As filed with the Securities and Exchange Commission on April 1, 1999
File Nos. 33-81800
811-8644
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 6 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No.8 /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
Keith T. Robinson
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006
Copies to:
Walter Grimm
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219-3035
It is proposed that this filing will become effective (check appropriate
box):
[] immediately upon filing pursuant to paragraph (b)
[X]on April 30, 1999 pursuant to paragraph (b)
[] 60 days after filing pursuant to paragraph (a)(1)
[] On (date) pursuant to paragraph (a)(1)
[] 75 days after filing pursuant to paragraph (a)(2)
[] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[X] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
BB&T Growth and Income Fund
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-228-1872
The BB&T Growth and Income Fund seeks capital growth, current income, or both by
investing primarily in stocks. The Fund's goals and investment program are
described in more detail inside. Branch Banking and Trust Company ("BB&T")
serves as the Fund's investment adviser.
The Fund sells its shares to insurance company separate accounts, so that the
Fund may serve as an investment option under variable life insurance policies
and variable annuity contracts issued by insurance companies. The Fund also may
sell its shares to certain other investors, such as qualified pension and
retirement plans, insurance companies, and BB&T.
This prospectus should be read in conjunction with the separate account's
prospectus describing the variable insurance contract. Please read both
prospectuses and retain them for future reference.
The Securities and Exchange Commission has not approved the Fund's shares or
determined whether this prospectus is accurate or complete. Anyone who tells you
otherwise is committing a crime.
The date of this prospectus is May 1, 1999.
TABLE OF CONTENTS
<TABLE>
<S> <C>
RISK/RETURN SUMMARY AND FUND EXPENSES MANAGEMENT OF THE FUND
Investment Objective Investment Adviser
Principal Investment Strategies Administrator and Distributor
Principal Investment Risks Servicing Agents
Fund Performance Year 2000
Fund Expenses TAXATION
FINANCIAL HIGHLIGHTS GENERAL INFORMATION
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS Description of the Trust and Its Shares
VALUATION OF SHARES Similar Fund Performance Information
PURCHASING AND REDEEMING SHARES Miscellaneous
</TABLE>
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
Investment Objective
The Fund seeks capital growth, current income, or both.
Principal Investment Strategies
Under normal market conditions, the 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.
Principal Investment Risks
An investment in the Fund entails investment risk, including possible loss of
the principal amount invested. The Fund is subject to market risk, which is the
risk that the market value of a portfolio security may move up and down,
sometimes rapidly and unpredictably. This risk may be particularly acute for the
Fund's investments in stocks. The Fund also is subject to interest rate risk,
which is the risk that changes in interest rates will affect the value of the
Fund's investments. In particular, the Fund's investments in fixed income
securities, if any, generally will change in value inversely with changes in
interest rates. Also, the Fund's investments may expose it to credit risk, which
is the risk that the issuer of a security will default or not be able to meet
its financial obligations.
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Fund Performance
The following chart and table show how the Fund has performed, and the table
compares the Fund's performance to that of the S&P 500(R) Index, a widely
recognized, unmanaged index of common stocks. The information does not reflect
charges and fees associated with a separate account that invests in the Fund or
any insurance contract for which the Fund is an investment option. These charges
and fees will reduce returns. Investors should be aware that past performance
does not indicate how the Fund will perform in the future.
Total Return for the Year Ended December 31, 1998*
[Bar Chart]
Best Quarter: December 31, 1998 17.32%
Worst Quarter: September 30, 1998 (8.19)%
Average Annual Total Return* (for the periods ended December 31, 1998)
<PAGE>
Past Year Since Inception (June 3, 1997)
--------- ------------------------------
Fund 13.36% 21.51%
S&P 500 28.60% 28.87%
- ------------------
* Assumes reinvestment of dividends and distributions.
Fund Expenses
The following expense table indicates expenses that an investor will incur as a
shareholder of the Fund during the current fiscal year. These expenses are
reflected in the share price of the Fund.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees*..........................................0.74%
Other Expenses*...........................................0.50%
Total Annual Fund Operating Expenses*.....................1.24%
- ------------------
* BB&T currently limits its management fees to 0.55%, and other expenses
currently are being limited to 0.36%. Total expenses after fee waivers
and expense reimbursements are 0.91%. Investors will be notified of any
material revision or cancellation of a fee waiver or expense
reimbursement, which may be terminated at any time at the option of the
Fund.
Expense Example
Use the following table to compare fees and expenses of the Fund to other
investment companies. It illustrates the amount of fees and expenses an investor
would pay, assuming (1) a $10,000 investment, (2) 5% annual return, (3)
redemption at the end of each time period, and (4) no changes in the Fund's
total operating expenses. It does not reflect separate account or insurance
contract fees and charges. An investor's actual costs may be different.
1 Year 3 Years 5 Years 10 Years
$126 $393 $681 $1,500
<PAGE>
FINANCIAL HIGHLIGHTS
The following table is included to assist investors in evaluating the financial
performance of the Fund since its commencement of operations through December
31, 1998. Certain information reflects financial results of a single share.
"Total Return" represents how much an investment in the Fund would have earned
(or lost) during each period. This information has been audited by
PricewaterhouseCoopers LLP, the Fund's independent auditors, whose report on the
Fund's financial statements, along with the Fund's financial statements, are
included in the Fund's annual report, which may be obtained without charge upon
request.
<TABLE>
<S> <C> <C>
Year ended June 3, 1997 through
For a share outstanding throughout the period: December 31, 1998 December 31, 1997 (a)
- ---------------------------------------------
------------------------- --------------------------
Net Asset Value, Beginning of Period $ 11.88 $ 10.00
------------------------- --------------------------
Income From Investment Operations:
Net investment income 0.16 0.10
Net gains or losses on securities (realized and unrealized) 1.42 1.89
-------------------------
--------------------------
Total from investment operations 1.58 1.99
------------------------- --------------------------
Less Distributions:
Dividends (from net investment income) (0.16) (0.10)
Dividends (in excess of net investment income) -- (0.01)
------------------------- --------------------------
Total distributions (0.16) (0.11)
------------------------- --------------------------
Net Asset Value, End of Period $ 13.30 $ 11.88
========================= ==========================
Total Return 13.36% 19.96%(b)
Ratios/Supplementary Data:
Net assets, end of period (000's) $ 49,062 $ 28,829
Ratio of expenses to average net assets 0.91% 0.91%(c)
Ratio of net income to average net assets 1.37% 1.68%(c)
Ratio of expenses to average net assets* 1.24% 2.31%(c)
Ratio of net income to average net assets* 1.04% 0.28%(c)
Portfolio turnover rate 2.77% 7.75%
</TABLE>
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
* During the period, certain fees were reimbursed and voluntarily reduced. If
such reimbursements and voluntary fee reductions had not occurred, the
ratios would have been as indicated.
<PAGE>
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
Investors should be aware that the investments made by the Fund at any given
time are not expected to be the same as those made by other mutual funds for
which BB&T acts as investment adviser, including mutual funds with names,
investment objectives and policies similar to the Fund. Investors should
carefully consider their investment goals and willingness to tolerate investment
risk before allocating their investment to the Fund.
The Fund's investment objective is to seek capital growth, current income, or
both. Equity securities purchased by the 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 Fund's investment objective for
income, most stocks will be purchased by the Fund primarily in pursuit of its
investment objective for growth.
BB&T uses a value-oriented investment approach that focuses on stocks of issuers
which over a five year period have achieved cumulative income in excess of the
cumulative dividends paid to shareholders. In evaluating prospective
investments, BB&T may consider factors such as the market price of a company's
securities relative to its evaluation of the company's long-term earnings, asset
value and cash flow potential, as well as historical value measures such as
price-earnings ratios, profit margins and liquidation values. The Fund may
invest in companies of any size, although most stocks purchased will be issued
by companies whose market capitalizations are large relative to the entirety of
the U.S. securities markets, but not as large as many of the stocks represented
in such broad market indexes as the S&P 500(R) Index.
The Fund has the flexibility to make portfolio investments and engage in other
investment techniques that are different than its principal strategies mentioned
here. More information on the Fund's investment strategies may be found in its
most recent annual/semi-annual report and in the Statement of Additional
Information (see back cover).
The Fund's investment strategies may subject it to a number of risks, including
the following.
Market Risk. Although stocks historically have outperformed other asset classes
over the long term, their prices tend to fluctuate more dramatically over the
shorter term. These movements may result from factors affecting individual
companies, or from broader influences like changes in interest rates, market
conditions, investor confidence or announcements of economic, political or
financial information. While potentially offering greater opportunities for
capital growth than larger, more established companies, the stocks of smaller
companies may be particularly volatile, especially during periods of economic
uncertainty. These companies may face less certain growth prospects, or depend
heavily on a limited line of products and services or the efforts of a small
number of key management personnel.
<PAGE>
The Fund may invest in stocks issued by foreign companies, although it will do
so only if the stocks are traded in the U.S. The stocks of foreign companies may
pose risks in addition to, or to a greater degree than, the risks described
above. Foreign companies may be subject to disclosure, accounting, auditing and
financial reporting standards and practices that are different from those to
which U.S. issuers are subject. Accordingly, the Fund may not have access to
adequate or reliable company information. In addition, political, economic and
social developments in foreign countries and fluctuations in currency exchange
rates may affect the operations of foreign companies or the value of their
stocks.
BB&T tries to manage market risk by primarily investing in relatively large
capitalization "value" stocks of U.S. issuers. Stocks of larger companies tend
to be less volatile than those of smaller companies, and value stocks in theory
limit downside risk because they are underpriced. Of course, BB&T's success in
moderating market risk cannot be assured. In addition, the Fund may produce more
modest gains than stock funds with more aggressive investment profiles.
Interest Rate Risk. Although the Fund's primary investment focus is stocks, it
may invest in debt securities and other types of fixed income securities.
Generally, the value of these securities will change inversely with changes in
interest rates. In addition, changes in interest rates may affect the operations
of the issuers of stocks in which the Fund invests. Rising interest rates, which
may be expected to lower the value of fixed income instruments and negatively
impact the operations of many issuers, generally exist during periods of
inflation or strong economic growth.
Credit Risk. The Fund's investments, and particularly investments in debt
securities, may be affected by the creditworthiness of issuers in which the Fund
invests. Changes in the financial strength, or perceived financial strength, of
a company may affect the value of its securities and, therefore, impact the
value of the Fund's shares.
Temporary Investments. BB&T may temporarily invest up to 100% of the Fund's
assets in high quality, short-term money market instruments if it believes
adverse economic or market conditions, such as excessive volatility or sharp
market declines, justify taking a defensive investment posture. If the Fund
attempts to limit investment risk by temporarily taking a defensive investment
position, it may be unable to pursue its investment objective during that time,
and it may miss out on some or all of an upswing in the securities markets.
Please see the Statement of Additional Information for more detailed information
about the Fund, its investment strategies, and its risks.
<PAGE>
VALUATION OF SHARES
The Fund prices its shares on the basis of the net asset value of the Fund,
which is determined as of the close of the New York Stock Exchange ("NYSE")
(generally 4:00 p.m. Eastern Time) on each Business Day (other than a day on
which there are insufficient changes in the value of the Fund's portfolio
securities to materially affect the Fund's net asset value or a day on which no
shares are tendered for redemption and no order to purchase any shares is
received). A Business Day is a day on which the NYSE is open for trading.
Currently, the NYSE is closed on the following holidays: New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
Net asset value per share for purposes of pricing sales and redemptions is
calculated by dividing the value of all securities and other assets belonging to
the Fund, less the liabilities charged to the Fund and any liabilities allocable
to the Fund, by the number of the Fund's outstanding shares. The net asset value
per share of the Fund will fluctuate as the value of the investment portfolio of
the Fund changes.
The securities in the 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 of Variable Insurance Funds (the "Trust") believes accurately reflects
fair value. For further information about valuation of investments, see the
Statement of Additional Information.
PURCHASING AND REDEEMING SHARES
Shares of the Fund are available for purchase by insurance company separate
accounts to serve as an investment medium for variable insurance contracts, and
by qualified pension and retirement plans, certain insurance companies, and
BB&T. Shares of the Fund are purchased or redeemed at the net asset value per
share next determined after receipt by the Fund's distributor of a purchase
order or redemption request. Transactions in shares of the Fund will be effected
only on a Business Day of the Fund.
Payment for shares redeemed normally will be made within seven days. The Fund
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. A
shareholder may incur brokerage costs in converting such securities to cash.
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the Securities and Exchange Commission in order to protect
remaining investors.
Investors do not deal directly with the Fund to purchase or redeem shares.
Please refer to the prospectus for the separate account for information on the
allocation of premiums and on transfers of accumulated value among sub-accounts
of the separate account that invests in the Fund.
<PAGE>
The Fund currently does not foresee any disadvantages to investors if the Fund
served as an investment medium for both variable annuity contracts and variable
life insurance policies. However, it is theoretically possible that the interest
of owners of annuity contracts and insurance policies for which the Fund served
as an investment medium might at some time be in conflict due to differences in
tax treatment or other considerations. The Board of Trustees and each
participating insurance company 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 Fund might be required to redeem the
investment of one or more of its separate accounts from the Fund, which might
force the Fund to sell securities at disadvantageous prices.
The Fund reserves the right to discontinue offering shares at any time. In the
event that the 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 Board of Trustees.
MANAGEMENT OF THE FUND
Investment Adviser
Branch Banking and Trust Company, 434 Fayetteville Street Mall, Raleigh, N.C.
27601, is the investment adviser of the Fund. Through its portfolio management
team, BB&T makes the day-to-day investment decisions for the Fund and
continuously reviews, supervises and administers the Fund's investment program.
BB&T is the oldest bank in North Carolina. It is the principal bank affiliate of
BB&T Corporation, a bank holding company that is a North Carolina corporation
headquartered in Winston-Salem, North Carolina. As of December 31, 1998, BB&T
Corporation had assets in excess of $34.4 billion. Through its subsidiaries,
BB&T Corporation operates over 534 banking offices in North Carolina, South
Carolina, Virginia, Maryland and Washington, D.C., providing a broad range of
financial services to individuals and businesses. 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. 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 17 years and currently
manages assets of more than $[ ] billion.
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 Fund's average daily net
assets; or (b) such amount as may from time to time be agreed upon in writing by
the Trust and BB&T. For services provided and expenses assumed during the fiscal
year ended December 31, 1998, BB&T received an investment advisory fee equal to
an annual rate of 0.55% of the Fund's average daily net assets.
<PAGE>
Richard B. Jones is the person who has been primarily responsible for the
management of the Fund since its inception. Mr. Jones has been a portfolio
manager in the BB&T Trust Division since 1987. He holds a B.S. in Business
Administration from Miami (Ohio) University and an M.B.A. from The Ohio State
University.
Administrator and Distributor
BISYS Fund Services Ohio, Inc. is the administrator for the Fund, and BISYS Fund
Services acts as the Fund's principal underwriter and distributor. The address
of each is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
See the Statement of Additional Information for further information about the
Fund's service providers.
Servicing Agents
The Trust has adopted a plan under which up to 0.25% of the Fund's average daily
net assets may be expended for support services to investors, such as
establishing and maintaining accounts and records, providing account
information, arranging for bank wires, responding to routine inquiries,
forwarding investor communications, assisting in the processing of purchase,
exchange and redemption requests, and assisting investors in changing account
designations and addresses. For expenses incurred and services provided, a
financial institution (or its affiliate) providing these services ("Servicing
Agent") may receive a fee from the Fund, computed daily and paid monthly, at an
annual rate of up to 0.25% of the average daily net assets of the Fund allocable
to variable insurance contracts owned by customers of the Servicing Agent. A
Servicing Agent may periodically waive all or a portion of its servicing fees
with respect to the Fund to increase the net income of the Fund available for
distribution as dividends.
Year 2000
The services provided to the Fund by BB&T and the Fund's other service providers
(collectively, the "Service Providers") are dependent on those Service
Providers' computer systems. Many computer software and hardware systems in use
today cannot distinguish between the year 2000 and the year 1900 because of the
way dates are encoded and calculated (the "Year 2000 Issue"). The failure to
make this distinction could have a negative impact on the Service Providers'
ability to handle securities trades, price securities, and conduct general
account services on behalf of the Fund. The Trust is working with the Service
Providers to take steps that are reasonably designed to address the Year 2000
Issue with respect to computer systems relied on by the Fund. The Trust believes
that these steps will be sufficient to avoid any material adverse impact on the
Fund, although there can be no assurances. The costs or consequences of an
incomplete or an untimely resolution of the Year 2000 Issue are unknown to the
Trust and the Service Providers at this time, but could have a material adverse
impact on the operations of the Fund and the Service Providers. In addition, if
the value of a Fund investment is adversely affected by a Year 2000 problem, the
net asset value of the Fund may be affected as well.
<PAGE>
TAXATION
To comply with regulations under the Internal Revenue Code, the Fund is required
to diversify its investments. Generally, the 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.
If the Fund fails to meet this diversification requirement, income with respect
to variable insurance contracts invested in the Fund at any time during the
calendar quarter in which the failure occurred could become currently taxable to
the owners of the contracts. Similarly, 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.
Reference is made to the prospectus for the separate account and variable
insurance contract for information regarding the federal income tax treatment of
distributions to the separate account. See the Statement of Additional
Information for more information on taxes.
GENERAL INFORMATION
Description of the Trust and Its Shares
Variable Insurance Funds was organized as a Massachusetts business trust in 1994
and currently consists of five portfolios. The Board of Trustees of the Trust
may establish additional portfolios in the future. Under Massachusetts law,
shareholders could be held personally liable for the obligations of the Trust
under certain circumstances. However, the Trust's declaration of trust disclaims
liability of its shareholders and provides for indemnification out of Trust
property for all loss and expense of any shareholder held personally liable for
the obligations of the Trust. Accordingly, the risk of a shareholder incurring
financial loss on account of shareholder liability should be considered remote.
<PAGE>
Similar Fund Performance Information
The following table provides information concerning the historical total return
performance of the Trust Shares class of the BB&T Growth and Income Stock Fund
(the "Similar Fund"), a series of the BB&T Mutual Funds Group. The Similar
Fund's investment objectives, policies and strategies are substantially similar
to those of the Fund and is currently managed by the same portfolio manager.
While the investment objectives, policies and risks of the Similar Fund and the
Fund are similar, they are not identical, and the performance of the Similar
Fund and the Fund will vary. The data is provided to illustrate the past
performance of BB&T in managing a substantially similar investment portfolio and
does not represent the past performance of the Fund or the future performance of
the Fund or its portfolio manager. Consequently, potential investors should not
consider this performance data as an indication of the future performance of the
Fund or of its portfolio manager.
The performance data shown below reflects the operating expenses of the Similar
Fund, which are lower than the expenses of the Fund. Performance would have been
lower for the Similar Fund if the Fund's expenses were used. In addition, the
Similar Fund, unlike the Fund, is not sold to insurance company separate
accounts to fund variable insurance contracts. As a result, the performance
results presented below do not take into account charges or deductions against a
separate account or variable insurance contract for cost of insurance charges,
premium loads, administrative fees, maintenance fees, premium taxes, mortality
and expense risk charges, or other charges that may be incurred under a variable
insurance contract for which the Fund serves as an underlying investment
vehicle. By contrast, investors with contract value allocated to the Fund will
be subject to charges and expenses relating to variable insurance contracts and
separate accounts.
The Similar Fund's performance data shown below is calculated in accordance with
standards prescribed by the Securities and Exchange Commission for the
calculation of average annual total return information. The investment results
of the Similar Fund presented below are unaudited and are not intended to
predict or suggest results that might be experienced by the Similar Fund or the
Fund. Share prices and investment returns will fluctuate reflecting market
conditions, as well as changes in company-specific fundamentals of portfolio
securities. The performance data for the benchmark index identified below does
not reflect the fees or expenses of the Similar Fund or the Fund.
<PAGE>
Average Annual Total Return for the Similar Fund and for Its Benchmark Index for
Periods Ended December 31, 1998
<TABLE>
<S> <C> <C> <C> <C>
Since Inception
Similar Fund/Benchmark 1 Year 3 Years 5 Years (October 9, 1992)
- ---------------------- ------ ------- ------- ----------------
BB&T Growth and Income Stock Fund 13.10% 22.53% 19.34% 18.36%
S&P 500(R) Index* 28.60% 28.23% 24.06% 22.16%
- -----------------
* The Standard & Poor's 500 Composite Stock Price Index is an unmanaged
index containing common stocks of 500 industrial, transportation,
utility and financial companies, regarded as generally representative
of the U.S. stock market. The Index reflects income and distributions,
if any, but does not reflect fees, brokerage commissions, or other
expenses of investing.
</TABLE>
Miscellaneous
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. If given or made, such information or representations
must not be relied upon as having been authorized by the Fund or its
distributor. This prospectus does not constitute an offering by the Fund or its
distributor in any jurisdiction in which such offering may not be lawfully made.
<PAGE>
For more information about the Fund, the following documents are available free
upon request:
Annual/Semi-Annual Reports:
The Fund's annual and semi-annual reports to shareholders contain additional
information on the Fund's investments. In the annual report, an investor will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Fund, including its operations and investment policies. It
is incorporated by reference and is legally considered a part of this
prospectus.
- --------------------------------------------------------------------------------
An investor can get free copies of reports and the SAI, or request other
information and discuss any questions about the Fund, by contacting a broker or
bank that sells an insurance contract that offers the Fund as an investment
option. Or contact the Fund at:
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
Telephone: 1-800-228-1872
- --------------------------------------------------------------------------------
Investors can review the Fund's reports and SAI at the Public Reference Room of
the Securities and Exchange Commission. Investors can get text-only copies:
. For a fee, by writing the Public Reference Section of the
Commission, Washington, D.C. 20549-6009 or calling 1-800-SEC-0330.
. Free from the Commission's Website at http://www.sec.gov
Investment Company Act file no. 811-8644.
<PAGE>
BB&T Capital Manager Fund
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-228-1872
The BB&T Capital Manager Fund seeks to provide capital appreciation by investing
in a diversified portfolio of affiliated mutual funds. The Fund's goals and
investment program are described in more detail inside. Branch Banking and Trust
Company ("BB&T") serves as the Fund's investment adviser.
The Fund sells its shares to insurance company separate accounts, so that the
Fund may serve as an investment option under variable life insurance policies
and variable annuity contracts issued by insurance companies. The Fund also may
sell its shares to certain other investors, such as qualified pension and
retirement plans, insurance companies, and BB&T.
This prospectus should be read in conjunction with the separate account's
prospectus describing the variable insurance contract. Please read both
prospectuses and retain them for future reference.
The Securities and Exchange Commission has not approved the Fund's shares or
determined whether this prospectus is accurate or complete. Anyone who tells you
otherwise is committing a crime.
The date of this prospectus is May 1, 1999.
TABLE OF CONTENTS
<TABLE>
<S> <C>
RISK/RETURN SUMMARY AND FUND EXPENSES MANAGEMENT OF THE FUND
Investment Objective Investment Adviser
Principal Investment Strategies Administrator and Distributor
Principal Investment Risks Servicing Agents
Fund Expenses Year 2000
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS TAXATION
Investment Objectives and Policies -- Underlying Funds GENERAL INFORMATION
Investment Risks of the Fund Description of the Trust and Its Shares
VALUATION OF SHARES Similar Fund Performance Information
PURCHASING AND REDEEMING SHARES Miscellaneous
</TABLE>
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
Investment Objective
The Fund seeks to provide capital appreciation.
Principal Investment Strategies
The Fund seeks its investment objective by investing in a diversified portfolio
of mutual funds (the "Underlying Funds") offered by the BB&T Mutual Funds Group,
an affiliated open-end investment company. The Fund will purchase shares of the
Underlying Funds at net asset value and without sales charge.
Principal Investment Risks
An investment in the Fund entails investment risk, including possible loss of
the principal amount invested. The Fund is subject to market risk, which is the
risk that the market value of its investments in Underlying Funds may move up
and down, sometimes rapidly and unpredictably. This risk may be particularly
acute for the Fund's investments in Underlying Funds that primarily invest in
common stocks and other equity securities. The Fund also is subject to interest
rate risk, which is the risk that changes in interest rates will affect the
value of the Fund's investments. In particular, the Fund's investments in
Underlying Funds that primarily invest in fixed income securities generally will
change in value inversely with changes in interest rates. Also, an investment by
the Fund in Underlying Funds that primarily invest in fixed income securities
will expose the Fund to credit risk, which is the risk that an issuer of the
portfolio securities of the Underlying Funds will default or not be able to meet
its financial obligations.
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Fund Performance
Because the Fund has no investment track record, it has no performance
information to compare against other mutual funds or a broad measure of
securities market performance, such as an index.
Fund Expenses
The following expense table indicates the estimated expenses that an investor
will incur as a shareholder of the Fund during the current fiscal year. These
expenses are reflected in the share price of the Fund.
<PAGE>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees*.............................................0.25%
Other Expenses*............................................[ ]%
Total Annual Fund Operating Expenses*......................[ ]%
- ------------------
* BB&T currently limits its management fees to []%, and other expenses
currently are being limited to []%. Total expenses after fee waivers
and expense reimbursements are []%. Investors will be notified of any
material revision or cancellation of a fee waiver or expense
reimbursement, which may be terminated at any time at the option of the
Fund.
In addition to the expenses shown above, investors will indirectly bear their
pro rata share of fees and expenses incurred by the Underlying Funds, so that
the investment returns of the Fund will be net of the expenses of the Underlying
Funds. Based on the expenses for the Fund and the Underlying Funds, the average
weighted expense ratio for the Fund, expressed as a percentage of average daily
net assets, is estimated to be [ ]%.
Expense Example
Use the following table to compare fees and expenses of the Fund to other
investment companies. It illustrates the amount of fees and expenses an investor
would pay, assuming (1) a $10,000 investment, (2) 5% annual return, (3)
redemption at the end of each time period, and (4) no changes in the Fund's
total operating expenses. It does not reflect separate account or insurance
contract fees and charges. An investor's actual costs may be different.
1 Year 3 Years
$ $
<PAGE>
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
Investors should be aware that the investments made by the Fund at any given
time are not expected to be the same as those made by other mutual funds for
which BB&T acts as investment adviser, including mutual funds with names,
investment objectives and policies similar to the Fund. Investors should
carefully consider their investment goals and willingness to tolerate investment
risk before allocating their investment to the Fund.
The Fund's investment objective is to seek to provide capital appreciation.
Under normal market conditions, it invests primarily in a group of diversified
Underlying Funds that invest primarily in equity securities. However, it also
may invest a portion of its assets in Underlying Funds that invest primarily in
fixed income securities or money market instruments.
The allocation of the Fund's assets among the Underlying Funds will be made by
BB&T, which will make allocation decisions according to its outlook for the
economy, financial markets, and relative market valuation of the Underlying
Funds. For temporary cash management and liquidity purposes, the Fund may also
hold cash and invest in short-term obligations.
The Fund's net asset value will fluctuate with changes in the equity markets and
the value of the Underlying Funds in which it invests. The Fund's investment
return is diversified by its investment in the Underlying Funds, which invest in
growth and income stocks, foreign securities, debt securities, and cash and cash
equivalents.
More information on the Fund's investment strategies, and those of the
Underlying Funds, may be found in the Statement of Additional Information (see
back cover).
Investment Objectives And Policies--Underlying Funds
BB&T Equity Funds
BB&T Growth and Income Stock Fund. The BB&T Growth and Income Stock Fund's
investment objective is to seek capital growth, current income or both,
primarily through investment in stocks. Under normal market conditions, the 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. While some stocks may be purchased primarily to
achieve the fund's investment objective for income, most stocks will be
purchased by the fund primarily in furtherance of its investment objective for
growth. The fund will favor stocks of issuers which over a given five year
period have achieved cumulative income in excess of the cumulative dividends
paid to shareholders.
