As filed with the Securities and Exchange Commission on April 28, 2000
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. 9 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 11 /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 May 1, 2000 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:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<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, 2000.
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TABLE OF CONTENTS
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 TAXATION
Fund Expenses 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
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RISK/RETURN SUMMARY AND FUND EXPENSES
Investment Objective
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 greatest 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*...........................[ ]%
=======
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* 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 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 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.
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.
<PAGE>
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.
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.
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 (or other agent)
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, or to
cease investment operations entirely. In such an event, 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, or in another mutual fund.
<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 December 31,
1999 of $43.4 billion and operated more than 660 banking offices and 1,300 ATM
locations in Alabama, Florida, Georgia, Louisana, Kentucky, Virginia, and
Tennessee. AmSouth has provided investment management services through its Trust
Investment Department since 1915. As of December 31, 1999, AmSouth and its
affiliates had over $9 billion in assets under 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.
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>
TAXATION
The Fund intends to diversify its investments in a manner intended to comply
with tax requirements generally applicable to mutual funds. In addition, the
Fund will 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 single
issuer are treated as one investment and each U.S. Government agency or
instrumentality is treated as a separate issuer. Any security issued,
guaranteed, or insured (to the extent so guaranteed or insured) by the U.S.
Government or an agency or instrumentality of the U.S. Government 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.
Since the shareholders of the Fund will be separate accounts, no discussion is
included here as to the federal income tax consequences at the shareholder
level. For information concerning the federal income tax consequences to
purchasers of the variable life insurance policies and variable annuity
contracts, see the prospectus for the relevant variable insurance contract. 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 nine 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 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.
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, 1999
Since
Inception
(December
Similar Fund/Benchmark 1 Year 3 Years 5 Years 10 Years 1, 1988)
- --------------------------------------------------------------------------------
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%
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* 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 and copy the SAI and other information about the Fund at
the Public Reference Room of the Securities and Exchange Commission. Investors
may call 1-202-942-8090 for more information about the Public Reference Room.
Investors can get text-only copies of information about the Fund:
o For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-0102 or by electronic request at [email protected].
o 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, 2000.
<TABLE>
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TABLE OF CONTENTS
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 TAXATION
Fund Expenses GENERAL INFORMATION
FINANCIAL HIGHLIGHTS Description of the Trust and Its Shares
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS Similar Fund Performance Information
VALUATION OF SHARES Miscellaneous
PURCHASING AND REDEEMING SHARES
</TABLE>
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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. The
portfolio manager does not currently intend to purchase convertible securities.
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 greatest 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 recently began operations, it does not have a calendar year of
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*...................................................2.70%
-----
Total Annual Fund Operating Expenses*.............................3.50%
=====
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* 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 5 Years 10 Years
$353 $1,074 $1,817 $3,774
<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, 1999. 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 the 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.
May 3, 1999 through
For a share outstanding throughout the period: December 31, 1999(a)
- --------------------------------------------- --------------------
Net Asset Value, Beginning of Period $ 10.00
Income From Investment Operations:
Net investment income 0.04
Net gains or losses on securities
realized and unrealized) (1.49)
Total from investment operations (1.45)
Less Distributions:
Dividends (from net investment income) (0.04)
Total distributions (0.04)
Net Asset Value, End of Period $ 8.51
Total Return (14.51)%(b)
Ratios/Supplementary Data:
Net assets, end of period (000's) $ 2,881
Ratio of expenses to average net assets 1.23%(c)
Ratio of net income to average net assets 0.69%(c)
Ratio of expenses to average net assets* 3.50%(c)
Portfolio turnover rate 18.21%
- -----------------------------
(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 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. 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.
<PAGE>
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.
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 (or
other agent) 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, or to
cease investment operations entirely. In such an event, 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, or in another mutual fund.
<PAGE>
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 December 31,
1999 of $43.4 billion and operated more than 660 banking offices and 1,300 ATM
locations in Alabama, Florida, Georgia, Louisiana, Kentucky, Virginia and
Tennessee. AmSouth has provided investment management services through its Trust
Investment Department since 1915. As of December 31, 1999, AmSouth and its
affiliates had over $9 billion in assets under 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. For services provided and expenses assumed
during the fiscal year ended December 31, 1999, AmSouth received an investment
advisory fee equal to 0.70% of the Fund's average daily net assets, out of which
it paid a sub-advisory fee to OakBrook equal to 0.50% of the Fund's average
daily net assets.
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.
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.
<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.
TAXATION
The Fund intends to diversify its investments in a manner intended to comply
with tax requirements generally applicable to mutual funds. In addition, the
Fund will 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 single
issuer are treated as one investment and each U.S. Government agency or
instrumentality is treated as a separate issuer. Any security issued,
guaranteed, or insured (to the extent so guaranteed or insured) by the U.S.
Government or an agency or instrumentality of the U.S. Government 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.
Since the shareholders of the Fund will be separate accounts, no discussion is
included here as to the federal income tax consequences at the shareholder
level. For information concerning the federal income tax consequences to
purchasers of the variable life insurance policies and variable annuity
contracts, see the prospectus for the relevant variable insurance contract. 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 nine 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 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 and copy the SAI and other information about the Fund at
the Public Reference Room of the Securities and Exchange Commission. Investors
may call 1-202-942-8090 for more information about the Public Reference Room.
Investors can get text-only copies of information about the Fund:
o For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-0102 or by electronic request at [email protected].
o Free from the Commission's Website at http://www.sec.gov.
Investment Company 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, 2000.
<TABLE>
<S> <C> <C>
TABLE OF CONTENTS
RISK/RETURN SUMMARY AND FUND EXPENSES MANAGEMENT OF THE FUND
Investment Objective Investment Advisor and Sub-Adviser
Principal Investment Strategies Administrator and Distributor
Principal Investment Risks Servicing Agents
Fund Performance TAXATION
Fund Expenses GENERAL INFORMATION
FINANCIAL HIGHLIGHTS Description of the Trust and Its Shares
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS Similar Fund Performance Information
VALUATION OF SHARES Prior Performance of Portfolio Manager
PURCHASING AND REDEEMING SHARES 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 greatest 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. The chart
demonstrates how the Fund's performance varies from year to year, 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.
<PAGE>
Calendar Year Total Returns*
[Bar Chart] 12.36% 25.00%
1998 1999
Best Quarter: 19.65% 12/31/99
Worst Quarter: -4.61 9/30/99
Average Annual Total Return* (for the periods ended December 31, 1999)
Since Inception
Past Year October 23, 1997
-------- ----------------
Fund 25.00% 18.14%
S&P 500(R) Index* 21.03% 23.74%
- ------------------
* Assumes reinvestment of dividends and distributions.
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*..................................................0.60%
Other Expenses*...................................................0.77%
-----
Total Annual Fund Operating Expenses*.............................1.37%
=====
- ------------------
* AmSouth currently limits its management fees to 0.51%, and other
expenses currently are being limited to 0.74%. 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 5 Years 10 Years
$139 $434 $750 $1,646
<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, 1999. 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> <C>
October 23,
Year ended 1997 through
For a share outstanding December 31, December 31,
throughout the period: 1999 1998 1997(a)
- ---------------------
Net Asset Value, Beginning of Period $ 11.26 $ 10.23 $ 10.00
Income From Investment Operations:
Net investment income 0.15 0.22 0.03
Net gains or losses on securities
(realized and unrealized) 2.64 1.03 0.23
Total from investment operations 2.79 1.25 0.26
Less Distributions:
Dividends (from net investment income) (0.16) (0.22) (0.03)
Total distributions (0.16) (0.22) (0.03)
Net Asset Value, End of Period $ 13.89 $ 11.26 $ 10.23
Total Return 25.00% 12.36% 2.27%(b)
Ratios/Supplementary Data:
Net assets, end of period (000's) $ 35,554 $ 22,543 $ 2,387
Ratio of expenses to average net assets 1.22% 1.14% 1.22%(c)
Ratio of net income to average net assets 1.31% 2.13% 2.39%(c)
Ratio of expenses to average net assets* 1.37% 1.53% 7.26%(c)
Portfolio turnover rate 110.31% 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 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.
<PAGE>
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.
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.
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 (or
other agent) 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, or to
cease investment operations entirely. In such an event, 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, or in another mutual fund.
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 December 31,
1999 of $43.4 billion and operated more than 660 banking offices and 1,300 ATM
locations in Alabama, Florida, Georgia, Louisiana, Kentucky, Virginia and
Tennessee. AmSouth has provided investment management services through its Trust
Investment Department since 1915. As of December 31, 1999, AmSouth and its
affiliates had over $9 billion in assets under 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 0.60% 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 year ended December 31, 1999, AmSouth received an investment
advisory fee equal to 0.51% of the Fund's average daily net assets, out of which
it paid a sub-advisory fee to Rockhaven equal to 0.31% 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.
<PAGE>
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.
TAXATION
The Fund intends to diversify its investments in a manner intended to comply
with tax requirements generally applicable to mutual funds. In addition, the
Fund will 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 single
issuer are treated as one investment and each U.S. Government agency or
instrumentality is treated as a separate issuer. Any security issued,
guaranteed, or insured (to the extent so guaranteed or insured) by the U.S.
Government or an agency or instrumentality of the U.S. Government 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.
Since the shareholders of the Fund will be separate accounts, no discussion is
included here as to the federal income tax consequences at the shareholder
level. For information concerning the federal income tax consequences to
purchasers of the variable life insurance policies and variable annuity
contracts, see the prospectus for the relevant variable insurance contract. 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 nine 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 (formerly 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 it 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.
Average Annual Total Return for the Similar Fund and for Its Benchmark Index for
Periods Ended December 31, 1999
Since Inception
Similar Fund/Benchmark 1 Year (March 20, 1997)
- ---------------------- ------ ------------------
AmSouth Equity Income Fund 25.15% 20.70%
S&P 500(R) Index* 21.03% 29.16%
- -----------------
* 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.
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.
<PAGE>
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.
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
Lipper
Federated Equity
Equity Income
Income S&P 500(R) Fund
Fund+* Index Index #
CLASS A SHARES (absent imposition of
sales charge)
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 charge)
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 charge)
One Year 16.76%
September 27, 1994 through January 31, 1997 22.79%
- -------------------
<PAGE>
+ 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 operating
expenses of the Fund. If the 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 and copy the SAI and other information about the Fund at
the Public Reference Room of the Securities and Exchange Commission. Investors
may call 1-202-942-8090 for more information about the Public Reference Room.
Investors can get text-only copies of information about the Fund:
o For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-0102 or by electronic request at [email protected].
o Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-8644.
<PAGE>
BB&T Growth and Income Fund
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-288-1872
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, 2000.
TABLE OF CONTENTS
<TABLE>
<S> <C> <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 TAXATION
Fund Expenses GENERAL INFORMATION
FINANCIAL HIGHLIGHTS Description of the Trust and Its Shares
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS Similar Fund Performance Information
VALUATION OF SHARES Miscellaneous
PURCHASING AND REDEEMING SHARES
</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 greatest 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. The chart
demonstrates how the Fund's performance varies from year to year, 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.
<PAGE>
Calendar Year Total Returns*
[Bar Chart] -3.85% 13.36%
1998 1999
Best Quarter: 17.32% 12/31/98
Worst Quarter: -11.17 9/30/99
Average Annual Total Return* (for the periods ended December 31, 1999)
Since Inception
Past Year (June 3, 1997)
--------- -------------
Fund -3.85% 10.96%
S&P 500 (R) Index 21.03% 25.71%
- ------------------
* Assumes reinvestment of dividends and distributions.
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*..................................................0.74%
Other Expenses*...................................................0.42%
-----
Total Annual Fund Operating Expenses*.............................1.16%
=====
- ------------------
* BB&T currently limits its management fees to 0.60%, and other expenses
currently are being limited to 0.27%. Total expenses after fee waivers
and expense reimbursements are 0.87%. 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
$118 $368 $638 $1,409
<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, 1999. 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> <C> <C>
Year ended December 31, June 3, 1997 through
For a share outstanding throughout the period 1999 1998 December 31, 1997(a)
- --------------------------------------------- -------------------------------------------------------
Net Asset Value, Beginning
of Period $ 13.30 $ 11.88 $ 10.00
Income From Investment Operations:
Net investment income 0.18 0.16 0.10
Net gains or losses on securities
(realized and unrealized) (0.69) 1.42 1.89
Total from investment operations (0.51) 1.58 1.99
Less Distributions:
Dividends (from net investment income) (0.15) (0.16) (0.10)
Dividends (in excess of net
investment income) -- -- (0.01)
Net realized gains (0.18) -- --
Total distributions (0.33) (0.16) (0.11)
Net Asset Value, End of Period $ 12.46 $ 13.30 $ 11.88
Total Return (3.85)% 13.36% 19.96%(b)
Ratios/Supplementary Data:
Net assets, end of period (000's) $ 52,525 $ 49,062 $28,829
Ratio of expenses to average net
assets 0.87% 0.91% 0.91%(c)
Ratio of net investment income to
average net assets 1.43% 1.37% 1.68%(c)
Ratio of expenses to average net
assets* 1.16% 1.24% 2.31%(c)
Ratio of net investment income to
average net assets* 1.14% 1.04% 0.28%(c)
Portfolio turnover rate 11.98% 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.
