
company and the deposit of funds with each such bank or trust company
shall be approved by vote of a majority of the Trustees of the Trust
as evidenced by a Resolution. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by
the Custodian only in that capacity.
5. Collection of Income.
The Custodian shall collect all income and other payments with respect
to securities held hereunder when such securities are in the name of,
or in the process of transfer into the name of, the Custodian or a
nominee of the Custodian on the record date for such income or other
payments in the case of registered securities, or are held by the
Custodian on the date of payment by the issuer thereof in the case of
bearer securities. The Custodian shall credit all such income
collected by it hereunder with respect to a Fund to the account of
such Fund. Without limiting the generality of the foregoing, the
Custodian shall detach and present for payment all coupons and other
income items requiring presentation as and when they become due and
shall collect dividends and interest when due on securities registered
in the name of the Custodian or a nominee of the Custodian. With
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<PAGE>
respect to securities of foreign issue, while the Custodian will use
its best efforts to collect any monies which may to its knowledge
become collectible arising from such securities, including dividends,
interest and other income, and to notify the Trust of any call for
redemption, offer of exchange, right of subscription, reorganization
or other proceedings affecting such securities, it is understood that
the Custodian shall be under no responsibility for any failure or
delay (other than a failure or delay arising from the Custodian's own
negligence or bad faith) in effecting such collections or giving such
notices, whether or not relevant information is published in any
financial service available to it.
The Custodian shall not be under any obligation or duty to take action
to effect collection of any amount, if the securities (domestic or
foreign) upon which such amount is payable are in default and payment
is refused after due demand or presentation. The Custodian will,
however, promptly notify the Trust in writing of such default and
refusal to pay.
6. Payment of Money of a Fund.
Upon receipt of proper instructions, which may be continuing
instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of a Fund in the following cases only:
a. Upon the purchase of securities for the account of such Fund but
only (1) against the delivery of such securities to the Custodian
(or any bank, banking firm or trust company doing business in the
United States or abroad which is qualified under the 1940 Act to
act as a custodian and has been designated by the Custodian as
its agent for this purpose) registered in the name of such Fund
or in the name of a nominee of such Fund or in the name of a
nominee of the Custodian referred to in Section 8 hereof or in
proper form for transfer; (2) in the case of a purchase effected
through a Depository, in accordance with the conditions set forth
in Section 11 hereof; or (3) in the case of repurchase agreements
entered into between such Fund and a bank or a registered
broker-dealer, (i) against delivery of the securities either in
certificate form or through an entry crediting the Custodian's
account at the Federal Reserve Bank with such securities or (ii)
against delivery of the receipt evidencing purchase by such Fund
of securities owned by the bank or the registered broker-dealer
along with written evidence of the agreement by the bank or the
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<PAGE>
bank or the registered broker-dealer to repurchase such
securities from such Fund;
b. In connection with the conversion, exchange or surrender of
securities owned by such Fund as set forth in Section 7(b)
hereof;
c. For the redemption or repurchase of Shares of such Fund as set
forth in Section 10 hereof;
d. For the payment of any expense or liability incurred by such
Fund, including but not limited to the following payments for the
account of such Fund: interest, taxes, management, accounting,
transfer agent and legal fees, and operating expenses of such
Fund whether or not such expenses are to be in whole or in part
capitalized or treated as deferred expenses;
e. For the payment of any dividends declared with respect to such
Fund pursuant to the governing documents of the Trust;
f. For transfer to a demand or time deposit account of such Fund in
any bank, whether domestic or foreign, or in any savings and loan
association; and
g. For any other proper purposes of such Fund, but --- only upon
receipt of, in addition to proper ---- instructions, a Resolution
specifying the amount of such payment, setting forth the purpose
for which such payment is to be made, declaring such purpose to
be a proper purpose of such Fund, and naming the person or
persons to whom such payment is to be made.
7. Duties of Custodian with Respect to Securities of a Fund
held by Custodian.
a. Holding Securities.
The Custodian shall hold in a separate account for each Fund, and
physically segregated at all times, except for securities held in
a Depository, from those of any other persons, firms or
corporations, pursuant to the provisions hereof, all securities
received by it from or for the account of such Fund. The
Custodian shall have no power or authority to assign,
hypothecate, pledge or otherwise dispose of any securities and
investments, except pursuant to proper instructions of the Trust
or as otherwise provided herein and only for the account of a
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<PAGE>
Fund as hereinafter provided.
b. Delivery of Securities.
The Custodian shall release and deliver securities owned by a
Fund held by the Custodian or in a Depository account of the
Custodian only upon receipt of proper instructions, which may be
continuing instructions when deemed appropriate by the parties,
and only in the following cases:
(1) Upon the sale of such securities for the account of such
Fund and receipt of payment therefor;
(2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities entered into
by such Fund;
(3) In the case of a sale effected through a Depository, in
accordance with the provisions of Section 11 hereof;
(4) To a Depository in connection with tender or other similar
offers for portfolio securities of such Fund;
(5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
(6) To the issuer thereof, or its agent, for transfer into the
name of such Fund or into the name of any nominee or
nominees of the Custodian or into the name or nominee name
of any agent appointed pursuant to Section 9; or for
exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount
or number of units; provided, that, in any such case, the
new securities are to be delivered to the Custodian;
(7) To the broker selling the same for examination in accordance
with the "street delivery" custom;
(8) For exchange or conversion pursuant to any plan or merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
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<PAGE>
securities, or pursuant to provisions for conversion
contained in such securities or pursuant to any deposit
agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian;
(9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights
or similar securities or the surrender of interim receipts
or temporary securities for definitive securities; provided
that, in any such case, the new securities and cash, if any,
are to be delivered to the Custodian;
(10) For delivery in connection with any loans of securities made
by such Fund, but only against receipt of adequate
collateral as agreed upon from time to time by the Custodian
and such Fund, which may be in the form of cash, obligations
issued by the United States Government, its agencies or
instrumentalities, or other securities as permitted in
accordance with the terms of the current Prospectus of such
Fund;
(11) For delivery as security in connection with any borrowings
by such Fund requiring a pledge of assets by such Fund, but
only against receipt of amounts borrowed by the Custodian
except where additional collateral is being pledged on an
outstanding loan; or
(12) For any other proper purposes of such Fund, but only upon
receipt of, in addition to proper instructions, a Resolution
specifying the securities to be delivered, setting forth the
purposes to be proper purposes of such Fund, and naming the
person or persons to whom delivery of such securities shall
be made.
8. Registration of Securities.
Securities held by the Custodian (other than bearer securities) on
behalf of a Fund shall be registered in the name of such Fund or in
the name of any nominee of such Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to such Fund,
unless the Trust has authorized in writing the appointment of a
7
<PAGE>
nominee to be used in common with other registered investment
companies having the same investment adviser as such Fund or in common
exclusively with other accounts for which the Custodian acts in a
fiduciary, advisory, custodial, or other similar capacity, or in the
name or nominee name of any agent appointed pursuant to Section 9 or
in the name of any nominee or nominees used by a Depository. All
securities accepted by the Custodian on behalf of a Fund under the
terms of this Contract shall be in "street" or other good delivery
form. The Custodian shall use its best efforts to the end that the
specific securities held by the Custodian on behalf of each Fund shall
be at all times identifiable as such in the Custodian's records.
9. Appointment of Agents.
Subject to the provisions of Section 12 of this Agreement, the
Custodian may at any time or times in its discretion appoint (and may
at any time remove) any other bank (as defined in the 1940 Act) as its
agent or subcustodian to carry out such of the provisions of this
Agreement as the Custodian may from time to time direct; provided,
however, that the appointment of any agent shall not relieve the
Custodian of any of its responsibilities or liabilities hereunder.
10. Payments for Redemption or Repurchase of Shares of a
Fund.
From such funds as may be available for the purpose, but subject to
the limitations of the Amended and Restated Declaration of Trust (the
"Agreement and Declaration of Trust") and Bylaws of the Trust and any
applicable votes of the Trustees of the Trust pursuant thereto, the
Custodian shall, upon receipt of instructions from the Transfer Agent
for a Fund, make funds available for payment to holders of Shares
("Shareholders") of such Fund who have delivered to the Transfer Agent
a request for redemption or repurchase of their Shares. In connection
with the redemption or repurchase of Shares of a Fund, the Custodian
is authorized upon receipt of instructions from the Transfer Agent to
wire funds to a commercial bank designated by a redeeming Shareholder.
11. Deposit of a Fund's Assets in a Depository.
The Custodian may deposit and/or maintain securities owned by a Fund
in (1) a clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934
which acts as a securities depository and provided such deposit and/or
8
<PAGE>
maintenance complies with all applicable provisions of Rule 17f-4
under the 1940 Act, as such Rule may from time to time be amended, or
(2) the book-entry system as provided in Subpart O of Treasury
Circular No. 300, 31 C.F.R. 306, Subpart B of 31 C.F.R. Part 350, and
the book-entry regulations of federal agencies substantially in the
form of Subpart O. The Trust shall furnish the Custodian with a
Resolution evidencing the approval by the Trust of the use of a
Depository by the Custodian. The Board of Trustees of the Trust shall
review, at least annually, the use of a Depository with respect to
this Agreement.
Without limiting the generality of the foregoing regarding the use of
such Depository, it is agreed that the following provisions shall
apply thereto:
a. The Custodian shall deposit and/or maintain the securities in an
account of the Custodian in the Depository that shall not include
any assets of the Custodian other than assets held by it for
customers;
b. The Custodian shall send the Trust a confirmation of any
transfers to or from the account of a Fund. Where securities are
transferred to that account, the Custodian shall also, by book
entry or otherwise, identify as belonging to such Fund a quantity
of securities in a fungible bulk of securities (1) registered in
the name of the Custodian (or its nominee) or (2) shown on the
Custodian's account on the books of the Depository;
c. The Custodian shall pay for securities purchased for the account
of a Fund upon (1) receipt of advice from the Depository that
such securities have been transferred to the account, and (2) the
making of an entry on the records of the Custodian to reflect
such payment and transfer for the account of such Fund. The
Custodian shall transfer securities sold for the account of a
Fund upon (1) receipt of advice from the Depository that payment
for such securities has been transferred to the account, and (2)
the making of an entry on the records of the Custodian to reflect
such transfer and payment for the account of the Fund. Copies of
all advices from the Depository of transfers of securities for
the account of a Fund shall identify such Fund as well as the
Trust, be maintained for such Fund by the Custodian and be
provided to the Trust at its request. The Custodian shall furnish
the Trust confirmation of each transfer to or from the account of
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a Fund in the form of a written advice or notice and shall
furnish to the Trust copies of daily transaction sheets
reflecting each day's transactions in the Depository for the
account of a Fund on the next business day;
d. The Custodian shall promptly send to the Trust reports the
Custodian receives from the Depository on the Depository's system
of internal accounting control. The Custodian shall send to the
Trust such reports on its own system of internal accounting
control as the Trust may reasonably request from time to time;
e. The Custodian shall comply with all other conditions which may be
imposed from time to time by statute or by appropriate rules and
regulations on the use of a Depository with respect to the
securities of a Fund; and
f. Anything to the contrary in this Agreement notwithstanding, the
Custodian shall be liable to a Fund for any loss or damage to
such Fund resulting from the use of a Depository by reason of the
Custodian's willful misfeasance, bad faith, or negligence, or
from any failure of the Custodian or any such agent to pursue
diligently such rights as it may have against such Depository; at
the election of a Fund, it shall be entitled to be subrogated to
the rights of the Custodian with respect to any claim against the
Depository or any person which the Custodian may have as a
consequence of any such loss or damage if and to the extent that
such Fund has not been made whole for any such loss or damage.