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 fund seeks to
achieve this objective by investing in a broadly diversified portfolio of
securities, including common stocks, preferred stocks and bonds.
<PAGE>
The portion of the 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 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.
It is a fundamental policy of the 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.
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 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 fund will assess
characteristics such as financial condition, revenue, growth, profitability,
earnings per share growth and trading liquidity.
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. It will pursue investments in
non-dollar denominated stocks primarily in countries included the Morgan Stanley
Capital International EAFE (Europe, Australasia, Far East) Index, and may also
invest its assets in countries with emerging economies or securities markets.
The 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 a
security's price momentum will also be a factor 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.
<PAGE>
BB&T Income Funds
BB&T Short-Intermediate U.S. Government Income Fund and BB&T Intermediate U.S.
Government Bond Fund. The investment objective of each of these funds is to seek
current income consistent with the preservation of capital. The BB&T
Short-Intermediate U.S. Government Income Fund will invest primarily in
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or in high grade collateralized mortgage obligations. The
dollar-weighted average portfolio maturity of the fund will be from two to five
years. The BB&T Intermediate U.S. Government 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 fund
will be from five to ten years. These funds also may invest in short-term
obligations, commercial bonds and the shares of other investment companies.
BB&T Money Fund
BB&T U.S. Treasury Money Market Fund. The investment objective of the BB&T U.S.
Treasury Money Market Fund is to seek current income with liquidity and
stability of principal by 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. Obligations purchased by the
fund are limited to U.S. dollar-denominated obligations which BB&T has
determined present minimal credit risks.
Investment Risks of the Fund
The Fund's investment strategies may subject it to a number of risks, including
the following.
Market Risk. Although equities historically have outperformed other asset
classes over the long term, their prices tend to fluctuate more dramatically
over the shorter term. These movements may result from factors affecting
individual companies, or from broader influences like changes in interest rates,
market conditions, investor confidence or announcements of economic, political
or financial information. While potentially offering greater opportunities for
capital growth than larger, more established companies, the equities of smaller
companies may be particularly volatile, especially during periods of economic
uncertainty. These companies may face less certain growth prospects, or depend
heavily on a limited line of products and services or the efforts of a small
number of key management personnel.
Certain of the Underlying Funds may invest in securities issued by foreign
companies. The securities of foreign companies may pose risks in addition to, or
to a greater degree than, the risks described above. Foreign companies may be
subject to disclosure, accounting, auditing and financial reporting standards
and practices that are different from those to which U.S. issuers are subject.
Accordingly, the Underlying Funds may not have access to adequate or reliable
company information. In addition, political, economic and social developments in
foreign countries and fluctuations in currency exchange rates may affect the
operations of foreign companies or the value of their stocks.
BB&T tries to manage market risk by broadly diversifying its investments among
the Underlying Funds, which are themselves diversified portfolios. Of course,
BB&T's success in moderating market risk cannot be assured. In addition, the
Fund may produce more modest gains than funds with more aggressive investment
profiles.
<PAGE>
Interest Rate Risk. Although the Fund's primary investment focus is equities, it
may invest in Underlying Funds that invest in debt securities and other types of
fixed income securities. Generally, the value of these securities will change
inversely with changes in interest rates. In addition, changes in interest rates
may affect the operations of the issuers of equities in which the Underlying
Funds invest. Rising interest rates, which may be expected to lower the value of
fixed income instruments and negatively impact the operations of many issuers,
generally exist during periods of inflation or strong economic growth.
Credit Risk. The Underlying Funds' investments, and particularly investments in
debt securities, may be affected by the creditworthiness of issuers in which the
Underlying Funds invest. Changes in the financial strength, or perceived
financial strength, of a company may affect the value of its securities and,
therefore, indirectly impact the value of the Fund's shares.
Temporary Investments. BB&T may temporarily invest up to 100% of the Fund's
assets in high quality, short-term money market instruments if it believes
adverse economic or market conditions, such as excessive volatility or sharp
market declines, justify taking a defensive investment posture. The Underlying
Funds generally have comparable investment flexibility. If the Fund or an
Underlying Fund attempts to limit investment risk by temporarily taking a
defensive investment position, it may be unable to pursue its investment
objective during that time, and it may miss out on some or all of an upswing in
the securities markets.
Investment in Underlying Funds. Because the Fund normally will invest
substantially all of its assets in the Underlying Funds, it will incur its pro
rata share of the Underlying Funds' expenses. In addition, the Fund will be
subject to the effects of business and regulatory developments that affect the
Underlying Funds or the investment company industry generally.
Please see the Statement of Additional Information for more detailed information
about the Fund and Underlying Funds, their investment strategies, and their
risks.
VALUATION OF SHARES
The Fund prices its shares on the basis of the net asset value of the Fund,
which is determined as of the close of the New York Stock Exchange ("NYSE")
(generally 4:00 p.m. Eastern Time) on each Business Day (other than a day on
which there are insufficient changes in the value of the Fund's portfolio
securities to materially affect the Fund's net asset value or a day on which no
shares are tendered for redemption and no order to purchase any shares is
received). A Business Day is a day on which the NYSE is open for trading.
Currently, the NYSE is closed on the following holidays: New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
Net asset value per share for purposes of pricing sales and redemptions is
calculated by dividing the value of all securities and other assets belonging to
the Fund, less the liabilities charged to the Fund and any liabilities allocable
to the Fund, by the number of the Fund's outstanding shares. The net asset value
per share of the Fund will fluctuate as the value of the investment portfolio of
the Fund changes.
<PAGE>
The securities in the Fund will be valued at market value. For further
information about valuation of investments, see the Statement of Additional
Information.
PURCHASING AND REDEEMING SHARES
Shares of the Fund are available for purchase by insurance company separate
accounts to serve as an investment medium for variable insurance contracts, and
by qualified pension and retirement plans, certain insurance companies, and
BB&T. Shares of the Fund are purchased or redeemed at the net asset value per
share next determined after receipt by the Fund's distributor of a purchase
order or redemption request. Transactions in shares of the Fund will be effected
only on a Business Day of the Fund.
Payment for shares redeemed normally will be made within seven days. The Fund
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. A
shareholder may incur brokerage costs in converting such securities to cash.
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the Securities and Exchange Commission in order to protect
remaining investors.
Investors do not deal directly with the Fund to purchase or redeem shares.
Please refer to the prospectus for the separate account for information on the
allocation of premiums and on transfers of accumulated value among sub-accounts
of the separate account that invests in the Fund.
The Fund currently does not foresee any disadvantages to investors if the Fund
served as an investment medium for both variable annuity contracts and variable
life insurance policies. However, it is theoretically possible that the interest
of owners of annuity contracts and insurance policies for which the Fund served
as an investment medium might at some time be in conflict due to differences in
tax treatment or other considerations. The Board of Trustees of Variable
Insurance Funds (the "Trust") and each participating insurance company 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
Fund might be required to redeem the investment of one or more of its separate
accounts from the Fund, which might force the Fund to sell securities at
disadvantageous prices.
The Fund reserves the right to discontinue offering shares at any time. In the
event that the 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 Board of Trustees.
<PAGE>
MANAGEMENT OF THE FUND
Investment Adviser
Branch Banking and Trust Company, 434 Fayetteville Street Mall, Raleigh, N.C.
27601, is the investment adviser of the Fund. Through its portfolio management
team, BB&T makes the day-to-day investment decisions for the Fund and
continuously reviews, supervises and administers the Fund's investment program.
BB&T is the oldest bank in North Carolina. It is the principal bank affiliate of
BB&T Corporation, a bank holding company that is a North Carolina corporation
headquartered in Winston-Salem, North Carolina. As of December 31, 1998, BB&T
Corporation had assets in excess of $34.4 billion. Through its subsidiaries,
BB&T Corporation operates over 534 banking offices in North Carolina, South
Carolina, Virginia, Maryland and Washington, D.C., providing a broad range of
financial services to individuals and businesses. 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. 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 17 years and currently
manages assets of more than $[ ] billion.
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) 0.25% of the Fund's average daily net
assets; or (b) such amount as may from time to time be agreed upon in writing by
the Trust and BB&T. As a shareholder of an Underlying Fund, the Fund also will
indirectly bear its proportionate share of any investment advisory fees and
other expenses paid by the Underlying Fund.
David R. Ellis is the person who has been primarily responsible for the
management of the Fund since its inception. Mr. Ellis has been a portfolio
manager in the BB&T Trust Division since 1986. He holds a B.S. in Business
Administration from the University of North Carolina at Chapel Hill.
Administrator and Distributor
BISYS Fund Services Ohio, Inc. is the administrator for the Fund, and BISYS Fund
Services acts as the Fund's principal underwriter and distributor. The address
of each is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
<PAGE>
See the Statement of Additional Information for further information about the
Fund's service providers.
Servicing Agents
The Trust has adopted a plan under which up to 0.25% of the Fund's average daily
net assets may be expended for support services to investors, such as
establishing and maintaining accounts and records, providing account
information, arranging for bank wires, responding to routine inquiries,
forwarding investor communications, assisting in the processing of purchase,
exchange and redemption requests, and assisting investors in changing account
designations and addresses. For expenses incurred and services provided, a
financial institution (or its affiliate) providing these services ("Servicing
Agent") may receive a fee from the Fund, computed daily and paid monthly, at an
annual rate of up to 0.25% of the average daily net assets of the Fund allocable
to variable insurance contracts owned by customers of the Servicing Agent. A
Servicing Agent may periodically waive all or a portion of its servicing fees
with respect to the Fund to increase the net income of the Fund available for
distribution as dividends.
Year 2000
The services provided to the Fund by BB&T and the Fund's other service providers
(collectively, the "Service Providers") are dependent on those Service
Providers' computer systems. Many computer software and hardware systems in use
today cannot distinguish between the year 2000 and the year 1900 because of the
way dates are encoded and calculated (the "Year 2000 Issue"). The failure to
make this distinction could have a negative impact on the Service Providers'
ability to handle securities trades, price securities, and conduct general
account services on behalf of the Fund. The Trust is working with the Service
Providers to take steps that are reasonably designed to address the Year 2000
Issue with respect to computer systems relied on by the Fund. The Trust believes
that these steps will be sufficient to avoid any material adverse impact on the
Fund, although there can be no assurances. The costs or consequences of an
incomplete or an untimely resolution of the Year 2000 Issue are unknown to the
Trust and the Service Providers at this time, but could have a material adverse
impact on the operations of the Fund and the Service Providers. In addition, if
the value of a Fund investment is adversely affected by a Year 2000 problem, the
net asset value of the Fund may be affected as well.
TAXATION
To comply with regulations under the Internal Revenue Code, the Fund is required
to diversify its investments. Generally, the 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.
<PAGE>
If the Fund fails to meet this diversification requirement, income with respect
to variable insurance contracts invested in the Fund at any time during the
calendar quarter in which the failure occurred could become currently taxable to
the owners of the contracts. Similarly, 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.
Reference is made to the prospectus for the separate account and variable
insurance contract for information regarding the federal income tax treatment of
distributions to the separate account. See the Statement of Additional
Information for more information on taxes.
GENERAL INFORMATION
Description of the Trust and Its Shares
Variable Insurance Funds was organized as a Massachusetts business trust in 1994
and currently consists of five portfolios. The Board of Trustees of the Trust
may establish additional portfolios in the future. Under Massachusetts law,
shareholders could be held personally liable for the obligations of the Trust
under certain circumstances. However, the Trust's declaration of trust disclaims
liability of its shareholders and provides for indemnification out of Trust
property for all loss and expense of any shareholder held personally liable for
the obligations of the Trust. Accordingly, the risk of a shareholder incurring
financial loss on account of shareholder liability should be considered remote.
Similar Fund Performance Information
The following table provides information concerning the historical total return
performance of the Trust Shares class of the BB&T Capital Manager Fund (the
"Similar Fund"), a series of the BB&T Mutual Funds Group. The Similar Fund's
investment objectives, policies and strategies are substantially similar to
those of the Fund and is currently managed by the same portfolio manager. While
the investment objectives, policies and risks of the Similar Fund and the Fund
are similar, they are not identical, and the performance of the Similar Fund and
the Fund will vary. The data is provided to illustrate the past performance of
BB&T in managing a substantially similar investment portfolio and does not
represent the past performance of the Fund or the future performance of the Fund
or its portfolio manager. Consequently, potential investors should not consider
this performance data as an indication of the future performance of the Fund or
of its portfolio manager.
The performance data shown below reflects the operating expenses of the Similar
Fund, which are lower than the expenses of the Fund. Performance would have been
lower for the Similar Fund if the Fund's expenses were used. In addition, the
Similar Fund, unlike the Fund, is not sold to insurance company separate
accounts to fund variable insurance contracts. As a result, the performance
results presented below do not take into account charges or deductions against a
separate account or variable insurance contract for cost of insurance charges,
premium loads, administrative fees, maintenance fees, premium taxes, mortality
and expense risk charges, or other charges that may be incurred under a variable
insurance contract for which the Fund serves as an underlying investment
vehicle. By contrast, investors with contract value allocated to the Fund will
be subject to charges and expenses relating to variable insurance contracts and
separate accounts.
<PAGE>
The Similar Fund's performance data shown below is calculated in accordance with
standards prescribed by the Securities and Exchange Commission for the
calculation of average annual total return information. The investment results
of the Similar Fund presented below are unaudited and are not intended to
predict or suggest results that might be experienced by the Similar Fund or the
Fund. Share prices and investment returns will fluctuate reflecting market
conditions, as well as changes in company-specific fundamentals of portfolio
securities. The performance data for the benchmark index identified below does
not reflect the fees or expenses of the Similar Fund or the Fund.
Average Annual Total Return for the Similar Fund and for Its Benchmark Index for
Periods Ended December 31,
1998
Similar Fund/Benchmark 1 Year Since Inception
(October 2, 1997)
BB&T Capital Manager Fund xx.xx% xx.xx%
S&P 500(R) Index* xx.xx% xx.xx%
- -----------------
* The Standard & Poor's 500 Composite Stock Price Index is an unmanaged
index containing common stocks of 500 industrial, transportation,
utility and financial companies, regarded as generally representative
of the U.S. stock market. The Index reflects income and distributions,
if any, but does not reflect fees, brokerage commissions, or other
expenses of investing.
Miscellaneous
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. If given or made, such information or representations
must not be relied upon as having been authorized by the Fund or its
distributor. This prospectus does not constitute an offering by the Fund or its
distributor in any jurisdiction in which such offering may not be lawfully made.
<PAGE>
For more information about the Fund, the following document is available free
upon request:
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Fund, including its operations and investment policies. It
is incorporated by reference and is legally considered a part of this
prospectus.
- --------------------------------------------------------------------------------
An investor can get free copies of the SAI, or request other information and
discuss any questions about the Fund, by contacting a broker or bank that sells
an insurance contract that offers the Fund as an investment option. Or contact
the Fund at:
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
Telephone: 1-800-228-1872
- --------------------------------------------------------------------------------
Investors can review the SAI at the Public Reference Room of the Securities and
Exchange Commission. Investors can get text-only copies:
. For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009 or calling 1-800-SEC-0330.
. Free from the Commission's Website at http://www.sec.gov
Investment Company Act file no. 811-8644.
<PAGE>
AmSouth Equity Income Fund
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-451-8382
The AmSouth Equity Income Fund seeks to provide above average income and capital
appreciation by investing primarily in income-producing equity securities. The
Fund's goals and investment program are described in more detail inside. AmSouth
Bank ("AmSouth") serves as the Fund's investment adviser, and Rockhaven Asset
Management, LLC ("Rockhaven") serves as the investment sub-adviser of the Fund.
The Fund sells its shares to insurance company separate accounts, so that the
Fund may serve as an investment option under variable life insurance policies
and variable annuity contracts issued by insurance companies. The Fund also may
sell its shares to certain other investors, such as qualified pension and
retirement plans, insurance companies, AmSouth, and Rockhaven.
This prospectus should be read in conjunction with the separate account's
prospectus describing the variable insurance contract. Please read both
prospectuses and retain them for future reference.
The Securities and Exchange Commission has not approved the Fund's shares or
determined whether this prospectus is accurate or complete. Anyone who tells you
otherwise is committing a crime.
The date of this prospectus is May 1, 1999.
TABLE OF CONTENTS
<TABLE>
<S> <C>
RISK/RETURN SUMMARY AND FUND EXPENSES MANAGEMENT OF THE FUND
Investment Objective Investment Adviser and Sub-Adviser
Principal Investment Strategies Administrator and Distributor
Principal Investment Risks Servicing Agents
Fund Performance Year 2000
Fund Expenses TAXATION
FINANCIAL HIGHLIGHTS GENERAL INFORMATION
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS Description of the Trust and Its Shares
VALUATION OF SHARES Similar Fund Performance Information
PURCHASING AND REDEEMING SHARES Prior Performance of Portfolio Manager
Miscellaneous
</TABLE>
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
Investment Objective
The Fund seeks to provide above average income and capital appreciation.
Principal Investment Strategies
Under normal market conditions, the Fund will invest at least 65% of its total
assets in income producing equity securities, including common stock, preferred
stock and securities convertible into common stocks, such as convertible bonds
and convertible preferred stocks.
Principal Investment Risks
An investment in the Fund entails investment risk, including possible loss of
the principal amount invested. The Fund is subject to market risk, which is the
risk that the market value of a portfolio security may move up and down,
sometimes rapidly and unpredictably. This risk may be particularly acute for the
Fund's investments in equity securities. The Fund also is subject to interest
rate risk, which is the risk that changes in interest rates will affect the
value of the Fund's investments. In particular, the Fund's investments in fixed
income securities generally will change in value inversely with changes in
interest rates. Also, an investment by the Fund in fixed income securities
generally will expose the Fund to credit risk, which is the risk that the issuer
of a security will default or not be able to meet its financial obligations.
This risk may be greater with respect to the Fund's investments in lower rated
securities.
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Fund Performance
The following chart and table show how the Fund has performed, and the table
compares the Fund's performance to that of the S&P 500(R) Index, a widely
recognized, unmanaged index of common stocks. The information does not reflect
charges and fees associated with a separate account that invests in the Fund or
any insurance contract for which the Fund is an investment option. These charges
and fees will reduce returns. Investors should be aware that past performance
does not indicate how the Fund will perform in the future.
Total Return for the Year Ended December 31, 1998*
[Bar Chart]
Best Quarter: December 31, 1998 17.29%
Worst Quarter: September 30, 1998 (12.15)%
<PAGE>
Average Annual Total Return* (for the periods ended December 31, 1998)
Past Year Since Inception (October 23, 1997)
--------- ----------------------------------
Fund 12.36% 12.67%
S&P 500 28.60% 26.20%
- ------------------
* Assumes reinvestment of dividends and distributions.
Fund Expenses
The following expense table indicates expenses that an investor will incur as a
shareholder of the Fund during the current fiscal year. These expenses are
reflected in the share price of the Fund.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees*.............................................0.60%
Other Expenses*..............................................0.93%
Total Annual Fund Operating Expenses*........................1.53%
- --------------------
* AmSouth currently limits its management fees to 0.32%. Total expenses
after fee waivers were 1.14% for the fiscal year ended December 31,
1998, and are limited to 1.25%. Investors will be notified of any
material revision or cancellation of the fee waiver, which may be
terminated at any time at the option of the Fund.
Expense Example
Use the following table to compare fees and expenses of the Fund to other
investment companies. It illustrates the amount of fees and expenses an investor
would pay, assuming (1) a $10,000 investment, (2) 5% annual return, (3)
redemption at the end of each time period, and (4) no changes in the Fund's
total operating expenses. It does not reflect separate account or insurance
contract fees and charges. An investor's actual costs may be different.
1 Year 3 Years 5 Years 10 Years
$156 $483 $834 $1,824
<PAGE>
FINANCIAL HIGHLIGHTS
The following table is included to assist investors in evaluating the financial
performance of the Fund since its commencement of operations through December
31, 1998. Certain information reflects financial results of a single share.
"Total Return" represents how much an investment in the Fund would have earned
(or lost) during each period. This information has been audited by
PricewaterhouseCoopers LLP, the Fund's independent auditors, whose report on the
Fund's financial statements, along with the Fund's financial statements, are
included in the Fund's annual report, which may be obtained without charge upon
request.
<TABLE>
<S> <C> <C>
Year ended October 23, 1997 through
For a share outstanding throughout the period: December 31, 1998 December 31, 1997 (a)
- ---------------------------------------------
------------------------- --------------------------
Net Asset Value, Beginning of Period $ 10.23 $ 10.00
------------------------- --------------------------
Income From Investment Operations:
Net investment income 0.22 0.03
Net gains or losses on securities (realized and unrealized) 1.03 0.23
------------------------- --------------------------
Total from investment operations 1.25 0.26
------------------------- --------------------------
Less Distributions:
Dividends (from net investment income) (0.22) (0.03)
------------------------- --------------------------
Total distributions (0.22) (0.03)
------------------------- --------------------------
Net Asset Value, End of Period $ 11.26 $ 10.23
========================= ==========================
Total Return 12.36% 2.27%(b)
Ratios/Supplementary Data:
Net assets, end of period (000's) $ 22,543 $ 2,387
Ratio of expenses to average net assets 1.14% 1.22%(c)
Ratio of net income to average net assets 2.13% 2.39%(c)
Ratio of expenses to average net assets* 1.53% 7.26%(c)
Ratio of net income to average net assets* 1.74% (3.65)%(c)
Portfolio turnover rate 120.83% 4.00%
</TABLE>
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
* During the period, certain fees were reimbursed and voluntarily reduced. If
such reimbursements and voluntary fee reductions had not occurred, the
ratios would have been as indicated.
<PAGE>
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
Investors should be aware that the investments made by the Fund at any given
time are not expected to be the same as those made by other mutual funds for
which AmSouth or Rockhaven acts as investment adviser, including mutual funds
with names, investment objectives and policies similar to the Fund. Investors
should carefully consider their investment goals and willingness to tolerate
investment risk before allocating their investment to the Fund.
The Fund seeks to provide above average income and capital appreciation. The
Fund's stock selection emphasizes those common stocks in each sector that have
good value, attractive yield, and dividend growth potential. The Fund also
utilizes convertible securities, which typically offer higher yields and good
potential for capital appreciation. The portion of the Fund's total assets
invested in common stock, preferred stock, and convertible securities varies
according to Rockhaven's assessment of market and economic conditions and
outlook. Most companies in which the Fund invests are listed on national
securities exchanges.
Rockhaven seeks to invest in equity securities which are believed to represent
investment value. Factors which may be considered in selecting equity securities
include industry and company fundamentals, historical price relationships,
and/or underlying asset value.
The Fund may invest in companies of any size, although most equities purchased
will be issued by companies whose market capitalizations are large relative to
the entirety of the U.S. securities markets, but not as large as many of the
securities represented in such broad market indexes as the S&P 500(R) Index.
The Fund has the flexibility to make portfolio investments and engage in other
investment techniques that are different than its principal strategies mentioned
here. More information on the Fund's investment strategies may be found in its
most recent annual/semi-annual report and in the Statement of Additional
Information (see back cover).
The Fund's investment strategies may subject it to a number of risks, including
the following.
Market Risk. Although equities historically have outperformed other asset
classes over the long term, their prices tend to fluctuate more dramatically
over the shorter term. These movements may result from factors affecting
individual companies, or from broader influences like changes in interest rates,
market conditions, investor confidence or announcements of economic, political
or financial information. While potentially offering greater opportunities for
capital growth than larger, more established companies, the equities of smaller
companies may be particularly volatile, especially during periods of economic
uncertainty. These companies may face less certain growth prospects, or depend
heavily on a limited line of products and services or the efforts of a small
number of key management personnel.
<PAGE>
The Fund may invest in equities issued by foreign companies. The equities of
foreign companies may pose risks in addition to, or to a greater degree than,
the risks described above. Foreign companies may be subject to disclosure,
accounting, auditing and financial reporting standards and practices that are
different from those to which U.S. issuers are subject. Accordingly, the Fund
may not have access to adequate or reliable company information. In addition,
political, economic and social developments in foreign countries and
fluctuations in currency exchange rates may affect the operations of foreign
companies or the value of their securities.
Rockhaven tries to manage market risk by primarily investing in relatively large
capitalization "value" equities of U.S. issuers. Equities of larger companies
tend to be less volatile than those of smaller companies, and value equities in
theory limit downside risk because they are underpriced. Of course, Rockhaven's
success in moderating market risk cannot be assured. In addition, the Fund may
produce more modest gains than equity funds with more aggressive investment
profiles.
Interest Rate Risk. The Fund may invest in debt securities and other types of
fixed income securities, such as convertible preferred stock and convertible
bonds and debentures. Generally, the value of these securities will change
inversely with changes in interest rates. In addition, changes in interest rates
may affect the operations of the issuers of stocks in which the Fund invests.
Rising interest rates, which may be expected to lower the value of fixed income
instruments and negatively impact the operations of many issuers, generally
exist during periods of inflation or strong economic growth.
Credit Risk. The Fund's investments, and particularly investments in convertible
securities and debt securities, may be affected by the creditworthiness of
issuers in which the Fund invests. Changes in the financial strength, or
perceived financial strength, of a company may affect the value of its
securities and, therefore, impact the value of the Fund's shares.
The Fund may invest in lower rated convertible securities and debt obligations,
including convertible securities that are not "investment grade", which are
commonly referred to as "junk bonds". To a greater extent than more highly rated
securities, lower rated securities tend to reflect short-term corporate,
economic and market developments, as well as investor perceptions of the
issuer's credit quality. Lower rated securities may be especially susceptible to
real or perceived adverse economic and competitive industry conditions. In
addition, lower rated securities may be less liquid than higher quality
investments. Reduced liquidity may prevent the Fund from selling a security at
the time and price that would be most beneficial to the Fund.
Rockhaven attempts to reduce the credit risk associated with lower rated
securities through diversification of the Fund's portfolio, credit analysis of
each issuer in which the Fund invests, and monitoring broad economic trends and
corporate and legislative developments. However, there is no assurance that
Rockhaven will successfully or completely reduce credit risk.
Temporary Investments. Rockhaven may temporarily invest up to 100% of the Fund's
assets in high quality, short-term money market instruments if it believes
adverse economic or market conditions, such as excessive volatility or sharp
market declines, justify taking a defensive investment posture. If the Fund
attempts to limit investment risk by temporarily taking a defensive investment
position, it may be unable to pursue its investment objective during that time,
and it may miss out on some or all of an upswing in the securities markets.
<PAGE>
Please see the Statement of Additional Information for more detailed information
about the Fund, its investment strategies, and its risks.
VALUATION OF SHARES
The Fund prices its shares on the basis of the net asset value of the Fund,
which is determined as of the close of the New York Stock Exchange ("NYSE")
(generally 4:00 p.m. Eastern Time) on each Business Day (other than a day on
which there are insufficient changes in the value of the Fund's portfolio
securities to materially affect the Fund's net asset value or a day on which no
shares are tendered for redemption and no order to purchase any shares is
received). A Business Day is a day on which the NYSE is open for trading.
Currently, the NYSE is closed on the following holidays: New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
Net asset value per share for purposes of pricing sales and redemptions is
calculated by dividing the value of all securities and other assets belonging to
the Fund, less the liabilities charged to the Fund and any liabilities allocable
to the Fund, by the number of the Fund's outstanding shares. The net asset value
per share of the Fund will fluctuate as the value of the investment portfolio of
the Fund changes.
The securities in the 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 of Variable Insurance Funds (the "Trust") believes accurately reflects
fair value. For further information about valuation of investments, see the
Statement of Additional Information.
PURCHASING AND REDEEMING SHARES
Shares of the Fund are available for purchase by insurance company separate
accounts to serve as an investment medium for variable insurance contracts, and
by qualified pension and retirement plans, certain insurance companies, AmSouth
and Rockhaven. Shares of the Fund are purchased or redeemed at the net asset
value per share next determined after receipt by the Fund's distributor of a
purchase order or redemption request. Transactions in shares of the Fund will be
effected only on a Business Day of the Fund.