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 (or other agent)
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, or to
cease investment operations entirely. In such an event, 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, or in another mutual fund.
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, 1999, BB&T
Corporation had assets in excess of $43.5 billion. Through its subsidiaries,
BB&T Corporation operates over 655 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.
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 lesser 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, 1999, BB&T received an investment advisory fee equal to
an annual rate of 0.60% of the Fund's average daily net assets.
During the first half of 2000, BB&T intends to reorganize its investment
advisory division as a separate, wholly owned subsidiary of BB&T to be called
BB&T Asset Management, Inc. ("BB&T Asset Management"). Once organized and
registered with the Securities and Exchange Commission, BB&T Asset Management
will replace BB&T as the investment adviser of the BB&T Funds. Following the
reorganization, the management and investment advisory personnel of BB&T that
are currently providing investment management services to the Fund will continue
to do so as the personnel of BB&T Asset Management. Additionally, BB&T Asset
Management will be wholly owned and otherwise fully controlled by BB&T. As a
result, this transaction will not be an "assignment" of the investment advisory
contract for purposes of the Investment Company Act of 1940 and, therefore, a
shareholder vote will not be required.
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.
<PAGE>
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.
TAXATION
The Fund intends to diversify its investments in a manner intended to comply
with tax requirements generally applicable to mutual funds. In addition, the
Fund will 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 single
issuer are treated as one investment and each U.S. Government agency or
instrumentality is treated as a separate issuer. Any security issued,
guaranteed, or insured (to the extent so guaranteed or insured) by the U.S.
Government or an agency or instrumentality of the U.S. Government 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.
Since the shareholders of the Fund will be separate accounts, no discussion is
included here as to the federal income tax consequences at the shareholder
level. For information concerning the federal income tax consequences to
purchasers of the variable life insurance policies and variable annuity
contracts, see the prospectus for the relevant variable insurance contract. 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 nine 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 BB&T Funds. The Similar Fund's investment
objectives, policies and strategies are substantially similar to those of the
Fund, and it 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, 1999
Since Inception
Similar Fund/Benchmark 1 Year 3 Years 5 Years (October 9, 1992)
- ---------------------- ------- ------- ------- --------------
BB&T Growth and Income Stock Fund -2.22% 13.77% 18.87% 15.27%
S&P 500(R) Index* 21.03% 27.56% 28.54% 21.53%
- -----------------
* 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 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 and copy the SAI and other information about the Fund at
the Public Reference Room of the Securities and Exchange Commission. Investors
may call 1-202-942-8090 for more information about the Public Reference Room.
Investors can get text-only copies of information about the Fund:
o For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-0102 or by electronic request at [email protected].
o 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
1-800-288-1872
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, 2000.
TABLE OF CONTENTS
<TABLE>
<S> <C> <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 TAXATION
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS GENERAL INFORMATION
Investment Objective and Policies -- Underlying Funds Description of the Trust and Its Shares
Investment Risks of the Fund Similar Fund Performance Information
VALUATION OF SHARES Miscellaneous
PURCHASING AND REDEEMING SHARES
</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 greatest 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.
<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*..................................................0.25%
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.
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.
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.
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. 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
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 (or other agent)
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.
Each Fund reserves the right to discontinue offering shares at any time, or to
cease investment operations entirely. In such an event, 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, or in another mutual fund.
<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, 1999, BB&T
Corporation had assets in excess of $43.5 billion. Through its subsidiaries,
BB&T Corporation operates over 655 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.
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 lesser 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.
TAXATION
The Fund intends to diversify its investments in a manner intended to comply
with tax requirements generally applicable to mutual funds. In addition, the
Fund will 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 single
issuer are treated as one investment and each U.S. Government agency or
instrumentality is treated as a separate issuer. Any security issued,
guaranteed, or insured (to the extent so guaranteed or insured) by the U.S.
Government or an agency or instrumentality of the U.S. Government 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.
Since the shareholders of the Fund will be separate accounts, no discussion is
included here as to the federal income tax consequences at the shareholder
level. For information concerning the federal income tax consequences to
purchasers of the variable life insurance policies and variable annuity
contracts, see the prospectus for the relevant variable insurance contract. 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 nine 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.
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, 1999
Since Inception
Similar Fund/Benchmark 1 Year (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 and copy the SAI and other information about the Fund at
the Public Reference Room of the Securities and Exchange Commission. Investors
may call 1-202-942-8090 for more information about the Public Reference Room.
Investors can get text-only copies of information about the Fund:
o For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-0102 or by electronic request at [email protected].
o Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-8644.
<PAGE>
HSBC Variable Growth and Income Fund
HSBC Variable Fixed Income Fund
HSBC Variable Cash Management Fund
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-888-467-8167
This prospectus describes three mutual funds offered by Variable Insurance Funds
(the "Trust"):
o HSBC Variable Growth and Income Fund, which seeks long-term growth of
capital and current income by investing primarily in common stocks,
preferred stocks, and convertible securities.
o HSBC Variable Fixed Income Fund, which seeks high current income consistent
with appreciation of capital by investing primarily in fixed income
securities.
o HSBC Variable Cash Management Fund, which seeks as high a level of current
income as is consistent with preservation of capital and liquidity by
investing in short-term, high quality money market instruments.
The Funds' goals and investment programs are described in more detail inside.
HSBC Asset Management (Americas) Inc. ("HSBC") serves as the Funds' investment
adviser.
The Funds sell their shares to insurance company separate accounts, so that the
Funds may serve as an investment option under variable life insurance policies
and variable annuity contracts issued by insurance companies. The Funds also may
sell their shares to certain other investors, such as qualified pension and
retirement plans, insurance companies, and HSBC.
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 Funds' 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, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
RISK/RETURN SUMMARIES AND FUND EXPENSES.............. MANAGEMENT OF THE FUNDS......................
HSBC VARIABLE GROWTH AND INCOME FUND.............. INVESTMENT ADVISER.........................
HSBC VARIABLE FIXED INCOME FUND................... PORTFOLIO MANAGERS.........................
HSBC VARIABLE CASH MANAGEMENT FUND................ ADMINISTRATOR AND DISTRIBUTOR..............
SERVICING AGENTS...........................
INVESTMENT OBJECTIVES AND STRATEGIES.................
HSBC VARIABLE GROWTH AND INCOME FUND.............. TAXATION.....................................
HSBC VARIABLE FIXED INCOME FUND...................
HSBC VARIABLE CASH MANAGEMENT FUND................ GENERAL INFORMATION..........................
RISK CONSIDERATIONS.................................. DESCRIPTION OF THE TRUST AND ITS SHARES....
SIMILAR FUND PERFORMANCE INFORMATION.......
VALUATION OF SHARES.................................. MISCELLANEOUS..............................
PURCHASING AND REDEEMING SHARES......................
</TABLE>
<PAGE>
RISK/RETURN SUMMARIES AND FUND EXPENSES
HSBC Variable Growth and Income Fund
Investment Objective
The Variable Growth and Income Fund seeks long-term growth of capital and
current income.
Principal Investment Strategies
Under normal market conditions, the Variable Growth and Income Fund will invest
primarily in common stocks, preferred stocks, and convertible securities. The
Fund may invest the balance of its assets in various types of fixed income
securities and in money market instruments.
HSBC selects securities for the portfolio that appear to be undervalued, some of
which will be income-producing. In selecting securities, HSBC uses quantitative
and fundamental research to identify stocks meeting either or both growth and
income criteria. Investments will be sold if they no longer meet the Fund's
criteria for income-oriented or growth-oriented instruments.
Principal Investment Risks
An investment in the Variable Growth and Income Fund entails risk, including
possible loss of the principal amount invested. The principal risks of investing
in the Fund include:
o Market Risk. The value of the Fund's investments will fluctuate as the
stock market fluctuates, sometimes rapidly and unpredictably, and
securities prices overall may decline over short or longer-term periods.
This risk may be greatest for the Fund's investments in common stocks.
Because the value of the Fund's investments will fluctuate with market
conditions, so will the value of an investment in the Fund. Additionally,
there is the risk that stocks selected because they represent value will
remain undervalued or out of favor.
o Interest Rate Risk. Changes in interest rates will affect the value of the
Fund's investments. In particular, the Fund's investments in
income-producing, fixed income or debt securities, such as preferred stocks
or convertible securities, generally will change in value inversely with
changes in interest rates.
o Credit Risk. The issuer of a security may default or not be able to meet
its financial obligations. This risk may be particularly acute for the
Fund's investments in income-producing, fixed income or debt securities.
The degree of risk for a particular security may be reflected in its credit
rating.
o Prepayment Risk. Risk that the principal amount of the mortgage or other
asset underlying an asset-backed security in which the Fund invests (if
any) may be repaid prior to the bond's maturity date, which is particularly
likely to occur if interest rates decline. When such repayment occurs, no
additional interest will be paid on the investment, and the Fund may be
exposed to potentially lower returns upon subsequent reinvestment of the
principal.
o Security-Specific Risk. An issuer of a portfolio investment may be unable
to achieve its earnings or growth expectations.
An investment in the Variable Growth and Income Fund is not a bank deposit and
is not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
<PAGE>
Fund Performance
Because the Variable Growth and Income 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 Variable Growth and Income 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*................................................0.55%
Other Expenses*.................................................1.06%
-------
Total Annual Fund Operating Expenses*...........................1.61%
=====
- ---------------------
*HSBC currently limits its management fees to 0.22%, other expenses currently
are being limited to 0.93%. Total expenses after fee waivers and expense
reimbursements are 1.15%. 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 Variable Growth and
Income Fund to other investment companies. The table 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
$ 164 $ 508
<PAGE>
HSBC Variable Fixed Income Fund
Investment Objective
The Variable Fixed Income Fund seeks high current income consistent with
appreciation of capital.
Principal Investment Strategies
Under normal market conditions, the Variable Fixed Income Fund will invest
primarily in investment grade fixed income securities, which includes securities
rated at least Baa by Moody's Investors Service ("Moody's") or BBB by Standard
and Poor's Ratings Services ("S&P"), or securities of comparable quality.
HSBC selects securities based on various factors, including outlook for the
economy and anticipated changes in interest rates and inflation. HSBC will
consider selling those securities that no longer meet the Fund's criteria for
investment.
Principal Investment Risks
An investment in the Variable Fixed Income Fund entails risk, including possible
loss of the principal amount invested. The principal risks of investing in the
Fund include:
o Market Risk. The value of the Fund's investments will fluctuate as the
securities market fluctuates, sometimes rapidly and unpredictably, and
securities prices overall may decline over short or longer-term periods.
Because the value of the Fund's investments will fluctuate with market
conditions, so will the value of an investment in the Fund.
o Interest Rate Risk. Changes in interest rates will affect the value of the
Fund's investments. In particular, the Fund's investments in fixed income
and debt securities generally will change in value inversely with changes
in interest rates. Interest rate risk may be greater for the Fund's
investments in mortgage-related securities because when interest rates
rise, the maturities of these types of securities tend to lengthen, and the
value of the securities decreases more significantly.
o Credit Risk. The issuer of a security may default or not be able to meet
its financial obligations. The degree of risk for a particular security may
be reflected in its credit rating. Credit risk includes the possibility
that the Fund's investments will have their credit ratings downgraded.
o Prepayment Risk. The principal amount of the mortgage or other asset
underlying as asset-backed security may be repaid prior to the bond's
maturity date, which is particularly likely to occur if interest rates
decline. When such repayment occurs, no additional interest will be paid on
the investment, and the Fund may be exposed to potentially lower returns
upon subsequent reinvestment of the principal.
An investment in the Variable Fixed Income 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 Variable Fixed Income 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 Variable Fixed Income 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*..............................................0.55%
Other Expenses*...............................................2.42%
-----
Total Annual Fund Operating Expenses*.........................2.97%
=====
- ----------------------
*HSBC is currently waiving its management fee and other expenses currently are
being limited to 1.15%. Total expenses after fee waivers and expense
reimbursements are 1.15%. 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 Variable Fixed
Income 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
$ 300 $ 918
<PAGE>
HSBC Variable Cash Management Fund
Investment Objective
The Variable Cash Management Fund seeks as high a level of current income as is
consistent with preservation of capital and liquidity.