Furthermore, the Custodian shall be fully responsible for any
loss suffered by a Fund as a result of any act or failure to act
on the part of a Depository, to the same extent that the
Custodian would have been liable had the Custodian taken or
failed to take such action with respect to securities of such
Fund entrusted to its custody. Without, in any way, limiting the
generality of the foregoing, the Custodian shall be responsible
for the safe custody of the securities held in such Depository,
to the same extent as if the Custodian held physical possession
of such securities.
12. Use of Subcustodians.
Subject to Board of Trustees approval pursuant to Rule 17f-5 under the
1940 Act, the Custodian may, in connection with the purchase and sale
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by a Fund of securities outside the United States, in its discretion
appoint in writing (and may at any time remove) any other bank or trust
company (which may include a foreign branch or agency of a bank or
trust company) as its agent hereunder (individually, a "Subcustodian")
to carry out, in accordance with the terms of this Agreement, such of
the provisions of the Agreement as the Custodian may, from time to
time, direct; provided, however, that such Subcustodian (which itself
would meet the qualifications for successor custodian set forth in
Section 18 and which will have been selected with reasonable care,
having in mind the duties to be assigned to it) is understood to be the
agent of the Custodian and not the agent of such Fund, and the
Custodian shall be fully responsible for the acts of such Subcustodian
and shall not be relieved of any of its responsibilities hereunder by
the appointment of such Subcustodian.
13. Use of Euro-clear Securities Clearance Facilities.
A Fund may, from time to time, with respect to securities purchased or
sold by such Fund in Europe, if any, wish to use the Euro-clear
Securities Clearance Facilities. In such cases, a Subcustodian of the
Custodian employed pursuant to Section 12 may, notwithstanding the
other provisions of this Agreement:
a. make payments of cash upon the purchase of securities for the
account of such Fund prior to delivery of such securities to the
Subcustodian; and
b. deliver securities upon sales of such securities for the account
of such Fund prior to receipt by the Subcustodian of payment
therefor;
provided that any such transactions shall be implemented in accordance
with procedures agreed to in advance in writing by the Trust, the
Custodian and such Subcustodian.
14. Voting and Other Action.
The Custodian shall promptly deliver or mail to the Trust all forms of
proxies and all notices of meetings and other notices or announcements
affecting or relating to the securities of a Fund, and, upon receipt of
proper instructions, shall execute and deliver or cause its nominee to
execute and deliver such proxies or other authorizations as may be
required. Neither the Custodian nor its nominee shall vote upon any of
the securities or execute any proxy to vote thereon or give any consent
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to take any other action with respect thereto (except as otherwise
herein provided) unless ordered to do so by proper instructions.
15. Transfer Tax and Other Disbursements.
A Fund shall pay or reimburse the Custodian from time to time for any
transfer taxes payable upon transfers of securities made hereunder, and
for all other necessary and proper disbursements and expenses made or
incurred by the Custodian in the performance of this Agreement;
provided that, with the exception of such transfer taxes, a Fund shall
not pay or reimburse the Custodian for any disbursements or expenses
made or incurred in connection with the use by the Custodian of a
Depository.
The Custodian shall execute and deliver and shall cause any Depository
to execute and deliver such certificates in connection with securities
delivered to it or by it under this Agreement as may be required under
the laws of any jurisdiction to exempt from taxation any exemptible
transfers and/or deliveries of any such securities.
16. Responsibility of Custodian.
The Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it
or delivered by it pursuant to this Agreement and shall be held
harmless in acting upon proper instructions, Resolutions, any notice,
request, consent, certificate or other instrument reasonably believed
by it to be genuine and to be signed by the proper party or parties and
shall be entitled to receive as conclusive proof of any fact or matter
required to be ascertained by it hereunder, a certificate signed by the
President, a Vice President, the Treasurer, the Secretary or an
Assistant Secretary of the Trust. The Custodian may receive and accept
a Resolution as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of
any action by the Board of Trustees pursuant to the Agreement and
Declaration of Trust or Bylaws of the Trust as described in such vote,
and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice from the Secretary or an
Assistant Secretary to the contrary.
The Custodian shall be entitled to rely on and may act upon advice of
counsel (who may be counsel for the Trust) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant
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to such advice.
The Custodian shall be held to the exercise of reasonable care in
carrying out the provisions of this Agreement but shall be liable only
in the case of its willful misfeasance, bad faith, or negligence in the
performance of its duties.
If a Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action
may, in the opinion of the Custodian, result in the custodian or its
nominee assigned to such Fund being liable for the payment of money or
incurring liability of some other form, such Fund, as a prerequisite to
requiring the Custodian to take such action, shall provide indemnity to
the Custodian in an amount and form satisfactory to it.
The Custodian shall not incur any personal liability of any nature in
connection with any act done or omitted to be done in good faith in the
administration of this account or in carrying out any directions of the
Trust or its officers and/or trustees issued in accordance with this
Agreement, and the Custodian shall be indemnified and saved harmless by
the Trust from and against any and all such act or conduct in its
official capacity, including all expenses reasonably incurred in its
defense in case the Trust fails to provide such defense, unless such
act or conduct is the result of the Custodian's own willful misconduct,
bad faith, or negligence.
17. Effective Period, Termination and Interpretive and
Additional Provisions.
This Agreement shall become effective with respect to a Fund as of the
date first written above, and shall continue in full force and effect
until terminated with respect to a Fund by an instrument in writing
either delivered or mailed, postage prepaid, to the other party, such
termination to take effect not sooner than sixty (60) days after the
date of such delivery and mailing; provided, however, that the Trust
shall not terminate this contract in contravention of any applicable
Federal or state regulations, or any provisions of the Agreement and
Declaration of Trust and Bylaws of the Trust as the same may from time
to time be amended, and further provided, that the Trust may at any
time by action of its Board of Trustees substitute with respect to a
Fund another bank or trust company for the Custodian by giving notice
as above to the Custodian.
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Upon termination hereof the Custodian shall be entitled to such
compensation as may be due it as of the date of such termination and
shall likewise be entitled to reimbursement for its costs, expenses,
and disbursements (whether incurred prior to or subsequent to
termination) and as provided herein.
This Agreement may be amended with respect to a Fund at any time by
mutual agreement of the parties hereto in writing; provided, however,
that this Agreement may not be amended in contravention of any
applicable Federal or state regulations, or any provisions of the
Agreement and Declaration of Trust and Bylaws of the Trust as the same
may from time to time be amended.
In connection with the operation of this Agreement, the Custodian and
the Trust may, with respect to a Fund, agree from time to time on such
provisions interpretive of or in addition to the provisions of this
Agreement as may in their joint opinion be consistent with the general
tenor of this Agreement, any such interpretive or additional provisions
to be signed by both parties and annexed hereto, provided that no such
interpretive or additional provisions shall contravene any applicable
Federal or state regulations, or any provisions of the Agreement and
Declaration of Trust and Bylaws of the Trust as the same may from time
to time be amended. No interpretive or additional provisions made as
provided in the preceding sentence shall be deemed to be an amendment
of this Agreement.
18. Successor Custodian.
If a successor custodian is appointed with respect to a Fund by the
Board of Trustees of the Trust, the Custodian shall, upon termination,
deliver to such successor custodian at the office of the Custodian,
duly endorsed and in form for transfer, all securities then held
hereunder and all funds or other properties of such Fund deposited with
or held by it hereunder.
If no such successor custodian is appointed, the Custodian shall, in
like manner, at its office, upon receipt of a certified copy of a vote
of the Shareholders of such Fund, deliver such securities, funds and
other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Shareholders of such Fund shall have
been delivered to the Custodian on or before the date when such
termination shall become effective, then the Custodian shall have the
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right to deliver to a bank or trust company of its own selection
qualified to act as a custodian under the 1940 Act, having an aggregate
capital, surplus, and undivided profits, as shown by its last published
report, of not less than $20,000,000, all securities, funds, and other
properties held by the Custodian on behalf of such Fund and all
instruments held by it relative thereto and all other property held by
it with respect to such Fund under this Agreement. Thereafter such bank
or trust company shall be the successor of the custodian with respect
to such Fund under this Agreement.
In the event that securities, funds, and other properties remain in the
possession of the Custodian after the date of termination hereof owing
to the failure of the trust to procure the certified copy referred to
above, or to the failure of the Trustees to appoint a successor
custodian, the Custodian shall be entitled to fair compensation for its
services during such period and the provisions of this Agreement
relating to the duties and obligations of the Custodian shall remain in
full force and effect.
19. Compensation of Custodian.
The Custodian shall be entitled to compensation for its services and
expenses as Custodian for the assets of a Fund as described on Schedule
B hereto.
20. Massachusetts Law to Apply.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of The Commonwealth of
Massachusetts.
21. 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
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provided in the Trust's Agreement and Declaration of Trust.
22. Notices.
All directions, orders, instructions, notices, accountings, reports and
other written communications required to be given under this Agreement
shall be addressed to the parties at their respective addresses as
shown below or such other addresses as each may hereafter designate in
writing delivered to the other:
In the case of the Trust:
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
In the case of the Custodian:
United States National Bank of Oregon
Trust Operations Department
111 S.W. Fifth Avenue T-6
Portland, Oregon
Attention: Kathy Richmond
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized officers and its seal
to be hereunto affixed as of the day first written above.
VARIABLE INSURANCE FUNDS
[ SEAL ] By:_______________________________________
Title:____________________________________
UNITED STATES NATIONAL BANK OF OREGON
[ SEAL ] By:______________________________________
Title:___________________________________
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Dated: ________, 1997
Schedule A
to the Custodian Agreement
between Variable Insurance Funds and
United States National Bank of Oregon
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
VARIABLE INSURANCE FUNDS
By:__________________________________
Date:________________________________
UNITED STATES NATIONAL BANK OF OREGON
By:_________________________________
Date:_______________________________
A-1
<PAGE>
Dated: _______, 1997
Schedule B
to the Custodian Agreement
between Variable Insurance Funds and
United States National Bank of Oregon
Each of the Funds named in Schedule A to the Custodian Agreement between
the Variable Insurance Funds and United States National Bank of Oregon dated
_____, 1997, as supplemented, shall pay United States National Bank a fee at an
annual rate of three one-hundredths of one percent (.03%) of such Fund's average
daily net assets. United States National Bank of Oregon shall also be entitled
to be reimbursed by each Fund for its reasonable out-of-pocket expenses incurred
in the performance of its duties under the Agreement.
VARIABLE INSURANCE FUNDS
By:______________________________
Date:____________________________
UNITED STATES NATIONAL BANK OF
OREGON
By:______________________________
Date:____________________________
B-1
CUSTODY AGREEMENT
THIS AGREEMENT, is made as of April , 1997, by and between VARIABLE INSURANCE
FUNDS, a business trust organized under the laws of the Commonwealth of
Massachusetts (the "Trust"), and THE FIFTH THIRD BANK, a banking company
organized under the laws of the State of Ohio (the "Custodian").