Payment for shares redeemed normally will be made within seven days. The Fund
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. A
shareholder may incur brokerage costs in converting such securities to cash.
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the Securities and Exchange Commission in order to protect
remaining investors.
<PAGE>
Investors do not deal directly with the Fund to purchase or redeem shares.
Please refer to the prospectus for the separate account for information on the
allocation of premiums and on transfers of accumulated value among sub-accounts
of the separate account that invests in the Fund.
The Fund currently does not foresee any disadvantages to investors if the Fund
served as an investment medium for both variable annuity contracts and variable
life insurance policies. However, it is theoretically possible that the interest
of owners of annuity contracts and insurance policies for which the Fund served
as an investment medium might at some time be in conflict due to differences in
tax treatment or other considerations. The Board of Trustees and each
participating insurance company 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 Fund might be required to redeem the
investment of one or more of its separate accounts from the Fund, which might
force the Fund to sell securities at disadvantageous prices.
The Fund reserves the right to discontinue offering shares at any time. In the
event that the 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 Board of Trustees.
MANAGEMENT OF THE FUND
Investment Adviser and Sub-Adviser
AmSouth. AmSouth Bank, 1901 Sixth Avenue North, Birmingham, Alabama 35203, is
the investment adviser of the Fund. AmSouth is the principal bank affiliate of
AmSouth Bancorporation, one of the largest banking institutions headquartered in
the mid-south region. AmSouth Bancorporation reported assets as of September 30,
1998 of $19.6 billion and operated more than 270 banking offices and 600 ATM
locations in Alabama, Florida, Georgia and Tennessee. AmSouth has provided
investment management services through its Trust Investment Department since
1915. As of September 30, 1998, AmSouth and its affiliates had over $8.5 billion
in assets under discretionary management and an additional $16.8 billion under
non-discretionary management. AmSouth is the largest provider of trust services
in Alabama, and its Trust Natural Resources and Real Estate Department is a
major manager of timberland, mineral, oil and gas properties and other real
estate interests.
Subject to the general supervision of the Board of Trustees and in accordance
with the investment objective and restrictions of the Fund, AmSouth is
authorized to manage the Fund, make decisions with respect to and place orders
for all purchases and sales of its investment securities, and maintain its
records relating to such purchases and sales.
<PAGE>
Under an investment advisory agreement between the Trust and AmSouth, the fee
payable to AmSouth by the Trust for investment advisory services is the lesser
of (a) a fee computed daily and paid monthly at the annual rate of 0.60% of the
Fund's daily net assets or (b) such fee as may from time to time be agreed upon
in writing by the Trust and AmSouth. For services provided and expenses assumed
during the fiscal period ended December 31, 1998, AmSouth received an investment
advisory fee equal to 0.374% of the Fund's average daily net assets, out of
which it paid a sub-advisory fee to Rockhaven equal to 0.224% of the Fund's
average daily net assets.
Rockhaven. Rockhaven serves as investment sub-adviser of the Fund in accordance
with a sub-advisory agreement with AmSouth. Rockhaven makes the day-to-day
investment decisions for the Fund and continuously reviews, supervises and
administers the Fund's investment program, subject to the general supervision of
the Board of Trustees and AmSouth in accordance with the Fund's investment
objective, policies and restrictions. For its services and expenses assumed
under the sub-advisory agreement, Rockhaven is entitled to a fee payable by
AmSouth, as described above.
Rockhaven is 50% owned by AmSouth and 50% owned by Mr. Christopher H. Wiles.
Rockhaven was organized in 1997 to perform advisory services for investment
companies and has its principal offices at 100 First Avenue, Suite 1050,
Pittsburgh, Pennsylvania 15222.
Mr. Wiles is the portfolio manager for the Fund and, as such, has the primary
responsibility for the day-to-day portfolio management of the Fund. Mr. Wiles is
the President and Chief Investment Officer of Rockhaven. From May, 1991 to
January, 1997, he was portfolio manager of the Federated Equity Income Fund.
Administrator and Distributor
BISYS Fund Services Ohio, Inc. is the administrator for the Fund, and BISYS Fund
Services acts as the Fund's principal underwriter and distributor. The address
of each is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
See the Statement of Additional Information for further information about the
Fund's service providers.
Servicing Agents
The Trust has adopted a plan under which up to 0.25% of the Fund's average daily
net assets may be expended for support services to investors, such as
establishing and maintaining accounts and records, providing account
information, arranging for bank wires, responding to routine inquiries,
forwarding investor communications, assisting in the processing of purchase,
exchange and redemption requests, and assisting investors in changing account
designations and addresses. For expenses incurred and services provided, a
financial institution (or its affiliate) providing these services ("Servicing
Agent") may receive a fee from the Fund, computed daily and paid monthly, at an
annual rate of up to 0.25% of the average daily net assets of the Fund allocable
to variable insurance contracts owned by customers of the Servicing Agent. A
Servicing Agent may periodically waive all or a portion of its servicing fees
with respect to the Fund to increase the net income of the Fund available for
distribution as dividends.
<PAGE>
Year 2000
The services provided to the Fund by AmSouth, Rockhaven and the Fund's other
service providers (collectively, the "Service Providers") are dependent on those
Service Providers' computer systems. Many computer software and hardware systems
in use today cannot distinguish between the year 2000 and the year 1900 because
of the way dates are encoded and calculated (the "Year 2000 Issue"). The failure
to make this distinction could have a negative impact on the Service Providers'
ability to handle securities trades, price securities, and conduct general
account services on behalf of the Fund. The Trust is working with the Service
Providers to take steps that are reasonably designed to address the Year 2000
Issue with respect to computer systems relied on by the Fund. The Trust believes
that these steps will be sufficient to avoid any material adverse impact on the
Fund, although there can be no assurances. The costs or consequences of an
incomplete or an untimely resolution of the Year 2000 Issue are unknown to the
Trust and the Service Providers at this time, but could have a material adverse
impact on the operations of the Fund and the Service Providers. In addition, if
the value of a Fund investment is adversely affected by a Year 2000 problem, the
net asset value of the Fund may be affected as well.
TAXATION
To comply with regulations under the Internal Revenue Code, the Fund is required
to diversify its investments. Generally, the 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.
If the Fund fails to meet this diversification requirement, income with respect
to variable insurance contracts invested in the Fund at any time during the
calendar quarter in which the failure occurred could become currently taxable to
the owners of the contracts. Similarly, 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.
Reference is made to the prospectus for the separate account and variable
insurance contract for information regarding the federal income tax treatment of
distributions to the separate account. See the Statement of Additional
Information for more information on taxes.
<PAGE>
GENERAL INFORMATION
Description of the Trust and Its Shares
Variable Insurance Funds was organized as a Massachusetts business trust in 1994
and currently consists of five portfolios. The Board of Trustees of the Trust
may establish additional portfolios in the future. Under Massachusetts law,
shareholders could be held personally liable for the obligations of the Trust
under certain circumstances. However, the Trust's declaration of trust disclaims
liability of its shareholders and provides for indemnification out of Trust
property for all loss and expense of any shareholder held personally liable for
the obligations of the Trust. Accordingly, the risk of a shareholder incurring
financial loss on account of shareholder liability should be considered remote.
Similar Fund Performance Information
The following table provides information concerning the historical total return
performance of the Premier Shares class of the AmSouth Equity Income Fund (the
"Similar Fund"), a series of the AmSouth Mutual Funds. The Similar Fund's
investment objectives, policies and strategies are substantially similar to
those of the Fund and is currently managed by the same portfolio manager. While
the investment objectives, policies and risks of the Similar Fund and the Fund
are similar, they are not identical, and the performance of the Similar Fund and
the Fund will vary. The data is provided to illustrate the past performance of
AmSouth and Rockhaven in managing a substantially similar investment portfolio
and does not represent the past performance of the Fund or the future
performance of the Fund or its portfolio manager. Consequently, potential
investors should not consider this performance data as an indication of the
future performance of the Fund or of its portfolio manager.
The performance data shown below reflects the operating expenses of the Similar
Fund, which are lower than the expenses of the Fund. Performance would have been
lower for the Similar Fund if the Fund's expenses were used. In addition, the
Similar Fund, unlike the Fund, is not sold to insurance company separate
accounts to fund variable insurance contracts. As a result, the performance
results presented below do not take into account charges or deductions against a
separate account or variable insurance contract for cost of insurance charges,
premium loads, administrative fees, maintenance fees, premium taxes, mortality
and expense risk charges, or other charges that may be incurred under a variable
insurance contract for which the Fund serves as an underlying investment
vehicle. By contrast, investors with contract value allocated to the Fund will
be subject to charges and expenses relating to variable insurance contracts and
separate accounts.
The Similar Fund's performance data shown below is calculated in accordance with
standards prescribed by the Securities and Exchange Commission for the
calculation of average annual total return information. The investment results
of the Similar Fund presented below are unaudited and are not intended to
predict or suggest results that might be experienced by the Similar Fund or the
Fund. Share prices and investment returns will fluctuate reflecting market
conditions, as well as changes in company-specific fundamentals of portfolio
securities. The performance data for the benchmark index identified below does
not reflect the fees or expenses of the Similar Fund or the Fund.
<PAGE>
Average Annual Total Return for the Similar Fund and for Its Benchmark Index for
Periods Ended December 31,
1998
Similar Fund/Benchmark 1 Year Since Inception
(March 20, 1997)
AmSouth Equity Income Fund 12.14% 18.05%
S&P 500(R) Index* 28.60% 30.95%
- -----------------
* The Standard & Poor's 500 Composite Stock Price Index is an unmanaged
index containing common stocks of 500 industrial, transportation,
utility and financial companies, regarded as generally representative
of the U.S. stock market. The Index reflects income and distributions,
if any, but does reflect fees, brokerage commissions, or other expenses
of investing.
Prior Performance of Portfolio Manager
From August 1, 1991 to January 31, 1997, Christopher Wiles, the portfolio
manager of the Fund, was the portfolio manager of the Federated Equity Income
Fund, which had investment objectives, policies and strategies that were
substantially similar to those of the Fund. The cumulative total return for the
Class A Shares of the Federated Equity Income Fund from August 1, 1991 through
January 31, 1997 was 139.82%, absent the imposition of a sales charge. The
cumulative total return for the same period for the S&P 500(R) Index was
135.09%. The cumulative total return for the Class B Shares of the Federated
Equity Income Fund from September 27, 1994 (date of initial public offering)
through January 31, 1997 was 62.64%, absent the imposition of a contingent
deferred sales charge. The cumulative total return for the same period for the
S&P 500(R) Index was 79.69%. At January 31, 1997, the Federated Equity Income
Fund had approximately $970 million in net assets.
The Federated Equity Income Fund, unlike the Fund, is not sold to insurance
company separate accounts to fund variable insurance contracts. As a result, the
performance results presented below do not take into account charges or
deductions against a separate account or variable insurance contract for cost of
insurance charges, premium loads, administrative fees, maintenance fees, premium
taxes, mortality and expense risk charges, or other charges that may be incurred
under a variable insurance contract for which the Fund serves as an underlying
investment vehicle. By contrast, investors with contract value allocated to the
Fund will be subject to charges and expenses relating to variable insurance
contracts and separate accounts.
<PAGE>
As portfolio manager of the Federated Equity Income Fund, Mr. Wiles had full
discretionary authority over the selection of investments for that fund. Average
annual total returns for the one-year, three-year, and five-year periods ended
January 31, 1997 and for the entire period during which Mr. Wiles managed the
Class A Shares of the Federated Equity Income Fund and for the one-year and
since inception period for the Class B Shares of the Federated Equity Income
Fund compared with the performance of the S&P 500(R) Index and the Lipper Equity
Income Fund Index were:
Prior Performance of Class A Shares and Class B Shares
of the Federated Equity Income Fund
<TABLE>
<S> <C> <C> <C>
Federated Lipper
Equity S&P 500(R) Equity Income Fund
Income Fund+* Index Index #
CLASS A SHARES (absent imposition of sales change)
One Year 23.26% 26.34% 19.48%
Three Years 17.03% 20.72% 15.09%
Five Years 16.51% 17.02% 14.73%
August 1, 1991 through January 31, 1997 17.25% 16.78% 14.99%
CLASS A SHARES (assuming imposition of the Federated Equity
Income Fund's maximum sales charge)
One Year 16.48%
Three Years 14.85%
Five Years 15.20%
August 1, 1991 through January 31, 1997 16.05%
CLASS B SHARES (absent imposition of contingent deferred
sales change)
One Year 22.26% 26.34% 19.48%
September 27, 1994 through January 31, 1997 23.15% 28.44% 20.65%
CLASS B SHARES (assuming imposition of the Federated Equity
Income Fund's maximum contingent deferred sales change)
One Year 16.76%
September 27, 1994 through January 31, 1997 22.79%
- ------------------
<PAGE>
</TABLE>
+ Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
* During the period from August 1, 1991 through January 31, 1997, the
operating expense ratio of the Class A Shares (the shares most similar to
the shares of the Fund) of the Federated Equity Income Fund ranged from
0.95% to 1.05% of the fund's average daily net assets. During the period
from September 27, 1994 through January 31, 1997 the operating expense
ratio for the Class B Shares of the Federated Equity Income Fund ranged
from 1.80% to 1.87% of the fund's average daily net assets. The operating
expenses of the Class A Shares and Class B Shares of the Federated Equity
Income Fund were lower and higher, respectively, than the projected
operating expenses of the shares of the Fund. If the actual operating
expenses of the Fund are higher than the historical operating expenses of
the Federated Equity Income Fund, this could negatively affect performance
of a similar investment program.
# The Lipper Equity Income Fund Index is composed of managed funds that seek
relatively high current income and growth of income through investing 60%
of more of their portfolios in equities.
The Federated Equity Income Fund is a separate fund and its historical
performance is not indicative of the potential performance of the Fund. Share
prices and investment returns will fluctuate reflecting market conditions, as
well as changes in company-specific fundamentals of portfolio securities.
Miscellaneous
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. If given or made, such information or representations
must not be relied upon as having been authorized by the Fund or its
distributor. This prospectus does not constitute an offering by the Fund or its
distributor in any jurisdiction in which such offering may not be lawfully made.
<PAGE>
For more information about the Fund, the following documents are available free
upon request:
Annual/Semi-Annual Reports:
The Fund's annual and semi-annual reports to shareholders contain additional
information on the Fund's investments. In the annual report, an investor will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Fund, including its operations and investment policies. It
is incorporated by reference and is legally considered a part of this
prospectus.
- --------------------------------------------------------------------------------
An investor can get free copies of reports and the SAI, or request other
information and discuss any questions about the Fund, by contacting a broker or
bank that sells an insurance contract that offers the Fund as an investment
option. Or contact the Fund at:
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
Telephone: 1-800-451-8382
- --------------------------------------------------------------------------------
Investors can review the Fund's reports and SAI at the Public Reference Room of
the Securities and Exchange Commission. Investors can get text-only copies:
. For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009 or calling 1-800-SEC-0330.
. Free from the Commission's Website at http://www.sec.gov
Investment Company Act file no. 811-8644.
<PAGE>
AmSouth Regional Equity Fund
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-451-8382
The AmSouth Regional Equity Fund seeks to provide growth of capital by investing
primarily in a diversified portfolio of common stock and securities convertible
into common stock, such as convertible bonds and convertible preferred stock,
issued by companies headquartered in the Southern Region of the United States.
The production of current income is an incidental objective of the Fund. The
Fund's goals and investment program are described in more detail inside. AmSouth
Bank ("AmSouth") serves as the Fund's investment adviser.
The Fund sells its shares to insurance company separate accounts, so that the
Fund may serve as an investment option under variable life insurance policies
and variable annuity contracts issued by insurance companies. The Fund also may
sell its shares to certain other investors, such as qualified pension and
retirement plans, insurance companies, and AmSouth.
This prospectus should be read in conjunction with the separate account's
prospectus describing the variable insurance contract. Please read both
prospectuses and retain them for future reference.
The Securities and Exchange Commission has not approved the Fund's shares or
determined whether this prospectus is accurate or complete. Anyone who tells you
otherwise is committing a crime.
The date of this prospectus is May 1, 1999.
TABLE OF CONTENTS
<TABLE>
<S> <C>
RISK/RETURN SUMMARY AND FUND EXPENSES MANAGEMENT OF THE FUND
Investment Objectives Investment Adviser
Principal Investment Strategies Administrator and Distributor
Principal Investment Risks Servicing Agents
Fund Expenses Year 2000
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS TAXATION
VALUATION OF SHARES GENERAL INFORMATION
PURCHASING AND REDEEMING SHARES Description of the Trust and Its Shares
Similar Fund Performance Information
Miscellaneous
</TABLE>
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
Investment Objectives
The Fund seeks to provide capital growth. The production of current income is an
incidental objective of the Fund.
Principal Investment Strategies
The Fund will invest primarily in a diversified portfolio of common stock and
securities convertible into common stock, such as convertible bonds and
convertible preferred stock, issued by companies headquartered in the Southern
Region of the United States, which includes Alabama, Florida, Georgia,
Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and Virginia.
Principal Investment Risks
An investment in the Fund entails investment risk, including possible loss of
the principal amount invested. The Fund is subject to market risk, which is the
risk that the market value of a portfolio security may move up and down,
sometimes rapidly and unpredictably. This risk may be particularly acute for the
Fund's investments in common stocks. The Fund's investment focus on the Southern
Region of the United States will expose the Fund to market risks that
particularly affect companies in that region. The Fund also is subject to
interest rate risk, which is the risk that changes in interest rates will affect
the value of the Fund's investments. In particular, the Fund's investments in
fixed income securities generally will change in value inversely with changes in
interest rates. Also, an investment by the Fund in fixed income securities
generally will expose the Fund to credit risk, which is the risk that the issuer
of a security will default or not be able to meet its financial obligations.
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Fund Performance
Because the Fund has no investment track record, it has no performance
information to compare against other mutual funds or a broad measure of
securities market performance, such as an index.
Fund Expenses
The following expense table indicates the estimated expenses that an investor
will incur as a shareholder of the Fund during the current fiscal year. These
expenses are reflected in the share price of the Fund.
<PAGE>
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees*...........................................0.60%
Other Expenses*..........................................[ ]%
Total Annual Fund Operating Expenses*....................[ ]%
- --------------------
* AmSouth currently limits its management fees to []%, and other expenses
currently are being limited to []%. Total expenses after fee waivers
and expense reimbursements are []%. Investors will be notified of any
material revision or cancellation of a fee waiver or expense
reimbursement, which may be terminated at any time at the option of the
Fund.
Expense Example
Use the following table to compare fees and expenses of the Fund to other
investment companies. It illustrates the amount of fees and expenses an investor
would pay, assuming (1) a $10,000 investment, (2) 5% annual return, (3)
redemption at the end of each time period, and (4) no changes in the Fund's
total operating expenses. It does not reflect separate account or insurance
contract fees and charges. An investor's actual costs may be different.
1 Year 3 Years
$ $
<PAGE>
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
Investors should be aware that the investments made by the Fund at any given
time are not expected to be the same as those made by other mutual funds for
which AmSouth or Rockhaven acts as investment adviser, including mutual funds
with names, investment objectives and policies similar to the Fund. Investors
should carefully consider their investment goals and willingness to tolerate
investment risk before allocating their investment to the Fund.
The Fund seeks to provide capital growth. The production of current income is an
incidental objective to the Fund. In pursuing these objectives, AmSouth seeks to
invest in securities which it believes to represent investment value. Factors
which AmSouth may consider in selecting securities include industry and company
fundamentals, historical price relationships, and/or underlying asset value.
AmSouth may use a variety of economic projections, technical analysis, and
earnings projections in formulating individual stock purchase and sale
decisions. Most companies in which the Fund invests are listed on national
securities exchanges.
AmSouth will select investments that it believes have basic investment value
which will eventually be recognized by other investors, thus increasing their
value to the Fund. In the selection of the investments for the Fund, AmSouth may
therefore by making investment decisions which could be contrary to the present
expectations of other professional investors. These decisions may involve
greater risks compared to other mutual funds. For example, other investors may
more accurately assess an investment's value, in which case the Fund may incur
losses. Additionally, there may be a long delay in investor recognition of the
accuracy of the investment decisions of the Fund, in which case invested capital
of the Fund in an individual security or group of securities may not appreciate
for an extended period.
The Fund may invest in companies of any size. Most equities purchased will be
issued by companies whose market capitalizations are not as large as many of the
securities represented in such broad market indexes as the S&P 500(R) Index.
The Fund has the flexibility to make portfolio investments and engage in other
investment techniques that are different than its principal strategies mentioned
here. More information on the Fund's investment strategies may be found in the
Statement of Additional Information (see back cover).
The Fund's investment strategies may subject it to a number of risks in addition
to those described above, including the following.
Market Risk. Although common stocks historically have outperformed other asset
classes over the long term, their prices tend to fluctuate more dramatically
over the shorter term. These movements may result from factors affecting
individual companies, or from broader influences like changes in interest rates,
market conditions, investor confidence or announcements of economic, political
or financial information. While potentially offering greater opportunities for
capital growth than larger, more established companies, the common stocks of
smaller companies may be particularly volatile, especially during periods of
economic uncertainty. These companies may face less certain growth prospects, or
depend heavily on a limited line of products and services or the efforts of a
small number of key management personnel.
<PAGE>
The Fund may invest in securities issued by foreign companies. The securities of
foreign companies may pose risks in addition to, or to a greater degree than,
the risks described above. Foreign companies may be subject to disclosure,
accounting, auditing and financial reporting standards and practices that are
different from those to which U.S. issuers are subject. Accordingly, the Fund
may not have access to adequate or reliable company information. In addition,
political, economic and social developments in foreign countries and
fluctuations in currency exchange rates may affect the operations of foreign
companies or the value of their securities.
AmSouth tries to manage market risk of the Fund by primarily investing in
"value" stocks of issuers in the Southern Region of the United States. Value
stocks in theory limit downside risk because they are underpriced. Of course,
AmSouth's success in moderating market risk cannot be assured. In addition, the
Fund may produce more modest gains than equity funds with more aggressive
investment profiles.
Regional Concentration. The Fund normally invests at least 65% of the value of
its total assets in common stocks and securities convertible into common stock
of companies headquartered in the Southern Region. There can be no assurance
that the economy of the Southern Region or the companies headquartered in the
Southern Region will grow in the future. Additionally, a company headquartered
in the Southern Region whose assets, revenues or employees are located
substantially outside of the Southern Region may miss out on any economic growth
in the Southern Region. Furthermore, any localized negative economic factors or
possible physical disasters in the Southern Region could have much greater
impact on the Fund's assets than on similar funds whose investments are
geographically more diverse.
Interest Rate Risk. The Fund may invest in debt securities and other types of
fixed income securities, such as convertible preferred stock and convertible
bonds. Generally, the value of these securities will change inversely with
changes in interest rates. In addition, changes in interest rates may affect the
operations of the issuers of stocks in which the Fund invests. Rising interest
rates, which may be expected to lower the value of fixed income instruments and
negatively impact the operations of many issuers, generally exist during periods
of inflation or strong economic growth.
Credit Risk. The Fund's investments, and particularly investments in convertible
securities and debt securities, may be affected by the creditworthiness of
issuers in which the Fund invests. Changes in the financial strength, or
perceived financial strength, of a company may affect the value of its
securities and, therefore, impact the value of the Fund's shares.
<PAGE>
The Fund may invest in lower rated convertible securities and debt obligations.
To a greater extent than more highly rated securities, lower rated securities
tend to reflect short-term corporate, economic and market developments, as well
as investor perceptions of the issuer's credit quality. Lower rated securities
may be especially susceptible to real or perceived adverse economic and
competitive industry conditions. In addition, lower rated securities may be less
liquid than higher quality investments. Reduced liquidity may prevent the Fund
from selling a security at the time and price that would be most beneficial to
the Fund.
Temporary Investments. AmSouth may temporarily invest up to 100% of the Fund's
assets in high quality, short-term money market instruments if it believes
adverse economic or market conditions, such as excessive volatility or sharp
market declines, justify taking a defensive investment posture. If the Fund
attempts to limit investment risk by temporarily taking a defensive investment
position, it may be unable to pursue its investment objective during that time,
and it may miss out on some or all of an upswing in the securities markets.
Please see the Statement of Additional Information for more detailed information
about the Fund, its investment strategies, and its risks.
VALUATION OF SHARES
The Fund prices its shares on the basis of the net asset value of the Fund,
which is determined as of the close of the New York Stock Exchange ("NYSE")
(generally 4:00 p.m. Eastern Time) on each Business Day (other than a day on
which there are insufficient changes in the value of the Fund's portfolio
securities to materially affect the Fund's net asset value or a day on which no
shares are tendered for redemption and no order to purchase any shares is
received). A Business Day is a day on which the NYSE is open for trading.
Currently, the NYSE is closed on the following holidays: New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
Net asset value per share for purposes of pricing sales and redemptions is
calculated by dividing the value of all securities and other assets belonging to
the Fund, less the liabilities charged to the Fund and any liabilities allocable
to the Fund, by the number of the Fund's outstanding shares. The net asset value
per share of the Fund will fluctuate as the value of the investment portfolio of
the Fund changes.
The securities in the 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 of Variable Insurance Funds (the "Trust") believes accurately reflects
fair value. For further information about valuation of investments, see the
Statement of Additional Information.
<PAGE>
PURCHASING AND REDEEMING SHARES
Shares of the Fund are available for purchase by insurance company separate
accounts to serve as an investment medium for variable insurance contracts, and
by qualified pension and retirement plans, certain insurance companies, and
AmSouth. Shares of the Fund are purchased or redeemed at the net asset value per
share next determined after receipt by the Fund's distributor of a purchase
order or redemption request. Transactions in shares of the Fund will be effected
only on a Business Day of the Fund.
Payment for shares redeemed normally will be made within seven days. The Fund
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. A
shareholder may incur brokerage costs in converting such securities to cash.
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the Securities and Exchange Commission in order to protect
remaining investors.
Investors do not deal directly with the Fund to purchase or redeem shares.
Please refer to the prospectus for the separate account for information on the
allocation of premiums and on transfers of accumulated value among sub-accounts
of the separate account that invests in the Fund.
The Fund currently does not foresee any disadvantages to investors if the Fund
served as an investment medium for both variable annuity contracts and variable
life insurance policies. However, it is theoretically possible that the interest
of owners of annuity contracts and insurance policies for which the Fund served
as an investment medium might at some time be in conflict due to differences in
tax treatment or other considerations. The Board of Trustees and each
participating insurance company 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 Fund might be required to redeem the
investment of one or more of its separate accounts from the Fund, which might
force the Fund to sell securities at disadvantageous prices.
The Fund reserves the right to discontinue offering shares at any time. In the
event that the 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 Board of Trustees.
<PAGE>
MANAGEMENT OF THE FUND
Investment Adviser
AmSouth Bank, 1901 Sixth Avenue North, Birmingham, Alabama 35203, is the
investment adviser of the Fund. AmSouth is the principal bank affiliate of
AmSouth Bancorporation, one of the largest banking institutions headquartered in
the mid-south region. AmSouth Bancorporation reported assets as of September 30,
1998 of $19.6 billion and operated more than 270 banking offices and 600 ATM
locations in Alabama, Florida, Georgia and Tennessee. AmSouth has provided
investment management services through its Trust Investment Department since
1915. As of September 30, 1998, AmSouth and its affiliates had over $8.5 billion
in assets under discretionary management and an additional $16.8 billion under
non-discretionary management. AmSouth is the largest provider of trust services
in Alabama, and its Trust Natural Resources and Real Estate Department is a
major manager of timberland, mineral, oil and gas properties and other real
estate interests.