Principal Investment Strategies
The Variable Cash Management Fund is a "money market fund" that seeks to
maintain a stable net asset value of $1.00 per share. The Fund pursues its
investment objective by investing in short-term, high quality money market
instruments. Under normal market conditions, the Variable Cash Management Fund
invests primarily in high quality obligations of banks, the U.S. Government, and
corporations. The Fund may concentrate its investments in bank obligations.
Principal Investment Risks
An investment in the Variable Cash Management Fund entails investment risk. The
principal risks of investing in the Fund include:
o Interest Rate Risk. Changes in interest rates will affect the value of the
Fund's investments. In particular, the Fund's investments generally will
change in value inversely with changes in interest rates.
o Credit Risk. The issuer of a security may default or not be able to meet
its financial obligations. The degree of risk for a particular security may
be reflected in its credit rating. Credit risk includes the possibility
that any of the Fund's investments will have their credit ratings
downgraded.
Although the Variable Cash Management Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Fund. An investment in the Variable Cash Management 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 Variable Cash Management 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.
<PAGE>
Fund Expenses
The following expense table indicates the estimated expenses that an investor
will incur as a shareholder of the Variable Cash Management 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*..............................................0.35%
Other Expenses*...............................................1.69%
-----
Total Annual Fund Operating Expenses*.........................2.04%
=====
- --------------------
*HSBC is currently waiving its management fee and other expenses currently are
being limited to 0.93%. Total expenses after fee waivers and expense
reimbursements are 0.93%. 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 Variable Cash
Management 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
$ 207 $ 640
<PAGE>
INVESTMENT OBJECTIVES AND STRATEGIES
Investors should be aware that the investments made by a Fund and the results
achieved by a Fund at any given time are not expected to be the same as those
made by other mutual funds for which HSBC 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 a Fund.
Each 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 each Fund's investment strategies may be found in the
Statement of Additional Information (see back cover).
HSBC Variable Growth and Income Fund
The Variable Growth and Income Fund's investment objective is long-term growth
of capital and current income. The Fund seeks to achieve this objective by
investing primarily in common stocks, preferred stocks, and convertible
securities. The Fund may invest the balance of its assets in fixed income
securities and money market instruments, including U.S. Government securities,
corporate bonds, asset-backed and mortgage-backed securities, obligations of
savings and loans and U.S. and foreign banks, commercial paper, and related
repurchase agreements.
The Fund's criteria for selecting equity securities are the issuer's managerial
strength, competitive position, price to earnings ratio, profitability,
prospects for growth, underlying asset value and relative market value. HSBC
uses quantitative and fundamental research to identify stocks meeting either or
both growth and income criteria and selects securities for the portfolio that
appear to be undervalued. The Fund may invest in securities that appear to be
undervalued because the value or potential for growth has been overlooked by
many investors or because recent changes in the economy, industry or the company
have not yet been reflected in the price of the securities. In order to increase
the Fund's portfolio income, the Fund may invest in securities that provide
current dividends or, in the opinion of HSBC, have a potential for dividend
growth in the future. Investments will be sold if they no longer meet the Fund's
criteria for income-oriented or growth-oriented instruments.
The Variable Growth and Income Fund will place greater emphasis on capital
appreciation as compared to income, although changes in market conditions and
interest rates will cause the Fund to vary emphasis of these two elements of its
investment program in order to meet its investment objective.
HSBC Variable Fixed Income Fund
The Variable Fixed Income Fund's investment objective is high current income
consistent with appreciation of capital. The Fund normally invests primarily in
fixed income securities. The Fund expects to maintain an average quality rating
of its investment portfolio of Aa (Moody's) or AA (S&P), or equivalent quality.
The Fund currently has no policy with respect to its average portfolio maturity.
<PAGE>
The Variable Fixed Income Fund invests primarily in U.S. Government securities,
corporate bonds, asset-backed and mortgage-backed securities, obligations of
savings and loans and U.S. and foreign banks, commercial paper, and related
repurchase agreements. The Fund also may invest in mortgage-related securities
that are issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, as well as variable and floating rate debt securities meeting
its quality standards.
The Variable Fixed Income Fund selects its investments based upon an analysis of
various factors, including the outlook for the economy and anticipated changes
in interest rates and inflation. If a security held by the Fund has its rating
revoked or reduced below the Fund's quality standards, the Fund may continue to
hold the security. In these circumstances, however, HSBC will consider whether
the Fund should continue to hold the security. Lower rated and unrated
securities may be subject to greater credit risk and have greater price
volatility than securities in the higher rating categories.
HSBC Variable Cash Management Fund
The Variable Cash Management Fund seeks as high a level of current income as is
consistent with preservation of capital and liquidity. The Fund invests in a
broad range of short-term money market instruments including: (i) obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities; (ii) variable rate demand and master demand notes; (iii)
certain repurchase agreements; (iv) negotiable certificates of deposit, bankers'
acceptances, time deposits, and other obligations issued or supported by U.S.
banks (including foreign branches) that have more than $1 billion in total
assets at the time of investment; (v) U.S. dollar-denominated obligations of
foreign banks (including U.S. branches) which at the time of investment have
more than $10 billion (or the equivalent in other currencies) in total assets
and branches or agencies in the United States, and which in the opinion of the
HSBC are of an investment quality comparable to obligations of U.S. banks which
may be purchased by the Fund and present minimal credit risk; (vi) domestic and
foreign commercial paper rated in the highest category by one or more nationally
recognized statistical rating organizations or rating agencies, or if unrated,
determined to be of comparable quality by HSBC; and (vii) investment grade
corporate debt securities.
The Variable Cash Management Fund may invest more than 25% of the current value
of its total assets in domestic bank obligations (including bank obligations
subject to repurchase agreements).
As a money market fund, the Variable Cash Management Fund must meet strict
requirements on the investment quality, maturity, and diversification of the
Fund's investments. Under applicable law, the Variable Cash Management Fund's
investments must have a remaining maturity of no more than 397 days, and its
investments must maintain on average weighted maturity that does not exceed 90
days.
<PAGE>
RISK CONSIDERATIONS
Each Fund's investment strategies may subject it to a number of risks, including
the following.
Market Risk (All Funds).
All of the Funds are subject, to some degree, to the risk that fluctuations in
the markets in which a Fund invests may affect the value of its investments.
This risk is most significant for the Variable Growth and Income Fund, which
invests primarily in stocks and other equity securities. 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.
The Variable Growth and Income Fund and the Variable Fixed Income Fund may
invest in securities issued by foreign companies. In addition, the Variable Cash
Management Fund may invest in U.S. dollar-denominated obligations (or credit and
liquidity enhancements) of foreign banks, foreign branches of U.S. banks, U.S.
branches of foreign banks, and commercial paper of 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 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 securities.
Interest Rate Risk (All Funds).
Each Fund may invest in debt securities and 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 Variable Growth and Income 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.
The Variable Cash Management Fund invests only in short-term instruments, whose
value is less affected by changes in interest rates than securities with longer
maturities. However, it is possible that an increase in interest rates could
change the Fund's share price.
<PAGE>
Credit Risk (All Funds).
The Funds' investments, and particularly investments in fixed income securities,
may be affected by the creditworthiness of issuers in which the Funds invest.
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
Funds' shares.
The Variable Growth and Income and Variable Fixed Income Fund may invest in
lower rated debt obligations, and the Variable Growth and Income Fund can invest
in comparably rated convertible securities. 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 a Fund from selling a security at the
time and price that would be most beneficial to the Fund.
The Variable Cash Management Fund invests in highly-rated securities to minimize
credit risk. Under applicable law, 95% of the Fund's holdings must be rated in
the highest credit category for money market instruments, and the remaining 5%
must be rated no lower than the second highest credit category.
Active Trading (Variable Growth and Income Fund and Variable Fixed Income Fund).
The Variable Growth and Income Fund and Variable Fixed Income Fund are actively
managed and, in some cases in response to market conditions, a Fund's portfolio
turnover may exceed 100%, which generally is considered to be a high rate of
portfolio turnover. A higher rate of portfolio turnover increases brokerage and
other expenses, which must be borne by a Fund and its shareholders, and may
negatively affect a Fund's performance.
Temporary Investments (Variable Growth and Income Fund and Variable Fixed Income
Fund).
HSBC may temporarily invest up to 100% of a 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 objectives during that time, and it may miss out on some
or all of an upswing in the securities markets.
Concentration of Investments (Variable Cash Management Fund).
To the extent that the Variable Cash Management Fund concentrates its
investments in the domestic banking industry, it may be impacted by economic and
other factors affecting that industry, unlike other mutual funds that do not
concentrate in bank obligations.
<PAGE>
Please see the Statement of Additional Information for more detailed information
about the Funds, their investment strategies, and their risks.
VALUATION OF SHARES
Each Fund prices its shares on the basis of the net asset value of the Fund,
which is determined on each Business Day (other than a day on which there are
insufficient changes in the value of a Fund's portfolio securities to materially
affect the Fund's net asset value or 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 New York Stock Exchange ("NYSE") is open for trading. The
Variable Growth and Income Fund and the Variable Fixed Income Fund determine
their net asset values as of the close of the NYSE (generally 4:00 p.m., Eastern
Time), while the Variable Cash Management Fund determines its net asset value as
of noon, Eastern Time.
Net asset value per share for purposes of pricing sales and redemptions is
calculated by dividing the value of all securities and other assets belonging to
a Fund, less the liabilities charged to 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 Variable Growth and Income Fund and the Variable Fixed Income
Fund will fluctuate as the value of the investment portfolio of the Fund
changes.
The Variable Growth and Income Fund and Variable Fixed Income Fund value their
securities at market value. If market quotations are not available, the
securities will be valued by a method that the Board of Trustees of the Trust
believes accurately reflects fair value. The Variable Cash Management Fund
values its securities at their amortized cost. This method involves valuing an
instrument at its cost and thereafter applying a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument.
For further information about valuation of investments, see the Statement of
Additional Information.
PURCHASING AND REDEEMING SHARES
Shares of each 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
HSBC. Shares of a Fund are purchased or redeemed at the net asset value per
share next determined after receipt by the Fund's distributor (or other agent)
of a purchase order or redemption request. Transactions in shares of a Fund will
be effected only on a Business Day of the Fund.
Payment for shares redeemed normally will be made within seven days. Each Fund
intends to pay cash for all shares redeemed, but under abnormal conditions that
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 Funds 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 accounts that invest in the Funds.
The Trust currently does not foresee any disadvantages to investors if the Funds
serve 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 Funds serve
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 a 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.
Each Fund reserves the right to discontinue offering shares at any time, or to
cease investment operations entirely. In such an event, 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, or in another mutual fund.
MANAGEMENT OF THE FUNDS
Investment Adviser
HSBC Asset Management (Americas) Inc., 140 Broadway, New York, NY, 10005, is the
adviser for the Funds. HSBC manages more than $4.7 billion of assets of
individuals, pension plans, corporations and institutions. Through its portfolio
management team, HSBC makes the day-to-day investment decisions and continuously
reviews, supervises and administers the Funds' investment programs.
Under an investment advisory agreement between the Trust and HSBC, the Trust
pays HSBC an investment advisory fee, computed daily and payable monthly, at an
annual rate equal to the lesser of the rates indicated below, or such amount as
may from time to time be agreed upon in writing by the Trust and HSBC.
<PAGE>
Percentage of
average daily net assets
- -------------------------------------------------------------------------
Variable Growth and Income Fund .55%
- ------------------------------------------------------------------------
Variable Fixed Income Fund .55%
- -------------------------------------------------------------------------
Variable Cash Management Fund .35%
- -------------------------------------------------------------------------
Portfolio Managers
Variable Growth and Income Fund: Mr. Fredric Lutcher III, Managing Director,
U.S. Equities, is responsible for the day-to-day management of the Variable
Growth and Income Fund. Prior to joining HSBC in late 1997, Mr. Lutcher worked
as Vice President and Senior Mutual Fund Portfolio Manager at Merrill Lynch
Asset Management for nine years.
Variable Fixed Income Fund and Variable Cash Management Fund: Edward J. Merkle,
Managing Director, Fixed Income, is responsible for the day-to-day management of
the Variable Fixed Income Fund and the Variable Cash Management Fund. Prior to
joining HSBC in 1986, Mr. Merkle served as Vice President in the money
management division at Bradford Trust and was the Senior Repo Trader at
Shearson-American Express.
Administrator and Distributor
BISYS Fund Services Ohio, Inc. is the administrator for the Funds, and BISYS
Fund Services acts as the Funds' 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 each 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 a 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.