WITNESSETH:
WHEREAS, the Trust desires that the Securities and cash of each of the
investment portfolios identified in Exhibit A hereto (such investment portfolios
and individually referred to herein as a "Fund" and collectively as the
"Funds"), be held and administered by the Custodian pursuant to this Agreement;
and
WHEREAS, the Trust is an open-end management investment company registered under
the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Custodian represents that it is a bank having the qualifications
prescribed in Section 26(a)(i) of the 1940 Act;
NOW, THEREFORE, in consideration of the mutual agreements herein made, the Trust
and the Custodian hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless the
context otherwise requires, shall have the following meanings:
1.1 "Authorized Person" means any Officer or other person duly authorized
by resolution of the Board of Trustees to give Oral Instructions and
Written Instructions on behalf of the Trust and named in Exhibit B
hereto or in such resolutions of the Board of Trustees, certified by an
Officer, as may be received by the Custodian from time to time.
1.2 "Board of Trustees" shall mean the Trustees from time to time serving
under the Trust's Amended and Restated Declaration of Trust, dated July
20, 1994, and amended and restated February 5, 1997, as from time to
time amended.
1.3 "Book-Entry System" shall mean a federal book-entry system as provided
in Subpart O of Treasury Circular No. 300, 31 CFR 306, in Subpart B of
31 CFR Part 350, or in such book-entry regulations of federal agencies
as are substantially in the form of such Subpart O.
1.4 "Business Day" shall mean any day recognized as a settlement day by
The New York Stock Exchange, Inc. and any other day for which the Fund
computes the net asset value of the Fund.
1.5 "NASD" shall mean The National Association of Securities Dealers, Inc.
1.6 "Officer" shall mean the President, any Vice President, the Secretary,
any Assistant Secretary, the Treasurer, or any Assistant Treasurer of
the Trust.
1.7 "Oral Instructions" shall mean instructions orally transmitted to and
accepted by the Custodian because such instructions are: (i) reasonably
believed by the Custodian to have been given by an Authorized Person,
(ii) recorded and kept among the records of the Custodian made in the
ordinary course of business and (iii) orally confirmed by the
Custodian. The Trust shall cause all Oral Instructions to be confirmed
by Written Instructions. If such Written Instructions confirming Oral
Instructions are not received by the Custodian prior to a transaction,
it shall in no way affect the validity of the transaction or the
authorization thereof by the Trust. If Oral Instructions vary from the
Written Instructions which purport to confirm them, the Custodian shall
notify the Trust of such variance but such Oral Instructions will
govern unless the Custodian has not yet acted.
<PAGE>
1.8 "Custody Account" shall mean any account in the name of the Trust,
which is provided for in Section 3.2 below.
1.9 "Proper Instructions" shall mean Oral Instructions or Written
Instructions. Proper Instructions may be continuing Written
Instructions when deemed appropriate by both parties.
1.10 "Securities Depository" shall mean The Participants Trust Company or
The Depository Trust Company and (provided that Custodian shall have
received a copy of a resolution of the Board of Trustees, certified by
an Officer, specifically approving the use of such clearing agency as a
depository for the Trust) any other clearing agency registered with the
Securities and Exchange Commission under Section 17A of the Securities
and Exchange Act of 1934 (the "1934 Act"), which acts as a system for
the central handling of Securities where all Securities of any
particular class or series of an issuer deposited within the system are
treated as fungible and may be transferred or pledged by bookkeeping
entry without physical delivery of the Securities.
1.11 "Securities" shall include, without limitation, common and preferred
stocks, bonds, call options, put options, debentures, notes, bank
certificates of deposit, bankers' acceptances, mortgage-backed
securities, shares or units of an investment company registered under
the 1940 Act money market instruments, guarantied investment contracts
or other obligations, and any certificates, receipts, warrants or other
instruments or documents representing rights to receive, purchase or
subscribe for the same, or evidencing or representing any other rights
or interests therein, or any similar property or assets that the
Custodian has the facilities to clear and to service.
1.12 "Shares" shall mean the units of beneficial interest issued by the
Trust.
1.13 "Written Instructions" shall mean (i) written communications actually
received by the Custodian and signed by one or more persons as the
Board of Trustees shall have from time to time authorized, or (ii)
communications by telex or any other such system from a person or
persons reasonably believed by the Custodian to be Authorized, or (iii)
communications transmitted electronically through the Institutional
Delivery System (IDS), or any other similar electronic instruction
system acceptable to Custodian and approved by resolutions of the Board
of Trustees, a copy of which, certified by an Officer, shall have been
delivered to the Custodian.
ARTICLE II
APPOINTMENT OF CUSTODIAN
2.1 Appointment. The Trust hereby constitutes and appoints the Custodian as
custodian of all Securities and cash owned by or in the possession of
the Funds at any time during the period of this Agreement, provided
that such Securities or cash at all times shall be and remain the
property of the Trust.
2.2 Acceptance. The Custodian hereby accepts appointment as such custodian
and agrees to perform the duties thereof as hereinafter set forth and
in accordance with the 1940 Act as amended. Except as specifically set
forth herein, the Custodian shall have no liability and assumes no
responsibility for any non-compliance by the Trust or a Fund of any
laws, rules or regulations.
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<PAGE>
ARTICLE III
CUSTODY OF CASH AND SECURITIES
3.1 Segregation. All Securities and non-cash property held by the Custodian
for the account of the Fund, except Securities maintained in a
Securities Depository or Book-Entry System, shall be physically
segregated from other Securities and non-cash property in the
possession of the Custodian and shall be identified as subject to this
Agreement.
3.2 Custody Account. The Custodian shall open and maintain in its trust
department a custody account in the name of each Fund, subject only to
draft or order of the Custodian, in which the Custodian shall enter and
carry all Securities, cash and other assets of the Fund which are
delivered to it.
3.3 Appointment of Agents. In its discretion, the Custodian may appoint,
and at any time remove, any domestic bank or trust company, which has
been approved by the Board of Trustees and is qualified to act as a
custodian under the 1940 Act, as sub-custodian to hold Securities and
cash of the Funds and to carry out such other provisions of this
Agreement as it may determine, and may also open and maintain one or
more banking accounts with such a bank or trust company (any such
accounts to be in the name of the Custodian and subject only to its
draft or order), provided, however, that the appointment of any such
agent shall not relieve the Custodian of any of its obligations or
liabilities under this Agreement.
3.4 Delivery of Assets to Custodian. The Fund shall deliver, or cause to
be delivered, to the Custodian all of the Fund's Securities, cash and
other assets, including (a) all payments of income, payments of
principal and capital distributions received by the Fund with respect
to such Securities, cash or other assets owned by the Fund at any time
during the period of this Agreement, and (b) all cash received by the
Fund for the issuance, at any time during such period, of Shares. The
Custodian shall not be responsible for such Securities, cash or other
assets until actually received by it.
3.5 Securities Depositories and Book-Entry Systems. The Custodian may
deposit and/or maintain Securities of the Funds in a Securities
Depository or in a Book-Entry System, subject to the following
provisions:
(a) Prior to a deposit of Securities of the Funds in any Securities
Depository or Book-Entry System, the Fund shall deliver to the
Custodian a resolution of the Board of Trustees, certified by an
Officer, authorizing and instructing the Custodian on an on-going
basis to deposit in such Securities Depository or Book-Entry
System all Securities eligible for deposit therein and to make
use of such Securities Depository or Book-Entry System to the
extent possible and practical in connection with its performance
hereunder, including, without limitation, in connection with
settlements of purchases and sales of Securities, loans of
Securities, and deliveries and returns of collateral consisting
of Securities. So long as such Securities Depository or
Book-Entry System shall continue to be employed for the deposit
of Securities of the Funds.
(b) Securities of the Fund kept in a Book-Entry System or Securities
Depository shall be kept in an account ("Depository Account") of
the Custodian in such Book-Entry System or Securities Depository
which includes only assets held by the Custodian as a fiduciary,
custodian or otherwise for customers.
(c) The records of the Custodian and the Custodian's account on the
books of the Book-Entry System and Securities Depository as the
case may be, with respect to Securities of a Fund maintained in a
Book-Entry System or Securities Depository shall, by book-entry,
or otherwise identify such Securities as belonging to the Fund.
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<PAGE>
(d) If Securities purchases by the Fund are to be held in a
Book-Entry System or Securities Depository, the Custodian shall
pay for such Securities upon (i) receipt of advice from the
Book-Entry System or Securities Depository that such Securities
have been transferred to the Depository Account, and (ii) the
making of an entry on the records of the Custodian to reflect
such payment and transfer for the account of the Fund. If
Securities sold by the Fund are held in a Book-Entry System or
Securities Depository, the Custodian shall transfer such
Securities upon (i) receipt of advice from the Book-Entry System
or Securities depository that payment for such Securities has
been transferred to the Depository Account, and (ii) the making
of an entry on the records of the Custodian to reflect such
transfer and payment for the account of the Fund.
(e) Upon request, the Custodian shall provide the Fund with copies of
any report (obtained by the Custodian from a Book-Entry System or
Securities Depository in which Securities of the Fund is kept) on
the internal accounting controls and procedures for safeguarding
Securities deposited in such Book-Entry System or Securities
Depository.
(f) Anything to the contrary in this Agreement notwithstanding, the
Custodian shall be liable to the Trust for any loss or damage to
the Trust resulting (i) from the use of a Book-Entry System or
Securities Depository by reason of any negligence or willful
misconduct on the part of Custodian or any sub-custodian
appointed pursuant to Section 3.3 above or any of its or their
employees or agents, or (ii) from failure of Custodian or any
such sub-custodian to enforce effectively such rights as it may
have against a Book-Entry System or Securities Depository. At its
election, the Trust shall be subrogated to the rights of the
Custodian with respect to any claim against a Book-Entry System
or Securities Depository or any other person for any loss or
damage to the Funds arising from the use of such Book-Entry
System or Securities Depository, if and to the extent that the
Trust has been made whole for any such loss or damage.
3.6 Disbursement of Moneys from Custody Accounts. Upon receipt of Proper
Instructions, the Custodian shall disburse moneys from a Fund Custody
Account but only in the following cases:
(a) For the purchase of Securities for the Fund but only upon
compliance with Section 4.1 of this Agreement and only (i) in the
case of Securities (other than options on Securities, futures
contracts and options on futures contracts), against the delivery
to the Custodian (or any sub-custodian appointed pursuant to
Section 3.3 above) of such Securities registered as provided in
Section 3.9 below in proper form for transfer, or if the purchase
of such Securities is effected through a Book-Entry System or
Securities Depository, in accordance with the conditions set
forth in Section 3.5 above; (ii) in the case of shares or units
of investment companies registered under the 1940 Act against
confirmation evidencing ownership in favor of the Trust (iii) in
the case of options on Securities, against delivery to the
Custodian (or such sub-custodian) of such receipts as are
required by the customs prevailing among dealers in such options;
(iv) in the case of futures contracts and options on futures
contracts, against delivery to the Custodian (or such
sub-custodian) of evidence of title thereto in favor of the Trust
or any nominee referred to in Section 3.9 below; and (v) in the
case of repurchase or reverse repurchase agreements entered into
between the Trust and a bank which is a member of the Federal
Reserve System or between the Trust and a primary dealer in U.S.