Subject to the general supervision of the Board of Trustees and in accordance
with the investment objectives, policies and restrictions of the Fund, AmSouth
makes the day-to-day investment decisions for the Fund and continuously reviews,
supervises and administers the Fund's investment program. Pedro Verdu, CFA, is
the portfolio manager for the Fund and has primary responsibility for the
day-to-day portfolio management of the Fund. Mr. Verdu has twenty-four years of
experience as an analyst and portfolio manager, and is currently the Director of
Equity Investing at AmSouth.
Under an investment advisory agreement between the Trust and AmSouth, the fee
payable to AmSouth by the Trust for investment advisory services is the lesser
of (a) a fee computed daily and paid monthly at the annual rate of 0.60% of the
Fund's daily net assets or (b) such fee as may from time to time be agreed upon
in writing by the Trust and AmSouth.
Administrator and Distributor
BISYS Fund Services Ohio, Inc. is the administrator for the Fund, and BISYS Fund
Services acts as the Fund's principal underwriter and distributor. The address
of each is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
See the Statement of Additional Information for further information about the
Fund's service providers.
<PAGE>
Servicing Agents
The Trust has adopted a plan under which up to 0.25% of the Fund's average daily
net assets may be expended for support services to investors, such as
establishing and maintaining accounts and records, providing account
information, arranging for bank wires, responding to routine inquiries,
forwarding investor communications, assisting in the processing of purchase,
exchange and redemption requests, and assisting investors in changing account
designations and addresses. For expenses incurred and services provided, a
financial institution (or its affiliate) providing these services ("Servicing
Agent") may receive a fee from the Fund, computed daily and paid monthly, at an
annual rate of up to 0.25% of the average daily net assets of the Fund allocable
to variable insurance contracts owned by customers of the Servicing Agent. A
Servicing Agent may periodically waive all or a portion of its servicing fees
with respect to the Fund to increase the net income of the Fund available for
distribution as dividends.
Year 2000
The services provided to the Fund by AmSouth and the Fund's other service
providers (collectively, the "Service Providers") are dependent on those Service
Providers' computer systems. Many computer software and hardware systems in use
today cannot distinguish between the year 2000 and the year 1900 because of the
way dates are encoded and calculated (the "Year 2000 Issue"). The failure to
make this distinction could have a negative impact on the Service Providers'
ability to handle securities trades, price securities, and conduct general
account services on behalf of the Fund. The Trust is working with the Service
Providers to take steps that are reasonably designed to address the Year 2000
Issue with respect to computer systems relied on by the Fund. The Trust believes
that these steps will be sufficient to avoid any material adverse impact on the
Fund, although there can be no assurances. The costs or consequences of an
incomplete or an untimely resolution of the Year 2000 Issue are unknown to the
Trust and the Service Providers at this time, but could have a material adverse
impact on the operations of the Fund and the Service Providers. In addition, if
the value of a Fund investment is adversely affected by a Year 2000 problem, the
net asset value of the Fund may be affected as well.
TAXATION
To comply with regulations under the Internal Revenue Code, the Fund is required
to diversify its investments. Generally, the 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.
If the Fund fails to meet this diversification requirement, income with respect
to variable insurance contracts invested in the Fund at any time during the
calendar quarter in which the failure occurred could become currently taxable to
the owners of the contracts. Similarly, 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.
<PAGE>
Reference is made to the prospectus for the separate account and variable
insurance contract for information regarding the federal income tax treatment of
distributions to the separate account. See the Statement of Additional
Information for more information on taxes.
GENERAL INFORMATION
Description of the Trust and Its Shares
Variable Insurance Funds was organized as a Massachusetts business trust in 1994
and currently consists of five portfolios. The Board of Trustees of the Trust
may establish additional portfolios in the future. Under Massachusetts law,
shareholders could be held personally liable for the obligations of the Trust
under certain circumstances. However, the Trust's declaration of trust disclaims
liability of its shareholders and provides for indemnification out of Trust
property for all loss and expense of any shareholder held personally liable for
the obligations of the Trust. Accordingly, the risk of a shareholder incurring
financial loss on account of shareholder liability should be considered remote.
Similar Fund Performance Information
The following table provides information concerning the historical total return
performance of the Premier Shares class of the AmSouth Regional Equity Fund (the
"Similar Fund"), a series of the AmSouth Mutual Funds. The Similar Fund's
investment objectives, policies and strategies are substantially similar to
those of the Fund and is currently managed by the same portfolio manager. While
the investment objectives, policies and risks of the Similar Fund and the Fund
are similar, they are not identical, and the performance of the Similar Fund and
the Fund will vary. The data is provided to illustrate the past performance of
AmSouth in managing a substantially similar investment portfolio and does not
represent the past performance of the Fund or the future performance of the Fund
or its portfolio manager. Consequently, potential investors should not consider
this performance data as an indication of the future performance of the Fund or
of its portfolio manager.
The performance data shown below reflects the operating expenses of the Similar
Fund, which are lower than the expenses of the Fund. Performance would have been
lower for the Similar Fund if the Fund's expenses were used. In addition, the
Similar Fund, unlike the Fund, is not sold to insurance company separate
accounts to fund variable insurance contracts. As a result, the performance
results presented below do not take into account charges or deductions against a
separate account or variable insurance contract for cost of insurance charges,
premium loads, administrative fees, maintenance fees, premium taxes, mortality
and expense risk charges, or other charges that may be incurred under a variable
insurance contract for which the Fund serves as an underlying investment
vehicle. By contrast, investors with contract value allocated to the Fund will
be subject to charges and expenses relating to variable insurance contracts and
separate accounts.
<PAGE>
The Similar Fund's performance data shown below is calculated in accordance with
standards prescribed by the Securities and Exchange Commission for the
calculation of average annual total return information. The investment results
of the Similar Fund presented below are unaudited and are not intended to
predict or suggest results that might be experienced by the Similar Fund or the
Fund. Share prices and investment returns will fluctuate reflecting market
conditions, as well as changes in company-specific fundamentals of portfolio
securities. The performance data for the benchmark index identified below does
not reflect the fees or expenses of the Similar Fund or the Fund.
Average Annual Total Return for the Similar Fund and for Its Benchmark Index for
Periods Ended December 31, 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
Since Inception
1 Year 3 Years 5 Years 10 Years (December 1, 1988)
----- ------- -------- --------- ------------------
Similar Fund/Benchmark
AmSouth Regional Equity Fund xx.xx% xx.xx% xx.xx% xx.xx% xx.xx%
S&P 500(R) Index* xx.xx% xx.xx% xx.xx% xx.xx% xx.xx%
</TABLE>
- -----------------
* The Standard & Poor's 500 Composite Stock Price Index is an unmanaged
index containing common stocks of 500 industrial, transportation,
utility and financial companies, regarded as generally representative
of the U.S. stock market. The Index reflects income and distributions,
if any, but does not reflect fees, brokerage commissions, or other
expenses of investing.
Miscellaneous
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. If given or made, such information or representations
must not be relied upon as having been authorized by the Fund or its
distributor. This prospectus does not constitute an offering by the Fund or its
distributor in any jurisdiction in which such offering may not be lawfully made.
<PAGE>
For more information about the Fund, the following document is available free
upon request:
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Fund, including its operations and investment policies. It
is incorporated by reference and is legally considered a part of this
prospectus.
- --------------------------------------------------------------------------------
An investor can get free copies of the SAI, or request other information and
discuss any questions about the Fund, by contacting a broker or bank that sells
an insurance contract that offers the Fund as an investment option. Or contact
the Fund at:
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
Telephone: 1-800-451-8382
- --------------------------------------------------------------------------------
Investors can review the SAI at the Public Reference Room of the Securities and
Exchange Commission. Investors can get text-only copies:
. For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009 or calling 1-800-SEC-0330.
. Free from the Commission's Website at http://www.sec.gov
Investment Company Act file no. 811-8644.
<PAGE>
AmSouth Select Equity Fund
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-451-8382
The AmSouth Select Equity Fund seeks to provide long-term growth of capital by
investing primarily in common stocks and securities convertible into common
stocks, such as convertible bonds and convertible preferred stocks. The Fund's
goals and investment program are described in more detail inside. AmSouth Bank
("AmSouth") serves as the Fund's investment adviser, and OakBrook Investments,
LLC ("OakBrook") serves as the investment sub-adviser of the Fund.
The Fund sells its shares to insurance company separate accounts, so that the
Fund may serve as an investment option under variable life insurance policies
and variable annuity contracts issued by insurance companies. The Fund also may
sell its shares to certain other investors, such as qualified pension and
retirement plans, insurance companies, AmSouth, and OakBrook.
This prospectus should be read in conjunction with the separate account's
prospectus describing the variable insurance contract. Please read both
prospectuses and retain them for future reference.
The Securities and Exchange Commission has not approved the Fund's shares or
determined whether this prospectus is accurate or complete. Anyone who tells you
otherwise is committing a crime.
The date of this prospectus is May 1, 1999.
TABLE OF CONTENTS
<TABLE>
<S> <C>
RISK/RETURN SUMMARY AND FUND EXPENSES MANAGEMENT OF THE FUND
Investment Objective Investment Adviser and Sub-Adviser
Principal Investment Strategies Administrator and Distributor
Principal Investment Risks Servicing Agents
Fund Expenses Year 2000
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS TAXATION
VALUATION OF SHARES GENERAL INFORMATION
PURCHASING AND REDEEMING SHARES Description of the Trust and Its Shares
Miscellaneous
</TABLE>
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
Investment Objective
The Fund seeks to provide long-term growth of capital.
Principal Investment Strategies
Under normal market conditions, the Fund will invest at least 65% of its total
assets in common stocks and securities convertible into common stocks, such as
convertible bonds and convertible preferred stocks, of companies with market
capitalizations that are greater than $2 billion at the time of purchase.
Principal Investment Risks
An investment in the Fund entails investment risk, including possible loss of
the principal amount invested. The Fund is subject to market risk, which is the
risk that the market value of a portfolio security may move up and down,
sometimes rapidly and unpredictably. This risk may be particularly acute for the
Fund's investments in common stocks, although the Fund's investment strategies
seek out stocks that tend to be less volatile than many common stocks over the
long term. The Fund also is subject to interest rate risk, which is the risk
that changes in interest rates will affect the value of the Fund's investments.
In particular, the Fund's investments in fixed income securities generally will
change in value inversely with changes in interest rates. Also, an investment by
the Fund in fixed income securities generally will expose the Fund to credit
risk, which is the risk that the issuer of a security will default or not be
able to meet its financial obligations. Because the Fund may concentrate its
investments in a relatively small number of issuers, it may be exposed to risks
caused by events that affect particular companies to a greater extent than more
broadly diversified mutual funds.
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Fund Performance
Because the Fund has no investment track record, it has no performance
information to compare against other mutual funds or a broad measure of
securities market performance, such as an index.
<PAGE>
Fund Expenses
The following expense table indicates the estimated expenses that an investor
will incur as a shareholder of the Fund during the current fiscal year. These
expenses are reflected in the share price of the Fund.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees*..............................................0.80%
Other Expenses*...............................................0.96%
Total Annual Fund Operating Expenses*.........................1.76%
- --------------------
* AmSouth currently limits its management fees to 0.70%, and other
expenses currently are being limited to 0.55%. Total expenses after fee
waivers and expense reimbursements are 1.25%. Investors will be
notified of any material revision or cancellation of a fee waiver or
expense reimbursement, which may be terminated at any time at the
option of the Fund.
Expense Example
Use the following table to compare fees and expenses of the Fund to other
investment companies. It illustrates the amount of fees and expenses an investor
would pay, assuming (1) a $10,000 investment, (2) 5% annual return, (3)
redemption at the end of each time period, and (4) no changes in the Fund's
total operating expenses. It does not reflect separate account or insurance
contract fees and charges. An investor's actual costs may be different.
1 Year 3 Years
$179 $554
<PAGE>
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
Investors should be aware that the investments made by the Fund at any given
time are not expected to be the same as those made by other mutual funds for
which AmSouth or OakBrook acts as investment adviser, including mutual funds
with names, investment objectives and policies similar to the Fund. Investors
should carefully consider their investment goals and willingness to tolerate
investment risk before allocating their investment to the Fund.
The Fund seeks to provide long-term growth of capital. The Fund seeks to obtain
its investment objective by investing primarily in companies that possess a
dominant market share and have a barrier, such as a patent or well-known brand
name, that shields its market share and profits from competitors. These
companies typically have long records of stable earnings growth. OakBrook
continuously monitors this universe of companies looking for opportunities to
purchase such stocks at reasonable prices.
In managing the investment portfolio for the Fund, OakBrook may focus on a
relatively limited number of stocks (generally 25 or less). OakBrook believes
that this investment strategy has the potential for higher total returns than an
investment strategy calling for investment in a larger number of securities.
In addition to its principal strategies discussed above, the Fund may invest in
securities issued by companies with market capitalizations below $2 billion, or
invest in futures and options contracts for purposes of hedging the Fund's
portfolio or maintaining its exposure to the equity markets. The Fund has the
flexibility to make portfolio investments and engage in other investment
techniques that are different than the strategies mentioned here. More
information on the Fund's investment strategies may be found in the Statement of
Additional Information (see back cover).
The Fund's investment strategies may subject it to a number of risks, including
the following.
Market Risk. Although common stocks historically have outperformed other asset
classes over the long term, their prices tend to fluctuate more dramatically
over the shorter term. These movements may result from factors affecting
individual companies, or from broader influences like changes in interest rates,
market conditions, investor confidence or announcements of economic, political
or financial information. While potentially offering greater opportunities for
capital growth than larger, more established companies, the common stocks of
smaller companies may be particularly volatile, especially during periods of
economic uncertainty. These companies may face less certain growth prospects, or
depend heavily on a limited line of products and services or the efforts of a
small number of key management personnel.
The Fund may invest in securities issued by foreign companies. The securities of
foreign companies may pose risks in addition to, or to a greater degree than,
the risks described above. Foreign companies may be subject to disclosure,
accounting, auditing and financial reporting standards and practices that are
different from those to which U.S. issuers are subject.
<PAGE>
Accordingly, the Fund may not have access to adequate or reliable company
information. In addition, political, economic and social developments in foreign
countries and fluctuations in currency exchange rates may affect the operations
of foreign companies or the value of their securities.
Interest Rate Risk. The Fund may invest in debt securities and other types of
fixed income securities, such as convertible preferred stock and convertible
bonds. Generally, the value of these securities will change inversely with
changes in interest rates. In addition, changes in interest rates may affect the
operations of the issuers of stocks in which the Fund invests. Rising interest
rates, which may be expected to lower the value of fixed income instruments and
negatively impact the operations of many issuers, generally exist during periods
of inflation or strong economic growth.
Credit Risk. The Fund's investments, and particularly investments in convertible
securities and debt securities, may be affected by the creditworthiness of
issuers in which the Fund invests. Changes in the financial strength, or
perceived financial strength, of a company may affect the value of its
securities and, therefore, impact the value of the Fund's shares. The Fund also
may be subject to credit risks posed by counterparties to futures and option
contracts.
The Fund may invest in lower rated convertible securities and debt obligations.
To a greater extent than more highly rated securities, lower rated securities
tend to reflect short-term corporate, economic and market developments, as well
as investor perceptions of the issuer's credit quality. Lower rated securities
may be especially susceptible to real or perceived adverse economic and
competitive industry conditions. In addition, lower rated securities may be less
liquid than higher quality investments. Reduced liquidity may prevent the Fund
from selling a security at the time and price that would be most beneficial to
the Fund.
Diversification. The Fund is a non-diversified fund, which means it may
concentrate its investments in the securities of a limited number of issuers.
However, the Fund will be subject to certain diversification requirements
imposed by the Internal Revenue Code. The use of a focused investment strategy
may increase the volatility of the Fund's investment performance, as the Fund
may be more susceptible to risks associated with a single economic, political or
regulatory event than a diversified portfolio. If the securities in which the
Fund invests perform poorly, the Fund could incur greater losses than it would
have had it been invested in a greater number of securities.
Temporary Investments. OakBrook may temporarily invest up to 100% of the Fund's
assets in high quality, short-term money market instruments if it believes
adverse economic or market conditions, such as excessive volatility or sharp
market declines, justify taking a defensive investment posture. If the Fund
attempts to limit investment risk by temporarily taking a defensive investment
position, it may be unable to pursue its investment objective during that time,
and it may miss out on some or all of an upswing in the securities markets.
Please see the Statement of Additional Information for more detailed information
about the Fund, its investment strategies, and its risks.
<PAGE>
VALUATION OF SHARES
The Fund prices its shares on the basis of the net asset value of the Fund,
which is determined as of the close of the New York Stock Exchange ("NYSE")
(generally 4:00 p.m. Eastern Time) on each Business Day (other than a day on
which there are insufficient changes in the value of the Fund's portfolio
securities to materially affect the Fund's net asset value or a day on which no
shares are tendered for redemption and no order to purchase any shares is
received). A Business Day is a day on which the NYSE is open for trading.
Currently, the NYSE is closed on the following holidays: New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
Net asset value per share for purposes of pricing sales and redemptions is
calculated by dividing the value of all securities and other assets belonging to
the Fund, less the liabilities charged to the Fund and any liabilities allocable
to the Fund, by the number of the Fund's outstanding shares. The net asset value
per share of the Fund will fluctuate as the value of the investment portfolio of
the Fund changes.
The securities in the 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 of Variable Insurance Funds (the "Trust") believes accurately reflects
fair value. For further information about valuation of investments, see the
Statement of Additional Information.
PURCHASING AND REDEEMING SHARES
Shares of the Fund are available for purchase by insurance company separate
accounts to serve as an investment medium for variable insurance contracts, and
by qualified pension and retirement plans, certain insurance companies, AmSouth
and OakBrook. Shares of the Fund are purchased or redeemed at the net asset
value per share next determined after receipt by the Fund's distributor of a
purchase order or redemption request. Transactions in shares of the Fund will be
effected only on a Business Day of the Fund.
Payment for shares redeemed normally will be made within seven days. The Fund
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. A
shareholder may incur brokerage costs in converting such securities to cash.
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the Securities and Exchange Commission in order to protect
remaining investors.
Investors do not deal directly with the Fund to purchase or redeem shares.
Please refer to the prospectus for the separate account for information on the
allocation of premiums and on transfers of accumulated value among sub-accounts
of the separate account that invests in the Fund.
The Fund currently does not foresee any disadvantages to investors if the Fund
served as an investment medium for both variable annuity contracts and variable
life insurance policies. However, it is theoretically possible that the interest
of owners of annuity contracts and insurance policies for which the Fund served
as an investment medium might at some time be in conflict due to differences in
tax treatment or other considerations. The Board of Trustees and each
participating insurance company 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 Fund might be required to redeem the
investment of one or more of its separate accounts from the Fund, which might
force the Fund to sell securities at disadvantageous prices.
<PAGE>
The Fund reserves the right to discontinue offering shares at any time. In the
event that the 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 Board of Trustees.
MANAGEMENT OF THE FUND
Investment Adviser and Sub-Adviser
AmSouth. AmSouth Bank, 1901 Sixth Avenue North, Birmingham, Alabama 35203, is
the investment adviser of the Fund. AmSouth is the principal bank affiliate of
AmSouth Bancorporation, one of the largest banking institutions headquartered in
the mid-south region. AmSouth Bancorporation reported assets as of September 30,
1998 of $19.6 billion and operated more than 270 banking offices and 600 ATM
locations in Alabama, Florida, Georgia and Tennessee. AmSouth has provided
investment management services through its Trust Investment Department since
1915. As of September 30, 1998, AmSouth and its affiliates had over $8.5 billion
in assets under discretionary management and an additional $16.8 billion under
non-discretionary management. AmSouth is the largest provider of trust services
in Alabama, and its Trust Natural Resources and Real Estate Department is a
major manager of timberland, mineral, oil and gas properties and other real
estate interests.
Subject to the general supervision of the Board of Trustees and in accordance
with the investment objective and restrictions of the Fund, AmSouth is
authorized to manage the Fund, make decisions with respect to and place orders
for all purchases and sales of its investment securities, and maintain its
records relating to such purchases and sales.
Under an investment advisory agreement between the Trust and AmSouth, the fee
payable to AmSouth by the Trust for investment advisory services is the lesser
of (a) a fee computed daily and paid monthly at the annual rate of 0.80% of the
Fund's daily net assets or (b) such fee as may from time to time be agreed upon
in writing by the Trust and AmSouth.
OakBrook. OakBrook serves as investment sub-adviser of the Fund in accordance
with a sub-advisory agreement with AmSouth. OakBrook makes the day-to-day
investment decisions for the Fund and continuously reviews, supervises and
administers the Fund's investment program, subject to the general supervision of
the Board of Trustees and AmSouth in accordance with the Fund's investment
objective, policies and restrictions. For its services and expenses incurred
under the sub-advisory agreement, OakBrook is entitled to a fee payable by
AmSouth.
<PAGE>
OakBrook is 50% owned by AmSouth and 50% owned by Neil Wright, Janna Sampson and
Peter Jankovskis. OakBrook was organized in February, 1998 to perform advisory
services for investment companies and other institutional clients and has its
principal offices at 701 Warrenville Road, Suite 135, Lisle, Illinois 60532.
The Fund is managed by a team from OakBrook. Dr. Neil Wright, Ms. Janna Sampson
and Dr. Peter Jankovskis are the portfolio managers for the Fund and have the
primary responsibility for the day-to-day portfolio management of the Fund. Dr.
Wright is OakBrook's President and the Chief Investment Officer. He holds a
doctorate in economics. From 1993 to 1997, Dr. Wright was the Chief Investment
Officer of ANB Investment Management & Trust Co. ("ANB"). He managed ANB's Large
Cap Growth Fund and other equity funds starting in 1981. Ms. Sampson is
OakBrook's Director of Portfolio Management. She holds a master of arts degree
in economics. From 1993 to 1997, Ms. Sampson was Senior Portfolio Manager for
ANB. She has worked in the investment field since 1981 and was a portfolio
manager at ANB from 1987 to 1997. Dr. Jankovskis is OakBrook's Director of
Research. He holds a doctorate in economics. He has conducted economic research
since 1988. From August, 1992 to July, 1996, Dr. Jankovskis was an Investment
Strategist for ANB, and from July, 1996 to December, 1997, he was the Manager of
Research for ANB.
Administrator and Distributor
BISYS Fund Services Ohio, Inc. is the administrator for the Fund, and BISYS Fund
Services acts as the Fund's principal underwriter and distributor. The address
of each is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
See the Statement of Additional Information for further information about the
Fund's service providers.
Servicing Agents
The Trust has adopted a plan under which up to 0.25% of the Fund's average daily
net assets may be expended for support services to investors, such as
establishing and maintaining accounts and records, providing account
information, arranging for bank wires, responding to routine inquiries,
forwarding investor communications, assisting in the processing of purchase,
exchange and redemption requests, and assisting investors in changing account
designations and addresses. For expenses incurred and services provided, a
financial institution (or its affiliate) providing these services ("Servicing
Agent") may receive a fee from the Fund, computed daily and paid monthly, at an
annual rate of up to 0.25% of the average daily net assets of the Fund allocable
to variable insurance contracts owned by customers of the Servicing Agent. A
Servicing Agent may periodically waive all or a portion of its servicing fees
with respect to the Fund to increase the net income of the Fund available for
distribution as dividends.
<PAGE>
Year 2000
The services provided to the Fund by AmSouth, OakBrook and the Fund's other
service providers (collectively, the "Service Providers") are dependent on those
Service Providers' computer systems. Many computer software and hardware systems
in use today cannot distinguish between the year 2000 and the year 1900 because
of the way dates are encoded and calculated (the "Year 2000 Issue"). The failure
to make this distinction could have a negative impact on the Service Providers'
ability to handle securities trades, price securities, and conduct general
account services on behalf of the Fund. The Trust is working with the Service
Providers to take steps that are reasonably designed to address the Year 2000
Issue with respect to computer systems relied on by the Fund. The Trust has no
reason to believe that these steps will not be sufficient to avoid any material
adverse impact on the Fund, although there can be no assurances. The costs or
consequences of an incomplete or an untimely resolution of the Year 2000 Issue
are unknown to the Trust and the Service Providers at this time, but could have
a material adverse impact on the operations of the Fund and the Service
Providers. In addition, if the value of a Fund investment is adversely affected
by a Year 2000 problem, the net asset value of the Fund may be affected as well.
TAXATION
To comply with regulations under the Internal Revenue Code, the Fund is required
to diversify its investments. Generally, the 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.
If the Fund fails to meet this diversification requirement, income with respect
to variable insurance contracts invested in the Fund at any time during the
calendar quarter in which the failure occurred could become currently taxable to
the owners of the contracts. Similarly, 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.
Reference is made to the prospectus for the separate account and variable
insurance contract for information regarding the federal income tax treatment of
distributions to the separate account. See the Statement of Additional
Information for more information on taxes.
<PAGE>
GENERAL INFORMATION
Description of the Trust and Its Shares
Variable Insurance Funds was organized as a Massachusetts business trust in 1994
and currently consists of five portfolios. The Board of Trustees of the Trust
may establish additional portfolios in the future. Under Massachusetts law,
shareholders could be held personally liable for the obligations of the Trust
under certain circumstances. However, the Trust's declaration of trust disclaims
liability of its shareholders and provides for indemnification out of Trust
property for all loss and expense of any shareholder held personally liable for
the obligations of the Trust. Accordingly, the risk of a shareholder incurring
financial loss on account of shareholder liability should be considered remote.
Miscellaneous
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. If given or made, such information or representations
must not be relied upon as having been authorized by the Fund or its
distributor. This prospectus does not constitute an offering by the Fund or its
distributor in any jurisdiction in which such offering may not be lawfully made.
<PAGE>
For more information about the Fund, the following document is available free
upon request:
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Fund, including its operations and investment policies. It
is incorporated by reference and is legally considered a part of this
prospectus.
- --------------------------------------------------------------------------------
An investor can get free copies of the SAI, or request other information and
discuss any questions about the Fund, by contacting a broker or bank that sells
an insurance contract that offers the Fund as an investment option. Or contact
the Fund at:
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
Telephone: 1-800-451-8382
- --------------------------------------------------------------------------------
Investors can review the SAI at the Public Reference Room of the Securities and
Exchange Commission. Investors can get text-only copies:
. For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009 or calling 1-800-SEC-0330.
. Free from the Commission's Website at http://www.sec.gov
Investment Company Act file no. 811-8644.
<PAGE>
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
BB&T: (800) 228-1872
AmSouth: (800) 451-8382
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
This Statement of Additional Information ("SAI") describes five investment
portfolios (the "Funds") of Variable Insurance Funds (the "Trust"). The Funds
are:
o BB&T Growth and Income Fund;
o BB&T Capital Manager Fund; *
o AmSouth Regional Equity Fund; *
o AmSouth Select Equity Fund; and
o AmSouth Equity Income Fund.
* As of the date of this SAI, the indicated Funds are not available for
investment.