TAXATION
Each Fund intends to diversify its investments in a manner intended to comply
with tax requirements generally applicable to mutual funds. In addition, each
Fund will 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 single
issuer are treated as one investment and each U.S. Government agency or
instrumentality is treated as a separate issuer. Any security issued,
guaranteed, or insured (to the extent so guaranteed or insured) by the U.S.
Government or an agency or instrumentality of the U.S. Government is treated as
a security issued by the U.S. Government or its agency or instrumentality,
whichever is applicable.
If a 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.
Since the shareholders of the Funds will be separate accounts, no discussion is
included here as to the federal income tax consequences at the shareholder
level. For information concerning the federal income tax consequences to
purchasers of the variable life insurance policies and variable annuity
contracts, see the prospectus for the relevant variable insurance contract. 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 nine 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 Class A shares of the Growth and Income Fund and Fixed Income
Fund, each a series of the HSBC Mutual Funds Trust, and the Cash Management
Fund, a series of HSBC Funds Trust (collectively, the "Similar Funds"), which
are similar to the Variable Growth and Income Fund, the Variable Fixed Income
Fund, and Variable Cash Management Fund, respectively. Each Similar Fund's
investment objectives, policies and strategies are substantially similar to
those of its corresponding Fund, and each is currently managed by the same
portfolio manager of the corresponding Fund. However, the portfolio managers of
the Variable Growth and Income Fund and the Variable Fixed Income Fund have not
managed the corresponding Similar Funds for the entire period shown. While the
investment objectives, policies and risks of the Similar Funds and the Funds are
similar, they are not identical, and the performance of a Similar Fund and its
corresponding Fund will vary. The data is provided to illustrate the past
performance of HSBC in managing substantially similar investment portfolios and
does not represent the past performance of the Funds or the future performance
of the Funds or their portfolio managers. Consequently, potential investors
should not consider this performance data as an indication of the future
performance of the Funds or of their portfolio managers.
The performance data shown below reflects the operating expenses of the Similar
Funds, which are higher than the expenses of the Funds. Performance would have
been higher for each Similar Fund if its corresponding Fund's expenses were
used. The Similar Funds, unlike the Funds, are 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 Funds serve as an underlying
investment vehicles. By contrast, investors with contract value allocated to the
Funds will be subject to charges and expenses relating to variable insurance
contracts and separate accounts.
The Similar Funds' 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 Funds presented below are unaudited and are not intended to
predict or suggest results that might be experienced by the Similar Funds or the
Funds. 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 benchmarks identified below do not
reflect the fees or expenses of the Similar Funds or the Funds.
<PAGE>
Average Annual Total Return for the Similar Funds and for Their Benchmarks for
Periods Ended December 31, 1999
Similar Fund/Benchmark 1 Year 3 Years 5 Years 10 Years
- -------------------------- -------- ---------- --------- --------
Growth and Income Fund+ 12.55% 22.11% 23.37% 15.41%
Growth and Income Fund++ 18.48% 24.22% 24.64% 16.00%
S&P 500(R)Composite Index* 21.04% 27.56% 28.54% 18.20%
Since Inception
Similar Fund/Benchmark 1 Year 3 Years 5 Years (January 15, 1993)
- -------------------------- -------- ---------- --------- ----------------
Fixed Income Fund+ -6.55% 3.24% 5.56% 4.92%
Fixed Income Fund++ -1.86% 4.91% 6.60% 5.65%
Lehman Brothers Aggregate -0.83% 5.73% 7.73% 6.42%
Bond Index**
Similar Fund/Benchmark 1 Year 3 Years 5 Years 10 Years
- --------------------------- -------- ---------- ---------- --------
Cash Management Fund 4.75% 5.03% 5.10% 5.02%
Lipper Money Market Fund*** 4.49% 4.78% 4.95% 4.79%
- -----------------
+ Assumes imposition of maximum front-end sales charge.
++ Absent imposition of maximum front-end sales charge.
* 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.
** The Lehman Brothers Aggregate Bond Index is an unmanaged index generally
representative of the bond market as a whole. The Index reflects income and
distributions, if any, but does not reflect fees, brokerage commissions, or
other expenses of investing.
*** The Lipper Money Market Fund Average is a total return performance average
of funds tracked by Lipper Analytical Services, Inc. that invest in high
quality financial instruments (rated in the top two grades) with
dollar-weighted average maturities of less than 90 days. It does not take
into account sales charges.
# The Similar Fund performance information set forth above reflects fee
waivers and/or expense reimbursements. Absent such waivers and/or
reimbursements, Similar Fund performance would have been lower.
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 Funds or their
distributor. This prospectus does not constitute an offering by the Funds or
their distributor in any jurisdiction in which such offering may not be lawfully
made.
<PAGE>
For more information about the Funds, the following document is available free
upon request:
Statement of Additional Information (SAI): The SAI provides more detailed
information about each 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 Funds, by contacting a broker or bank that sells
an insurance contract that offers the Funds as an investment option. Or contact
the Funds at:
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
Telephone: 1-888-467-8167
- --------------------------------------------------------------------------------
Investors can review and copy the SAI and other information about the Fund at
the Public Reference Room of the Securities and Exchange Commission. Investors
may call 1-202-942-8090 for more information about the Public Reference Room.
Investors can get text-only copies of information about the Fund:
o For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-0102 or by electronic request at [email protected].
o Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-8644.
<PAGE>
Old Kent Core Equity Fund
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-__________
The Old Kent Core Equity Fund seeks long-term capital growth, with current
income as a secondary objective, by investing primarily in equity securities of
U.S. companies. The Fund's goals and investment program are described in more
detail inside. Lyon Street Asset Management Company ("Lyon Street") 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 Lyon Street.
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, 2000.
TABLE OF CONTENTS
<TABLE>
<S> <C> <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 TAXATION
Fund Expenses 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 long-term capital growth, with current income as a secondary
objective.
Principal Investment Strategies
Under normal market conditions, the Fund will invest primarily in equity
securities of U.S. companies each having $100 million or more in market
capitalization, that are traded on the New York Stock Exchange, American Stock
Exchange or over-the-counter. The Fund intends to primarily invest its assets in
equity securities that Lyon Street believes have potential for capital growth,
and secondarily for income. A portion of the Fund's assets may be invested in
preferred stock or bonds convertible into common stock. The Fund expects to earn
current income mainly from stock dividends and from interest on convertible
bonds.
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 greatest 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, such as convertible bonds and preferred stocks, generally will
change in value inversely with changes in interest rates. Also, the Fund's
investments, and particularly its investments in fixed income securities, 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
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.
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees................................................0.70%
Other Expenses.................................................0.83%
-----
Total Annual Fund Operating Expenses...........................1.53%
=====
- ------------------
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
$156 $483
<PAGE>
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
Investors should be aware that the investments made by the Fund and the results
achieved by the Fund at any given time are not expected to be the same as those
made by other mutual funds for which Lyon Street 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 long-term capital growth, with
current income as a secondary objective. While some equity securities may be
purchased primarily to achieve the Fund's investment objective for current
income, most equities will be purchased by the Fund primarily in pursuit of its
investment objective for long-term capital growth.
Lyon Street uses a flexible investment approach that allows investment in both
"growth" stocks and "value" stocks. Growth stocks typically offer strong revenue
and earnings potential and accompanying capital growth, with less dividend
income than value stocks. Value stocks are those that appear to be underpriced
based upon valuation measures. In evaluating prospective investments, Lyon
Street may consider broad economic, industry or market trends, company-specific
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, and 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 and similar in size to the stocks represented in such broad market
indexes as the S&P 500(R) Index.
The Fund also utilizes convertible securities and preferred stocks, 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 Lyon Street's assessment of
market and economic conditions and outlook.
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, 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 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. 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.
To the extent the Fund concentrates its investments in growth stocks or value
stocks, it will be subject to the risks particular to each type of stock, as
well as the risk that the chosen stocks may underperform other types of stocks.
Growth stocks may be particularly susceptible to rapid price swings during
periods of economic uncertainty or in the event of earnings disappointments, and
they typically have less dividend income to cushion the effect of adverse market
conditions. Value stocks in theory limit downside risk because they are
underpriced. Of course, Lyon Street's success in moderating market risk cannot
be assured. There is no guarantee that a value stock is, in fact, undervalued,
or that the market will ever recognize its true value. In addition, to the
extent the Fund concentrates its investments in value stocks, the Fund may
produce more modest gains than stock funds with more aggressive investment
profiles.
<PAGE>
Interest Rate Risk. Although the Fund's primary investment focus is stocks, it
may invest in fixed income securities, such as convertible bonds and preferred
stocks. 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 fixed
income 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 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.
Temporary Investments. Lyon Street 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 objectives 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.
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 Lyon
Street. Shares of the Fund are purchased or redeemed at the net asset value per
share next determined after receipt by the Fund's distributor (or other agent)
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 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, or to
cease investment operations entirely. In such an event, 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, or in another mutual fund.
MANAGEMENT OF THE FUND
Investment Adviser
Lyon Street is the investment adviser of the Fund. Through its portfolio
management team, Lyon Street makes the day-to-day investment decisions for the
Fund and continuously reviews, supervises and administers the Fund's investment
program.
Lyon Street, a wholly owned subsidiary of Old Kent Bank, maintains offices at
111 Lyon Street, NW, Grand Rapids, Michigan 49503. Old Kent Bank is a wholly
owned subsidiary of Old Kent Financial Corporation, which is a financial
services company with total assets as of December 31, 1999 of approximately
$18.1 billion. Prior to 1998, the Investment Management Group ("IMG") at Lyon
Street managed assets as a division of Old Kent Bank. Old Kent Bank has managed
the assets of individual and institutional investors for over 100 years. Lyon
Street employs an experienced staff of professional investment analysts,
portfolio managers and traders, and uses several proprietary computer-based
systems in conjunction with fundamental analysis to identify investment
opportunities.
Under an investment advisory agreement between the Trust and Lyon Street, the
Trust pays Lyon Street an investment advisory fee, computed daily and payable
monthly, at an annual rate equal to the lesser of: (a) 0.70% 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 Lyon Street.
Allan J. Meyers, CFA, the Chief Equity Officer at Lyon Street, is the person who
is primarily responsible for the management of the Fund. Mr. Meyers has over
twenty years of portfolio management experience, including fourteen years with
IMG.
Joseph T. Keating, President and Chief Investment Officer at Lyon Street, is
responsible for developing and implementing the Fund's investment policies. Mr.
Keating has over twenty-two years of portfolio management experience, including
eleven years with IMG.
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.
TAXATION
The Fund intends to diversify its investments in a manner intended to comply
with tax requirements generally applicable to mutual funds. In addition, the
Fund will 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 single
issuer are treated as one investment and each U.S. Government agency or
instrumentality is treated as a separate issuer. Any security issued,
guaranteed, or insured (to the extent so guaranteed or insured) by the U.S.
Government or an agency or instrumentality of the U.S. Government 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.
Since the shareholders of the Fund will be separate accounts, no discussion is
included here as to the federal income tax consequences at the shareholder
level. For information concerning the federal income tax consequences to
purchasers of the variable life insurance policies and variable annuity
contracts, see the prospectus for the relevant variable insurance contract. 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 nine 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 Institutional Class shares of the Kent Growth and Income Fund
(the "Similar Fund"), a series of the Kent Funds. The Similar Fund's investment
objectives, policies and strategies are substantially similar to those of the
Fund, and it is currently managed by the same portfolio manager. However, the
portfolio manager has not managed the Similar Fund for the entire period shown.
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 Lyon Street 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 net operating expenses of the
Similar Fund, which are lower than the estimated operating 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, 1999
<TABLE>
<S> <C> <C> <C> <C> <C>
Similar Fund/Benchmark 1 Year 3 Years 5 Years Since Inception Inception Date
- ---------------------- ------ ------- ------- --------------- --------------
Kent Growth and Income Fund 18.53% 23.31% 24.63% 18.85% 11/2/92
S&P 500(R) Index* 21.03% 27.56% 28.54% 21.75% 10/31/92
</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.
# The Similar Fund performance information set forth above reflects fee
waivers and/or expense reimbursements. Absent such waivers and/or
reimbursements, Similar Fund performance would have been lower.
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-__________
- --------------------------------------------------------------------------------
Investors can review and copy the SAI and other information about the Fund at
the Public Reference Room of the Securities and Exchange Commission. Investors
may call 1-202-942-8090 for more information about the Public Reference Room.