Government securities, against delivery of the purchased
Securities either in certificate form or through an entry
crediting the Custodian's account at a Book-Entry System or
Securities Depository for the account of the Fund with such
Securities;
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(b) In connection with the conversion, exchange or surrender, as set
forth in Section 3.7(f) below, of Securities owned by the Fund;
(c) For the payment of any dividends or capital gain distributions
declared by the Fund;
(d) In payment of the redemption price of Shares as provided in
Section 5.1 below;
(e) For the payment of any expense or liability incurred by the
Trust, including but not limited to the following payments for
the account of a Fund: interest; taxes; administration,
investment management, investment advisory, accounting, auditing,
transfer agent, custodian, trustee and legal fees; and other
operating expenses of a Fund; in all cases, whether or not such
expenses are to be in whole or in part capitalized or treated as
deferred expenses;
(f) For transfer in accordance with the provisions of any agreement
among the Trust, the Custodian and a broker-dealer registered
under the 1934 Act and a member of the NASD, relating to
compliance with rules of The Options Clearing Corporation and of
any registered national securities exchange (or of any similar
organization or organizations) regarding escrow or other
arrangements in connection with transactions by the Trust;
(g) For transfer in accordance with the provisions of any agreement
among the Trust, the Custodian, and a futures commission merchant
registered under the Commodity Exchange Act, relating to
compliance with the rules of the Commodity Futures Trading
Commission and/or any contract market (or any similar
organization or organizations) regarding account deposits in
connection with transactions by the Trust;
(h) For the funding of any uncertificated time deposit or other
interest-bearing account with any banking institution (including
the Custodian), which deposit or account has a term of one year
or less; and
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(i) For any other proper purposes, but only upon receipt, in addition
to Proper Instructions, of a copy of a resolution of the Board of
Trustees, certified by an Officer, specifying the amount and
purpose of such payment, declaring such purpose to be a proper
corporate purpose, and naming the person or persons to whom such
payment is to be made.
3.7 Delivery of Securities from Fund Custody Accounts. Upon receipt of
Proper Instructions, the Custodian shall release and deliver
Securities from a Custody Account but only in the following cases:
(a) Upon the sale of Securities for the account of a Fund but only
against receipt of payment therefor in cash, by certified or
cashiers check or bank credit;
(b) In the case of a sale effected through a Book-Entry System or
Securities Depository, in accordance with the provisions of
Section 3.5 above;
(c) In the case of a sale of shares or units of an investment company
delivery shall be effected through a sale of the assets off the
custodian's system, to reflect the transaction within the
investment companies book-entry system;
(d) To an Offeror's depository agent in connection with tender or
other similar offers for Securities of a Fund; provided that, in
any such case, the cash or other consideration is to be delivered
to the Custodian;
(e) To the issuer thereof or its agent (i) for transfer into the name
of the Trust, the Custodian or any sub-custodian appointed
pursuant to Section 3.3 above, or of any nominee or nominees of
any of the foregoing, or (ii) for exchange for a different number
of certificates or other evidence representing the same aggregate
face amount or number of units; provided that, in any such case,
the new Securities are to be delivered to the Custodian;
(f) To the broker selling Securities, for examination in accordance
with the "street delivery" custom;
(g) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment
of the issuer of such Securities, or pursuant to provisions for
conversion contained in such Securities, or pursuant to any
deposit agreement, including surrender or receipt of underlying
Securities in connection with the issuance or cancellation of
depository receipts; provided that, in any such case, the new
Securities and cash, if any, are to be delivered to the
Custodian;
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(h) Upon receipt of payment therefor pursuant to any repurchase or
reverse repurchase agreement entered into by a Fund;
(i) In the case of warrants, rights or similar Securities, upon the
exercise thereof, provided that, in any such case, the new
Securities and cash, if any, are to be delivered to the
Custodian;
(j) For delivery in connection with any loans of Securities of a
Fund, but only against receipt of such collateral as the Trust
shall have specified to the Custodian in Proper Instructions;
(k) For delivery as security in connection with any borrowings by the
Trust on behalf of a Fund requiring a pledge of assets by such
Fund, but only against receipt by the Custodian of the amounts
borrowed;
(l) Pursuant to any authorized plan of liquidation, reorganization,
merger, consolidation or recapitalization of the Trust or a Fund;
(m) For delivery in accordance with the provisions of any agreement
among the Trust, the Custodian and a broker-dealer registered
under the 1934 Act and a member of the NASD, relating to
compliance with the rules of The Options Clearing Corporation and
of any registered national securities exchange (or of any similar
organization or organizations) regarding escrow or other
arrangements in connection with transactions by the Trust on
behalf of a Fund;
(n) For delivery in accordance with the provisions of any agreement
among the Trust on behalf of a Fund, the Custodian, and a futures
commission merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures
Trading Commission and/or any contract market (or any similar
organization or organizations) regarding account deposits in
connection with transactions by the Trust on behalf of a Fund; or
(o) For any other proper corporate purposes, but only upon receipt of
Proper Instructions.
3.8 Actions Not Requiring Proper Instructions. Unless otherwise instructed by
the Trust, the Custodian shall with respect to all Securities held for a
Fund;
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(a) Subject to Section 7.4 below, collect on a timely basis all
income and other payments to which the Trust is entitled either
by law or pursuant to custom in the securities business;
(b) Present for payment and, subject to Section 7.4 below, collect on
a timely basis the amount payable upon all Securities which may
mature or be called, redeemed, or retired, or otherwise become
payable;
(c) Endorse for collection, in the name of the Trust, checks, drafts
and other negotiable instruments;
(d) Surrender interim receipts or Securities in temporary form for
Securities in definitive form;
(e) Execute, as custodian, any necessary declarations or certificates
of ownership under the federal income tax laws or the laws or
regulations of any other taxing authority now or hereafter in
effect, and prepare and submit reports to the Internal Revenue
Service ("IRS") and to the Trust at such time, in such manner and
containing such information as is prescribed by the IRS;
(f) Hold for a Fund, either directly or, with respect to Securities
held therein, through a Book-Entry System or Securities
Depository, all rights and similar securities issued with respect
to Securities of the Fund; and
(g) In general, and except as otherwise directed in Proper
Instructions, attend to all non-discretionary details in
connection with sale, exchange, substitution, purchase, transfer
and other dealings with Securities and assets of the Fund.
3.9 Registration and Transfer of Securities. All Securities held for a
Fund that are issued or issuable only in bearer form shall be held by
the Custodian in that form, provided that any such Securities shall be
held in a Book-Entry System for the account of the Trust on behalf of
a Fund, if eligible therefor. All other Securities held for a Fund may
be registered in the name of the Trust on behalf of such Fund, the
Custodian, or any sub-custodian appointed pursuant to Section 3.3
above, or in the name of any nominee of any of them, or in the name of
a Book-Entry System, Securities Depository or any nominee of either
thereof or in the case of shares or units of an investment company in
book-entry with the investment company and listed on the records of
the Custodian. Provided, however, that such Securities are held
specifically for the account of the Trust on behalf of a Fund. The
Trust shall furnish to the Custodian appropriate instruments to enable
the Custodian to hold or deliver in proper form for transfer, or to
register in the name of any of the nominees hereinabove referred to or
in the name of a Book-Entry System or Securities Depository, any
Securities registered in the name of a Fund.
3.10 Records. (a) The Custodian shall maintain, by Fund, complete and
accurate records with respect to Securities, cash or other property
held for the Trust, including (i) journals or other records of
original entry containing an itemized daily record in detail of all
receipts and deliveries of Securities and all receipts and
disbursements of cash; (ii) ledgers (or other records) reflecting (A)
Securities in transfer, (B) Securities in physical possession, (C)
monies and Securities borrowed and monies and Securities loaned
(together with a record of the collateral therefor and substitutions
of such collateral), (D) dividends and interest received, and (E)
dividends receivable and interest accrued; and (iii) canceled checks
and bank records related thereto. The Custodian shall keep such other
books and records of the Trust as the Trust shall reasonably request,
or as may be required by the 1940 Act, including, but not limited to
Section 31 and Rule 31a-1 and Rule 31a-2 promulgated thereunder.
Customer agrees to review statements and reports promptly on receipt
and inquiries regarding any valuations or other reports must be
submitted within one month of the receipt of the Custodians statement
or report, and on expiration of this period, statements and reports
are considered agreed as correct. Express or tacit approval of such
statement or report implies acceptance of the various entries listed
therein and approval of any reservations made by the Custodian.
Thereafter, Customer assumes the responsibility to correct any errors.
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(b) All such books and records maintained by the Custodian shall (i) be
maintained in a form acceptable to the Trust and in compliance with
rules and regulations of the Securities and Exchange Commission, (ii)
be the property of the Trust and at all times during the regular
business hours of the Custodian be made available upon request for
inspection by duly authorized officers, employees or agents of the
Trust and employees or agents of the Securities and Exchange
Commission, and (iii) if required to be maintained by Rule 31a-1 under
the 1940 Act, be preserved for the periods prescribed in Rule 31a-2
under the 1940 Act.
3.11 Fund Reports by Custodian. The Custodian shall furnish the Trust with a
daily activity statement by Fund and a summary of all transfers to or
from the Custody Account on the day following such transfers. At least
monthly and from time to time, the Custodian shall furnish the Trust
with a detailed statement, by Fund, of the Securities and moneys held
for the Trust under this Agreement.
3.12 Other Reports by Custodian. The Custodian shall provide the Trust with
such reports, as the Trust may reasonably request from time to time, on
the internal accounting controls and procedures for safeguarding
Securities, which are employed by the Custodian or any sub-custodian
appointed pursuant to Section 3.3 above.
3.13 Proxies and Other Materials. The Custodian shall cause all proxies, if
any, relating to Securities which are not registered in the name of a
Fund, to be promptly executed by the registered holder of such
Securities, without indication of the manner in which such proxies are
to be voted, and shall include all other proxy materials, if any,
promptly deliver to the Trust such proxies, all proxy soliciting
materials, which should include all other proxy materials, if any, and
all notices to such Securities.
3.14 Information on Corporate Actions. Custodian will promptly notify the
Trust of corporate actions, limited to those Securities registered in
nominee name and to those Securities held at a Depository or
sub-Custodian acting as agent for Custodian. Custodian will be
responsible only if the notice of such corporate actions is published
by the Financial Daily Card Service, J.J. Kenny Called Bond Service,
DTC, or received by first class mail from the agent. For market
announcements not yet received and distributed by Custodian's services,
Trust will inform its custody representative with appropriate
instructions. Custodian will, upon receipt of Trust's response within
the required deadline, effect such action for receipt or payment for
the Trust. For those responses received after the deadline, Custodian
will effect such action for receipt or payment, subject to the
limitations of the agent(s) effecting such actions. Custodian will
promptly notify Trust for put options only if the notice is received by
first class mail from the agent. The Trust will provide or cause to be
provided to Custodian with all relevant information contained in the
prospectus for any security which has unique put/option provisions and
provide Custodian with specific tender instructions at least ten
business days prior to the beginning date of the tender period.