The Trust offers an indefinite number of transferable units ("Shares") of each
Fund. Shares of the Funds may be sold to segregated asset accounts ("Separate
Accounts") of insurance companies to serve as the investment medium for variable
life insurance policies and variable annuity contracts ("Variable Contracts")
issued by the insurance companies. Shares of the Funds also may be sold to
qualified pension and retirement plans, certain insurance companies, and the
investment advisers and sub-advisers of the Funds. 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 May 1, 1999, as
supplemented from time to time. This SAI contains more detailed information than
that set forth in a Prospectus and should be read in conjunction with the
Prospectus. This SAI incorporates the Funds' financial statements and related
notes and auditors reports from the Funds' annual reports for the fiscal year
ended December 31, 1998, and 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 the toll free
numbers set forth above.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES................................................................................1
Additional Information on the Capital Manager Fund's Investment Policies.................................1
Additional Information on Portfolio Instruments..........................................................1
INVESTMENT RESTRICTIONS..........................................................................................22
Portfolio Turnover......................................................................................24
NET ASSET VALUE..................................................................................................25
Valuation of the Funds..................................................................................25
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...................................................................25
MANAGEMENT OF THE TRUST..........................................................................................26
Trustees and Officers...................................................................................26
Investment Advisers.....................................................................................29
Investment Sub-Advisers.................................................................................30
Portfolio Transactions..................................................................................32
Glass-Steagall Act......................................................................................33
Administrator...........................................................................................34
Expenses................................................................................................35
Distributor.............................................................................................36
Custodians, Transfer Agent and Fund Accounting Services.................................................36
Auditors................................................................................................37
Legal Counsel...........................................................................................37
ADDITIONAL INFORMATION...........................................................................................37
Description of Shares...................................................................................37
Vote of a Majority of the Outstanding Shares............................................................38
Principal Shareholders..................................................................................39
Shareholder and Trustee Liability.......................................................................39
Additional Tax Information..............................................................................39
Performance Information.................................................................................41
Miscellaneous...........................................................................................43
FINANCIAL STATEMENTS.............................................................................................44
APPENDIX .........................................................................................................i
</TABLE>
<PAGE>
The Trust is an open-end management investment company which currently offers
five separate Funds, each with different investment objectives. This SAI
contains information about the following two Funds which, along with the
"Underlying Funds" described below, are advised by Branch Banking and Trust
Company ("BB&T"): the BB&T Growth and Income Fund (the "Growth and Income Fund")
and the BB&T Capital Manager Fund (the "Capital Manager Fund"). In addition,
this SAI contains information about the AmSouth Regional Equity Fund (the
"Regional Equity Fund"), which is advised by AmSouth Bank ("AmSouth"), the
AmSouth Equity Income Fund ("Equity Income Fund"), which is advised by AmSouth,
with Rockhaven Asset Management, LLC ("Rockhaven") serving as sub-adviser, and
the AmSouth Select Equity Fund ("Select Equity Fund"), which is advised by
AmSouth, with OakBrook Investments, LLC ("OakBrook") serving as sub-adviser.
Much of the information contained in this SAI expands upon subjects discussed in
the Prospectuses of the Funds described above. Capitalized terms not defined
herein are defined in such Prospectuses. No investment in a Fund should be made
without first reading the Fund's Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Additional Information on the Capital Manager Fund's Investment Policies
The Capital Manager Fund seeks its investment objective by investing in a
diversified portfolio of one or more of the following funds (the "Underlying
Funds"), all of which are series of The BB&T Mutual Funds Group, an 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 Funds, which may
engage in the investment techniques described below. In addition to shares of
the Underlying Funds, for temporary cash management purposes, the Capital
Manager Fund may invest in short-term obligations (with maturities of 12 months
or less) consisting of commercial paper (including variable amount master demand
notes) and obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. These investments are described below under
"Additional Information on Portfolio Instruments."
<PAGE>
Additional Information on Portfolio Instruments
The following policies supplement the investment objectives and policies of the
Funds and the Underlying Funds as set forth in the Prospectuses.
Bank Obligations. The Growth and Income Fund, the Regional Equity Fund, the
Equity Income Fund, the Select Equity 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 Regional Equity Fund, the Select Equity Fund and the Equity Income Fund 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.
The Funds and Underlying Funds (except for the BB&T U.S. Treasury Fund) may
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 a
nationally recognized statistical rating organization ("NRSRO") (e.g., A-2 or
better by Standard & Poor's Ratings Services ("S&P"), Prime-2 or better by
Moody's Investors Service, Inc. ("Moody's") or F-2 or better by Fitch Investors
Service ("Fitch")) or, if not rated, determined to be of comparable quality to
instruments that are so rated. The Funds, the BB&T Growth and Income Fund and
the 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.
<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. BB&T, AmSouth and any sub-adviser each
will consider the earning power, cash flow, and other liquidity ratios of the
issuers of such notes and will continuously monitor their financial status and
ability to meet payment on demand. In determining dollar weighted average
portfolio maturity, a variable amount master demand note will be deemed to have
a maturity equal to the longer of the period of time remaining until the next
interest rate adjustment or the period of time remaining until the principal
amount can be recovered from the issuer through demand. The period of time
remaining until the principal amount can be recovered under a variable amount
master demand note shall not exceed seven days.
Short-Term Obligations. The Growth and Income Fund, the Equity Income Fund, the
Regional Equity Fund, the Select Equity Fund, and the Underlying 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, a Fund or
Underlying Fund 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, these investments may
constitute 100% of a Fund's or Underlying Fund's portfolio and, in such
circumstances, will constitute a temporary suspension of its attempts to achieve
its investment objective.
Short-Term Trading. In order to generate income, the Growth and Income Fund, the
Equity Income Fund, the Regional Equity Fund, the Select Equity Fund and the
Underlying 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 a Fund or an Underlying Fund in order to take
advantage of what its adviser or sub-adviser believes are changes in market,
industry or individual company conditions or outlook. Any such trading would
increase the portfolio turnover rate a Fund or Underlying Fund and its
transaction costs.
<PAGE>
Foreign Investments.The Equity Income Fund, the Regional Equity Fund, or the
Select Equity Fund may invest in foreign securities through the purchase of
American Depositary Receipts ("ADRs") or, except for the Select Equity Fund, the
purchase of securities of the Toronto Stock Exchange, but will not do so if
immediately after a purchase and as a result of the purchase the total value of
such foreign securities owned by a Fund would exceed 25% of the value of its
total assets. 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,
Inc. ("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. 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.
<PAGE>
Because foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies, there may be less publicly available information
about a foreign company than about a U.S. company. Volume and liquidity in most
foreign bond markets are less than in the U.S., and securities of many foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. Fixed commissions on foreign securities exchanges are generally
higher than negotiated commissions on U.S. exchanges, although a Fund or an
Underlying Fund will endeavor to achieve the most favorable net results on
portfolio transactions. There is generally less government supervision and
regulation of securities exchanges, brokers, dealers and listed companies than
in the U.S., thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities.
Foreign markets also have different clearance and settlement procedures, and in
certain markets, there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Such delays in settlement could result in temporary periods
when a portion of the assets of a Fund or Underlying Fund investing in foreign
markets is uninvested and no return is earned thereon. The inability of such a
Fund or Underlying Fund to make intended security purchases due to settlement
problems could cause the Fund or Underlying Fund to miss attractive investment
opportunities. Losses to a Fund or Underlying Fund due to subsequent declines in
the value of portfolio securities, or losses arising out of an inability to
fulfill a contract to sell such securities, could result in potential liability
to the Fund or Underlying Fund. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
the investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
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.
In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers which have similar maturities and quality. Under
certain market conditions these investments may be less liquid than the
securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Finally, in the event of a default of any such foreign debt
obligations, it may be more difficult to obtain or to enforce a judgment against
the issuers of such securities.
<PAGE>
If a security is denominated in foreign currency, the value of the security to a
Fund or an Underlying Fund will be affected by changes in currency exchange
rates and in exchange control regulations, and costs will be incurred in
connection with conversions between currencies. Currency risks generally
increase in lesser developed markets. Exchange rate movements can be large and
can endure for extended periods of time, affecting either favorably or
unfavorably the value of a Fund's or Underlying Fund's assets. The value of the
assets of a Fund or Underlying Fund as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations.
A change in the value of any foreign currency against the U.S. dollar will
result in a corresponding change in the U.S. dollar value of securities
denominated in that currency. Such changes will also affect the income and
distributions to Shareholders of a Fund or an Underlying Fund investing in
foreign markets. In addition, although the a Fund or Underlying Fund will
receive income on foreign securities in such currencies, it will be required to
compute and distribute income in U.S. dollars. Therefore, if the exchange rate
for any such currency declines materially after income has been accrued and
translated into U.S. dollars, a Fund or Underlying Fund could be required to
liquidate portfolio securities to make required distributions. Similarly, if an
exchange rate declines between the time a Fund or Underlying Fund incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of such
currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater.
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, a Fund or Underlying Fund can avoid
currency risks during the settlement period for either purchase or sales.
In general, there is a large, liquid market in the United States for many ADRs.
The information available for ADRs is subject to the accounting, auditing and
financial reporting standards of the domestic market or exchange on which they
are traded, which standards are more uniform and more exacting than those to
which many foreign issuers may be subject. Certain ADRs, typically those
denominated as unsponsored, require the holders thereof to bear most of the
costs of such facilities, while issuers of sponsored facilities normally pay
more of the costs thereof. The depository of an unsponsored facility frequently
is under no obligation to distribute shareholder communications received from
the issuer of the deposited securities or to pass through the voting rights to
facility holders with respect to the deposited securities, whereas the
depository of a sponsored facility typically distributes shareholder
communications and passes through the voting rights.
<PAGE>
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 Depositary
Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and other similar global
instruments. EDRs, which are sometimes referred to as Continental Depositary
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 depositary receipts structured like global debt issues to
facilitate trading on an international basis. 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 depositary receipts may be more volatile than if such
instruments were sponsored by the issuer.
Money Market Funds. Each of the Growth and Income Fund, the Regional Equity
Fund, the Equity Income Fund, the Select Equity Fund, and the Underlying 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.
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.
In order to avoid the imposition of additional fees as a result of investments
by the Growth and Income Fund, the Regional Equity Fund, the Equity Income Fund,
the Select Equity Fund, and the Underlying Funds (except for the BB&T U.S.
Treasury Fund) in shares of affiliated money market funds, BB&T, AmSouth, BISYS
Fund Services ("BISYS" or "Distributor"), and their affiliates will not retain
any portion of their usual service fees from the Funds that are attributable to
investments in shares of the affiliated money market funds. No sales charges,
contingent deferred sales charges, 12b-1 fees, or other underwriting or
distribution fees will be incurred in connection with their investments in the
affiliated money market funds. These Funds will vote their shares of each of the
affiliated money market funds in proportion to the vote by all other
shareholders of such fund. Moreover, no single Fund or Underlying Fund may own
more than 3% of the outstanding shares of a single affiliated money market fund.
Standard & Poor's Depository Receipts. The Growth and Income Fund, the BB&T
Growth and Income Fund, the BB&T Balanced Fund, and the BB&T Small Company
Growth Fund may invest in Standard & Poor's Depository Receipts ("SPDRs"). SPDRs
represent interests in trusts sponsored by a subsidiary of the American Stock
Exchange, Inc. and are structured to provide investors proportionate undivided
interests in a securities portfolio constituting substantially all the common
stocks (in substantially the same weighting) as the component common stocks of a
particular Standard & Poor's Index ("S&P" Index"), such as the S&P 500. SPDRs
are not redeemable, but are exchange traded. SPDRs represent interests in an
investment company that is not actively managed, and instead holds securities in
an effort to track the performance of the pertinent S&P Index and not for the
purpose of selecting securities that are considered superior investments. The
results of SPDRs will not replicate exactly the performance of the pertinent S&P
Index due to reductions in the SPDRs' performance attributable to transaction
and other expenses, including fees to service providers, borne by the SPDRs.
SPDRs distribute dividends on a quarterly basis. The Fund or an Underlying Fund
must limit investments in an SPDR to 5% of its total assets and 3% of the
outstanding voting securities of the SPDR issuer. Moreover, the Fund's or
Underlying Fund's investments in SPDRs, when aggregated with all other
investments in investment companies, may not exceed 10% of the total assets of
the Fund or the Underlying Fund.
<PAGE>
U.S. Government Obligations. The BB&T U.S. Treasury Fund may invest in U.S.
Government securities to the extent that they are obligations issued or
guaranteed by the U.S. Treasury. The Funds 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"). 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.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Government National Mortgage Association ("GNMA"), are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Federal National Mortgage Association ("FNMA"), are supported by the right of
the issuer to borrow from the Treasury; others, such as those of the Student
Loan Marketing Association ("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 Federal Farm Credit Bureau or the Federal Home Loan
Mortgage Corporation ("FHLMC"), are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law. Each Fund or
Underlying Fund will invest in the obligations of such agencies or
instrumentalities only when BB&T, AmSouth, or a sub-adviser believes that the
credit risk with respect thereto is minimal.
The Growth and Income Fund, the BB&T Short-Intermediate Fund, BB&T Intermediate
Bond Fund, BB&T Growth and Income Fund, BB&T Balanced Fund, and BB&T Small
Company Growth Fund 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.
<PAGE>
Options Trading. The Growth and Income Fund, 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 and the BB&T International Equity Fund
also 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, the Equity Income
Fund, the Regional Equity Fund, the Select Equity Fund, and the BB&T
International Equity Fund may also engage in writing covered call options
(options on securities or currencies owned by the Fund or Underlying Fund). 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 portfolio security or currency subject to a call option is sold, a 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 the Fund or Underlying Fund
previously has written. If a 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 Fund or Underlying Fund
delivers the underlying security or currency upon exercise. In addition, upon
the exercise of a call option by the holder thereof, a 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 a Fund or an
Underlying Fund will cause the underlying value of portfolio securities and/or
currencies subject to such options to exceed 25% of its total assets.
When a Fund or Underlying Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund or Underlying
Fund is included in the liability section of its statement of assets and
liabilities as a deferred credit. The amount of the deferred credit will be
subsequently marked-to-market to reflect the current value of the option
written. The current value of the traded option is the last sale price or, in
the absence of a sale, the average of the closing bid and asked prices. If an
option expires on the stipulated expiration date, or if a Fund or Underlying
Fund enters into a closing purchase transaction, it will realize a gain (or a
loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the deferred credit related to such option
will be eliminated. If an option is exercised, the Fund or Underlying Fund may
deliver the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received
and the Fund or Underlying Fund will realize a gain or loss.
<PAGE>
The Regional Equity Fund, the Equity Income Fund and the Select Equity Fund may
write only covered call options. This means that these Funds will only write a
call option on a security which it already owns. Such options must be listed on
a national securities exchange and issued by the Options Clearing Corporation.
The purpose of writing covered call options is to generate additional premium
income for these Funds. This premium income will serve to enhance the Fund's
total return and will reduce the effect of any price decline of the security
involved in the option. Covered call options will generally be written on
securities which are not expected to make any major price moves in the near
future but which, over the long term, are deemed to be attractive investments
for the Fund. Under normal conditions, it is not expected that the Regional
Equity Fund or the Equity Income Fund will cause the underlying value of
portfolio securities and/or currencies subject to such options to exceed 25% of
its total assets.
Once the decision to write a call option has been made, AmSouth, Rockhaven or
OakBrook, in determining whether a particular call option should be written on a
particular security, will consider the reasonableness of the anticipated premium
and the likelihood that a liquid secondary market will exist for those options.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security from being called, or
to permit the sale of the underlying security. Furthermore, effecting a closing
transaction will permit a Fund to write another call option on the underlying
security with either a different exercise price or expiration date or both. If a
Fund desires to sell a particular security from its portfolio on which it has
written a call option, it will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security. There is, of course, no assurance
that the Fund will be able to effect such closing transactions at a favorable
price. If a Fund cannot enter into such a transaction, it may be required to
hold a security that it might otherwise have sold, in which case it would
continue to be at market risk on the security. This could result in higher
transaction costs. A Fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by the Regional Equity Fund and the Equity Income Fund will
normally have expiration dates of less than nine months from the date written.
The exercise price of the options may be below, equal to, or above the current
market values of the underlying securities at the time the options are written.
From time to time, a Fund may purchase an underlying security for delivery in
accordance with an exercise notice of a call option assigned to it, rather than
delivering such security from its portfolio. In such cases, additional costs
will be incurred. A Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by a Fund.
The Select Equity Fund may purchase put options from time to time. A put is a
right to sell a specified security (or securities) within a specified period of
time at a specified exercise price. Puts may be acquired by the Fund to
facilitate the liquidity of the portfolio assets. Puts may also be used to
facilitate the reinvestment of assets at a rate of return more favorable than
that of the underlying security. The Fund may sell, transfer, or assign a put
only in conjunction with the sale, transfer, or assignment of the underlying
security or securities. The amount payable to the Fund upon its exercise of a
"put" is normally (i) the Fund's acquisition cost of the securities subject to
the put (excluding any accrued interest which the Fund paid on the acquisition),
less any amortized market premium or plus any accreted market or original issue
discount during the period the Fund owned the securities, plus (ii) all interest
accrued on the securities since the last interest payment date during that
period. The Fund will generally acquire puts only where the puts are available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for puts either separately in cash or
by paying higher price for portfolio securities which are acquired subject to
the puts (thus reducing the yield to maturity otherwise available for the same
securities). The Fund intends to enter into puts only with dealers, banks, and
broker-dealers which, in the opinion of OakBrook, present minimal credit risks.
<PAGE>
The BB&T International Equity Fund also may purchase index put and call options
and write covered 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.
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. The
BB&T International Equity Fund will segregate assets or otherwise cover index
options that would require it to pay cash upon exercise.
When-Issued and Delayed-Delivery Securities. The Growth and Income Fund, the
Regional Equity Fund, the Equity Income Fund, the Select Equity 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). In addition, these Funds
and the BB&T Small Company Growth Fund and BB&T International Equity Fund may
sell securities on a "forward commitment" basis. The BB&T International Equity
Fund also may purchase securities on a "forward commitment" basis. The Funds and
Underlying Funds 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 involve a risk that the yield obtained in the transaction will be
less than that available in the market when delivery takes place. The Funds and
Underlying Funds will not pay for such securities or start earning interest on
them until they are received. In when-issued and delayed-delivery transactions,
the Fund relies on the seller to complete the transaction; the seller's failure
to do so may cause the Fund to miss a price or yield considered to be
advantageous.
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, a 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 a 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, a Fund's 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.
<PAGE>
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 a Fund or Underlying Fund incurring a loss or
missing the opportunity to obtain a price considered to be advantageous.
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. The Growth and Income
Fund, the Regional Equity Fund, the Equity Income 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 a 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' Prospectuses and this
SAI, represent pools of mortgage loans assembled for sale to investors by
various governmental agencies such as GNMA and government-related organizations
such as FNMA and 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.
<PAGE>
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.
The Growth and Income Fund, the Regional Equity Fund, the Select Equity Fund,
the Equity Income Fund, and each Underlying Fund (except the BB&T U.S. Treasury
Fund and the BB&T International Equity Fund) may invest in Collateralized
Mortgage Obligation ("CMOs"). 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 Underlying Fund may fail to fully recoup its initial investment in these
securities even if the security is rated in the highest rating category.
<PAGE>
Like mortgages underlying mortgage-backed securities, automobile sales contracts
or credit card receivables underlying asset-backed securities are subject to
prepayment, which may reduce the overall return to certificate holders.
Nevertheless, principal prepayment rates tend not to vary much with interest
rates, and the short-term nature of the underlying car loans or other
receivables tends to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in prepayment on the certificates
if the full amounts due on underlying sales contracts or receivables are not
realized because of unanticipated legal or administrative costs of enforcing the
contracts or because of depreciation or damage to the collateral (usually
automobiles) securing certain contracts, or other factors. In certain market
conditions, asset-backed securities may experience volatile fluctuations in
value and periods of illiquidity. If consistent with its investment objective
and policies, a Fund may invest in other asset-backed securities that may be
developed in the future.
Real Estate Investment Trusts. The Equity Income Fund, Regional Equity Fund, and
Select Equity may invest in real estate investment trusts. Real estate
investment trusts are sensitive to factors such as changes in real estate values
and property taxes, interest rates, cash flow of underlying real estate assets,
overbuilding, and the management skill and creditworthiness of the issuer. Real
estate may also be affected by tax and regulatory requirements, such as those
relating to the environment.
Restricted Securities. "Section 4(2) securities" are securities which are issued
in reliance on the "private placement" exemption from registration which is
afforded by Section 4(2) of the Securities Act of 1933 (the "1933 Act"). The
BB&T U.S. Treasury Fund will not purchase Section 4(2) securities which have not
been determined to be liquid in excess of 10% of its net assets. The Growth and
Income Fund, the Regional Equity Fund, the Equity Income Fund, the Select Equity
Fund and the Underlying BB&T Funds (other than the BB&T U.S. Treasury Fund) will
not purchase section 4(2) securities which have not been determined to be liquid
in excess of 15% of its net assets. 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 or Underlying Funds which 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. BB&T, AmSouth,
Rockhaven, OakBrook 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, including those 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.
<PAGE>
BB&T, AmSouth, Rockhaven, OakBrook or any other sub-adviser may deem Section
4(2) securities liquid if it believes that, based on the trading markets for
such security, such security can be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Fund or
Underlying Fund has valued the security. In making such determination, the
following factors, among others, may be deemed relevant: (i) the credit quality
of the issuer; (ii) the frequency of trades and quotes for the security; (iii)
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (iv) dealer undertakings to make a market in the
security; and (v) the nature of the security and the nature of market-place
trades.
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.
Lending of Portfolio Securities. In order to generate additional income the
Funds (except the Capital Manager Fund) and Underlying Funds may, from time to
time, lend portfolio securities to broker-dealers, banks or institutional
borrowers of securities. The Funds and Underlying 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 the Funds and Underlying Funds
do not have the right to vote securities on loan, each 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, it could experience delays in recovering its securities
and possible capital losses. The Funds and 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 a Fund or the BB&T International Equity Fund to loan up to 33 1/3%
of the value of its total assets, and the remaining Underlying Funds to lend
only up to 30% of each such Underlying Fund's assets.
Convertible Securities. The Funds (other than the Capital Manager Fund) and many
of the Underlying Funds may invest in convertible securities. Convertible
securities are fixed income securities that may be exchanged or converted into a
predetermined number of the issuer's underlying common stock at the option of
the holder during a specified time period. Convertible securities may take the
form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features of
several of these securities. The Equity Income Fund may invest in convertible
securities that are rated "BB" by S&P and "Ba" by Moody's, or lower, at the time
of investment, or if unrated, are of comparable quality. The other Funds and
Underlying Funds will invest in convertible securities that are rated "BBB" or
"Baa" or higher.
<PAGE>
Securities related "BB" or "Ba" or lower either have speculative characteristics
or are speculative with respect to capacity to pay interest and repay principal
in accordance with the terms of the obligations. There is no lower limit with
respect to rating categories for convertible securities in which the Fund may
invest. Corporate debt obligations are "investment grade" if they are rated
"BBB" or higher by S&P or "Baa" or higher by Moody's or, if unrated, are
determined to be of comparable quality. Debt obligations that are not determined
to be investment grade are high yield, high risk bonds, typically subject to
greater market fluctuations and greater risk of loss of income and principal due
to an issuer's default. To a greater extent than investment grade securities,
lower rated securities tend to reflect short-term corporate, economic and market
developments, as well as investor perceptions or the issuer's credit quality.
Because investments in lower rated securities involve greater investment risk,
achievement of the Equity Income Fund's investment objective may be more
dependent on Rockhaven's credit analysis than would be the case if the Fund were
investing in higher rated securities. High yield securities may be more
susceptible to real or perceived adverse economic and competitive industry
conditions than investment grade securities. The market prices of debt
securities also generally fluctuate with changes in interest rates so that the
Equity Income Fund's net asset value can be expected to decrease as long-term
interest rates rise and to increase as long-term rates fall. In addition, the
secondary trading market for high yield securities may be less liquid than the
market for higher grade securities. In addition, lower rated securities may be
more difficult to dispose of or to value than high-rated, lower-yielding
securities. Rockhaven attempts to reduce the risks described above through
diversification of the Equity Income Fund's portfolio and by credit analysis of
each issuer as well as by monitoring broad economic trends and corporate and
legislative developments.
Convertible bonds and convertible preferred stocks are fixed income securities
that generally retain the investment characteristics of fixed income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock.
When owned as part of a unit along with warrants, which are options to buy the
common stock, they function as convertible bonds, except that the warrants
generally will expire before the bond's maturity. Convertible securities are
senior to equity securities, and, therefore, have a claim to assets of the
corporation prior to the holders of common stock in the case of liquidation.
However, convertible securities are generally subordinated to similar
non-convertible securities of the same company. The interest income and
dividends from convertible bonds and preferred stocks provide a stream of income
with generally higher yields than common stocks, but lower than non-convertible
securities of similar quality.
A Fund will exchange or convert the convertible securities held in its portfolio
into shares of the underlying common stock in instances in which, in the opinion
of the adviser or sub-adviser, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, a Fund will hold or trade the convertible securities. In selecting
convertible securities for the Fund, the adviser or sub-adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying equity security for
capital appreciation. In evaluating these matters with respect to a particular
convertible security, the adviser or sub-adviser may consider numerous factors,
including the economic and political outlook, the value of the security relative
to other investment alternatives, trends in the determinants of the issuer's
profits, and the issuer's management capability and practices.
As with all fixed income securities, the market values of convertible securities
tend to increase when interest rates decline and, conversely, tend to decline
when interest rates increase.
<PAGE>
Medium-Grade Debt Securities. The Regional Equity Fund and the Equity Income
Fund each may invest up to 10% of its total assets in debt securities (other
than convertible securities, which are discussed above), which are within the
fourth highest rating group assigned by an NRSRO (e.g., including securities
rated BBB by S&P or Baa by Moody's ) or, if not rated, are determined to be of
comparable quality ("Medium-Grade Securities").
As with other fixed-income securities, Medium-Grade Securities are subject to
credit risk and market risk. Market risk relates to changes in a security's
value as a result of changes in interest rates. Credit risk relates to the
ability of the issuer to make payments of principal and interest. Medium-Grade
Securities are considered by Moody's to have speculative characteristics.
Medium-Grade Securities are generally subject to greater credit risk than
comparable higher-rated securities because issuers are more vulnerable to
economic downturns, higher interest rates or adverse issuer-specific
developments. In addition, the prices of Medium-Grade Securities are generally
subject to greater market risk and therefore react more sharply to changes in
interest rates. The value and liquidity of Medium-Grade Securities may be
diminished by adverse publicity and investor perceptions.
Because certain Medium-Grade Securities are traded only in markets where the
number of potential purchasers and sellers, if any, is limited, the ability of a
Fund to sell such securities at their fair market value either to meet
redemption requests or to respond to changes in the financial markets may be
limited.
Particular types of Medium-Grade Securities may present special concerns. The
prices of payment-in-kind or zero-coupon securities may react more strongly to
changes in interest rates than the prices of other Medium-Grade Securities. Some
Medium-Grade Securities in which a Fund 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 a Fund 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, AmSouth, Rockhaven and OakBrook conduct their own
independent credit analysis of Medium-Grade Securities.
Should subsequent events cause the rating of a debt security purchased by a Fund
to fall below BBB or Baa, as the case may be, its adviser or sub-adviser will
consider such an event in determining whether the Fund should continue to hold
that security. In no event, however, would a Fund be required to liquidate any
such portfolio security where the Fund would suffer a loss on the sale of such
security.
<PAGE>
High Yield Securities. The Equity Income Fund may invest in high yield
convertible securities. High yield securities are securities that are rated
below investment grade by an NRSRO (e.g., "BB" or lower by S&P and "Ba" or lower
by Moody's). Other terms used to describe such securities include "lower rated
bonds," "non-investment grade bonds" and "junk bonds." Generally, lower rated
securities provide a higher yield than higher rated securities of similar
maturity, but are subject to a greater degree of risk with respect to the
ability of the issuer to meet its principal and interest obligations. Issuers of
high yield securities may not be as strong financially as those issuing higher
rated securities. The securities are regarded as predominantly speculative. The
market value of high yield securities may fluctuate more than the market value
of higher rated securities, since high yield securities tend to reflect
short-term corporate and market developments to a greater extent than higher
rated securities, which fluctuate primarily in response to the general level of
interest rates, assuming that there has been no change in the fundamental
interest rates, assuming that there has been no change in the fundamental
quality of such securities. The market prices of fixed income securities
generally fall when interest rates rise. Conversely, the market prices of fixed
income securities generally rise when interest rates fall.