Investors can get text-only copies of information about the Fund:
o For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-0102 or by electronic request at [email protected].
o 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
1-800-451-8382
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
This Statement of Additional Information ("SAI") describes three investment
portfolios (the "Funds") of Variable Insurance Funds (the "Trust"). The Funds
are:
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 Fund is 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, 2000, 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, 1999, 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
INVESTMENT OBJECTIVES AND POLICIES.............................................1
Additional Information on Portfolio Instruments.......................1
INVESTMENT RESTRICTIONS.......................................................17
Portfolio Turnover...................................................19
NET ASSET VALUE...............................................................19
Valuation of the Funds...............................................20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................20
MANAGEMENT OF THE TRUST.......................................................21
Trustees and Officers................................................21
Investment Adviser...................................................23
Investment Sub-Advisers..............................................24
Portfolio Transactions...............................................26
Federal Banking Law..................................................27
Administrator........................................................28
Expenses ............................................................29
Distributor..........................................................29
Custodians, Transfer Agent and Fund Accounting Services..............30
Independent Accountants..............................................30
Legal Counsel........................................................31
Code of Ethics.......................................................31
ADDITIONAL INFORMATION........................................................31
Description of Shares................................................31
Vote of a Majority of the Outstanding Shares.........................32
Principal Shareholders...............................................32
Shareholder and Trustee Liability....................................33
Additional Tax Information...........................................33
Performance Information..............................................36
Miscellaneous........................................................38
FINANCIAL STATEMENTS..........................................................38
APPENDIX...................................................................... i
<PAGE>
The Trust is an open-end management investment company which currently offers
nine separate funds, each with different investment objectives. 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. The first two
Funds are diversified, while the Select Equity Fund is a non-diversified fund.
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 Portfolio Instruments
The following policies supplement the investment objectives and policies of the
Funds as set forth in the Prospectuses.
Bank Obligations. Each Fund 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 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.
Each 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.
<PAGE>
The Funds 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 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.
Variable Amount Master Demand Notes. Variable amount master demand notes, in
which the Funds 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 and the issuer, they are
not normally traded. Although there is no secondary market in the notes, a 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. 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. Each 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, 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
will limit its investment in short-term obligations to 35% of its total assets.
For temporary defensive purposes, these investments may constitute 100% of a
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, each 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 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 of a Fund and its transaction costs.
Foreign Investments. Each 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.
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 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.
<PAGE>
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 investing in foreign markets is
uninvested and no return is earned thereon. The inability of such a Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Losses to a 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. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
the investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers which have similar maturities and quality. Under
certain market conditions these investments may 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.
If a security is denominated in foreign currency, the value of the security to a
Fund will be affected by changes in currency exchange rates and in exchange
control regulations, and costs will be incurred in connection with conversions
between currencies. Currency risks generally increase in lesser developed
markets. Exchange rate movements can be large and can endure for extended
periods of time, affecting either favorably or unfavorably the value of a Fund's
assets. The value of the assets of a Fund as measured in U.S. dollars may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations.
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 investing in foreign markets. In
addition, although a 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 could be required to liquidate portfolio securities to make required
distributions. Similarly, if an exchange rate declines between the time a 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.
ADRs, which are traded in the United States on exchanges or over-the-counter,
are issued by domestic banks. ADRs represent the right to receive securities of
foreign issuers deposited in a domestic bank or a correspondent bank. ADRs do
not eliminate all the risk inherent in investing in the securities of foreign
issuers' stock. However, by investing in ADRs rather than directly in foreign
issuers' stock, a Fund can avoid currency risks during the settlement period for
either purchase or sales.
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.
Money Market Funds. Each 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 order to avoid the imposition of additional fees as a result of investments
by a Fund in shares of affiliated money market funds, 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 may own more than 3% of the
outstanding shares of a single affiliated money market fund.
<PAGE>
U.S. Government Obligations. The 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 may invest do not include Certificates of Accrual
on Treasury Securities ("CATS") or Treasury Income Growth Receipts ("TIGRs").
Obligations of certain agencies and instrumentalities of the U.S. Government,
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 will invest
in the obligations of such agencies or instrumentalities only when AmSouth, or a
sub-adviser believes that the credit risk with respect thereto is minimal.
Options Trading. Each Fund may also engage in writing covered call options
(options on securities or currencies owned by the 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
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 previously has written. If a Fund is unable to
effect a closing purchase transaction, it will not be able to sell the
underlying security or currency until the option expires or the Fund delivers
the underlying security or currency upon exercise. In addition, upon the
exercise of a call option by the holder thereof, a Fund will forego the
potential benefit represented by market appreciation over the exercise price.
Under normal conditions, it is not expected that a Fund will cause the
underlying value of portfolio securities and/or currencies subject to such
options to exceed 25% of its total assets.
When a Fund writes an option, an amount equal to the net premium (the premium
less the commission) received by the 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 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 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 will
realize a gain or loss.
A Fund may write only covered call options. This means that the 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 the Funds. This premium income will serve to
enhance a 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.
<PAGE>
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.
When-Issued and Delayed-Delivery Securities. Each 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, the Funds may
sell securities on a "forward commitment" basis. The 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 will not pay for such securities or start
earning interest on them until they are received.
When a 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 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 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
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 commitment to
purchase "when-issued" or "delayed-delivery" securities will not exceed 25% of
the value of each Fund's total assets.
When a 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 incurring a loss or missing the opportunity to obtain a price
or yield considered to be advantageous.
<PAGE>
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 Regional Equity Fund
and the Equity Income Fund 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 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'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 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 will receive when these
amounts are reinvested.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage related securities
and among the securities that they issue. Mortgage-related securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-related securities issued by FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of FNMA and are not backed by or entitled to
the full faith and credit of the United States. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to the timely payment of the principal and interest by FNMA. Mortgage-related
securities issued by FHLMC include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of
the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to the timely payment of interest, which is guaranteed by
FHLMC. FHLMC guarantees either ultimate collection or the timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
Each 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 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. Each Fund may invest in real estate investment
trusts. Real estate investment trusts are sensitive to factors such as changes
in real estate values and property taxes, interest rates, cash flow of
underlying real estate assets, overbuilding, and the management skill and
creditworthiness of the issuer. Real estate may also be affected by tax and
regulatory requirements, such as those relating to the environment.
Restricted Securities. "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"). A 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 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. AmSouth,
Rockhaven, or OakBrook 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.
AmSouth, Rockhaven, or OakBrook 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 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 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 may, from time to time, lend portfolio securities to broker-dealers, banks
or institutional borrowers of securities. The Funds must receive 100%
collateral, in the form of cash or U.S. Government securities. This collateral
must be valued daily, and should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the lender. During
the time portfolio securities are on loan, the borrower pays the lender any
dividends or interest paid on such securities. Loans are subject to termination
by the lender or the borrower at any time. While the 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, it could experience
delays in recovering its securities and possible capital losses. The Funds will
only enter into loan arrangements with broker-dealers, banks or other
institutions determined to be creditworthy under guidelines established by the
Board of Trustees that permit a Fund to loan up to 33 1/3% of the value of its
total assets.
Convertible Securities. The 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 will invest in convertible securities that are rated "BBB" or "Baa"
or higher.
<PAGE>
Securities rated "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 of 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.
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.
<PAGE>
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.
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 and 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 a Fund may be subject to repurchase
agreements. Under the terms of a repurchase agreement, a Fund would acquire
securities from member banks of the Federal Deposit Insurance Corporation and
registered broker-dealers that 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 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 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 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 would sell certain of its securities to financial
institutions such as banks and broker-dealers, and agree to repurchase them, or
substantially similar securities in the case of a dollar roll agreement, at a
mutually agreed upon date and price. A dollar roll agreement is analogous to a
reverse repurchase agreement, with a Fund selling mortgage-backed securities for
delivery in the current month and simultaneously contracting to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. At the time a Fund enters into a reverse repurchase agreement or
dollar roll agreement, it will place in a segregated custodial account assets
such as U.S. Government securities or other liquid securities consistent with
its investment restrictions having a value equal to the repurchase price
(including accrued interest), and will subsequently continually monitor the
account to ensure that such equivalent value is maintained at all times. Reverse
repurchase agreements and dollar roll agreements involve the risk that the
market value of securities to be purchased by a Fund may decline below the price
at which it is obligated to repurchase the securities, or that the other party
may default on its obligation, so that a Fund is delayed or prevented from
completing the transaction.
Futures Contracts. The Select 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. The 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 the
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, the 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, the 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 the 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 the 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 the Fund as a regulated investment company.
Futures transactions involve brokerage costs and require the Fund to segregate
liquid assets, such as cash, U.S. Government securities or other liquid
securities to cover its obligation under such contracts. The Fund may lose the
expected benefit of futures transactions if interest rates, securities prices or
foreign exchange rates move in an unanticipated manner. Such unanticipated
changes may also result in poorer overall performance than if the Fund had not
entered into any futures transactions. In addition, the value of the Fund's
futures positions may not prove to be perfectly or even highly correlated with
the value of its portfolio securities and foreign currencies, limiting the
Fund's ability to hedge effectively against interest rate, foreign exchange rate
and/or market risk and giving rise to additional risks. There is no assurance of
liquidity in the secondary market for purposes of closing out futures positions.
Foreign Currency Transactions. The value of the assets of a Fund as measured in
U.S. dollars may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and the Funds (except
the Select Equity Fund) may incur costs in connection with conversions between
various currencies. The Funds 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
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 are able to protect themselves 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) 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 hedging strategy will be successful is highly uncertain.
<PAGE>
It is impossible to forecast with precision the market value of portfolio
securities at the expiration of a forward currency contract. Accordingly, it may
be necessary for a Fund to purchase additional currency on the spot market if
the market value of the security is less than the amount of foreign currency
such Fund is obligated to deliver when a decision is made to sell the security
and make delivery of the foreign currency in settlement of a forward contract.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency such Fund is obligated to deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, it will incur a gain or a loss to the extent that there has been
movement in forward currency contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a new forward currency contract to
sell the foreign currency. Although such contracts tend to minimize the risk of
loss due to a decline in the value of the hedged currency, they also tend to
limit any potential gain which might result should the value of such currency
increase. The Funds will have to convert their holdings of foreign currencies
into U.S. dollars from time to time. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies.
Foreign Currency Options. A foreign currency option provides the Equity Income
Fund, or the Regional 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 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 was
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 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 would not have to exercise
its call but could acquire in the spot market the amount of foreign currency
needed for settlement.
Foreign Currency Futures Transactions. As part of its financial futures
transactions, the Equity Income Fund and the Regional Equity Fund may use
foreign currency futures contracts and options on such futures contracts.
Through the purchase or sale of such contracts, a 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 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 will not enter into a futures contract or purchase an option
thereon if immediately thereafter the initial margin deposits for futures
contracts held by such Fund plus premiums paid by it for open options on futures
would exceed 5% of such Fund's total assets. Such Fund will not engage in
transactions in financial futures contracts or options thereon for speculation,
but only to attempt to hedge against changes in market conditions affecting the
values of securities which such Fund holds or intends to purchase. When futures
contracts or options thereon are purchased to protect against a price increase
on securities intended to be purchased later, it is anticipated that at least
25% of such intended purchases will be completed. When other futures contracts
or options thereon are purchased, the underlying value of such contracts will at
all times not exceed the sum of: (1) accrued profit on such contracts held by
the broker; (2) cash or high quality money market instruments set aside in an
identifiable manner; and (3) cash proceeds from investments due in 30 days.
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund's investment objective is fundamental and may not be changed without a
vote of the holders of a majority of the Fund's outstanding Shares. In addition,
the following investment restrictions may be changed with respect to a
particular Fund only by a vote of a majority of the outstanding Shares of that
Fund (as defined under "ADDITIONAL INFORMATION -- Vote of a Majority of the
Outstanding Shares" in this SAI).
None of the Funds will:
1. Purchase any securities which would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in securities of
one or more issuers conducting their principal business activities in the same
industry, provided that: (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
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; and (c)
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;
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 are not prohibited by this restriction).
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;
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.
<PAGE>
Portfolio Turnover
Changes may be made in a Fund's portfolio consistent with the investment
objective and policies of the Fund whenever such changes are believed to be in
the best interests of the Fund and its Shareholders. The portfolio turnover
rates for all of the Funds may vary greatly from year to year as well as within
a particular year, and may be affected by cash requirements for redemptions of
Shares and by requirements which enable the Funds to receive certain favorable
tax treatments. High portfolio turnover rates will generally result in higher
transaction costs to a Fund, including brokerage commissions.
Each Fund will be managed without regard to its portfolio turnover rate.
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.
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.
<PAGE>
MANAGEMENT OF THE TRUST
Trustees and Officers
Overall responsibility for management of the Trust rests with its Board of
Trustees, who are elected by the Shareholders of the Trust. The Trustees elect
the officers of the Trust to supervise actively its day-to-day operations.