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ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
4.1 Purchase of Securities. Promptly upon each purchase of Securities for
the Trust, Written Instructions shall be delivered to the Custodian,
specifying (a) the name of the issuer or writer of such Securities, and
the title or other description thereof, (b) the number of shares,
principal amount (and accrued interest, if any) or other units
purchased, (c) the date of purchase and settlement, (d) the purchase
price per unit, (e) the total amount payable upon such purchase, and
(f) the name of the person to whom such amount is payable. The
Custodian shall upon receipt of such Securities purchased by a Fund pay
out of the moneys held for the account of such Fund the total amount
specified in such Written Instructions to the person named therein. The
Custodian shall not be under any obligation to pay out moneys to cover
the cost of a purchase of Securities for a Fund, if in the relevant
Custody Account there is insufficient cash available to the Fund for
which such purchase was made.
4.2 Liability for Payment in Advance of Receipt of Securities Purchased. In
any and every case where payment for the purchase of Securities for a
Fund is made by the Custodian in advance of receipt for the account of
the Fund of the Securities purchased but in the absence of specific
Written or Oral Instructions to so pay in advance, the Custodian shall
be liable to the Fund for such Securities to the same extent as if the
Securities had been received by the Custodian.
4.3 Sale of Securities. Promptly upon each sale of Securities by a Fund,
Written Instructions shall be delivered to the Custodian, specifying
(a) the name of the issuer or writer of such Securities, and the title
or other description thereof, (b) the number of shares, principal
amount (and accrued interest, if any), or other units sold, (c) the
date of sale and settlement (d) the sale price per unit, (e) the total
amount payable upon such sale, and (f) the person to whom such
Securities are to be delivered. Upon receipt of the total amount
payable to the Trust as specified in such Written Instructions, the
Custodian shall deliver such Securities to the person specified in such
Written Instructions. Subject to the foregoing, the Custodian may
accept payment in such form as shall be satisfactory to it, and may
deliver Securities and arrange for payment in accordance with the
customs prevailing among dealers in Securities.
4.4 Delivery of Securities Sold. Notwithstanding Section 4.3 above or any
other provision of this Agreement, the Custodian, when instructed to
deliver Securities against payment, shall be entitled, if in accordance
with generally accepted market practice, to deliver such Securities
prior to actual receipt of final payment therefor. In any such case,
the Trust shall bear the risk that final payment for such Securities
may not be made or that such Securities may be returned or otherwise
held or disposed of by or through the person to whom they were
delivered, and the Custodian shall have no liability for any of the
foregoing.
4.5 Payment for Securities Sold, etc. In its sole discretion and from time
to time, the Custodian may credit the relevant Custody Account, prior
to actual receipt of final payment thereof, with (i) proceeds from the
sale of Securities which it has been instructed to deliver against
payment, (ii) proceeds from the redemption of Securities or other
assets of the Trust, and (iii) income from cash, Securities or other
assets of the Trust. Any such credit shall be conditional upon actual
receipt by Custodian of final payment and may be reversed if final
payment is not actually received in full. The Custodian may, in its
sole discretion and from time to time, permit the Trust to use funds so
credited to its Custody Account in anticipation of actual receipt of
final payment. Any such funds shall be repayable immediately upon
demand made by the Custodian at any time prior to the actual receipt of
all final payments in anticipation of which funds were credited to the
Custody Account.
4.6 Advances by Custodian for Settlement. The Custodian may, in its sole
discretion and from time to time, advance funds to the Trust to
facilitate the settlement of a Trust transactions on behalf of a Fund
in its Custody Account. Any such advance shall be repayable immediately
upon demand made by Custodian.
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ARTICLE V
REDEMPTION OF TRUST SHARES
Transfer of Funds. From such funds as may be available for the purpose in the
relevant Custody Account, and upon receipt of Proper Instructions specifying
that the funds are required to redeem Shares of a Fund, the Custodian shall wire
each amount specified in such Proper Instructions to or through such bank as the
Trust may designate with respect to such amount in such Proper Instructions.
Upon effecting payment or distribution in accordance with proper Instructions,
the Custodian shall not be under any obligation or have any responsibility
thereafter with respect to any such paying bank.
ARTICLE VI
SEGREGATED ACCOUNTS
Upon receipt of Proper Instructions, the Custodian shall establish and maintain
a segregated account or accounts for and on behalf of each Fund, into which
account or accounts may be transferred cash and/or Securities, including
Securities maintained in a Depository Account,
(a) in accordance with the provisions of any agreement among the
Trust, the Custodian and a broker-dealer registered under the
1934 Act and a member of the NASD (or any futures commission
merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange
(or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in
connection with transactions by the Trust,
(b) for purposes of segregating cash or Securities in connection
with securities options purchased or written by a Fund or in
connection with financial futures contracts (or options
thereon) purchased or sold by a Fund,
(c) which constitute collateral for loans of Securities made by
a Fund,
(d) for purposes of compliance by the Trust with requirements
under the 1940 Act for the maintenance of segregated accounts
by registered investment companies in connection with reverse
repurchase agreements and when-issued, delayed delivery and
firm commitment transactions, and
(e) for other proper corporate purposes, but only upon receipt of,
in addition to Proper Instructions, a certified copy of a
resolution of the Board of Trustees, certified by an Officer,
setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate
purposes.
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ARTICLE VII
CONCERNING THE CUSTODIAN
7.1 Standard of Care. The Custodian shall be held to the exercise of
commercially reasonable care in carrying out its obligations under this
Agreement, and shall be without liability to the Trust for any loss,
damage, cost, expense (including attorneys' fees and disbursements),
liability or claim unless such loss, damages, cost, expense, liability
or claim arises from bad faith, negligence or reckless or willful
misconduct on its part or on the part of any sub-custodian appointed
pursuant to Section 3.3 above. The Custodian's cumulative liability
within a calendar year shall be limited with respect to the Trust or
any party claiming by, through or on behalf of the Trust for the
initial and all subsequent renewal terms of this Agreement, to the
actual damages sustained by the Trust, (actual damages for uninvested
funds shall be the overnight Feds fund rate). The Custodian shall be
entitled to rely on and may act upon advice of counsel on all matters,
and shall be without liability for any action reasonably taken or
omitted pursuant to such advice, subject to the standard of care set
forth above. The Custodian shall promptly notify the Trust of any
action taken or omitted by the Custodian pursuant to advice of counsel.
The Custodian shall not be under any obligation at any time to
ascertain whether the Trust is in compliance with the 1940 Act, the
regulations thereunder, the provisions of the Trust's charter documents
or by-laws, or its investment objectives and policies as then in
effect.
7.2 Actual Collection Required. The Custodian shall not be liable for, or
considered to be the custodian of, any cash belonging to the Trust or
any money represented by a check, draft or other instrument for the
payment of money, until the Custodian or its agents actually receive
such cash or collect on such instrument.
7.3 No Responsibility for title, etc. So long as and to the extent that it
is in the exercise of reasonable care, the Custodian shall not be
responsible for the title, validity or genuineness of any property or
evidence of title thereto received or delivered by it pursuant to this
Agreement.
7.4 Limitation on Duty to Collect. Custodian shall not be required to
enforce collection, by legal means or otherwise, of any money or
property due and payable with respect to Securities held for the Trust
if such Securities are in default or payment is not made after due
demand or presentation.
7.5 Reliance Upon Documents and Instructions. The Custodian shall be
entitled to rely upon any certificate, notice or other instrument in
writing received by it and reasonably believed by it to be genuine. The
Custodian shall be entitled to rely upon any Oral Instructions and/or
any Written Instructions actually received by it pursuant to this
Agreement.
7.6 Express Duties Only. The Custodian shall have no duties or obligations
whatsoever except such duties and obligations as are specifically set
forth in this Agreement, and no covenant or obligation shall be implied
in this Agreement against the Custodian.
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7.7 Cooperation. The Custodian shall cooperate with and supply necessary
information, by the Trust, to the entity or entities appointed by the
Trust to keep the books of account of the Trust and/or compute the
value of the assets of the Trust. The Custodian shall take all such
reasonable actions as the Trust may from time to time request to enable
the Trust to obtain, from year to year, favorable opinions from the
Trust's independent accountants with respect to the Custodian's
activities hereunder in connection with (a) the preparation of the
Trust's registration statement on Form N-1A, its reports on Form N-SAR
and any other reports required by the Securities and Exchange
Commission, and (b) the fulfillment by the Trust of any other
requirements of the Securities and Exchange Commission.
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification. The Trust shall indemnify and hold harmless the
Custodian and any sub-custodian appointed pursuant to Section 3.3
above, and any nominee of the Custodian or of such sub-custodian from
and against any loss, damage, cost, expense (including attorneys' fees
and disbursements), liability (including, without limitation, liability
arising under the Securities Act of 1933, the 1934 Act, the 1940 Act,
and any state or foreign securities and/or banking laws) or claim
arising directly or indirectly (a) from the fact that Securities are
registered in the name of any such nominee, or (b) from any action or
inaction by the Custodian or such sub-custodian (i) at the request or
direction of or in reliance on the advice of the Trust, or (ii) upon
Proper Instructions, or (c) generally, from the performance of its
obligations under this Agreement or any sub-custody agreement with a
sub-custodian appointed pursuant to Section 3.3 above or, in the case
of any such sub-custodian, from the performance of its obligations
under such custody agreement, provided that neither the Custodian nor
any such sub-custodian shall be indemnified and held harmless from and
against any such loss, damage, cost, expense, liability or claim
arising from the Custodian's or such sub-custodian's negligence, bad
faith or willful misconduct, or the negligence, bad faith or wilful
misconduct of an agent or employee of the Custodian or a sub-custodian.
8.2 The Custodian shall indemnify and hold harmless the Trust from and
against any loss, damage, cost, expense (including attorneys' fees and
disbursements), liability (including, without limitation, liability
arising under the Securities Act of 1933, the 1934 Act, the 1940 Act,
and any state or foreign securities, banking and/or insurance laws) or
claim arising directly or indirectly from the negligence, bad faith or
willful misconduct of the Custodian, any sub-custodian or the agent or
employee of either.
8.3 Indemnity to be Provided. If the Trust requests the Custodian to take
any action with respect to Securities, which may, in the opinion of the
custodian, result in the Custodian or its nominee becoming liable for
the payment of money or incurring liability of some other form, the
Custodian shall not be required to take such action until the Trust
shall have provided indemnity therefor to the Custodian in an amount
and form satisfactory to the Custodian.
ARTICLE IX
FORCE MAJEURE
Neither the Custodian nor the Trust shall be liable for any failure or delay in
performance of its obligations under this Agreement arising out of or caused,
directly or indirectly, by circumstances beyond its reasonable control,
including, without limitation, acts of God; earthquakes; fires; floods; wars;
civil or military disturbances; sabotage; strikes; epidemics; riots; power
failures; computer failure and any such circumstances beyond its reasonable
control as may cause interruption, loss or malfunction of utility,
transportation, computer (hardware or software) or telephone communication
service; accidents; labor disputes, acts of civil or military authority;
governmental actions; or inability to obtain labor, material, equipment or
transportation; provided, however, that the Custodian in the event of a failure
or delay shall use its best efforts to ameliorate the effects of any such
failure or delay. Notwithstanding the foregoing, the Custodian shall maintain
sufficient disaster recovery procedures to minimize interruptions.
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ARTICLE X
EFFECTIVE PERIOD; TERMINATION
10.1 Effective Period. This Agreement shall become effective as of the date
first set forth above and shall continue in full force and effect
until terminated as hereinafter provided.