Additional risks of high yield securities include limited liquidity and
secondary market support. As a result, the prices of high yield securities may
decline rapidly in the event that a significant number of holders decide to
sell. Changes in expectations regarding an individual issuer, an industry or
high yield securities generally could reduce market liquidity for such
securities and make their sale by the Equity Income Fund more difficult, at
least in the absence of price concessions. Reduced liquidity also could
adversely affect the Equity Income Fund's ability to accurately value high yield
securities. Issuers of high yield securities also are more vulnerable to real or
perceived economic changes (for instance, an economic downturn or prolonged
period of rising interest rates), political changes or adverse developments
specific to the issuer. Adverse economic, political or other developments may
impair the issuer's ability to service principal and interest obligations, to
meet projected business goals and to obtain additional financing, particularly
if the issuer is highly leveraged. In the event of a default, the Equity Income
Fund would experience a reduction of its income and could expect a decline in
the market value of the defaulted securities.
Repurchase Agreements. Securities held by the Growth and Income Fund, the
Regional Equity Fund, the Equity Income Fund, the Select Equity Fund and the
Underlying Funds 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 BB&T, AmSouth, Rockhaven or OakBrook 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, 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 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.
<PAGE>
Reverse Repurchase Agreements and Dollar Roll Agreements. The Funds and
Underlying Funds may also enter into reverse repurchase agreements and 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 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 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, the Select Equity Fund, the BB&T
Small Company Growth Fund, and the BB&T International Equity Fund may 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
is 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. A Fund or Underlying Fund 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. This investment technique is
designed primarily to hedge against anticipated future changes in market
conditions or foreign exchange rates which otherwise might adversely affect the
value of securities which a Fund or Underlying Fund holds or intends to
purchase. For example, when interest rates are expected to rise or market values
of portfolio securities are expected to fall, a Fund or an Underlying Fund can
seek through the sale of futures contracts to offset a decline in the value of
its portfolio securities. When interest rates are expected to fall or market
values are expected to rise, a Fund or Underlying Fund, through the purchase of
such contracts, can attempt to secure better rates or prices than might later be
available in the market when it effects anticipated purchases.
The acquisition of put and call options on futures contracts will, respectively,
give a Fund or an Underlying Fund the right (but not the obligation), for a
specified price, to sell or to purchase the underlying futures contract, upon
exercise of the option, at any time during the option period.
The value of a Fund's or Underlying Fund's contracts may equal or exceed 100% of
its total assets, although it will not purchase or sell a futures contract
unless immediately following such sale or purchase 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 the its net assets. Futures transactions will be
limited to the extent necessary to maintain the qualification of a Fund or
Underlying Fund as a regulated investment company.
<PAGE>
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 a Fund or Underlying Fund had not entered into any
futures transactions. In addition, the value of a Fund's or Underlying 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 or Underlying 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.
Foreign Currency Transactions. The value of the assets of the Equity Income
Fund, the Regional Equity Fund, the Select Equity Fund, and 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 such Funds (except the Select Equity Fund) and
Underlying Fund may incur costs in connection with conversions between various
currencies. The Funds and the BB&T International Equity Fund will conduct
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
forward contracts to purchase or sell foreign currencies. A forward foreign
currency exchange contract ("forward currency contract") involves an obligation
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These forward currency contracts are
traded directly between currency traders (usually large commercial banks) and
their customers. The Funds and the BB&T International Equity Fund 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, the Funds or the BB&T International Equity 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. The Funds (except the Select
Equity Fund) and BB&T International Equity Fund may also hedge foreign currency
exchange rate risk by engaging in a currency financial futures and options
transactions, which are described below. The forecasting of short-term currency
market movements is extremely difficult and whether such a short-term heading
strategy will be successful is highly uncertain.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration of a forward currency contract. Accordingly, it may
be necessary for a Fund or the BB&T International Equity Fund to purchase
additional currency on the spot market if the market value of the security is
less than the amount of foreign currency such Fund or 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 Fund or Underlying Fund is obligated
to deliver.
<PAGE>
If a Fund or the BB&T International Equity Fund retains the portfolio security
and engages in an offsetting transaction, it will incur a gain or a loss to the
extent that there has been movement in forward currency contract prices. If a
Fund or the BB&T International Equity Fund engages in an offsetting transaction,
it may subsequently enter into a new forward currency contract to sell the
foreign currency. Although such contracts tend to minimize the risk of loss due
to a decline in the value of the hedged currency, they also tend to limit any
potential gain which might result should the value of such currency increase.
The Funds and BB&T International Equity Fund 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.
The BB&T International Equity Fund does not intend to enter into such forward
currency contracts if it would have more than 10% of the value of its total
assets committed to such currency contracts on a regular or continuous basis.
This Underlying Fund also will not enter into such forward currency 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 its securities or other
assets denominated in that currency. The BB&T International Equity 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 currency
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 the Underlying Fund's
commitments with respect to such contracts. The BB&T International Equity Fund
generally does not enter into a forward contract with a term longer than one
year.
Foreign Currency Options. A foreign currency option provides the Equity Income
Fund, the Regional Equity Fund, or the BB&T International Equity Fund, as the
option buyer, with the right to buy or sell a stated amount of foreign currency
at the exercise price at a specified date or during the option period. A call
option gives its owner the right, but not the obligation, to buy the currency,
while a put option gives its owner the right, but not the obligation, to sell
the currency. The option seller (writer) is obligated to fulfill the terms of
the option sold if it is exercised. However, either seller or buyer may close
its position during the option period in the secondary market for such options
any time prior to expiration.
A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect a Fund or Underlying Fund against an adverse
movement in the value of a foreign currency, it does not limit the gain which
might result from a favorable movement in the value of such currency. For
example, if a Fund or Underlying Fund were holding securities denominated in an
appreciating foreign currency and had purchased a foreign currency put to hedge
against a decline in the value of the currency, it would not have to exercise
its put. Similarly, if a Fund or Underlying Fund has entered into a contract to
purchase a security denominated in a foreign currency and had purchased a
foreign currency call to hedge against a rise in the value of the currency but
instead the currency had depreciated in value between the date of purchase and
the settlement date, such Fund or Underlying Fund would not have to exercise its
call but could acquire in the spot market the amount of foreign currency needed
for settlement.
<PAGE>
Foreign Currency Futures Transactions. As part of its financial futures
transactions, the Equity Income Fund, the Regional Equity 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 or Underlying Fund plus
premiums paid by it for open options on futures would exceed 5% of such Fund's
or Underlying 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 or Underlying Fund holds or
intends to purchase. When futures contracts or options thereon are purchased to
protect against a price increase on securities intended to be purchased later,
it is anticipated that at least 25% of such intended purchases will be
completed. When other futures contracts or options thereon are purchased, the
underlying value of such contracts will at all times not exceed the sum of: (1)
accrued profit on such contracts held by the broker; (2) cash or high quality
money market instruments set aside in an identifiable manner; and (3) cash
proceeds from investments due in 30 days.
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).
<PAGE>
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 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) 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. This investment
restriction does not apply to the Select Equity Fund. In addition, there is no
limit to the percentage of assets that the Capital Manager Fund may invest in
any investment company;
3. Borrow money or issue senior securities, except that a Fund may
borrow from banks or brokers, in amounts up to 10% of the value of its total
assets at the time of such borrowing. A Fund will not purchase securities while
its borrowings exceed 5% of its total assets;
4. Make loans, except that a Fund may purchase or hold debt instruments
and lend portfolio securities (in an amount not to exceed one-third of its total
assets), in accordance with its investment objective and policies, make time
deposits with financial institutions and enter into repurchase agreements;
5. Underwrite the securities issued by other persons, except to the
extent that a Fund may be deemed to be an underwriter under certain securities
laws in the disposition of "restricted securities;"
6. Purchase or sell commodities or commodities contracts, except to the
extent disclosed in the current Prospectus of the Fund; and
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).
<PAGE>
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 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% 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 Capital Manager Fund, this Fund will
concentrate more than 25% of its total assets in the investment company
industry. However, no Underlying Fund in which such Fund invests will
concentrate more than 25% of its total assets in any one industry.
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 the Capital Manager Fund is expected to be low,
as such Fund will purchase or sell shares of the Underlying Funds, to (i)
accommodate purchases and sales of such Fund's Shares, and (ii) change the
percentage of its assets invested in each Underlying Fund in which it invests in
response to market conditions. The Growth and Income Fund, the Regional Equity
Fund, the Equity Income Fund and the Select Equity 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 Underlying Fund's Prospectus.
<PAGE>
The portfolio turnover rate for each of the Funds is calculated by dividing the
lesser of a Fund's purchases or sales of portfolio securities for the year by
the monthly average value of the securities. The Securities and Exchange
Commission requires that the calculation exclude all securities whose remaining
maturities at the time of acquisition are one year or less.
NET ASSET VALUE
The net asset value of each Fund is determined and the Shares of each Fund are
priced as of the Valuation Times on each Business Day of the Trust (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 a day on which no
Shares of the Fund are tendered for redemption and no order to purchase any
Shares is received). A "Business Day" is a day on which the New York Stock
Exchange, Inc. ("NYSE") is open for trading. Currently, the NYSE is closed on
the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and
Christmas.
Valuation of the 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. Shares of investment companies are valued on the basis
of their net asset values, subject to any applicable sales charge. 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. The public offering price of Shares of the Funds is their net asset
value per Share.
The Trust may suspend the right of redemption or postpone the date of payment
for Shares during any period when (a) trading on the NYSE is restricted by
applicable rules and regulations of the Securities and Exchange Commission, (b)
the NYSE is closed for other than customary weekend and holiday closings, (c)
the Securities and Exchange Commission has by order permitted such suspension,
or (d) an emergency exists as a result of which (i) disposal by the Trust of
securities owned by it is not reasonably practical or (ii) it is not reasonably
practical for the Trust to determine the fair market value of its net assets.
<PAGE>
Shares may be redeemed without charge on any day that net asset value is
calculated. 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.
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.
<PAGE>
The names of the Trustees, their addresses, ages, and principal occupations
during the past five years are set forth below:
<TABLE>
<S> <C>
Name, Address, and Age Principal Occupation During Past 5 Years
- ---------------------- ----------------------------------------
James H. Woodward Chancellor, University of North Carolina at Charlotte.
University of North Carolina
at Charlotte
Charlotte, NC 28223
Age: 59
Michael Van Buskirk Chief Executive Officer, Ohio Bankers Association
37 West Broad Street (industry trade association).
Suite 1001
Columbus, OH 43215
Age: 52
Walter B. Grimm* Employee of BISYS Fund Services (6/92-present).
3435 Stelzer Road
Columbus, Oh 43219
Age: 52
* 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 such Trustee $500 for each special meeting
of the Board of Trustees attended in telephone, and $250 for each special
meeting of the Board of Trustees attended by telephone. For the fiscal year
ended December 31, 1998, the Trust paid the following compensation to the
Trustees of the Trust:
Aggregate Compensation Total Compensation from
Name from Trust* Trust and Fund Complex**
James H. Woodward $4,000 $ 15,000
Michael Van Buskirk $4,000 $ 4,000
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 consisted of the Trust, the Tax-Free Trust of Oregon, The
BB&T Mutual Funds Group and AmSouth Mutual Funds.
<PAGE>
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):
Position(s) Held Principal Occupation
Name and Address With the Trust During Past 5 Years
- ---------------- ---------------- -------------------
Walter Grimm President and Chairman of the Employee of BISYS Fund Services
Age: 52 Board (6/92-present).
Frank Deutchki Vice President Employee of BISYS Fund Services
Age: 45 (4/96 - present); Vice President,
Audit Director at Mutual Funds Services
Company, a subsidiary of United States Trust
Services Company of New York (2/89-3/96).
Gregory Maddox Vice President and Assistant Employee of BISYS Fund Services
Columbia Square Secretary (4/91 - present).
Suite 500
1230 Columbia Street
San Diego, CA 92101
Age: 29
Charles L. Booth Vice President and Assistant Employee of BISYS Fund Services
Age: 39 Secretary (1988 - present).
Alaina Metz Secretary Employee of BISYS Fund Services
Age: 31 (6/95 - present); Supervisor,
Mutual Fund Legal Department,
Alliance Capital Management (5/89
- 6/95).
Gary Tenkman Treasurer Employee of BISYS Fund Services
Age: 28 (4/98 - present); Audit Manager
Ernst & Young LLP (1990-4/98)
<PAGE>
Nimish Bhatt Principal Financial and Employee of BISYS Fund Services
Age: 35 Accounting Officer and Comptroller (7/96 - present); Assistant Vice
President, Evergreen Funds/First Union Bank
(1995 to 7/96); Senior Tax Consultant, Price
Waterhouse, LLP (1990-12/94).
</TABLE>
The officers of the Trust receive no compensation directly from the Trust for
performing the duties of their offices. BISYS Fund Services Ohio, Inc. receives
fees from the Trust for providing certain administration, fund accounting and
transfer agency services.
As of April 1, 1999, the Trustees and officers of the Trust, as a group, owned
Variable Contracts that entitled them to give voting instructions with respect
to 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 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
BB&T Corporation, a bank holding company that is a North Carolina corporation,
headquartered in Winston-Salem, North Carolina.
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Funds' investment objectives and restrictions, investment
advisory services are provided to the Regional Equity Fund, the Equity Income
Fund, and the Select Equity Fund by AmSouth, 1901 Sixth Avenue North,
Birmingham, AL 35203, pursuant to an Investment Advisory Agreement dated
September 16, 1997 (the "AmSouth Investment Advisory Agreement"). AmSouth is the
principal bank affiliate of AmSouth Bancorporation, one of the largest banking
institutions headquartered in the mid-south region.
<PAGE>
Under the Investment Advisory Agreements, BB&T and AmSouth (the "Investment
Advisers") have agreed to provide, either directly or through one or more
sub-advisers, investment advisory services for each of the Funds as described in
the Prospectus. For the services provided and expenses assumed pursuant to the
BB&T Investment Advisory Agreement, each of the following Funds pays BB&T a fee,
computed daily and paid monthly, at the following annual rates, calculated as a
percentage of the average daily net assets of such Fund: 0.74% for the Growth
and Income Fund, and 0.25% for the Capital Manager Fund. For the period from
June 3, 1997 (commencement of operations) through December 31, 1997, the Growth
and Income Fund incurred investment advisory fees equal to $65,023, of which
$33,638 was waived or reimbursed by BB&T. For the fiscal year ended December 31,
1998, the Growth and Income Fund incurred investment advisory fees equal to
$285,972, of which $73,716 was waived or reimbursed by BB&T. For the services
provided and expenses assumed pursuant to the AmSouth Investment Advisory
Agreement, each of the Regional Equity Fund and the Equity Income Fund pays
AmSouth a fee, computed daily and paid monthly, at the annual rate of 0.60%,
calculated as a percentage of the average daily net assets of such Fund. For the
period from October 23, 1997 (commencement of operations) through December 31,
1997, the Equity Income Fund incurred investment advisory fees equal to $1,234,
of which $1,234 was waived or reimbursed by AmSouth. For the fiscal year ended
December 31, 1998, the Equity Income Fund incurred investment advisory fees
equal to $85,510, of which $32,185 was waived or reimbursed by AmSouth.
Unless sooner terminated, each Investment Advisory Agreement continues in effect
as to a particular Fund for an initial term of two years, and thereafter for
successive one-year periods if such continuance is approved at least annually by
the Board of Trustees or by vote of a majority of the outstanding Shares of such
Fund and a majority of the Trustees who are not parties to the Investment
Advisory Agreement or interested persons (as defined in the 1940 Act) of any
party to the Investment Advisory Agreement by votes cast in person at a meeting
called for such purpose. Each Investment Advisory Agreement is terminable as to
a particular Fund at any time on 60 days' written notice without penalty by the
Trustees, by vote of a majority of the outstanding Shares of that Fund, or by
the Investment Adviser. Each Investment Advisory Agreement also terminates
automatically in the event of any assignment, as defined in the 1940 Act.
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.
<PAGE>
Investment Sub-Advisers
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Fund's investment objective and restrictions, investment
sub-advisory services are provided to the Equity Income Fund by Rockhaven, 100
First Avenue, Suite 1050, Pittsburgh, PA 15222, pursuant to a sub-advisory
agreement with AmSouth dated September 16, 1997. Rockhaven is 50% owned by
AmSouth and 50% owned by Mr. Christopher H. Wiles. Subject to the general
supervision of the Trust's Board of Trustees and in accordance with the Fund's
investment objective and restrictions, investment sub-advisory services are
provided to the Select Equity Fund by OakBrook, 701 Warrenville Road, Suite 135,
Lisle, IL 60532, pursuant to a sub-advisory agreement with OakBrook dated May 1,
1999. OakBrook is 50% owned by AmSouth and 50% owned by Neil Wright, Janna
Sampson and Peter Jankovskis. Rockhaven and OakBrook are referred to herein as
"Sub-Advisers", and each agreement between AmSouth and a Sub-Adviser may be
referred to as a "Sub-Advisory Agreement".
Under the Sub-Advisory Agreement with Rockhaven, Rockhaven has agreed to provide
investment advisory services for the Equity Income Fund as described in the
Prospectus describing that Fund. For its services and expenses incurred under
the Sub-Advisory Agreement, Rockhaven is entitled to a fee payable by AmSouth.
The fee is computed daily and paid monthly at an annual rate of 0.36% of the
Fund's average daily net assets or such lower fee as may be agreed upon in
writing by AmSouth and Rockhaven, provided that if AmSouth waives a portion of
its investment advisory fee, the Sub-Adviser has agreed that its sub-advisory
fee shall not exceed 60% of AmSouth's net investment advisory fee. For the
period from October 23, 1997 (commencement of operations) through December 31,
1997, no sub-advisory fees were paid by AmSouth to Rockhaven. For the fiscal
year ended December 31, 1998, $21,326.61 in sub-advisory fees were paid by
AmSouth to Rockhaven.
Under the Sub-Advisory Agreement with OakBrook, OakBrook has agreed to provide
investment advisory services for the Select Equity Fund as described in the
Prospectus describing that Fund. For its services and expenses incurred under
the Sub-Advisory Agreement, OakBrook is entitled to a fee payable by AmSouth.
The fee is computed daily and paid monthly at an annual rate of 0.56% of the
Fund's average daily net assets or such lower fee as may be agreed upon in
writing by AmSouth and OakBrook.
Unless sooner terminated, a Sub-Advisory Agreement shall continue with respect
to a Fund for an initial term of two years, and thereafter for successive
one-year periods if such continuance is approved at least annually by the Board
of Trustees of the Trust or by vote of the holders of a majority of the
outstanding voting Shares of the Fund and a majority of the Trustees who are not
parties to the Sub-Advisory Agreement or interested persons (as defined in the
1940 Act) of any party to the Sub-Advisory Agreement by vote cast in person at a
meeting called for such purpose. A Sub-Advisory Agreement may be terminated with
respect to a Fund by the Trust at any time without the payment of any penalty by
the Board of Trustees of the Trust, by vote of the holders of a majority of the
outstanding voting securities of the Fund, or by the Investment Adviser or
Sub-Adviser on 60 days' written notice. A Sub-Advisory Agreement will also
immediately terminate in the event of its assignment, as defined in the 1940
Act.
<PAGE>
Each Sub-Advisory Agreement provides that the Sub-Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Investment Adviser, the Trust or the Fund in connection with the performance of
its duties, except that the Sub-Adviser shall be liable to the Investment
Adviser for a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Sub-Adviser in the
performance of its duties or from reckless disregard by it of its obligations or
duties thereunder. From time to time, advertisements, supplemental sales
literature and information furnished to present or prospective Variable Contract
Owners may include descriptions of a Sub-Adviser including, but not limited to,
(i) descriptions of a Sub-Adviser's operations; (ii) descriptions of certain
personnel and their functions; and (iii) statistics and rankings relating to a
Sub-Adviser's operations.
Portfolio Transactions
The Investment Advisers and the Sub-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
circumstances where better price and execution are available elsewhere.
Allocation of transactions, including their frequency, to various brokers and
dealers is determined by each Investment Adviser or Sub-Adviser in its best
judgment and in a manner deemed fair and reasonable to Shareholders. In
selecting a broker or dealer, each Investment Adviser or Sub-Adviser evaluates a
wide range of criteria, including the commission rate or dealer mark-up,
execution capability, the broker's/dealer's positioning and distribution
capabilities, back office efficiency, ability to handle difficult trades,
financial stability, reputation, prior performance, and, in the case of
brokerage commissions, research. The primary consideration is the broker's
ability to provide prompt execution of orders in an effective manner at the most
favorable price for the security. Subject to this consideration, brokers and
dealers who provide supplemental investment research to an Investment Adviser or
Sub-Adviser may receive orders for transactions on behalf of the Trust. Research
may include brokers' analyses of specific securities, performance and technical
statistics, and information databases. It may also include maintenance research,
which is the information that keeps an Investment Adviser or Sub-Adviser
informed concerning overall economic, market, political and legal trends. Under
some circumstances, an Investment Adviser's or Sub-Adviser's evaluation of
research and other broker selection criteria may result in one or a few brokers
executing a substantial percentage of a Fund's trades. This might occur, for
example, where a broker can provide best execution at a cost that is reasonable
in relation to its services and the broker offers unique or superior research
facilities, special knowledge or expertise in a Fund's relevant markets, or
access to proprietary information about companies that are a majority of a
Fund's investments.
<PAGE>
Research information so received is in addition to and not in lieu of services
required to be performed by each Investment Adviser or Sub-Adviser and does not
reduce the fees payable to an Investment Adviser or Sub-Adviser by the Trust.
Such information may be useful to an Investment Adviser or Sub-Adviser in
serving both the Trust and other clients and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
in carrying out its obligations to the Trust. While each Investment Adviser or
Sub-Adviser generally seeks competitive commissions, the Trust may not
necessarily pay the lowest commission available on each brokerage transaction
for reasons discussed above.
Investment decisions for each Fund are made independently from those for the
other Funds or any other portfolio, investment company or account managed by
BB&T, AmSouth, Rockhaven, or OakBrook. Any such other portfolio, investment
company or account may also invest in the same securities as the Trust. When a
purchase or sale of the same security is made at substantially the same time on
behalf of a Fund and another Fund, portfolio, investment company or account, the
transaction will be averaged as to price and available investments will be
allocated as to amount in a manner which the Investment Adviser or Sub-Adviser
believes to be equitable to the Fund(s) and such other portfolio, investment
company or account. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
by a Fund. To the extent permitted by law, the Investment Adviser or Sub-Adviser
may aggregate the securities to be sold or purchased for a Fund with those to be
sold or purchased for the other Funds or for other portfolio, investment
companies or accounts in order to obtain best execution. In making investment
recommendations for the Trust, an Investment Adviser or Sub-Adviser will not
inquire or take into consideration whether an issuer of securities proposed for
purchase or sale by the Trust is a customer of the Investment Adviser, the
Sub-Adviser or BISYS, their parents or their subsidiaries or affiliates and, in
dealing with its customers, BB&T, AmSouth, Rockhaven, OakBrook, their parents,
subsidiaries, and affiliates will not inquire or take into consideration whether
securities of such customers are held by the Trust.
For the period from June 3, 1997 (commencement of operations) through December
31, 1997, and for the fiscal year ended December 31, 1998, the Growth and Income
Fund paid aggregate brokerage commissions equal to $34,811 and $26,447.50,
respectively. For the period from October 23, 1997 (commencement of operations)
through December 31, 1997, and for the fiscal year ended December 31, 1998, the
Equity Income Fund paid aggregate brokerage commissions equal to $2,520 and
$60,004.58, respectively.
<PAGE>
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 and the Sub-Advisers believe that they possess the legal
authority to perform the services for the Funds contemplated by the
Prospectuses, this SAI, the Investment Advisory Agreements and the Sub-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 or a Sub-Adviser from continuing to serve as
investment adviser to the Funds or could restrict the services which it is
permitted to perform for the Funds. In addition, such changes, decisions or
interpretations could prevent an Investment Adviser's or Sub-Adviser's
affiliates from performing Variable Contract Owner servicing activities or from
receiving compensation therefor or could restrict the types of services such
entities are permitted to provide and the amount of compensation they are
permitted to receive for such services. Depending upon the nature of any changes
in the services which could be provided by the Investment Advisers or the
Sub-Advisers, the Board of Trustees would review the Trust's relationship with
the Investment Advisers or the Sub-Advisers and consider taking all action
necessary in the circumstances, and it is probable that the Board of Trustees
would either recommend to Shareholders the selection of another qualified
advisor or, if that course of action appeared impractical, that the Funds be
liquidated.
Administrator
BISYS Fund Services Ohio, Inc. ("BISYS Ohio" or "Administrator"), 3435 Stelzer
Road, Columbus, Ohio 43219-3035, serves as general manager and administrator to
the Trust pursuant to a Management and Administration Agreement dated March 1,
1999 (the "Administration Agreement"). Prior to that date, BISYS served as
general manager and administrator to the Trust. The Administrator assists in
supervising all operations of each Fund (other than those performed by BB&T and
AmSouth under the Investment Advisory Agreements, by Rockhaven and OakBrook
under the Sub-Advisory Agreements, by BISYS Ohio as fund accountant and dividend
disbursing agent, and by the Trust's custodians. The Administrator provides
financial services to institutional clients.
Under the Administration Agreement, the Administrator has agreed to maintain
office facilities for the Trust; furnish statistical and research data, clerical
and certain bookkeeping services and stationery and office supplies; prepare the
periodic reports to the Securities and Exchange Commission on Form N-SAR or any
replacement forms therefor; compile data for, prepare for execution by the Funds
and file certain federal and state tax returns and required tax filings; prepare
compliance filings pursuant to state laws with the advice of the Trust's
counsel; keep and maintain the financial accounts and records of the Funds,
including calculation of daily expense accruals; and generally assist in all
aspects of the Trust's operations other than those performed by the Investment
Advisers under the Investment Advisory Agreements, by the Sub-Advisers under the
Sub-Advisory Agreements, by the fund accountant and dividend disbursing agent,
and by the Trust's custodians. Under the Administration Agreement, the
Administrator may delegate all or any part of its responsibilities thereunder.
<PAGE>
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) a fee
calculated at the annual rate of 0.20% 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. 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. For the period from
June 3, 1997 (commencement of operations) through December 31, 1997, the Growth
and Income Fund incurred administration fees equal to $17,514, of which $13,138
was waived or reimbursed by BISYS. For the period from October 23, 1997
(commencement of operations) through December 31, 1997, the Equity Income Fund
incurred administration fees equal to $411, of which $411 was waived or
reimbursed by BISYS. For the fiscal year ended December 31, 1998, the Growth and
income Fund and the Equity Income Fund respectively incurred administration fees
equal to $77,290 and $55,246, of which $28,503 and $22,164, respectively, was
waived or reimbursed by BISYS.
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
Each Investment Adviser, Sub-Adviser and the Administrator bears all expenses in
connection with the performance of its services other than the cost of
securities (including brokerage commissions) purchased for the Funds. The Funds
will bear the following expenses relating to their operations: 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 custodians and fund accountant, certain insurance
premiums, costs of maintenance of the Trust's existence, costs of Shareholders'
reports and meetings, and any extraordinary expenses incurred in the Funds'
operations. 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.