The names of the Trustees, their addresses, ages, and principal occupations
during the past five years are set forth below:
Name, Address, and Age Principal Occupation During Past 5 Years
- --------------------- ----------------------------------------
James H. Woodward Chancellor, University of North Carolina
University of North Carolina at Charlotte.
at Charlotte
Charlotte, NC 28223
Age: 60
Michael Van Buskk Chief Executive Officer, Ohio Bankers
37 West Broad Street Association (industry trade association).
Suite 1001
Columbus, OH 43215
Age: 53
Walter B. Grimm* Employee of BISYS Fund
3435 Stelzer Road Services (6/92-present).
Columbus, Oh 43219
Age: 54
- -------------------
* 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 person, and $250 for each special meeting
of the Board of Trustees attended by telephone. For the fiscal year ended
December 31, 1999, the Trust paid the following compensation to the Trustees of
the Trust:
Name Aggregate Compensation Total Compensation from
from Trust and Fund Complex**
---------------------- ------------------------
James H. Woodward $4,000 $20,750
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, Kent Funds, HSBC Mutual Funds
Trust, HSBC Funds Trust, The BB&T Funds and AmSouth Funds.
The officers of the Trust, their addresses, ages, and principal occupations
during the past five years are as follows (unless otherwise indicated, the
address of each officer is 3435 Stelzer Road, Columbus, OH 43219):
Position(s) Held Principal Occupation
Name, Address, and Age With the Trust During Past 5 Years
Walter Grimm President and Chairman Employee of BISYS Fund
Age: 54 of the Board Services (6/92-present).
Frank Deutchki Vice President Employee of BISYS Fund
Age: 46 Services (4/96 - present);
Vice President, Audit
Director at Mutual Funds
Services Company, a
subsidiary of United
States Trust Company of
New York (2/89 - 3/96).
Gregory Maddox Vice President and Employee of BISYS Fund
Columbia Square Assistant Secretary Services (4/91 - present).
Suite 500
1230 Columbia Street
San Diego, CA 92101
Age: 32
<PAGE>
Charles L. Booth Vice President and Employee of BISYS Fund
Age: 40 Assistant Secretary Services (1988 - present).
Alaina Metz Secretary Employee of BISYS Fund
Age: 33 Services (6/95 - present);
Supervisor, Mutual Fund
Legal Department, Alliance
Capital Management (5/89
- 6/95).
Gary Tenkman Treasurer Employee of BISYS Fund
Age: 29 Services (4/98 - present);
Audit Manager Ernst &
Young LLP (1990 - 4/98).
Nimish Bhatt Principal Financial Employee of BISYS Fund
Age: 36 and Accounting Officer Services (7/96 - present);
and Comptroller Assistant Vice President,
Evergreen Funds/First
Union Bank (1995 to 7/96);
Senior Tax Consultant,
Price Waterhouse, LLP
(1990 - 12/94).
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, 2000, 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 Adviser
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 each Fund by AmSouth, 1901 Sixth Avenue North,
Birmingham, AL 35203, pursuant to an Investment Advisory Agreement dated
September 16, 1997 (the "Investment Advisory Agreement"). AmSouth is the
principal bank affiliate of AmSouth Bancorporation, one of the largest banking
institutions headquartered in the mid-south region.
Under the Investment Advisory Agreement, AmSouth has 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 Investment Advisory Agreement, AmSouth is
entitled to a fee, computed daily and paid monthly, at the following rates,
calculated as a percentage of average daily net assets of each Fund: 0.60% for
the Regional Equity Fund and Equity Income Fund, and 0.80% for the Select Equity
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 $12,008 was waived or reimbursed by AmSouth. For the
fiscal years ended December 31, 1998 and December 31, 1999, the Equity Income
Fund incurred investment advisory fees equal to $85,510 and $161,583
respectively, of which $32,185 and $24,238, respectively, was waived or
reimbursed by AmSouth. For the period from May 3, 1999 (commencement of
operations) through December 31, 1999, the Select Equity Fund incurred
investment advisory fees equal to $9,703, of which $970 was waived or reimbursed
by AmSouth.
Unless sooner terminated, the 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. The 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
AmSouth. The Investment Advisory Agreement also terminates automatically in the
event of any assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that AmSouth 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 AmSouth or a Sub-Adviser 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 AmSouth including, but not limited to, (i) descriptions
of AmSouth's operations; (ii) descriptions of certain personnel and their
functions; and (iii) statistics and rankings related to AmSouth'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
years ended December 31, 1998 and December 31, 1999, $21,327.61 and $82,255.71,
respectively, were paid by AmSouth to Rockhaven in sub-advisory fees.
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, provided that if AmSouth waives some or all of
its investment advisory fee, OakBrook shall waive its fee so that it shall
receive no more than seventy percent (70%) of the net investment advisory fee
paid to AmSouth, subject to the requirement that OakBrook receive an investment
advisory fee at an annual rate no lower than the following rates (as a
percentage of the average daily net assets of the Select Equity Fund) for the
indicated levels of assets under management: up to $10 million -.476%; $10-50
million - .42%; and over $50 million - .28%. For the period from May 3, 1999
(commencement of operations) through December 31, 1999, $6,089 was paid by
AmSouth to OakBrook in sub-advisory fees.
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.
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.
<PAGE>
Portfolio Transactions
AmSouth 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 AmSouth or a Sub-Adviser in its best judgment and in a
manner deemed fair and reasonable to Shareholders. In selecting a broker or
dealer, AmSouth or a 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 AmSouth or a 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 AmSouth or a Sub-Adviser informed concerning overall economic,
market, political and legal trends. Under some circumstances, AmSouth or a
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.
Research information so received is in addition to and not in lieu of services
required to be performed by AmSouth or a Sub-Adviser and does not reduce the
fees payable to AmSouth or a Sub-Adviser by the Trust. Such information may be
useful to AmSouth or a 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 AmSouth or a 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
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 AmSouth or a 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, AmSouth or a 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,
AmSouth or a 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
AmSouth, a Sub-Adviser or BISYS, their parents or their subsidiaries or
affiliates and, in dealing with its customers, 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 October 23, 1997 (commencement of operations) through
December 31, 1997, and for the fiscal years ended December 31, 1998 and December
31, 1999, the Equity Income Fund paid aggregate brokerage commissions equal to
$2,520, $60,004.58, and $58,139.52, respectively. For the period from May 1,
1999 (commencement of operations) through December 31, 1999, the Select Equity
Fund paid aggregate brokerage commissions equal to $2,738.56.
<PAGE>
Federal Banking Law
The Gramm-Leach-Bliley Act of 1999 repealed certain provisions of the
Glass-Steagall Act that had previously restricted the ability of banks and their
affiliates to engage in certain mutual fund activities. Nevertheless, AmSouth's
activities remain subject to, and may be limited by, applicable federal banking
law and regulations. AmSouth believes that it possesses the legal authority to
perform the services for the Fund contemplated by the Prospectus, this SAI, and
the Investment Advisory Agreement without violation of applicable statutes and
regulations. If future changes in these laws and regulations were to limit the
ability of AmSouth to perform these services, the Board of Trustees would review
the Trust's relationship with AmSouth and consider taking all action necessary
in the circumstances, which could include recommending 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 AmSouth
under the Investment Advisory Agreement, 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 AmSouth under
the Investment Advisory Agreement, 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.
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
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 years ended December 31, 1998 and
December 31, 1999, the Equity Income Fund incurred administration fees equal to
$28,503 and $53,861, respectively, of which $22,164 and $10,608, respectively,
was waived or reimbursed by BISYS, or BISYS Ohio. For the period from May 3,
1999 (commencement of operations) through December 31, 1999, the Select Equity
Fund incurred administration fees equal to $2,426, of which $20,663 was waived
or reimbursed by BISYS Ohio.
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.
<PAGE>
Expenses
AmSouth, each 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 custodian and fund accountant, certain insurance
premiums, costs of maintenance of the Trust's existence, costs of Shareholders'
reports and meetings, and any extraordinary expenses incurred in 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.
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.
Custodian, Transfer Agent and Fund Accounting Services
AmSouth serves as custodian to the Trust with respect to each Fund pursuant to a
Custody Agreement dated as of September 16, 1997. As custodian, its
responsibilities include safeguarding and controlling the Funds' cash and
securities, handling the receipt and delivery of securities, and collecting
interest and dividends on the Funds' investments.
BISYS Ohio serves as transfer agent and dividend disbursing agent for the Funds
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.
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.
<PAGE>
Independent Accountants
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.
Code of Ethics
The Trust, AmSouth, each Sub-Adviser and BISYS each have adopted a code of
ethics, as required by applicable law, which is designed to prevent affiliated
persons of the Trust, AmSouth, a Sub-Adviser and BISYS from engaging in
deceptive, manipulative, or fraudulent activities in connection with securities
held or to be acquired by the Funds (which may also be held by persons subject
to a code). There can be no assurance that the codes will be effective in
preventing such activities.
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 nine series of Shares which represent interests in each
series of the Trust. The Trust's Declaration of Trust authorizes the Board of
Trustees to divide or redivide any unissued Shares of the Trust into one or more
additional series or classes by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting power,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.
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.
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.
<PAGE>
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding Shares of each Fund
affected by the matter. For purposes of determining whether the approval of a
majority of the outstanding Shares of a Fund will be required in connection with
a matter, a Fund will be deemed to be affected by a matter unless it is clear
that the interests of each Fund in the matter are identical, or that the matter
does not affect any interest of the Fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy submitted to
Shareholders would be effectively acted upon with respect to a series only if
approved by a majority of the outstanding Shares of such Fund. However, Rule
18f-2 also provides that the ratification of independent public accountants, the
approval of principal underwriting contracts, and the election of Trustees may
be effectively acted upon by Shareholders of the Trust voting without regard to
Fund.
Vote of a Majority of the Outstanding Shares
As used in the Funds' Prospectuses and the SAI, "vote of a majority of the
outstanding Shares of the Trust or the Fund" means the affirmative vote, at an
annual or special meeting of Shareholders duly called, of the lesser of (a) 67%
or more of the votes of Shareholders of the Trust or the Fund present at such
meeting at which the holders of more than 50% of the votes attributable to the
Shareholders of record of the Trust or the Fund are represented in person or by
proxy, or (b) the holders of more than 50% of the outstanding votes of
Shareholders of the Trust or the Fund.
Principal Shareholders
As of April 19, 2000, Hartford Life Insurance Company Separate Account Two, 200
Hopmeadow Street, Simsbury, Connecticut 06070 owned 100% of the outstanding
Shares of the Equity Income Fund and 88.01% of the outstanding shares of the
Select Equity Fund, and thus may be deemed to be able to control the outcome of
any matter submitted to a vote of the Shareholders of either of those Funds.
AmSouth Investment Services, 250 Riverchase Parkway, Birmingham, AL 35244 owned
11.99% of the outstanding Shares of the Select Equity Fund, and thus may be
deemed to be able to control the outcome of any matter submitted to a vote of
the shareholders of the Select Equity Fund.
<PAGE>
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. This discussion does not purport to be
complete or to deal with all aspects of federal income taxation that may be
relevant. This discussion is based upon present provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the regulations promulgated
thereunder, and judicial and administrative ruling authorities, all of which are
subject to change, which change may be retroactive. Prospective investors should
consult their own tax advisors with regard to the federal, state, local and
foreign tax aspects of an investment in a Fund.
Each Fund intends to qualify annually and to elect to be treated as a regulated
investment company under Subchapter M of 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.
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, each 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,
each 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.
Each Fund also intends to comply with the separate diversification requirements
imposed by Section 817(h) of the Code and the regulations thereunder on certain
insurance company separate accounts. These requirements, which are in addition
to the diversification requirements imposed on a Fund by the 1940 Act and
Subchapter M of the Code, place certain limitations on assets of each insurance
company separate account used to fund variable contracts. Because Section 817(h)
and those regulations treat the assets of a Fund as assets of the related
separate account, these regulations are imposed on the assets of the Fund.