10.2 Termination. Either party hereto may terminate this Agreement by giving
to the other party a notice in writing specifying the date of such
termination, which shall be not less than sixty (60) days after the
date of the giving of such notice. If a successor custodian shall have
been appointed by the Board of Trustees, the Custodian shall, upon
receipt of a notice of acceptance by the successor custodian, on such
specified date of termination (a) deliver directly to the successor
custodian all Securities (other than Securities held in a Book-Entry
System or Securities Depository) and cash then owned by the Trust and
held by the Custodian as custodian, and (b) transfer any Securities
held in a Book-Entry System or Securities Depository to an account of
or for the benefit of the Trust at the successor custodian, provided
that the Trust shall have paid to the Custodian all fees, expenses and
other amounts to the payment or reimbursement of which it shall then be
entitled. Upon such delivery and transfer, the Custodian shall be
relieved of all obligations under this Agreement. The Trust may at any
time immediately terminate this Agreement in the event of the
appointment of a conservator or receiver for the Custodian by
regulatory authorities in the State of Ohio or upon the happening of a
like event at the direction of an appropriate regulatory agency or
court of competent jurisdiction.
10.3 Failure to Appoint Successor Custodian. If a successor custodian is not
designated by the Trust on or before the date of termination specified
pursuant to Section 10.2 above, then the Custodian shall have the right
to deliver to a bank or trust company of its own selection, which is
(a) a "Bank" as defined in the 1940 Act, (b) has aggregate capital,
surplus and undivided profits as shown on its then most recent
published report of not less than $25 million, and (c) is doing
business in New York, New York, all Securities, cash and other property
held by Custodian under this Agreement and to transfer to an account of
or for the Trust at such bank or trust company all Securities of the
Trust held in a Book-Entry System or Securities Depository. Upon such
delivery and transfer, such bank or trust company shall be the
successor custodian under this Agreement and the Custodian shall be
relieved of all obligations under this Agreement. If, after reasonable
inquiry, Custodian cannot find a successor custodian as contemplated in
this Section 10.3, then Custodian shall have the right to deliver to
the Trust all Securities and cash then owned by the Trust and to
transfer any Securities held in a Book-Entry System or Securities
Depository to an account of or for the Trust. Thereafter, the Trust
shall be deemed to be its own custodian with respect to the Trust and
the Custodian shall be relieved of all obligations under this
Agreement.
ARTICLE XI
COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to compensation as agreed upon from time to time
by the Trust and the Custodian. The fees and other charges in effect on the date
hereof and applicable to the Funds are set forth in Exhibit C attached hereto.
ARTICLE XII
LIMITATION OF LIABILITY
The Trust is a business trust organized under the laws of the Commonwealth of
Massachusetts, and under a Declaration of Trust, to which reference is hereby
made a copy of which is on file at the office of the Secretary of the
Commonwealth of Massachusetts, as required by law, and to any and all amendments
thereto so filed or hereafter filed. The obligations of the Trust entered into
in the name of the Trust or on behalf thereof by any of the Trustees, officers,
employees or agents are made not individually, but in such capacities, and are
not binding upon any of the Trustees, officers, employees, agents or
shareholders of the Trust or the Funds personally, but bind only the assets of
the Trust, and all persons dealing with any of the Funds of the Trust must look
solely to the assets of the Trust belonging to such Fund for the enforcement of
any claims against the Trust.
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ARTICLE XIII
NOTICES
Unless otherwise specified herein, all demands, notices, instructions, and other
communications to be given hereunder shall be in writing and shall be sent or
delivered to The receipt at the address set forth after its name herein below:
To the Trust: To the Fund:
Variable Insurance Funds The Fifth Third Bank
3435 Stelzer Road 38 Fountain Square Plaza
Columbus, Ohio 43219 Cincinnati, Ohio 45263
Attn: Rick Ille Attn: Area Manager - Trust
Operations
Telephone: (614) 470-8454 Telephone: (513) 579-5300
Facsimile: (614) 470-8715 Facsimile: (513) 579-4312
or at such other address as either party shall have provided to the other by
notice given in accordance with this Article XIII. Writing shall include
transmission by or through teletype, facsimile, central processing unit
connection, on-line terminal and magnetic tape.
ARTICLE XIV
MISCELLANEOUS
14.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio.
14.2 References to Custodian. The Trust shall not circulate any printed
matter which contains any reference to Custodian without the prior
written approval of Custodian, excepting printed matter contained in
the prospectus or statement of additional information or its
registration statement for the Trust and such other printed matter as
merely identifies Custodian as custodian for the Trust. The Trust
shall submit printed matter requiring approval to Custodian in draft
form, allowing sufficient time for review by Custodian and its counsel
prior to any deadline for printing.
14.3 No Waiver. No failure by either party hereto to exercise and no delay
by such party in exercising, any right hereunder shall operate as a
waiver thereof. The exercise by either party hereto of any right
hereunder shall not preclude the exercise of any other right, and the
remedies provided herein are cumulative and not exclusive of any
remedies provided at law or in equity.
14.4 Amendments. This Agreement cannot be changed orally and no amendment to
this Agreement shall be effective unless evidenced by an instrument in
writing executed by the parties hereto.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, and by the parties hereto on separate counterparts, each
of which shall be deemed an original but all of which together shall
constitute but one and the same instrument.
14.6 Severability. If any provision of this Agreement shall be invalid,
illegal or unenforceable in any respect under any applicable law, the
validity, legality and enforceability of the remaining provisions shall
not be affected or impaired thereby.
14.7 Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that this Agreement shall
not be assignable by either party hereto without the written consent of
the other party hereto.
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14.8 Headings. The headings of sections in this Agreement are for
convenience of reference only and shall not affect the meaning or
construction of any provision of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed and delivered in its name and on its behalf by its representatives
thereunto duly authorized, all as of the day and year first above written.
ATTEST: VARIABLE INSURANCE FUNDS
______________________ By:_____________________________
Its:__________________________________
ATTEST: THE FIFTH THIRD BANK
______________________ By:_____________________________
Its:__________________________________
16
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Dated:________________ , 19_____
EXHIBIT A
TO THE CUSTODY AGREEMENT BETWEEN
VARIABLE INSURANCE FUNDS AND THE FIFTH THIRD BANK
___________, 19___
Name of Fund Date
BB&T Capital Manager Variable Insurance Fund
BB&T Growth and Income Variable Insurance Fund
VARIABLE INSURANCE FUNDS
By:__________________________________
Its:_________________________________
THE FIFTH THIRD BANK
By:__________________________________
Its:_________________________________
17
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Dated: _____________ , 1997
EXHIBIT B
TO THE CUSTODY AGREEMENT BETWEEN
VARIABLE INSURANCE FUNDS AND THE FIFTH THIRD BANK
________, 19___
AUTHORIZED PERSONS
Set forth below are the names and specimen signatures of the persons authorized
by the Trust to Administer each Custody Account.
Name Signature
_________________________________ __________________________
_________________________________ __________________________
_________________________________ __________________________
_________________________________ __________________________
_________________________________ __________________________
18
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SIGNATURE RESOLUTION
RESOLVED, That all of the following officers of VARIABLE INSURANCE FUNDS and any
of them, namely the Chairman, President, Vice President, Secretary and
Treasurer, are hereby authorized as signers for the conduct of business for an
on behalf of the Funds with THE FIFTH THIRD BANK:
____________________ CHAIRMAN ___________________
____________________ PRESIDENT ___________________
____________________ VICE PRESIDENT ___________________
____________________ VICE PRESIDENT ___________________
____________________ VICE PRESIDENT ___________________
____________________ VICE PRESIDENT ___________________
____________________ TREASURER ___________________
____________________ SECRETARY ___________________
In addition, the following Assistant Treasurer is authorized to sign on behalf
of the Trust for the purpose of effecting securities transactions:
____________________ ASSISTANT ___________________
TREASURER
The undersigned officers of VARIABLE INSURANCE FUNDS hereby certify that the
foregoing is within the parameters of a Resolution adopted by Trustees of the
Trust in a meeting held , 19 , directing and authorizing preparation of
documents and to do everything necessary to effect the Custody Agreement between
VARIABLE INSURANCE FUNDS and THE FIFTH THIRD BANK.
By:___________________
Its:__________________
By:___________________
Its:__________________
19
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EXHIBIT C
TO THE CUSTODY AGREEMENT BETWEEN
VARIABLE INSURANCE FUNDS AND THE FIFTH THIRD BANK
__________, 19__
MUTUAL FUND CUSTODY FEE SCHEDULE
BASIC ACCOUNT CHARGE
FUND SIZE:
Less than $25MM 1 bp
$25MM - $100MM .75 bp
$100MM - $200MM .5 bp
Greater than $200MM .25 bp
Minimum $ 2,400.00
TRANSACTION FEES
DTC/FED Eligible Trades $ 9.00
Physical $25.00
Amortized Security Trades $25.00
Options $25.00
Mutual Funds $15.00
Foreign - Euroclear & Cedel $50.00
Foreign - Other TBD
SYSTEMS
Automated Securities Workstation $150.00
$200.00 Initial Setup
Mainframe-To-Mainframe $150.00
$200.00 Initial Setup
ACCESS Single Account $ 50.00
Multiple Accounts $100.00
MISCELLANEOUS FEES
Principal & Interest Collection (on amortized securities) $ 5.00
Per additional issue for repo collateral $ 5.00
Voluntary Corporate Actions $ 25.00
Wire Transfers (In/Out) $ 7.00
Check Requests $ 6.00
Automated Asset Reconciliation $ 25.00
Escrow Receipt $ 5.00
Special Services per hr. fee $ 75.00
Overnight Packages $ 8.00
Other TBD
20
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
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<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).
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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.
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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:_________________________
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<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
one-hundredths of one
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;
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<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.
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<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.
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<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.
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<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
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
<PAGE>
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.
8
<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
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
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made this day of MAY, 1997, between Variable Insurance
Funds, an open-end management investment company organized as a Massachusetts
business trust (the "Trust"), on behalf of certain of its series as set forth on
Schedule A, as may be amended from time to time (the "Funds"), and HARTFORD LIFE
INSURANCE COMPANY, a life insurance company organized under the laws of the
State of Connecticut (the "Company"), on its own behalf and on behalf of each
segregated asset account of the Company set forth on Schedule A, as may be
amended from time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Trust has registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and has registered the offer
and sale of its shares under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, the Trust desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets; and
WHEREAS, the Trust intends to obtain an order from the Securities and
Exchange Commission granting Participating Insurance Companies and their
separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a)
and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder,
to the extent necessary to permit shares of the Trust to be sold to and held by
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Exemptive Order"); and
WHEREAS, the Company has registered or will register (unless registration
is not required under applicable law) certain variable life insurance policies
and/or variable annuity contracts under the 1933 Act (the "Contracts"); and
WHEREAS, the Company has registered or will register (unless registration
is not required under applicable law) each Account as a unit investment trust
under the 1940 Act; and
WHEREAS, the Company desires to utilize shares of one or moreFunds as an
investment vehicle of the Accounts;
NOW THEREFORE, in consideration of their mutual promises, the parties agree
as follows:
<PAGE>
ARTICLE I
Sale of Trust Shares
1.1 The Trust shall make shares of its Funds available to the Accounts at
the net asset value next computed after receipt of such purchase order by the
Trust (or its agent), as established in accordance with the provisions of the
then current prospectus of the Trust. Shares of a particular Fund of the Trust
shall be ordered in such quantities and at such times as determined by the
Company to be necessary to meet the requirements of the Contracts. The Trustees
of the Trust (the "Trustees") may refuse to sell shares of any Fund to any
person, or suspend or terminate the offering of shares of any Fund if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Trustees acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Fund.