<PAGE>
Distributor
BISYS serves as distributor to the Trust pursuant to the Distribution Agreement
dated June 1, 1997 (the "Distribution Agreement"). As distributor, BISYS acts as
agent for the Funds in the distribution of their Shares and, in such capacity,
advertises and pays the cost of advertising, office space and personnel involved
in such activities. BISYS serves as distributor without remuneration from the
Funds. Unless otherwise terminated, the Distribution Agreement will remain in
effect for an initial term of two years, and thereafter continues for successive
one-year periods if approved at least annually (i) by the Board of Trustees or
by the vote of a majority of the outstanding Shares of the Trust, and (ii) by
the vote of a majority of the Trustees who are not parties to the Distribution
Agreement or interested persons (as defined in the 1940 Act) of any party to the
Distribution Agreement, cast in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement may be terminated in the
event of any assignment, as defined in the 1940 Act.
Custodians, Transfer Agent and Fund Accounting Services
Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45263, serves as
custodian to the Trust with respect to the Growth and Income Fund and the
Capital Manager Fund pursuant to a Custody Agreement dated as of May 21, 1997.
AmSouth serves as custodian to the Trust with respect to the Regional Equity
Fund, the Equity Income Fund and the Select Equity Fund pursuant to a Custody
Agreement dated as of September 16, 1997. Each custodian's responsibilities
include safeguarding and controlling the Funds' cash and securities, handling
the receipt and delivery of securities, and collecting interest and dividends on
such Funds' investments.
BISYS Ohio serves as transfer agent and dividend disbursing agent for all Funds
of the Trust pursuant to an agreement dated as of March 1, 1999. Under this
agreement, BISYS Ohio 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 Ohio provides certain fund accounting services to the Trust
pursuant to a Fund Accounting Agreement dated March 1, 1999. Under the Fund
Accounting Agreement, BISYS Ohio 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.
<PAGE>
BISYS Ohio receives an annual fee of $14 per Variable Contract Owner account,
subject to certain per-Fund base fees, for its services as transfer agent and,
for its services as fund accountant, BISYS Ohio receives a fee, computed daily
and paid periodically, at an annual rate equal to the greater of 0.03% of each
Fund's average daily net assets or $30,000.
Auditors
The firm of PricewaterhouseCoopers LLP, 100 East Broad Street, Columbus, Ohio
43215, serves as independent auditors for the Trust. Its services comprise
auditing the Trust's financial statements and advising the Trust as to certain
accounting and tax matters.
Legal Counsel
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006, 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 that was organized on July 20, 1994.
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 five 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 Prospectuses 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.
<PAGE>
Each Share represents an equal proportionate interest in the Fund with other
Shares of the Fund, and is entitled to such dividends and distributions out of
the income earned on the assets belonging to the 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 portfolio except as otherwise expressly required by
law.
An annual or special meeting of Shareholders to conduct necessary business is
not required by the Trust's Declaration of Trust, the 1940 Act or other
authority except, under certain circumstances, to elect Trustees, amend the
Declaration of Trust, approve an investment advisory agreement and to satisfy
certain other requirements. To the extent that such a meeting is not required,
the Trust may elect not to have an annual or special meeting.
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.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding Shares of each Fund
affected by the matter. For purposes of determining whether the approval of a
majority of the outstanding Shares of a Fund will be required in connection with
a matter, a Fund will be deemed to be affected by a matter unless it is clear
that the interests of each Fund in the matter are identical, or that the matter
does not affect any interest of the Fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy submitted to
Shareholders would be effectively acted upon with respect to a series only if
approved by a majority of the outstanding Shares of such Fund. However, Rule
18f-2 also provides that the ratification of independent public accountants, the
approval of principal underwriting contracts, and the election of Trustees may
be effectively acted upon by Shareholders of the Trust voting without regard to
Fund.
Vote of a Majority of the Outstanding Shares
As used in the Funds' Prospectuses and the SAI, "vote of a majority of the
outstanding Shares of the Trust or the Fund" means the affirmative vote, at an
annual or special meeting of Shareholders duly called, of the lesser of (a) 67%
or more of the votes of Shareholders of the Trust or the Fund present at such
meeting at which the holders of more than 50% of the votes attributable to the
Shareholders of record of the Trust or the Fund are represented in person or by
proxy, or (b) the holders of more than 50% of the outstanding votes of
Shareholders of the Trust or the Fund.
<PAGE>
Principal Shareholders
As of March 13, 1999, Hartford Life Insurance Company Separate Account Two, 200
Hopmeadow Street, Simsbury, Connecticut 06070 owned 49.0253% and Wilbranch, P.O.
Box 2887, Wilson, North Carolina 27894 owned 50.9747% of the outstanding Shares
of the Growth and Income Fund, and thus may be deemed to be able to control the
outcome of any matter submitted to a vote of the Shareholders of that Fund. As
of the same date, Hartford Life Insurance Company Separate Account Two owned
100% of the outstanding Shares of the Equity Income Fund, and thus may be deemed
to be able to control the outcome of any matter submitted to a vote of the
Shareholders of that 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"). If a Fund so qualifies, it
generally will not be subject to federal income taxes to the extent that it
distributes on a timely basis its investment company taxable income and its net
capital gains.
<PAGE>
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) 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 (iii) 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.
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.
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 a 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.
<PAGE>
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. The Fund may, however, be able
to elect alternative tax treatment for such investments that would avoid this
unfavorable result.
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 extent distributed, be treated as
long-term capital gains in the hands of a Shareholder regardless of the length
of time the Shareholder may have held the Shares.
Hedging Transactions
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 (such as Separate
Accounts) 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.
<PAGE>
Yields of the 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 Fund will vary
from time to time depending upon market conditions, the composition of the
Fund's portfolio and operating expenses of the Trust allocated to the 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. For the 30-day period ended December 31, 1998,
the yield for each operational Fund was as follows: 1.16% for the Growth and
Income Fund; and 1.01% for the Equity Income Fund.
At any time in the future, yields may be higher or lower than past yields and
there can be no assurance that any historical results will continue.
Standardized quotations of average annual total return for Fund Shares will be
expressed in terms of the average annual compounded rate of return for a
hypothetical investment in Shares over periods of 1, 5 and 10 years or up to the
life of the Fund), calculated pursuant to the following formula: P(1 + T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of expenses (on an annual basis), and
assume that all dividends and distributions on Shares are reinvested when paid.
For the period from its commencement of operations (indicated in parentheses)
through December 31, 1998 and for the fiscal year ending on such date, average
annual total return for each operational Fund was as follows: 21.51% and 13.36%,
respectively, for the Growth and Income Fund (June 3, 1997); and 12.67% and
12.36%, respectively, for the Equity Income Fund (October 23, 1997).
Performance information for the Funds may be compared in reports and promotional
literature to the performance of other mutual funds with comparable investment
objectives and policies through various mutual fund or market indices such as
those prepared by Dow Jones & Co., Inc., S&P, Shearson Lehman Brothers, Inc. and
The Russell 2000 Index and to data prepared by Lipper Analytical Services, Inc.,
a widely recognized independent service which monitors the performance of mutual
funds, Morningstar, Inc. and the Consumer Price Index. Comparisons may also be
made to indices or data published in Money Magazine, Forbes, Barron's, The Wall
Street Journal, The Bond Buyer's Weekly 20-Bond Index, The Bond Buyer's Index,
The Bond Buyer, The New York Times, Business Week, Pensions and Investments, and
U.S.A. Today. In addition to performance information, general information about
these Funds that appears in a publication such as those mentioned above may be
included in advertisements and in reports to Variable Contract Owners.
Each Fund may also compute aggregate total return for specified periods. The
aggregate total return is determined by dividing the net asset value of this
account at the end of the specified period by the value of the initial
investment and is expressed as a percentage. Calculation of aggregate total
return assumes reinvestment of all income dividends and capital gain
distributions during the period.
<PAGE>
The Funds also may quote annual, average annual and annualized total return and
aggregate total return performance data for various periods other than those
noted above. Such data will be computed as described above, except that the
rates of return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return.
Quotations of yield or total return for the Funds will not take into account
charges and deductions against a Separate Account to which the Funds' Shares are
sold or charges and deductions against the Variable Contracts. The Funds' yield
and total return should not be compared with mutual funds that sell their shares
directly to the public since the figures provided do not reflect charges against
the Separate Accounts or the Variable Contracts. Performance information for any
Fund reflects only the performance of a hypothetical investment in the Fund
during the particular time period in which the calculations are based.
Performance information should be considered in light of the Funds' investment
objectives and policies, characteristics and quality of the portfolios and the
market conditions during the given time period, and should not be considered as
a representation of what may be achieved in the future.
Miscellaneous
Individual Trustees are elected by the Shareholders and, subject to removal by
the vote of two-thirds of the Board of Trustees, serve for a term lasting until
the next meeting of Shareholders at which Trustees are elected. Such meetings
are not required to be held at any specific intervals. Individual Trustees may
be removed by vote of the Shareholders voting not less than a majority of the
Shares then outstanding, cast in person or by proxy at any meeting called for
that purpose, or by a written declaration signed by Shareholders voting not less
than two-thirds of the Shares then outstanding. In accordance with current laws,
it is anticipated that an insurance company issuing a Variable Contract that
participates in the Funds will request voting instructions from variable
contract owners and will vote shares or other voting interests in the Separate
Account in proportion of the voting instructions received.
The 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 Prospectuses 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 Prospectuses 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 Prospectuses and this SAI.
<PAGE>
FINANCIAL STATEMENTS
Financial statements for the Trust as of December 31, 1998 for its fiscal year
then ended, including notes thereto and the reports of PricewaterhouseCoopers
LLP thereon dated February 11, 1999, are incorporated by reference from the
Trust's 1998 Annual Reports. A copy of the Reports delivered with this SAI
should be retained for future reference.
<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.
<PAGE>
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
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity. Ratings categories for securities in these groups
are as follows: MIG 1/VMIG 1 - denotes best quality, there is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing; MIG 2/VMIG 2 - denotes high
quality, margins of protection are ample although not as large as in the
preceding group; MIG 3/VMIG 3 - denotes high quality, all security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades; MIG 4/VMIG 4 - denotes adequate quality, protection commonly regarded as
required of an investment security is present, but there is specific risk; SQ -
denotes speculative quality, instruments in this category lack margins of
protection.
Description of Moody's commercial paper ratings:
Excerpts from Moody's commercial paper ratings are listed as follows:
Prime - 1 - issuers (or supporting institutions) have a superior ability for
repayment of senior short-term promissory obligations; Prime - 2 - issuers (or
supporting institutions) have a strong ability for repayment of senior
short-term promissory obligations; Prime - 3 - issuers (or supporting
institutions) have an acceptable ability for repayment of senior short-term
promissory obligations; Not Prime - issuers do not fall within any of the Prime
categories.
Description of S&P's ratings for corporate and municipal bonds:
Investment grade ratings: AAA - the highest rating assigned by S&P,
capacity to pay interest and repay principal is extremely strong; AA - has a
very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in a small degree; A - has strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories; BBB - regarded as having an adequate capacity to pay
interest and repay principal - whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
<PAGE>
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 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.
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits
(a) (1) Amended and Restated Declaration of Trust dated July 20,
1994, as amended and restated February 5, 1997(1)
(2) Establishment and Designation of Series effective
February 5, 1997(1)
(3) Redesignation of Two Existing Series and Establishment
and Designation of Two Additional Series effective
August 13, 1997(3)
(4) Establishment and Designation of Series
(b) By-Laws(1)
(c) Articles V and VI of the Registrant's Amended and Restated
Declaration of Trust define rights of holders of Shares.
(d) (1) Form of Investment Advisory Agreement between
Registrant and Branch Banking and Trust Company(2)
(2) Form of Investment Advisory Agreement between
Registrant and AmSouth Bank(4)
(3) Form of Sub-Advisory Agreement between AmSouth Bank and
Rockhaven Asset Management, LLC(4)
(4) Form of Sub-Advisory Agreement between AmSouth Bank and
OakBrook Investments, LLC
(e) Form of Distribution Agreement between Registrant and BISYS
Fund Services(3)
(f) Not Applicable
(g) (1) Form of Custodian Agreement between Registrant and
Fifth Third Bank(2)
(2) Form of Custodian Agreement between Registrant and
AmSouth Bank(4)
(h) (1) Form of Management and Administration Agreement between
Registrant and BISYS Fund Services Ohio, Inc.
C-1
<PAGE>
(2) Form of Fund Accounting Agreement between
Registrant and BISYS Fund Services Ohio, Inc.
(3) Form of Transfer Agency Agreement between
Registrant and BISYS Fund Services Ohio, Inc.
(4) Form of Fund Participation Agreement with Hartford Life
Insurance Company(4)
(5) Form of Variable Contract Owner Servicing Agreement
(i) Opinion and Consent of Counsel(2)
(j) Consent of Independent Auditors
(k) Not Applicable
(l) Purchase Agreement(2)
(m) Not Applicable
(n) Financial Data Schedule Pursuant to Rule 483 (filed as
Exhibit 27)
(o) Not Applicable
(p) (1) Secretary's Certificate Pursuant to Rule 483(b)(2)
(2) Powers of Attorney(2)
(3) Power of Attorney (Gary Tenkman)(5)
(4) Power of Attorney (Nimish Bhatt)
- ----------
* To be filed by amendment.
1 Filed with Pre-Effective Amendment No. 1 to Registrant's Registration
Statement on February 5, 1997.
2 Filed with Pre-Effective Amendment No. 2 to Registrant's Registration
Statement on May 29, 1997.
3 Filed with Post-Effective Amendment No. 1 to Registrant's Registration
Statement on July 3, 1997.
4 Filed with Post-Effective Amendment No. 2 to Registrant's Registration
Statement on September 15, 1997.
5 Filed with Post-Effective Amendment No. 5 to Registrant's Registration
Statement on January 20, 1999.
C-2
<PAGE>
Item 24. Persons Controlled by or Under Common Control with Registrant
Not applicable
Item 25. 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 26. Business and Other Connections of Investment Advisers and their
Officers and Directors
The business of each of the Investment Advisers is summarized under
"Management of the Fund" in the Prospectuses constituting Part A and
"Management of the Trust" in the Statement of Additional Information
constituting Part B of this Registration Statement, which summaries are
incorporated herein by reference.
Information relating to the business and other connections of Branch
Banking and Trust Company ("BB&T") and each director, officer or
partner of BB&T is hereby incorporated by reference to disclosure in
Item 28 of the registration statement of Form N-1A of BB&T Mutual
Funds Group (File Nos. 33-49098 and 811-06719). Information relating
to the business and other connections of AmSouth Bank, Rockhaven Asset
Management, LLC, and OakBrook Investments, LLC, and each director,
officer or partner of each, is hereby incorporated by reference to
disclosure in Item 28 of the registration statement of Form N-1A of
AmSouth Mutual Funds (File Nos. 33-21660 and 811-5551).
C-3
<PAGE>
Item 27. Principal Underwriter
(a) BISYS Fund Services ("BISYS") acts as distributor for Registrant.
BISYS also distributes the securities of The Victory Portfolios,
The AmSouth Mutual Funds, The Alpine Equity Trust, 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 Magna Funds, The Meyers Investment Trust, The
Pacific Capital Funds, The Riverfront Funds, Inc., The Summit
Investment Trust, Governor Funds, Gradison Custodian Trust,
Gradison Growth Trust, Gradison-McDonald Cash Reserves Trust,
Gradison-McDonald Municipal Custodians Trust, The Fifth Third
Funds, INTRUST Funds Trust, The Kent Funds, The HSBC Funds Trust
and HSBC Mutual Funds Trust, The Infinity Mutual Funds, Inc.,
Pegasus Funds, The Parkstone Advantage Funds, The Republic Funds
Trust and Republic Advisor Funds Trust, ESC Strategic Funds,
Inc., The Eureka Funds, Hirtle Callaghan Trust, M.S.D. & T.
Funds, Puget Sound Alternative Investment Series Trust, The
Sefton Funds Trust, The Victory Variable Insurance Funds, and
Vintage Mutual Fund, Inc., each of which is a management
investment 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 Group, Inc. Sole Shareholder None
150 Clove Road
Little Falls, NJ 07424
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-4
<PAGE>
Item 28. 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: Banking
and Trust Company, 434 Fayetteville Street Mall, Raleigh, NC 27601,
AmSouth Bank, 1901 Sixth Avenue North, Birmingham, Alabama 35203,
Rockhaven Asset Management, LLC, 100 First Avenue, Suite 1050,
Pittsburgh, PA 15222, and OakBrook Investments, LLC, 701 Warrenville
Road, Suite 135, Lisle, IL 60532 (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
distributor); and BISYS Fund Services Ohio, Inc., 3435 Stelzer Road,
Columbus, Ohio 43219-3035 (records relating to its functions as
administrator, transfer agent, and fund accountant).
Item 29. Management Services
Not Applicable
Item 30. Undertakings
(a) 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.
(b) 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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this registration statement under
Rule 485(b) under the Securities Act and has duly caused this
Post-Effective Amendment No. 6 to its Registration Statement to be signed
on its behalf by the undersigned thereunto duly authorized in the city of
Washington, D.C. on the 1st day of April, 1999.
VARIABLE INSURANCE FUNDS
By: ________*_________
Walter Grimm
President
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, Chairman April 1, 1999
Walter Grimm of the Board, and Trustee
________*__________ Principal Financial April 1, 1999
Nimish Bhatt and Accounting Officer
and Comptroller
________*__________ Trustee April 1, 1999
Michael Van Buskirk
________*________ Trustee April 1, 1999
James Woodward
* By: /s/ Keith T. Robinson
Keith T. Robinson as attorney-in-fact, pursuant to powers of attorney
filed as Exhibit 19(b) (since redesignated as Exhibit p(2)) to
Pre-Effective Amendment No.2 to the Registrant's Registration
Statement, and, with respect to Nimish Bhatt, pursuant to a power of
attorney filed as Exhibit p(4) herewith.
C-6
<PAGE>
VARIABLE INSURANCE FUNDS
INDEX TO EXHIBITS FILED
WITH POST-EFFECTIVE AMENDMENT NO. 6
Exhibit Description
<TABLE>
<S> <C>
(a)(4) (filed as EX-99.B1(a)(4)) Establishment and Designation of Series
(d)(4) (filed as EX-99.B5(d)(4)) Form of Sub-Advisory Agreement between
AmSouth Bank and OakBrook Investments, LLC
(h)(1) (filed as EX-99.B9(h)(1)) Form of Management and Administration
Agreement between Registrant and BISYS Fund
Services Ohio, Inc.
(h)(2) (filed as EX-99.B9)(h)(2)) Form of Fund Accounting Agreement between
Registrant and BISYS Fund Services Ohio, Inc.
(h)(3) (filed as EX-99.B9(h)(3)) Form of Transfer Agency Agreement between
Registrant and BISYS Fund Services Ohio, Inc.
(h)(5) (filed as EX-99.B9(h)(5)) Form of Variable Contract Owner Servicing
Agreement
(j) (filed as EX-99.B11(j)) Consent of PricewaterhouseCoopers LLP
(p)(4) (filed as EX-99.B19(p)(4)) Power of Attorney (Nimish Bhatt)
(n) (filed as EX-27) Financial Data Schedules pursuant to Rule 483
</TABLE>
VARIABLE INSURANCE FUNDS
Establishment and Designation of One Additional Series
The undersigned, being all of the Trustees of Variable Insurance Funds (the
"Trust"), a Massachusetts business trust, acting pursuant to Section 5.11 of the
Declaration of Trust dated July 20, 1994, as amended and restated February 5,
1997 (the "Declaration of Trust"), hereby divide the shares of beneficial
interest ("Shares") of the Trust into one additional separate series (the
"Fund"), of a single class, the Fund hereby created having the following special
and relative rights:
1. The Fund shall be designated as follows:
AmSouth Select Equity Fund.
2. The Fund shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the then
current prospectus and registration statement materials for the Fund under the
Securities Act of 1933. Each Share of the Fund shall be redeemable, shall
represent a pro rata beneficial interest in the assets of the Fund, and shall be
entitled to receive its pro rata share of net assets allocable to such Shares of
the Fund upon liquidation of the Fund, all as provided in the Declaration of
Trust. The proceeds of sales of Shares of the Fund, together with any income and
gain thereon, less any diminution or expenses thereof, shall irrevocably belong
to the Fund, unless otherwise required by law.
3. Each Share of the Fund shall be entitled to one vote for each dollar
of value invested (or fraction thereof in respect of a fractional Share) on
matters on which such Shares shall be entitled to vote, except to the extent
otherwise required by the Investment Company Act of 1940 or when the Trustees
have determined that the matter affects only the interest of Shareholders of
certain series or classes, in which case only the Shareholders of such series or
classes shall be entitled to vote thereon. Any matter shall be deemed to have
been effectively acted upon with respect to the Fund if acted upon as provided
in Rule 18f-2 under such Act, or any successor rule, and in the Declaration of
Trust.
4. The assets and liabilities of the Trust shall be allocated among the
Fund and all other series of the Trust (collectively, the "Funds") as set forth
in Section 5.11 of the Declaration of Trust, except as described below.
(a) Costs incurred by the Trust on behalf of the Funds in connection
with the organization and registration and public offering of
Shares of the Funds shall be amortized for the Funds over the
lesser of the life of a Fund, the two year period beginning on
the date such costs become payable, or such other period as
required by applicable law; costs incurred by the Trust on behalf
of pre-existing Funds in connection with the organization and
initial registration and public offering of Shares of those Funds
shall be amortized for the Funds over the lesser of the life of
each such Fund, the two year period beginning on the date such
costs become payable, or such other period as required by
applicable law.
(b) The Trustees may from time to time in particular cases make
specific allocations of assets or liabilities among the Funds,
and each allocation of liabilities, expenses, costs, charges and
reserves by the Trustees shall be conclusive and binding upon the
Shareholders of all Funds for all purposes.
5. The Trustees (including any successor Trustee) shall have the right
at any time and from time to time to reallocate assets and expenses or to change
the designation of any Fund now or hereafter created or to otherwise change the
special and relative rights of any such Fund, provided that such change shall
not adversely affect the rights of the Shareholders of such Fund.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this instrument as of
the date set forth below.
Date: February 25, 1999
-------------------------------
James H. Woodward, as Trustee
-------------------------------
Michael Van Buskirk, as Trustee
-------------------------------
Walter B. Grimm, as Trustee
SUB-ADVISORY AGREEMENT
AGREEMENT dated as of March 1, 1999 between AmSouth Bank, an Alabama
banking association with its principal place of business in Alabama (herein
called the "Investment Adviser") and OakBrook Investments, LLC, a Delaware
limited liability company with its principal place of business in Illinois
(herein called the "Sub-Adviser").
WHEREAS, Variable Insurance Funds (the "Trust"), a Massachusetts
business trust having its principal place of business at 3435 Stelzer Road,
Columbus, Ohio 43219-3035, is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended (the "40 Act");
WHEREAS, the Trust has retained the Investment Adviser to provide or
procure investment advisory services on behalf of certain investment portfolios
of the Trust; and
WHEREAS, the Investment Adviser wishes to retain the Sub-Adviser to
assist the Investment Adviser in providing investment advisory services in
connection with such portfolios of the Trust as now or hereafter may be
identified on Schedule A hereto as such Schedule may be amended from time to
time with the consent of the parties hereto (each herein called a "Fund").
WHEREAS, the Sub-Adviser is willing to provide such services to the
Investment Adviser upon the terms and conditions and for the compensation set
forth below.
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, and intending to be legally bound hereby, it is agreed between
the parties hereto as follows:
1. Appointment. The Investment Adviser hereby appoints the Sub-Adviser
its sub-adviser with respect to the Funds as provided for in the Investment
Advisory Agreement between the Investment Adviser and the Trust dated as of
September 16, 1997 (such Agreement or the most recent successor advisory
agreement between such parties is herein called the "Advisory Agreement"). The
Sub-Adviser accepts such appointment and agrees to render the services herein
set forth for the compensation herein provided.
2. Delivery of Documents. The Investment Adviser shall provide to the
Sub-Adviser copies of the Trust's most recent prospectus and statement of
additional information (including supplement thereto) which relate to any class
of shares representing interests in the Fund (each such prospectus and statement
of additional information as presently in effect, and as they shall from time to
time be amended and supplemented, is herein respectively called a "Prospectus"
and a "Statement of Additional Information").
<PAGE>
3. Sub-Advisory Services to the Funds.
(a) Subject to the supervision of the Investment Adviser, the
Sub-Adviser will supervise the day-to-day operations of each Fund and perform
the following services: (i) provide investment research and credit analysis
concerning the Fund's investments; (ii) conduct a continual program of
investment of the Fund's assets; (iii) place orders for all purchases and sales
of the investments made for the Fund; (iv) maintain the books and records
required in connection with its duties hereunder; and (v) keep the Investment
Adviser informed of developments materially affecting the Fund.
(b) The Sub-Adviser will use the same skill and care in
providing such services as it uses in providing services to fiduciary accounts
for which it has investment responsibilities; provided that, notwithstanding
this Paragraph 3(b), the liability of the Sub-Adviser for actions taken and
non-actions with respect to the performance of services under this Agreement
shall be subject to the limitations set forth in Paragraph 11(a) of this
Agreement.
(c) The Sub-Adviser will communicate to the Investment Adviser
and to the Trust's custodian and Fund accountants as instructed by the
Investment Adviser on each day that a purchase or sale of a security is effected
for a Fund (i) the name of the issuer, (ii) the amount of the purchase or sale,
(iii) the name of the broker or dealer, if any, through which the purchase or
sale will be affected, (iv) the CUSIP number of the security, if any, and (v)
such other information as the Investment Adviser may reasonably require for
purposes of fulfilling its obligations to the Trust under the Advisory
Agreement.
(d) The Sub-Adviser will provide the services rendered by it
hereunder in accordance with each Fund's investment objectives, policies and
restrictions as stated in the Prospectus and Statement of Additional
Information.
(e) The Sub-Adviser will maintain records of the information
set forth in Paragraph 3(c) hereof with respect to the securities transactions
of each Fund and will furnish the Trust's Board of Trustees with such periodic
and special reports as the Board may reasonably request.
(f) The Sub-Adviser will promptly review all (1) reports of
current security holdings in the Funds, (2) summary reports of transactions and
pending maturities (including the principal, cost and accrued interest on each
portfolio security in maturity date order) and (3) current cash position reports
(including cash available from portfolio sales and maturities and sales of a
Fund's shares less cash needed for redemptions and settlement of portfolio
purchases), all within a reasonable time after receipt thereof from the Trust
and will report any errors or discrepancies in such reports to the Trust or its
designee within three (3) business days after discovery of such discrepancies.
<PAGE>
4. Brokerage. The Sub-Adviser may place orders pursuant to its
investment determinations for a Fund either directly with the issuer or with any
broker or dealer. In placing orders, the Sub-Adviser will consider the
experience and skill of the firm's securities traders, as well as the firm's
financial responsibility and administrative efficiency. The Sub-Adviser will
attempt to obtain the best price and the most favorable execution of its orders.
Consistent with these obligations, the Sub-Adviser may, subject to the approval
of the Board of Trustees of the Trust, select brokers on the basis of the
research, statistical and pricing services they provide to a Fund. A commission
paid to such brokers may be higher than that which another qualified broker
would have charged for effecting the same transaction, provided that the
Sub-Adviser determines in good faith that such transaction is reasonable in
terms either of the transaction or the overall responsibility of the Sub-Adviser
to a Fund and its other clients and that the total commissions paid by the Fund
will be reasonable in relation to the benefits to the Fund over the long term.
In no instance will portfolio securities be purchased from or sold to the
Trust's principal distributor, the Investment Adviser or any affiliate thereof
(as the term "affiliate" is defined in the 40 Act), except to the extent
permitted by SEC exemptive order or by applicable law.
5. Compliance with Laws: Confidentiality: Conflicts of Interest.
(a) The Sub-Adviser agrees that it will comply with all
applicable laws, rules and regulations of all federal and state regulatory
agencies having jurisdiction over the Sub-Adviser in performance of its duties
hereunder (herein called the "Rules").