Specifically, the regulations provide that, after a one year start-up period or
except as permitted by the "safe harbor" described below, as of the end of each
calendar quarter or within 30 days thereafter no more than 55% of the total
assets of a Fund may be represented by any one investment, no more than 70% by
any two investments, no more than 80% by any three investments and no more than
90% by any four investments. For this purpose, all securities of the same issuer
are considered a single investment, and each U.S. Government agency and
instrumentality is considered a separate issuer. Section 817(h) provides, as a
safe harbor, that a separate account will be treated as being adequately
diversified if the diversification requirements under Subchapter M are satisfied
and no more than 55% of the value of the account's total assets is attributable
to cash and cash items (including receivables), U.S. Government securities and
securities of other regulated investment companies. Failure by a Fund to both
qualify as a regulated investment company and satisfy the Section 817(h)
requirements would generally cause the variable contracts to lose their
favorable tax status and require a contract holder to include in ordinary income
any income accrued under the contracts for the current and all prior taxable
years. Under certain circumstances described in the applicable Treasury
regulations, inadvertent failure to satisfy the applicable diversification
requirements may be corrected, but such a correction would require a payment to
the Internal Revenue Service based on the tax contract holders would have
incurred if they were treated as receiving the income on the contract for the
period during which the diversification requirements were not satisfied. Any
such failure may also result in adverse tax consequences for the insurance
company issuing the contracts. Failure by a Fund to qualify as a regulated
investment company would also subject the Fund to federal and state income
taxation on all of its taxable income and gain, whether or not distributed to
shareholders.
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 a given Fund 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 a 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.
If the Fund invests in shares of a passive 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. A 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.
<PAGE>
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 each 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.
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, 1999,
the yield for the Equity Income Fund was 1.08%, and the yield for the Select
Equity Fund was 0.83%.
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 (October 23, 1997) through
December 31, 1999 and for the fiscal year ended on such date, average annual
total return for the Equity Income Fund was 18.14% and 25.00%, respectively. For
the period from its commencement of operations (May 3, 1999) through December
31, 1999, the total return for the Select Equity Fund was (14.51%).
<PAGE>
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.,
the Russell 2000 Index, the Consumer Price Index, and to data prepared by Lipper
Analytical Services, Inc., a widely recognized independent service which
monitors the performance of mutual funds, or Morningstar, Inc. 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 the Funds that appears in a publication such as those
mentioned above may be included in advertisements and in reports to Variable
Contract Owners.
Each Fund may also compute aggregate total return for specified periods. The
aggregate total return is determined by dividing the net asset value of this
account at the end of the specified period by the value of the initial
investment and is expressed as a percentage. Calculation of aggregate total
return assumes reinvestment of all income dividends and capital gain
distributions during the period.
The Funds also may quote annual, average annual and annualized total return and
aggregate total return performance data for various periods other than those
noted above. Such data will be computed as described above, except that the
rates of return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return.
Quotations of yield or total return for the Funds will not take into account
charges and deductions against a Separate Account to which the Funds' Shares are
sold or charges and deductions against the Variable Contracts. The Funds' yield
and total return should not be compared with mutual funds that sell their shares
directly to the public since the figures provided do not reflect charges against
the Separate Accounts or the Variable Contracts. Performance information for any
Fund reflects only the performance of a hypothetical investment in the Fund
during the particular time period in which the calculations are based.
Performance information should be considered in light of the Funds' investment
objectives and policies, characteristics and quality of the portfolios and the
market conditions during the given time period, and should not be considered as
a representation of what may be achieved in the future.
Miscellaneous
Individual Trustees are elected by the Shareholders and, subject to removal by
the vote of two-thirds of the Board of Trustees, serve for a term lasting until
the next meeting of Shareholders at which Trustees are elected. Such meetings
are not required to be held at any specific intervals. Individual Trustees may
be removed by vote of the Shareholders voting not less than a majority of the
Shares then outstanding, cast in person or by proxy at any meeting called for
that purpose, or by a written declaration signed by Shareholders voting not less
than two-thirds of the Shares then outstanding. In accordance with current laws,
it is anticipated that an insurance company issuing a Variable Contract that
participates in the Funds will request voting instructions from variable
contract owners and will vote shares or other voting interests in the Separate
Account in proportion of the voting instructions received.
The 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.
FINANCIAL STATEMENTS
Financial statements for the Trust with respect to the Select Equity Fund and
the Equity Income Fund as of December 31, 1999 for their fiscal years then
ended, including notes thereto and the reports of PricewaterhouseCoopers LLP
thereon dated February 14, 2000 are incorporated by reference from the Trust's
1999 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.
S&P applies indicators "+," no character, and "-" to its rating
categories. The indicators show relative standing within the major rating
categories.
<PAGE>
Description of Moody's commercial paper ratings:
Excerpts from Moody's commercial paper ratings are listed as follows:
Prime - 1 - issuers (or supporting institutions) have a superior ability for
repayment of senior short-term promissory obligations; Prime - 2 - issuers (or
supporting institutions) have a strong ability for repayment of senior
short-term promissory obligations; Prime - 3 - issuers (or supporting
institutions) have an acceptable ability for repayment of senior short-term
promissory obligations; Not Prime - issuers do not fall within any of the Prime
categories.
Description of S&P's ratings for corporate and municipal bonds:
Investment grade ratings: AAA - the highest rating assigned by S&P,
capacity to pay interest and repay principal is extremely strong; AA - has a
very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in a small degree; A - has strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories; BBB - regarded as having an adequate capacity to pay
interest and repay principal - whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Speculative grade ratings: BB, B, CCC, CC, C - debt rated in these
categories is regarded as having predominantly speculative characteristics with
respect to capacity to pay interest and repay principal - while such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions; CI - reserved
for income bonds on which no interest is being paid; D -in default, and payment
of interest and/or repayment of principal is in arrears. Plus (+) or Minus (-) -
the ratings from "AA" to "CCC" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Description of S&P's 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>
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-228-1872
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
This Statement of Additional Information ("SAI") describes two diversified
investment portfolios (the "Funds") of Variable Insurance Funds (the "Trust").
The Funds are:
o BB&T Growth and Income Fund; and
o BB&T Capital Manager Fund; *
* As of the date of this SAI, the indicated Fund is 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 adviser 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, 2000, 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, 1999, 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
number set forth above.
<PAGE>
TABLE OF CONTENTS
INVESTMENT OBJECTIVES AND POLICIES.............................................1
Additional Information on the Capital Manager Fund's
Investment Policies....................................................1
Additional Information on Portfolio Instruments............................1
INVESTMENT RESTRICTIONS.......................................................18
Portfolio Turnover........................................................20
NET ASSET VALUE...............................................................20
Valuation of the Funds....................................................20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................21
MANAGEMENT OF THE TRUST.......................................................22
Trustees and Officers.....................................................22
Investment Adviser........................................................24
Portfolio Transactions....................................................25
Federal Banking Law.......................................................26
Administrator.............................................................27
Expenses..................................................................28
Distributor...............................................................28
Custodian, Transfer Agent and Fund Accounting Services....................28
Independent Accountants...................................................29
Legal Counsel.............................................................29
Code of Ethics............................................................29
ADDITIONAL INFORMATION........................................................30
Description of Shares.....................................................30
Principal Shareholders....................................................31
Shareholder and Trustee Liability.........................................31
Additional Tax Information................................................32
Performance Information...................................................34
Miscellaneous.............................................................36
FINANCIAL STATEMENTS..........................................................36
APPENDIX.......................................................................i
<PAGE>
The Trust is an open-end management investment company which currently offers
nine separate funds, each with different investment objectives. This SAI
contains information about the following two diversified 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").
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."
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, 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.
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.
<PAGE>
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.
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 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 Funds 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, 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 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 the Growth and Income 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 of the Growth and Income
Fund or Underlying Fund and its transaction costs.
Foreign Investments. 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. 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.
<PAGE>
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.
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 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 an Underlying Fund investing in foreign markets
is uninvested and no return is earned thereon. The inability of such an
Underlying Fund to make intended security purchases due to settlement problems
could cause an Underlying Fund to miss attractive investment opportunities.
Losses to an 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
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.
<PAGE>
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 a result to assess 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.
If a security is denominated in foreign currency, the value of the security to
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
an Underlying Fund's assets. The value of the assets of an 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 an 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, an Underlying Fund could be required to liquidate portfolio
securities to make required distributions. Similarly, if an exchange rate
declines between the time an 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, an 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. The Growth and Income Fund and each of 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 or
Underlying 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 and the Underlying Funds (except for the BB&T U.S.
Treasury Fund) in shares of affiliated money market funds, BB&T, BISYS Fund
Services ("BISYS" or "Distributor"), and their affiliates will not retain any
portion of their usual service fees 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. The Growth and Income Fund and the Underlying 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, neither the Growth and
Income Fund nor any 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 Growth and Income 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
Growth and Income 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 Growth and Income Fund or the Underlying Fund.
U.S. Government Obligations. The BB&T U.S. Treasury Fund may invest in U.S.
Government securities to the extent that they are obligations issued or
guaranteed by the U.S. Treasury. The 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").
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 believes that the credit risk with respect
thereto is minimal.
<PAGE>
The Growth and Income Fund, the BB&T Short-Intermediate Fund, the BB&T
Intermediate Bond Fund, the BB&T Growth and Income Fund, the BB&T Balanced Fund,
and the 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.
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 and the BB&T
International Equity Fund may also engage in writing covered call options
(options on securities or currencies owned by the Growth and Income 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, the
Growth and Income Fund or Underlying Fund will effect a "closing purchase
transaction"--the purchase of a call option on the same security or currency
with the same exercise price and expiration date as the call option which the
Fund or Underlying Fund previously has written. If the Growth and Income Fund or
Underlying Fund is unable to effect a closing purchase transaction, it will not
be able to sell the underlying security or currency until the option expires or
the Growth and Income Fund or Underlying Fund delivers the underlying security
or currency upon exercise. In addition, upon the exercise of a call option by
the holder thereof, the Growth and Income Fund or Underlying Fund will forego
the potential benefit represented by market appreciation over the exercise
price. Under normal conditions, it is not expected that the Growth and Income
Fund or 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.
<PAGE>
When the Growth and Income Fund or Underlying Fund writes an option, an amount
equal to the net premium (the premium less the commission) received by the
Growth and Income 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 the
Growth and Income 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 Growth and Income 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 Growth and
Income Fund or Underlying Fund will realize a gain or loss.
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 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, the Growth and
Income Fund, the BB&T Small Company Growth Fund, and the 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 Growth and Income Fund 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 Growth and Income Fund and Underlying Funds will not
pay for such securities or start earning interest on them until they are
received.
When the Growth and Income Fund or Underlying Fund agrees to purchase securities
on a "when-issued" or "delayed-delivery" basis, its custodian will set aside
cash or liquid securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside securities to satisfy the
purchase commitment, and in such a case, the Growth and Income 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 the Growth and Income
Fund or Underlying Fund investing in securities on a when-issued or delayed
delivery basis, net assets will fluctuate to a greater degree when it sets aside
securities to cover such purchase commitments than when it sets aside cash. In
addition, because the Growth and Income Fund or Underlying Fund will set aside
cash or liquid securities to satisfy its purchase commitments in the manner
described above, its liquidity and the ability of its investment adviser to
manage it might be affected in the event its commitments to purchase
"when-issued" or "delayed-delivery" securities ever exceeded 25% of the value of
its assets. Under normal market conditions, however, the Growth and Income
Fund's or Underlying Fund's commitment to purchase "when-issued" or
"delayed-delivery" securities will not exceed 25% of the value of the Growth and
Income Fund or Underlying Fund's total assets.
<PAGE>
When the Growth and Income Fund or Underlying Fund engages in "when-issued" or
"delayed-delivery" transactions, it relies on the seller to consummate the
trade. Failure of the seller to do so may result in the Growth and Income Fund
or Underlying Fund incurring a loss or missing the opportunity to obtain a price
or yield 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 BB&T Short-Intermediate Fund, the BB&T Intermediate Bond Fund, the
BB&T Balanced Fund, and the BB&T Small Company Growth Fund each may, consistent
with its investment objective and policies, invest in mortgage-related
securities issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. In addition, each may invest in mortgage-related securities
issued by nongovernmental entities, provided, however, that to the extent the
Growth and Income 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
Growth and Income 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 the Growth and Income 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 Growth and Income Fund or Underlying Funds
will receive when these amounts are reinvested.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage related securities
and among the securities that they issue. Mortgage-related securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-related securities issued by FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of FNMA and are not backed by or entitled to
the full faith and credit of the United States. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to the timely payment of the principal and interest by FNMA. Mortgage-related
securities issued by FHLMC include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of
the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to the timely payment of interest, which is guaranteed by
FHLMC. FHLMC guarantees either ultimate collection or the timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
<PAGE>
The Growth and 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,
the Growth and Income 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.
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, the Growth and Income Fund or Underlying Fund may invest in other
asset-backed securities that may be developed in the future.
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 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 Growth and Income Fund 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, 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.