1.2 The Trust will redeem any full or fractional shares of any Fund when
requested by the Company on behalf of an Account at the net asset value next
computed after receipt by the Trust (or its agent) of the request for
redemption, as established in accordance with the provisions of the then current
prospectus of the Trust. The Trust shall make payment for such shares in the
manner established from time to time by the Trust, but in no event shall payment
be delayed for a greater period than is permitted by the 1940 Act.
1.3 For the purposes of Sections 1.1 and 1.2, the Trust hereby appoints the
Company as its agent for the limited purpose of receiving and accepting purchase
and redemption orders resulting from investment in and payments under the
Contracts. Receipt by the Company shall constitute receipt by the Trust provided
that i) such orders are received by the Company in good order prior to the time
the net asset value of each Portfolio is priced in accordance with its
prospectus and ii) the Trust receives notice of such orders by 11:00 a.m. New
York time on the next following Business Day. "Business Day" shall mean any day
on which the New York Stock Exchange is open for trading and on which the Trust
calculates its net asset value pursuant to the rules of the Securities and
Exchange Commission.
1.4 Purchase orders that are transmitted to the Trust in accordance with
Section 1.3 shall be paid no later than 12:00 noon New York time on the same
Business Day that the Trust receives notice of the order. Payments shall be made
in federal funds transmitted by wire.
1.5 Issuance and transfer of the Trust's shares will be by book entry only.
Stock certificates will not be issued to the Company or the Account. Shares
ordered from the Trust will be recorded in the appropriate title for each
Account or the appropriate subaccount of each Account.
1.6 The Trust shall furnish prompt notice to the Company of any income
dividends or capital gain distributions payable on the Trust's shares. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Fund's shares in additional shares of that
Fund. The Trust shall notify the Company of the number of shares so issued as
payment of such dividends and distributions.
1.7 The Trust shall make the net asset value per share for each Fund
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 6 p.m. New York time.
1.8 The Trust agrees that its shares will be sold only to Participating
Insurance Companies and their separate accounts to certain qualified pension and
retirement plans, and to any other eligible purchaser to the extent permitted by
the Exemptive Order. No shares of any Fund will be sold directly to the general
public. The Company agrees that Trust shares will be used only for the purposes
of funding the Contracts and Accounts listed in Schedule A, as amended from time
to time.
1.9 The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and conflicts
of interest corresponding to those contained in Section 2.8 and Article IV of
this Agreement.
2
<PAGE>
ARTICLE II
Obligations of the Parties
2.1 The Trust shall prepare and be responsible for filing with the
Securities and Exchange Commission and any state regulators requiring such
filing all shareholder reports, notices, proxy materials (or similar materials
such as voting instruction solicitation materials), prospectuses and statements
of additional information of the Trust. The Trust shall bear the costs of
registration and qualification of its shares, preparation and filing of the
documents listed in this Section 2.1 and all taxes to which the Trust is subject
on the issuance and transfer of its shares.
2.2 At the option of the Company, the Trust shall either (a) provide the
Company (at the Company's expense) with as many copies of the Trust's current
prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
as the Company shall reasonably request; or (b) provide the Company with a
camera ready copy of such documents in a form suitable for printing. The Trust
shall provide the Company with a copy of its statement of additional information
in a form suitable for duplication by the Company. The Trust (at its expense)
shall provide the Company with copies of any Trust-sponsored proxy materials in
such quantity as the Company shall reasonably require for distribution to
Contract owners.
2.3 The Company shall bear the costs of printing and distributing the
Trust's prospectus, statement of additional information, shareholder reports and
other shareholder communications to owners of and applicants for policies for
which the Trust is serving or is to serve as an investment vehicle. The Company
shall bear the costs of distributing proxy materials (or similar materials such
as voting solicitation instructions) to Contract owners. The Company assumes
sole responsibility for ensuring that such materials are delivered to Contract
owners in accordance with applicable federal and state securities laws.
2.4 The Company shall furnish, or cause to be furnished, to the Trust or
its designee, a copy of each Contract prospectus or statement of additional
information in which the Trust or its investment adviser is named prior to the
filing of such document with the Securities and Exchange Commission. The Company
shall furnish, or shall cause to be furnished, to the Trust or its designee,
each piece of sales literature or other promotional material in which the Trust
or its investment adviser is named, at least ten Business Days prior to it use.
No such material shall be used if the Trust or its designee reasonably objects
to such use within ten Business Days after receipt of such material.
2.5 The Company shall not give any information or make any representations
or statements on behalf of the Trust or concerning the Trust or its investment
adviser in connection with the sale of the Contracts other than information or
representations contained in and accurately derived from the registration
statement or prospectus for the Trust shares (as such registration statement and
prospectus may be amended or supplemented from time to time), reports of the
Trust, Trust-sponsored proxy statements, or in sales literature or other
promotional material approved by the Trust or its designee, except as required
by legal process or regulatory authorities or with the written permission of the
Trust or its designee.
2.6 The Trust shall not give any information or make any representations or
statements on behalf of the Company or concerning the Company, the Accounts or
the Contracts other than information or representations contained in and
accurately derived from the registration statement or prospectus for the
Contracts (as such registration statement and prospectus may be amended or
supplemented from time to time), or in materials approved by the Company for
distribution including sales literature or other promotional materials, except
as required by legal process or regulatory authorities or with the written
permission of the Company.
3
<PAGE>
2.7 So long as, and to the extent that the Securities and Exchange
Commission interprets the 1940 Act to require pass-through voting privileges for
variable policyowners, the Company will provide pass-through voting privileges
to owners of policies whose cash values are invested, through the Accounts, in
shares of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each Account, the
Company will vote shares of the Trust held by the Account and for which no
timely voting instructions from policyowners are received as well as shares its
owns that are held by that Account, in the same proportion as those shares for
which voting instructions are received. The Company and its agents will in no
way recommend or oppose or interfere with the solicitation of proxies for Trust
shares held by Contract owners without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion.
2.8 The Company shall notify the Trust of any applicable state
insurance laws that restrict the Funds' investments or otherwise affect the
operation of the Trust and shall notify the Trust of any changes in such laws.
ARTICLE III
Representations and Warranties
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of Connecticut
and that it has legally and validly established each Account as a segregated
asset account under such law on the date set forth in Schedule A.
3.2 The Company represents and warrants that each Account is a "segregated
asset account" for purposes of Section 817 of, and/or Section 1.817-5 of
regulations prumulgated under the Internal Revenue Code of 1986, as amended and
(1) has been registered or, prior to any issuance or sale of the Contracts, will
be registered as a unit investment trust in accordance with the provisions of
the 1940 Act or, alternatively (2) has not been registered in proper reliance
upon an exclusion from registration under the 1940 Act.
3.3 The Company represents and warrants that the Contracts or interests in
the Accounts (1) are or, prior to issuance, will be registered as securities
under the 1933 Act or, alternatively (2) are not registered because they are
properly exempt from registration under the 1933 Act or will be offered
exclusively in transactions that are properly exempt from registration under the
1933 Act. The Company further represents and warrants that the Contracts will be
issued and sold in compliance in all material respects with all applicable
federal and state laws, including the Internal Revenue Code of 1986, as amended,
and the sale of the Contracts shall comply in all material respects with state
insurance suitability requirements.
3.4 The Trust represents and warrants that it is duly organized and validly
existing under the laws of the State of Massachusetts.
3.5 The Trust represents and warrants that the Trust shares offered and
sold pursuant to this Agreement will be registered under the 1933 Act and the
Trust shall be registered under the 1940 Act prior to any issuance or sale of
such shares. The Trust shall amend its registration statement under the 1933 Act
and the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Trust shall register and qualify its shares for sale
in accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust.
3.6 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in Section
817(h) of the Internal Revenue Code of 1986, as amended, and the rules and
regulations thereunder.
4
<PAGE>
ARTICLE IV
Potential Conflicts
4.1 The parties acknowledge that the Trust's shares may be made available
for investment to other Participating Insurance Companies. In such event, the
Trustees will monitor the Trust for the existence of any material irreconcilable
conflict between the interests of the contract owners of all Participating
Insurance Companies. An irreconcilable material conflict may arise for a variety
of reasons, including: (a) an action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting instructions given by
variable annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract owners.
The Trustees shall promptly inform the Company if they determine that an
irreconcilable material conflict exists and the implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Exemptive Order by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3 If it is determined by a majority of the Trustees, or a majority of its
disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its expense and to the extent reasonably practicable (as determined by the
Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Fund and
reinvesting such assets in a different investment medium, including (but not
limited to) another Fund of the Trust, or submitting the question of whether or
not such segregation should be implemented to a vote of all affected Contract
owners and, as appropriate, segregating the assets of any appropriate group
(i.e., annuity contract owners, life insurance contract owners, or variable
contract owners of one or more Participating Insurance Companies) that votes in
favor of such segregation, or offering to the affected Contract owners the
option of making such a change; and (b) establishing a new registered management
investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however that such withdrawal and termination shall be limited
to the extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested Trustees. Any such withdrawal and
termination must take place within six (6) months after the Trust gives written
notice that this provision is being implemented. Until the end of such six (6)
month period, the Trust shall continue to accept and implement orders by the
Company for the purchase and redemption of shares of the Trust.
5
<PAGE>
4.5 If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account within six (6) months after the Trustees inform the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of the
Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Company be required to establish a new funding medium for the Contracts if
an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Trustees determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six (6)
months after the Trustees inform the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall be
limited to the extent required by any such material irreconcilable conflict as
determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonable request so that the
Trustees may fully carry out the duties imposed upon them by the Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Exemptive Order) on terms and conditions materially different
from those contained in the Exemptive Order, then the Trust and/or the
Participating Insurance Companies, as appropriate, shall take such steps as may
be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3,
as adopted, to the extent such rules are applicable.
6
<PAGE>
ARTICLE V
Indemnification
5.1 Indemnification By the Company. The Company agrees to indemnify and
hold harmless the Trust and each of its Trustees, officers, employees and agents
and each person, if any, who controls the Trust within the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration statement or
prospectus for the Contracts or in the Contracts themselves or in sales
literature generated or approved by the Company on behalf of the Contracts of
Accounts (or any amendment or supplement to any of the foregoing) (collectively,
"Company Documents" for the purposes of this Article V), or arise out of or are
based upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, provided that this indemnity shall not apply as to any Indemnified
Party if such statement or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from written information
furnished to the Company by or on behalf of the Trust for use in Company
Documents or otherwise for use in connection with the sale of the Contracts or
Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Trust Documents as defined in Section 5.2(a) or wrongful conduct of the Company
or persons under its control, with respect to the sale or acquisition of the
Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as defined in Section
5.2(a) or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading if such statement or omission was made in reliance upon and
accurately derived from written information furnished to the Trust by or on
behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or arise
out of or result from any other material breach of this Agreement by the
Company.