(b) The Sub-Adviser will treat confidentially and as
proprietary information of the Trust all records and information relative to the
Trust and prior, present or potential shareholders, and will not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld where the Sub-Adviser may be exposed to civil
or criminal contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities, or when so requested
by the Trust.
(c) The Sub-Adviser will maintain a policy and practice of
conducting sub-advisory services hereunder independently of the banking
operations of its affiliates. In making investment recommendations for a Fund,
the Sub-Adviser's personnel will not inquire or take into consideration whether
the issuers of securities proposed for purchase or sale for the Fund's account
are bank customers of the Sub-Adviser's affiliates unless so required by
applicable law. In dealing with their bank customers, affiliates of Sub-Adviser
will not inquire or take into consideration whether securities of those
customers are held by a Fund.
<PAGE>
6. Control by Trust's Board of Trustees. Any recommendations concerning
a Fund's investment program proposed by the Sub-Adviser to the Fund and the
Investment Adviser pursuant to this Agreement, as well as any other activities
undertaken by the Sub-Adviser on behalf of a Fund pursuant thereto shall at all
times be subject to any applicable directives of the Board of Trustees of the
Trust.
7. Services Not Exclusive. The Sub-Adviser's services hereunder are not
deemed to be exclusive, and the Sub-Adviser shall be free to render similar or
dissimilar services to others so long as its services under this Agreement are
not impaired thereby.
8. Books and Records. In compliance with the requirements of Rule 31a-3
of the Rules, and any other applicable Rule, the Sub-Adviser hereby agrees that
all records which it maintains for the Trust are the property of the Trust and
further agrees to surrender promptly to the Trust any such records upon the
Trust's request. The Sub-Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 and any other applicable Rule, the records required to
be maintained by the Sub-Adviser hereunder pursuant to Rule 31a-1 and any other
applicable Rule.
9. Expenses. During the term of this Agreement, the Sub-Adviser will
bear all expenses incurred by it in connection with the performance of its
services under this Agreement other than the cost of securities (including
brokerage commissions, if any) purchased for the Fund. Notwithstanding the
foregoing, the Sub-Adviser shall not bear expenses related to the operation of
the Trust or any Fund including, but not limited to, taxes, interest, brokerage
fees and commissions and any extraordinary expense items.
10. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, the Investment Adviser will pay the Sub-Adviser and
the Sub-Adviser will accept as full compensation therefor a fee computed daily
and paid monthly in arrears on the first business day of each month equal to the
lesser of (i) the fee at the applicable annual rates set forth on Schedule A
hereto or (ii) such fee as may from time to time be agreed upon in writing by
the Investment Adviser and the Sub-Adviser. If the fee payable to the
Sub-Adviser pursuant to this paragraph begins to accrue after the beginning of
any month or if this Agreement terminates before the end of any month, the fee
for the period from such date to the end of such month or from the beginning of
such month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs. For purposes of calculating fees, the
value of a Fund's net assets shall be computed in the manner specified in the
Prospectus and the Trust's Declaration of Trust for the computation of the value
of the Fund's net assets in connection with the determination of the net asset
value of the Fund's shares. Payment of said compensation shall be the sole
responsibility of the Investment Adviser and shall in no way be an obligation of
the Fund or of the Trust.
<PAGE>
11. Limitation of Liability.
(a) The Sub-Adviser shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Investment Adviser,
the Trust or a Fund in connection with the matters to which Agreement relates,
except that Sub-Adviser shall be liable to the Investment Adviser for a loss
resulting from a breach of fiduciary duty by Sub-Adviser under the 40 Act with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of Sub-Adviser in
the performance of its duties or from reckless disregard by it of its
obligations or duties under this Agreement. In no case shall the Sub-Adviser be
liable for actions taken or non-actions with respect to the performance of
services under this Agreement based upon specific information, instructions or
requests given or made to the Sub-Adviser by the Investment Adviser.
(b) The Investment Adviser shall be responsible at all times
for supervising the Sub-Adviser, and this Agreement does not in any way limit
the duties and responsibilities that the Investment Adviser has agreed to under
the Advisory Agreement.
12. Duration and Termination. This Agreement shall become effective as
of the date hereof provided that it shall have been approved by vote of a
majority of the outstanding voting securities of a Fund and, unless sooner
terminated as provided herein, shall continue with respect to a Fund for an
initial term of two years. Thereafter, if not terminated, this Agreement shall
continue in effect for successive 12-month periods, provided such continuance is
specifically approved at least annually (a) by the vote of a majority of those
members of the Board of Trustees of the Trust who are not parties to this
Agreement or interested persons of the Trust or any such party, cast in person
at a meeting called for the purpose of voting on such approval, and (b) by the
Board of Trustees of the Trust or by vote of a majority of the outstanding
voting securities of a Fund; provided, however, that this Agreement may be
terminated with respect to a Fund (i) by the Trust at any time without the
payment of any penalty by the Board of Trustees of the Trust, (ii) by vote of a
majority of the outstanding voting securities of the Fund, (iii) by the
Investment Adviser on 60 days' written notice to the Sub-Adviser or (iv) by the
Sub-Adviser on 60 days' written notice to the Investment Adviser. This Agreement
will also immediately terminate in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities",
"interested person" and "assignment" shall have the same meaning as such terms
have in the 40 Act.)
13. Sub-Adviser's Representations. The Sub-Adviser hereby represents
and warrants as follows:
(a) it will manage each Fund so that each Fund will qualify as
a regulated investment company under Subchapter M of the Internal Revenue Code
and will comply with the diversification requirements of Section 817(h) of the
Internal Revenue Code and the regulations issued thereunder, and any other rules
and regulations pertaining to investment vehicles underlying variable annuity or
variable life insurance policies;
<PAGE>
(b) it shall immediately notify the Trust and the Investment
Adviser upon having a reasonable basis for believing that any Fund has ceased to
comply with the diversification provisions of Section 817(h) of the Internal
Revenue Code or the regulations thereunder; and
(c) it shall be responsible for making inquiries and for
reasonably ensuring that any employee of the Sub-Adviser, any person or firm
that the Sub-Adviser has employed or with which it has associated, or any
employee thereof has not, to the best of the Sub-Adviser's knowledge, in any
material connection with the handling of Trust assets: (i) been convicted, in
the last ten (10) years, of any felony or misdemeanor arising out of conduct
involving embezzlement, fraudulent conversion, or misappropriation of funds or
securities, or involving violations of Sections 1341, 1342, or 1343 of Title 18,
United States Code; or (ii) been found by any state regulatory authority, within
the last ten (10) years, to have violated or to have acknowledged violation of
any provision of any state insurance law involving fraud, deceit, or knowing
misrepresentation; or (iii) been found by any federal or state regulatory
authorities, within the last ten (10) years, to have violated or to have
acknowledged violation of any provisions of federal or state securities laws
involving fraud, deceit or knowing misrepresentation.
14. Insurance Company Offerees. All parties acknowledge that the Trust
will offer its shares so that it may serve as an investment vehicle for variable
annuity contracts and variable life insurance policies issued by insurance
companies, as well as to qualified pension and retirement plans. The Investment
Adviser and the Sub-Adviser agree that shares of the Funds may be offered only
to the separate accounts and general accounts of insurance companies that are
approved in writing by the Sub-Adviser. The Sub-Adviser agrees that shares of
the Funds may be offered to separate accounts and the general account of
Hartford Life Insurance Company and to separate accounts and the general
accounts of any insurance companies that are affiliated with Hartford Life
Insurance Company. The Sub-Adviser and the Investment Adviser agree that the
Sub-Adviser shall be under no obligation to investigate insurance companies to
which the Trust offers or proposes to offer its shares.
15. Amendment of this Agreement. No provision of this Agreement may be
changed, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, discharge or
termination is sought.
16. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any provisions
hereof or otherwise affect their construction or effect. If any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this Agreement shall not be effected thereby.
This Agreement shall be binding upon and shall inure to the benefit of the
parties herein and their respective successors and shall be governed by
Massachusetts law.
The names "Variable Insurance Funds" and "Trustees of Variable
Insurance Funds " refer respectively to the Trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under an
Amended and Restated Declaration of Trust dated as of July 20, 1994 and amended
and restated as of February 5, 1997, to which reference is hereby made and a
copy of which is on file at the office of the Secretary of State of The
Commonwealth of Massachusetts and elsewhere as required by law, and to any and
all amendments thereto so filed or hereafter filed. The obligations of "Variable
Insurance Funds" entered into in the name or on behalf thereof by any of the
Trustees, representatives or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, shareholders or
representatives of the Trust personally, but bind only the assets of the Trust,
and all persons dealing with any series of shares of the Trust must look solely
to the assets of the Trust belonging to such series for the enforcement of any
claims against the Trust.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
(SEAL) AmSouth Bank
By: _______________________________
Title: ____________________________
(SEAL) OakBrook Investments, LLC
By: _______________________________
Title: ____________________________
<PAGE>
Dated: March 1, 1999
Schedule A
to the Subadvisory Agreement
between AmSouth Bank and
OakBrook Investments, LLC
NAME OF FUND COMPENSATION
AmSouth Select Equity Fund Annual rate of fifty-six one-hundredths of
one percent (.56%) of the average daily net
assets of such Fund; provided that if
AmSouth Bank waives some or all of its
investment advisory fee, OakBrook
Investments, LLC shall waive its fee so that
if shall receive no more than seventy
percent (70%) of the net investment advisory
fee paid to AmSouth Bank.
All fees are computed daily and paid monthly.
AmSouth Bank
By:________________________
Name:______________________
Title:_____________________
OakBrook Investments, LLC
By:________________________
Name:______________________
Title:_____________________
MANAGEMENT AND ADMINISTRATION AGREEMENT
AGREEMENT made this 1st day of March, 1999, 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. ("Administrator"), 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 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 promises 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 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.
<PAGE>
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 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.
<PAGE>
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
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; Indemnification
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. The Trust agrees to indemnify and
hold harmless Administrator, 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
Administrator'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 Administrator
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 Administrator 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, the Administrator
shall give the Trust written notice of and reasonable opportunity to defend
against said claim in its own name or in the name of Administrator. Any person,
even though also a officer, director, 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.
<PAGE>
5. Term
The term of this Agreement shall commence 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 remain in effect through an initial three-year period from the date
first written above ("Initial Term"). Thereafter, unless otherwise terminated as
provided herein, this Agreement shall be renewed automatically for successive
three-year periods ("Rollover Periods"). This Agreement may be terminated
without penalty: (i) by provision of a notice of nonrenewal in the manner set
forth below; (ii) by mutual agreement of the parties; or (iii) for "cause," as
defined below, upon the provision of 60 days advance written notice by the party
alleging cause. Written notice of nonrenewal must be provided at least 60 days
prior to the end of the Initial Term or any Rollover Period, as the case may be.
For purposes of this Agreement, "cause" shall mean: (a) a material
breach of this Agreement that has not been remedied for thirty (30) days
following written notice of such breach from the non-breaching party; (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; or (c) financial difficulties on the
part of the party to be terminated which are 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.
Notwithstanding the foregoing, after such termination for so long as
the Administrator, 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 the Administrator and unpaid by the Trust
upon such termination shall be immediately due and payable upon and
notwithstanding such termination. The Administrator shall be entitled to collect
from the Trust, in addition to the compensation described in Schedule A hereto,
the amount of all of the Administrator's cash disbursements for services in
connection with the Administrator's activities in effecting such termination,
including without limitation, the delivery to the Trust and/or its designees of
the Trust's property, records, instruments and documents.
<PAGE>
If, for any reason other than nonrenewal, mutual agreement of the
parties or "cause," as defined above, the Administrator is replaced as
administrator, or if a third party is added to perform all or a part of the
services provided by the Administrator under this Agreement (excluding any
sub-administrator appointed by the Administrator as provided in Article 1
hereof), then the Trust shall make a one-time cash payment, in consideration of
the fee structure and services to be provided under this Agreement, and not as a
penalty, to the Administrator equal to the balance due the Administrator for the
remainder of the then-current term of this Agreement, assuming for purposes of
calculation of the payment that such balance shall be based upon the average
amount of the relevant Fund(s)'s assets for the twelve months prior to the date
the Administrator is replaced or a third party is added.
In the event the Trust or a Fund is merged into another legal entity in
part or in whole pursuant to any form of business reorganization or is
liquidated in part or in whole prior to the expiration of the then-current term
of this Agreement, the parties acknowledge and agree that the liquidated damages
provision set forth above shall be applicable in those instances in which the
Administrator is not retained to provide administration services consistent with
this Agreement. The one-time cash payment referenced above shall be due and
payable on the day prior to the first day in which the Administrator is replaced
or a third party is added.
The parties further acknowledge and agree that, in the event the
Administrator is replaced, or a third party is added, as set forth above, (i) a
determination of actual damages incurred by the Administrator would be extremely
difficult, and (ii) the liquidated damages provision contained herein is
intended to adequately compensate the Administrator for damages incurred and is
not intended to constitute any form of penalty.
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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
written above.
VARIABLE INSURANCE FUNDS BISYS FUND SERVICES OHIO, INC.
By: _____________________________ By: _________________________
Title: __________________________ Title: ______________________
<PAGE>
Dated: March 1, 1999
Schedule A
to the
Management and Administration Agreement
between Variable Insurance Funds and BISYS Fund Services Ohio, Inc.
NAME OF FUND COMPENSATION*
<TABLE>
<S> <C>
BB&T Growth and Income Fund Annual rate of twenty-one hundredths of one percent (.20%)
of each Fund's average daily net assets.
BB&T Capital Manager Fund Annual rate of seven on-hundredths of one percent (0.07%)
of each Fund's average daily net assets.
AmSouth Regional Equity Fund Annual rate of twenty one-hundredths of one percent (0.20%)
AmSouth Equity Income Fund of each Fund's average daily net assets.
AmSouth Select Equity Fund
</TABLE>
- ----------------------------
*All fees are computed daily and paid periodically.
VARIABLE INSURANCE FUNDS
By:___________________________
Title:_________________________
BISYS FUND SERVICES OHIO, INC.
By:___________________________
Title:________________________
FUND ACCOUNTING AGREEMENT
AGREEMENT made this 1st day of March, 1999, 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 promises 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;
(b) Calculate the dividend and capital gain distribution,
if any;
<PAGE>
(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;
(p) Post Fund income and expense transactions to
appropriate categories;
<PAGE>
(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.
<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:
<TABLE>
<S> <C> <C>
(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.
</TABLE>
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.
<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:
<TABLE>
<S> <C> <C>
(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.
</TABLE>
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,
for an initial term of three years from the date first written above ("Initial
Term"). Thereafter, unless otherwise terminated as provided herein, this
Agreement shall be renewed automatically for successive three-year periods
("Rollover Periods"). This Agreement may be terminated without penalty: (i) by
provision of a notice of nonrenewal in the manner set forth below; (ii) by
mutual agreement of the parties; or (iii) for "cause," as defined below, upon
the provision of 60 days advance written notice by the party alleging cause.
Written notice of nonrenewal must be provided at least 60 days prior to the end
of the Initial Term or any Rollover Period, as the case may be.
For purpose of this Agreement, "cause" shall mean: (a) a
material breach of this Agreement that has not been remedied for thirty (30)
days following written notice of such breach from the non-breaching party; (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; or (c) financial difficulties on the
part of the party to be terminated which are 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.
<PAGE>
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, instruments and
documents.
If, for any reason other than nonrenewal, mutual agreement of
the parties or "cause," as defined 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
subcontractor appointed by BISYS Ohio as provided in Section 2 hereof), then the
Trust shall make a one-time cash payment, in consideration of the fee structure
and services to be provided under this Agreement, and not as a penalty, to BISYS
Ohio equal to the balance due BISYS Ohio for the remainder of the then-current
term of this Agreement, assuming for purposes of calculation of the payment that
such balance shall be based upon the average amount of the relevant Fund(s)'s
assets for the twelve months prior to the date BISYS Ohio is replaced or a third
party is added.
In the event the Trust or a Fund is merged into another legal
entity in part or in whole pursuant to any form of business reorganization or is
liquidated in part or in whole prior to the expiration of the then-current term
of this Agreement, the parties acknowledge and agree that the liquidated damages
provision set forth above shall be applicable in those instances in which BISYS
Ohio is not retained to provide fund accounting services consistent with this
Agreement. The one-time cash payment referenced above shall be due and payable
on the day prior to the first day in which BISYS Ohio is replaced or a third
party is added.
The parties further acknowledge and agree that, in the event
BISYS Ohio is replaced, or a third party is added, as set forth above, (i) a
determination of actual damages incurred by BISYS Ohio would be extremely
difficult, and (ii) the liquidated damages provision contained herein is
intended to adequately compensate BISYS Ohio for damages incurred and is not
intended to constitute any form of penalty.
<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. 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 with respect to the
Trust or based, if applicable, upon reasonable reliance on information, records,
instructions or requests with respect to the Trust 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
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.
<PAGE>
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, 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.
<PAGE>
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.
(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.
<PAGE>
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.
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.
<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:_________________________________
<PAGE>
Dated: March 1, 1999
Schedule A
to the Fund Accounting Agreement
between Variable Insurance Funds and
BISYS Fund Services Ohio, Inc.
NAME OF FUND
BB&T Growth and Income Variable Insurance Fund
BB&T Capital Manager Variable Insurance Fund
AmSouth Regional Equity Fund
AmSouth Equity Income Fund
AmSouth Select Equity Fund
VARIABLE INSURANCE FUNDS
By:_________________________
BISYS FUND SERVICES OHIO, INC.
By:____________________________
<PAGE>
Dated: March 1, 1999
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:________________________
TRANSFER AGENCY AGREEMENT
AGREEMENT made this 1st day of March, 1999, 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 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 promises 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 Schedule B hereto shall be subject to mutual agreement at the time
such amendment to Schedule B is proposed.
<PAGE>
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 (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) (the "Effective Date").
5. Term. This Agreement shall continue in effect with respect to a
Fund, unless earlier terminated by either party hereto as provided hereunder,
for an initial term of three years from the date first written above ("Initial
Term"). Thereafter, unless otherwise terminated as provided herein, this
Agreement shall be renewed automatically for successive three-year periods
("Rollover Periods"). This Agreement may be terminated without penalty: (i) by
provision of a notice of nonrenewal in the manner set forth below; (ii) by
mutual agreement of the parties; or (iii) for "cause," as defined below, upon
the provision of sixty (60) days advance written notice by the party alleging
cause. Written notice of nonrenewal must be provided at least 60 days prior to
the end of the Initial Term or any Rollover Period, as the case may be.
For purposes of this Agreement, "cause" shall mean: (a) a
material breach of this Agreement that has not been remedied for thirty (30)
days following written notice of such breach from the non-breaching party; (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; or (c) financial difficulties on the
part of the party to be terminated which are 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.
<PAGE>
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. 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 Company, in
addition to the fees and disbursements provided by Sections 2 and 3 hereof, the
amount of all of BISYS Ohio's cash disbursements 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.
If, for any reason other than nonrenewal, mutual agreement of
the parties or "cause," as defined above, BISYS Ohio is replaced as transfer
agent, 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-transfer Agent
appointed by BISYS Ohio as provided in Section 1 hereof), then the Trust shall
make a one-time cash payment, in consideration of the fee structure and services
to be provided under this Agreement, and not as a penalty, to BISYS Ohio equal
to the balance due BISYS Ohio for the remainder of the then-current term of this
Agreement, assuming for purposes of calculation of the payment that such balance
shall be based upon the average number of shareholder accounts for the relevant
Fund(s) for the twelve (12) months prior to the date BISYS Ohio is replaced or a
third party is added.
In the event the Trust or a Fund is merged into another legal
entity in part or in whole pursuant to any form of business reorganization or is
liquidated in part or in whole prior to the expiration of the then-current term
of this Agreement, the parties acknowledge and agree that the liquidated damages
provision set forth above shall be applicable in those instances in which BISYS
Ohio is not retained to provide transfer agency services consistent with this
Agreement, including the number of shareholder accounts subject to such
services. The one-time cash payment referenced above shall be due and payable on
the day prior to the first day in which BISYS Ohio is replaced or a third party
is added.
The parties further acknowledge and agree that in the event
BISYS Ohio is replaced, or a third party is added, as set forth above, (i) a
determination of actual damages incurred by BISYS Ohio would be extremely
difficult, and (ii) the liquidated damages provision contained herein is
intended to adequately compensate BISYS Ohio for damages incurred and is not
intended to constitute any form of penalty.
<PAGE>
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
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.
<PAGE>
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
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,
dealers, 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.
<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;
<PAGE>
2. Copies of resolutions of the Board of Trustees covering the
following matters:
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
the Commission pursuant to Rule 17Ad-13 under the Exchange
Act.
<PAGE>
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.
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.
<PAGE>
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.
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:_______________________________
<PAGE>
Dated: March 1, 1999
Schedule A
to the Transfer Agency Agreement
between Variable Insurance Funds and
BISYS Fund Services Ohio, Inc.
NAME OF FUND
BB&T Growth and Income Fund
BB&T Capital Manager Fund
AmSouth Regional Equity Fund
AmSouth Equity Income Fund
AmSouth Select Equity Fund
VARIABLE INSURANCE FUNDS
By:_____________________________
BISYS FUND SERVICES OHIO, INC.
By:_____________________________
<PAGE>
Dated: March 1, 1999
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.
<PAGE>
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. 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.
<PAGE>
Dated: March 1, 1999
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.
<PAGE>
Dated: March 1, 1999
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.
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
Service 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 direct or indirect investors
in each of the investment portfolios of the Trust identified in Schedule A
hereto (individually, a "Fund" and collectively, the "Funds"), including
variable contract owners with contract value allocated to the Funds, the
Trustees of the Trust have adopted a Service 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 who may from
time to time be investors in the Funds ("Customers"). 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
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.
<PAGE>
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.
2.5 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.
<PAGE>
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 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.
<PAGE>
4.3 The Participating Organization agrees that under no circumstances shall
the Trust or the Distributor be liable to the Participating
Organization or any other person under this Agreement as a result of
any action by the SEC or the NASD affecting the operation or
continuation of the Plan.
5. EXCULPATION; INDEMNIFICATION.
5.1 The Trust shall not be liable to the Participating Organization and the
Participating Organization shall not be liable to the Trust except for
acts or failures to act which constitute lack of good faith or gross
negligence and for obligations expressly assumed by either party
hereunder. Nothing contained in this Agreement is intended to operate
as a waiver by the Trust or by the Participating Organization of
compliance with any applicable federal or state law, rule, or
regulation and the rules and regulations promulgated by the NASD.
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 March 1,
2000, and thereafter will continue automatically for successive
one-year periods from that date, 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.
<PAGE>
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.
7.2 The Trust may enter into other similar agreements for the provision of
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.
<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:______________________
<PAGE>
Dated: March 1, 1999
Schedule A
to the Service Agreement
between Variable Insurance Funds
and [Participating Organization]
NAME OF FUND COMPENSATION*
Annual rate of up to twenty-five
BB&T Growth and Income Fund one hundreds of one percent (0.25%)
BB&T Capital Manager Fund of the average daily net assets of
AmSouth Regional Equity Fund each Fund's shares attributable to
AmSouth Equity Income Fund Customers of the Participating
AmSouth Select Equity Fund Organization.
- --------------------
* All fees are computed daily and paid monthly.
VARIABLE INSURANCE FUNDS [PARTICIPATING ORGANIZATION]
By: __________________________ By: _________________________
Title: _________________________ Title: _________________________
Date: _________________________ Date: _________________________
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective Amendment
No. 6 to the Registration Statement on Form N-1A (File No. 33-81800) of our
report dated February 11, 1999 on our audits of the financial statements and
financial highlights of the BB&T Growth and Income Fund and the AmSouth Equity
Income Fund, which reports are included in the Annual Report to Shareholders for
the year ended December 31, 1998, which is incorporated by reference in the
Post-Effective Amendment to the Registration Statement. We also consent to the
reference to our Firm under the captions "Financial Highlights" in the
Prospectuses for the BB&T Growth and Income Fund and the AmSouth Equity Income
Fund and under the captions "Financial Statements" and "Auditors" in the
Statement of Additional Information in this Post-Effective Amendment No. 6 to
Registration Statement on Form N-1A (File No. 33-81800).
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Columbus, Ohio
March 31, 1999
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the person whose signature
appears below constitutes and appoints Jeffrey L. Steele, 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 confirming all that said attorneys-in-fact, or
their substitute or substitutes, may do or cause to be done by virtue hereof.
/s/ Nimish S. Bhatt
---------------------
Nimish Bhatt
Date: 3/19/99
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000927290
<NAME> VARIABLE INSURANCE FUNDS
<SERIES>
<NUMBER> 001
<NAME> BB&T GROWTH AND INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 42521088
<INVESTMENTS-AT-VALUE> 49192120
<RECEIVABLES> 77778
<ASSETS-OTHER> 6244
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 49276142
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 214535
<TOTAL-LIABILITIES> 214535
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42451526
<SHARES-COMMON-STOCK> 3688258
<SHARES-COMMON-PRIOR> 2426943
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 1048
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 59903
<ACCUM-APPREC-OR-DEPREC> 6671032
<NET-ASSETS> 49061607
<DIVIDEND-INCOME> 800985
<INTEREST-INCOME> 81175
<OTHER-INCOME> 0
<EXPENSES-NET> 351516
<NET-INVESTMENT-INCOME> 530644
<REALIZED-GAINS-CURRENT> (36048)
<APPREC-INCREASE-CURRENT> 4670681
<NET-CHANGE-FROM-OPS> 5165277
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 514713
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1227333
<NUMBER-OF-SHARES-REDEEMED> 8596
<SHARES-REINVESTED> 42578
<NET-CHANGE-IN-ASSETS> 20232673
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 16979
<OVERDIST-NET-GAINS-PRIOR> 23855
<GROSS-ADVISORY-FEES> 285972
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 480478
<AVERAGE-NET-ASSETS> 38644909
<PER-SHARE-NAV-BEGIN> 11.88
<PER-SHARE-NII> 0.16
<PER-SHARE-GAIN-APPREC> 1.42
<PER-SHARE-DIVIDEND> 0.16
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.30
<EXPENSE-RATIO> 0.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000927290
<NAME> VARIABLE INSURANCE FUNDS
<SERIES>
<NUMBER> 002
<NAME> AMSOUTH EQUITY INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> DEC-31-1997
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 20345596
<INVESTMENTS-AT-VALUE> 22885652
<RECEIVABLES> 602865
<ASSETS-OTHER> 8158
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 23496674
<PAYABLE-FOR-SECURITIES> 918568
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 35370
<TOTAL-LIABILITIES> 953938
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21533905
<SHARES-COMMON-STOCK> 2001942
<SHARES-COMMON-PRIOR> 1462856
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 8707
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 1281202
<ACCUM-APPREC-OR-DEPREC> 2298740
<NET-ASSETS> 22542736
<DIVIDEND-INCOME> 402033
<INTEREST-INCOME> 64349
<OTHER-INCOME> 0
<EXPENSES-NET> 162661
<NET-INVESTMENT-INCOME> 303721
<REALIZED-GAINS-CURRENT> (1278675)
<APPREC-INCREASE-CURRENT> 2263855
<NET-CHANGE-FROM-OPS> 1288901
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 304238
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1874103
<NUMBER-OF-SHARES-REDEEMED> 134871
<SHARES-REINVESTED> 29521
<NET-CHANGE-IN-ASSETS> 20156070
<ACCUMULATED-NII-PRIOR> 517
<ACCUMULATED-GAINS-PRIOR> (2073)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 85510
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 217780
<AVERAGE-NET-ASSETS> 14251619
<PER-SHARE-NAV-BEGIN> 10.23
<PER-SHARE-NII> 0.22
<PER-SHARE-GAIN-APPREC> 1.03
<PER-SHARE-DIVIDEND> 0.22
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.26
<EXPENSE-RATIO> 1.14
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