7
<PAGE>
5.2 Indemnification By the Trust. The Trust agrees to indemnify and hold
harmless the Company and each of its directors, officers, employees and agents
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Trust) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the registration statement
or prospectus for the Trust (or any amendment or supplement thereto),
(collectively, "Trust Documents" for the purposes of this Article V), or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, provided that this indemnity shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement or
omission was made in reliance upon and was accurately derived from written
information furnished to the Trust by or on behalf of the Company for use in
Trust Documents or otherwise for use in connection with the sale of the
Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Company Documents) or wrongful conduct of the Trust or persons under its
control, with respect to the sale or acquisition of the Contracts or Trust
shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Company Documents or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading if such statement or
omission was made in reliance upon and accurately derived from written
information furnished to the Company by or on behalf of the Trust; or
(d) arise out of or result from any failure by the Trust to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this Agreement or arise out
of or result from any other material breach of this Agreement by the Trust.
5.3 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any Losses incurred or assessed against an Indemnified Party that arise from
such Indemnified party's willful misfeasance, bad faith or negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
5.4 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified the other party in writing within a reasonable time after
the summons, or other first written notification, giving information of the
nature of the claim shall have been served upon or otherwise received by such
Indemnified Party (or after such Indemnified Party shall have received notice of
service upon or other notification to any designated agent), but failure to
notify the party against whom indemnification is sought of any such claim shall
not relieve that party from any liability which it may have to the Indemnified
Party in the absence of Sections 5.1 and 5.2.
5.5 In case any such action is brought against the Indemnified Parties, the
Indemnifying Party shall be entitled to participate, at its own expense, in the
defense of such action. The Indemnifying Party also shall be entitled to assume
the defense thereof, with counsel reasonably satisfactory to the party named in
the action. After notice from the Indemnifying Party to the Indemnified Party of
an election to assume such defense, the Indemnified Party shall bear the fees
and expenses of any additional counsel retained by it, and the Indemnifying
Party will not be liable to the Indemnified Party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8
<PAGE>
ARTICLE VI
Termination
6.1 This Agreement may be terminated by either party for any reason by one
hundred eighty (180) days advance written notice delivered to the other party.
6.2 Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company and to the extent permitted by applicable law,
continue to make available additional shares of the Trust (or any Fund) pursuant
to the terms and conditions of this Agreement for all Contracts in effect on the
effective date of termination of this Agreement, provided that the Company
continues to pay the costs set forth in Section 2.3.
6.3 The provisions of Article V shall survive the termination of this
Agreement, and the provision of Article IV and Section 2.8 shall survive the
termination of this Agreement as long as shares of the Trust are held on behalf
of Contract owners in accordance with Section 6.2.
ARTICLE VII
Notices
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Trust:
Variable Insurance Fund c/o BISYS Fund Services
3435 Stelzer Road, Suite 1000
Columbus, OH 43219-8003
Attention: Rick Ille
If to the Company:
Hartford Life Insurance Company
200 Hopmeadow Street
Simsbury, Connecticut 06089
Attention: Lynda Godkin
General Counsel
9
<PAGE>
ARTICLE VIII
Miscellaneous
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of Connecticut.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc., and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with an investigation or inquiry relating
to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
8.8 The parties to this Agreement acknowledge and agree that this Agreement
shall not be exclusive in any respect.
10
<PAGE>
8.9 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other party.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers to
execute this Participation Agreement as of the date and year first above
written.
VARIABLE INSURANCE FUNDS
By:
Name:
Title:
HARTFORD LIFE INSURANCE COMPANY
By:
Name:
Title:
11
<PAGE>
Schedule A
Separate Accounts and Associated Contracts
Name of Separate Account Contracts Funded
By Separate Account
HLIC Separate Account Two The Director Variable Annuity
Funds
BB&T Growth and Income Fund
BB&T Capital Manager Fund
A-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.
2
<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 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.
- --------------------
* All fees are computed daily and paid monthly.
VARIABLE INSURANCE FUNDS [PARTICIPATING ORGANIZATION]
By: __________________________ By: _____________________________
Title:________________________ Title:___________________________
Date:_________________________ Date:____________________________
A-1
[DPR Letterhead]
May 28, 1997
Variable Insurance Funds
3435 Stelzer Road
Columbus, OH 43219-3035
Dear Sirs:
In connection with the registration under the Securities Act of 1933 of an
indefinite number of shares of beneficial interest of Variable Insurance Funds
(the "Trust"), we have examined such matters as we have deemed necessary to give
this opinion.
On the basis of the foregoing, it is our opinion that the shares of the
Trust have been duly authorized and, when paid for as contemplated by the
Trust's Registration Statement, will be validly issued, fully paid and
non-assessable by the Trust.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to all references to our firm therein.
Very truly yours,
/s/ Dechert Price & Rhoads
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation in this Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-1A (File No. 33-81800) of the Variable
Insurance Funds, of our report dated May 22, 1997 on our audit of the financial
statement of the BB&T Growth and Income Fund which report is included in the
Registration Statement. We also consent to the reference to our Firm under the
caption "Other Service Providers" in the Prospectus and "Auditors" in the
Statement of Additional Information relating to the Variable Insurance Funds in
this Pre-Effective Amendment No. 2 to the Registration Statement on Form N-1A
(File No. 33-81800).
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
May 27, 1997
PURCHASE AGREEMENT
Variable Insurance Funds (the "Trust"), a Massachusetts business trust with
transferable shares, Branch Banking and Trust Company, on behalf of and as
trustee for the Retirement Plan for the Employees of Branch Banking and Trust
Company (the "Purchaser"), and Branch Banking and Trust Company ("BB&T"), on its
own behalf, hereby agree with each other as follows:
1. The Trust hereby offers Purchaser and Purchaser hereby purchases 10,000
shares of the BB&T Growth and Income Fund at a price of $10.00 per share (such
shares of beneficial interest in the Trust being hereinafter collectively known
as "Shares"). Purchaser hereby acknowledges the purchase of the Shares and the
Trust hereby acknowledges receipt from Purchaser of funds in the amount of
$100,000 in full payment for the Shares.
2. Purchaser represents and warrants to the Trust that the Shares are being
acquired for investment purposes and not with a view to the distribution
thereof.
3. Costs incurred by the Trust in connection with the registration and the
initial public offering of shares of the Trust, including the Shares, have been
deferred and will be amortized over a period of 24 months from commencement of
operations. Unless otherwise required by law, in the event that any of the
initial Shares purchased by Purchaser hereunder are redeemed by any holder
thereof during the period that the costs incurred by the Trust in connection
with the registration and initial public offering are amortized by the Trust,
the Trust is authorized to reduce the redemption proceeds to cover any
unamortized expenses in the same proportion as the number of initial Shares
being redeemed bears to the number of initial shares, including the Shares,
outstanding at the time of redemption. If, for any reason, said reduction of
redemption proceeds is not in fact made by the Trust in the event of such a
redemption, BB&T agrees to reimburse the Trust immediately for any unamortized
expenses in the proportion stated above, unless otherwise required by law.
4. 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,
as amended.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the ____ day of _________________, 1997.
(SEAL)
Attest: VARIABLE INSURANCE FUNDS
______________________ By:_____________________________
Title:__________________________
(SEAL)
Attest: PURCHASER
_______________________ By:_____________________________
Title:__________________________
(SEAL)
Attest: BRANCH BANKING AND TRUST COMPANY
______________________ By:_____________________________
Title:__________________________
CERTIFICATE OF SECRETARY
The undersigned, being the duly elected Secretary of Variable Insurance
Funds (the "Trust"), hereby certifies pursuant to Rule 483(b) under the
Securities Act of 1933 that the following resolution was unanimously approved at
the meeting of the Board of Trustees of the Trust held on April 23, 1997:
RESOLVED, that the Trustees and officers of the Trust who
may be required to execute the Trust's Registration Statement on
Form N-1A and any amendments thereto be, and each of them hereby
is, authorized to execute a power of attorney appointing Jeffrey
L. Steele and Keith T. Robinson their true and lawful attorneys,
to execute in their name, place and stead, in their capacity as
Trustee or officer of the Trust, said Registration Statement and
any amendments thereto, and all instruments necessary or
incidental in connection therewith, and to file the same with the
Securities and Exchange Commission; and said attorneys shall have
the power to act thereunder and shall have full power of
substitution and resubstitution; and said attorneys shall have
full power and authority to do and perform in the name and on
behalf of each of said Trustees and officers, or any or all of
them, in any and all capacities, every act whatsoever requisite
or necessary to be done in the premises, as fully and to all
intents and purposes as each of said Trustees or officers, or any
or all of them, might or could do in person, said acts of said
attorneys, being hereby ratified and approved.
/s/ Dana A. Gentile
_____________________________
Date: April 23, 1997
SEAL
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Jeffrey L. Steele and Keith T. Robinson and each
of them, to act severally as attorneys-in-fact and agents, with power of
substitution and resubstitution, for the undersigned in any and all capacities
to sign the Registration Statement of Variable Insurance Funds and any pre- or
post-effective amendments thereto, and to file the same, with exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and conforming all that said attorneys-in-fact, or
their substitute or substitutes, may do or cause to be done by virtue hereof.
/s/ Wally Grimm
__________________________
Wally Grimm
Date: April 23, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Jeffrey L. Steele and Keith T. Robinson and each
of them, to act severally as attorneys-in-fact and agents, with power of
substitution and resubstitution, for the undersigned in any and all capacities
to sign the Registration Statement of Variable Insurance Funds and any pre- or
post-effective amendments thereto, and to file the same, with exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and conforming all that said attorneys-in-fact, or
their substitute or substitutes, may do or cause to be done by virtue hereof.
/s/ Michael Van Buskirk
_________________________
Michael Van Buskirk
Date: April 23, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Jeffrey L. Steele and Keith T. Robinson and each
of them, to act severally as attorneys-in-fact and agents, with power of
substitution and resubstitution, for the undersigned in any and all capacities
to sign the Registration Statement of Variable Insurance Funds and any pre- or
post-effective amendments thereto, and to file the same, with exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and conforming all that said attorneys-in-fact, or
their substitute or substitutes, may do or cause to be done by virtue hereof.
/s/ James Woodward
_________________________
James Woodward
Date: April 23, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Jeffrey L. Steele and Keith T. Robinson and each
of them, to act severally as attorneys-in-fact and agents, with power of
substitution and resubstitution, for the undersigned in any and all capacities
to sign the Registration Statement of Variable Insurance Funds and any pre- or
post-effective amendments thereto, and to file the same, with exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and conforming all that said attorneys-in-fact, or
their substitute or substitutes, may do or cause to be done by virtue hereof.
/s/ Richard Ille
_________________________
Rick Ille
Date: April 23, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Jeffrey L. Steele and Keith T. Robinson and each
of them, to act severally as attorneys-in-fact and agents, with power of
substitution and resubstitution, for the undersigned in any and all capacities
to sign the Registration Statement of Variable Insurance Funds and any pre- or
post-effective amendments thereto, and to file the same, with exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and conforming all that said attorneys-in-fact, or
their substitute or substitutes, may do or cause to be done by virtue hereof.
/s/ William Tomko
_________________________
William Tomko
Date: April 23, 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
<OVERDISTRIBUTION-NII> 0
<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>