BB&T 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
Growth and Income 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 the Growth and Income 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
Growth and Income Fund and Underlying Funds may, from time to time, lend
portfolio securities to broker-dealers, banks or institutional borrowers of
securities. The Growth and Income Fund 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 Growth and Income Fund 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 the Growth and Income Fund or Underlying Fund, it could
experience delays in recovering its securities and possible capital losses. The
Growth and Income Fund 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 the Growth and Income 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.
<PAGE>
Convertible Securities. The Growth and Income 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 Growth and Income Fund and Underlying Funds will invest in
convertible securities that are rated "BBB" or "Baa" or higher.
Securities rated "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 Growth and
Income 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 of the
issuer's credit quality. 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. 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.
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.
<PAGE>
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.
Repurchase Agreements. Securities held by the Growth and Income Fund and the
Underlying Funds may be subject to repurchase agreements. Under the terms of a
repurchase agreement, the Growth and Income Fund or Underlying Fund would
acquire securities from member banks of the Federal Deposit Insurance
Corporation and registered broker-dealers that BB&T deems creditworthy, 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, the
Growth and Income 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 Growth and Income Fund's or
Underlying Fund's custodian or another qualified custodian, as appropriate, or
in the Federal Reserve/Treasury book-entry system.
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 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. The Growth and Income 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 the Growth and Income 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, the Growth and
Income 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, the Growth and
Income 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.
<PAGE>
The acquisition of put and call options on futures contracts will, respectively,
give the Growth and Income 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 the Growth and Income 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 the Growth and Income Fund or Underlying Fund as a regulated
investment company.
Futures transactions involve brokerage costs and require the Growth and Income
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. The Growth and Income Fund or an Underlying Fund may lose the
expected benefit of futures transactions if interest rates, securities prices or
foreign exchange rates move in an unanticipated manner. Such unanticipated
changes may also result in poorer overall performance than if the Growth and
Income Fund or Underlying Fund had not entered into any futures transactions. In
addition, the value of the Growth and Income 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 Growth and
Income 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 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 the Underlying Fund may incur costs in connection with
conversions between various currencies. 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 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 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 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 hedging 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 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 Underlying Fund is obligated to deliver when a
decision is made to sell the security and make delivery of the foreign currency
in settlement of a forward contract. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
such Underlying Fund is obligated to deliver.
If 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 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 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.
<PAGE>
Foreign Currency Options. A foreign currency option provides 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 the BB&T International Equity 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 the BB&T International Equity Fund was 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 the BB&T International Equity 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, the BB&T International
Equity Fund would not have to exercise its call but could acquire in the spot
market the amount of foreign currency needed for settlement.
Foreign Currency Futures Transactions. As part of its financial futures
transactions the 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, an 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, the Growth and
Income 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," the Growth and Income 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 the Growth and Income Fund
or Underlying Fund plus premiums paid by it for open options on futures would
exceed 5% of the Growth and Income Fund's or Underlying Fund's total assets. The
Growth and Income 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 the Growth and Income 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.
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund's investment objective is fundamental and may not be changed without a
vote of the holders of a majority of the Fund's outstanding Shares. In addition,
the following investment restrictions may be changed with respect to a
particular Fund only by a vote of a majority of the outstanding Shares of that
Fund (as defined under "ADDITIONAL INFORMATION -- Vote of a Majority of the
Outstanding Shares" in this SAI).
None of the Funds will:
1. Purchase any securities which would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in securities of
one or more issuers conducting their principal business activities in the same
industry, provided that: (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
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. 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).
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.
<PAGE>
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 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.
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.
<PAGE>
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.
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.
The names of the Trustees, their addresses, ages, and principal occupations
during the past five years are set forth below:
Name, Address, and Age Principal Occupation During Past 5 Years
- ---------------------- ----------------------------------------
James H. Woodward Chancellor, University of North Carolina
University of North Carolina at Charlotte.
at Charlotte
Charlotte, NC 28223
Age: 60
Michael Van Buskirk Chief Executive Officer, Ohio Bankers
37 West Broad Street Association (industry trade association).
Suite 1001
Columbus, OH 43215
Age: 53
Walter B. Grimm* Employee of BISYS Fund Services (6/92-
3435 Stelzer Road present).
Columbus, Oh 43219
Age: 54
- ----------------------
* Mr. Grimm is an "interested person" of the Trust as that term is defined in
the 1940 Act.
<PAGE>
The Trust pays each Trustee who is not an employee of BISYS or its affiliates a
retainer fee at the rate of $500 per calendar quarter, reasonable out-of-pocket
expenses, $500 for each regular meeting of the Board of Trustees attended in
person, and $250 for each regular meeting of the Board of Trustees attended by
telephone. The Trust also pays each such Trustee $500 for each special meeting
of the Board of Trustees attended in person, and $250 for each special meeting
of the Board of Trustees attended by telephone. For the fiscal year ended
December 31, 1999, 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 $20,750
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, Kent Funds, HSBC Mutual Funds
Trust, HSBC Funds Trust, The BB&T Mutual Funds Group and AmSouth Mutual
Funds.
The officers of the Trust, their addresses, ages, and principal occupations
during the past five years are as follows (unless otherwise indicated, the
address of each officer is 3435 Stelzer Road, Columbus, OH 43219):
Position(s) Held Principal Occupation
Name, Address, and Age With the Trust During Past 5 Years
- ---------------------- -------------- -------------------
Walter Grimm President and Chairman Employee of BISYS Fund
Age: 54 of the Board Services (6/92-present).
Frank Deutchki Vice President Employee of BISYS Fund
Age: 46 Services (4/96 - present);
Vice President, Audit
Director at Mutual Funds
Services Company, a
subsidiary of United States
Trust Company of New York
(2/89 - 3/96).
Gregory Maddox Vice President and Employee of BISYS Fund
Columbia Square Assistant Secretary Services (4/91 - present).
Suite 500
1230 Columbia Street
San Diego, CA 92101
Age: 32
Charles L. Booth Vice President and Employee of BISYS Fund
Age: 40 Assistant Secretary Services (1988 - present).
Alaina Metz Secretary Employee of BISYS Fund
Age: 33 Services (6/95 - present);
Supervisor, Mutual Fund
Legal Department, Alliance
Capital Management (5/89 -
6/95).
Gary Tenkman Treasurer Employee of BISYS Fund
Age: 29 Services (4/98 - present);
Audit Manager Ernst & Young
LLP (1990 - 4/98).
Nimish Bhatt Principal Financial and Employee of BISYS Fund
Age: 36 Accounting Officer and Services (7/96 - present);
Comptroller Assistant Vice President,
Evergreen Funds/First Union
Bank (1995 to 7/96); Senior
Tax Consultant, Price
Waterhouse, LLP (1990 -
12/94).
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, 2000, 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.
<PAGE>
Investment Adviser
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.
Under the Investment Advisory Agreement, BB&T has agreed to provide investment
advisory services for each of the Funds as described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, BB&T is entitled to a fee, computed daily and paid monthly, at the
following annual rates, calculated as a percentage of the average daily net
assets of each 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 years ended December 31, 1998 and December
31, 1999, the Growth and Income Fund incurred investment advisory fees equal to
$285,972 and $376,143,respectively, of which $73,716 and $70,597, respectively,
was waived or reimbursed by BB&T.
Unless sooner terminated, the 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. The 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
BB&T. The Investment Advisory Agreement also terminates automatically in the
event of any assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that BB&T 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 BB&T in the performance of its duties, or from
reckless disregard of its 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 BB&T including, but not limited to, (i) descriptions of
BB&T's operations; (ii) descriptions of certain personnel and their functions;
and (iii) statistics and rankings related to BB&T's operations.
Portfolio Transactions
BB&T determines, 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 BB&T in its best judgment and in a manner deemed fair
and reasonable to Shareholders. In selecting a broker or dealer, BB&T 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 BB&T 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 BB&T informed concerning overall economic, market, political and
legal trends. Under some circumstances, BB&T'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 BB&T and does not reduce the fees payable to BB&T by
the Trust. Such information may be useful to BB&T 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 BB&T 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. 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
BB&T 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, BB&T 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, BB&T will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by the Trust is a customer of
BB&T, or BISYS, their parents or their subsidiaries or affiliates and, in
dealing with its customers, BB&T 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 years ended December 31, 1998 and December 31,
1999, the Growth and Income Fund paid aggregate brokerage commissions equal to
$34,811, $26,447.50, and $26,939.00, respectively.
Federal Banking Law
The Gramm-Leach-Bliley Act of 1999 repealed certain provisions of the
Glass-Steagall Act that had previously restricted the ability of banks and their
affiliates to engage in certain mutual fund activities. Nevertheless, BB&T's
activities remain subject to, and may be limited by, applicable federal banking
law and regulations. BB&T believes that it possesses the legal authority to
perform the services for the Funds contemplated by the Prospectus, this SAI, and
the Investment Advisory Agreement without violation of applicable statutes and
regulations. If future changes in these laws and regulations were to limit the
ability of BB&T to perform these services, the Board of Trustees would review
the Trust's relationship with BB&T and consider taking all action necessary in
the circumstances, which could include recommending 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
under the Investment Advisory Agreement, 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 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.
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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 fiscal years ended December 31, 1998
and December 31, 1999, the Growth and Income Fund incurred administration fees
equal to $77,290 and $101,661, respectively, of which $55,246 and $76,245,
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
BB&T 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.
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.
Custodian, 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.
The 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 the Funds
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.
<PAGE>
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.
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.
Independent Accountants
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.
Code of Ethics
The Trust, BB&T and BISYS each have adopted a code of ethics, as required by
applicable law, which is designed to prevent affiliated persons of the Trust,
BB&T and BISYS from engaging in deceptive, manipulative, or fraudulent
activities in connection with securities held or to be acquired by the Fund
(which may also be held by persons subject to a code). There can be no assurance
that the codes will be effective in preventing such activities.
<PAGE>
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 nine series of Shares which represent interests in each
series of the Trust. The Trust's Declaration of Trust authorizes the Board of
Trustees to divide or redivide any unissued Shares of the Trust into one or more
additional series or classes by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting power,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.
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.
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.
<PAGE>
Vote of a Majority of the Outstanding Shares
As used in the Funds' Prospectuses and the SAI, "vote of a majority of the
outstanding Shares of the Trust or the Fund" means the affirmative vote, at an
annual or special meeting of Shareholders duly called, of the lesser of (a) 67%
or more of the votes of Shareholders of the Trust or the Fund present at such
meeting at which the holders of more than 50% of the votes attributable to the
Shareholders of record of the Trust or the Fund are represented in person or by
proxy, or (b) the holders of more than 50% of the outstanding votes of
Shareholders of the Trust or the Fund.
Principal Shareholders
As of April 19, 2000, Hartford Life Insurance Company Separate Account Two, 200
Hopmeadow Street, Simsbury, Connecticut 06070 owned 55.15% and Wilbranch, P.O.
Box 2887, Wilson, North Carolina 27894 owned 44.85% 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.
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. This discussion does not purport to be
complete or to deal with all aspects of federal income taxation that may be
relevant. This discussion is based upon present provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the regulations promulgated
thereunder, and judicial and administrative ruling authorities, all of which are
subject to change, which change may be retroactive. Prospective investors should
consult their own tax advisors with regard to the federal, state, local and
foreign tax aspects of an investment in the Fund.
Each Fund intends to qualify annually and to elect to be treated as a regulated
investment company under Subchapter M of 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, each 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,
each 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.
Each Fund also intends to comply with the separate diversification requirements
imposed by Section 817(h) of the Code and the regulations thereunder on certain
insurance company separate accounts. These requirements, which are in addition
to the diversification requirements imposed on a Fund by the 1940 Act and
Subchapter M of the Code, place certain limitations on assets of each insurance
company separate account used to fund variable contracts. Because Section 817(h)
and those regulations treat the assets of a Fund as assets of the related
separate account, these regulations are imposed on the assets of the Fund.
Specifically, the regulations provide that, after a one year start-up period or
except as permitted by the "safe harbor" described below, as of the end of each
calendar quarter or within 30 days thereafter no more than 55% of the total
assets of a Fund may be represented by any one investment, no more than 70% by
any two investments, no more than 80% by any three investments and no more than
90% by any four investments. For this purpose, all securities of the same issuer
are considered a single investment, and each U.S. Government agency and
instrumentality is considered a separate issuer. Section 817(h) provides, as a
safe harbor, that a separate account will be treated as being adequately
diversified if the diversification requirements under Subchapter M are satisfied
and no more than 55% of the value of the account's total assets is attributable
to cash and cash items (including receivables), U.S. Government securities and
securities of other regulated investment companies. Failure by a Fund to both
qualify as a regulated investment company and satisfy the Section 817(h)
requirements would generally cause the variable contracts to lose their
favorable tax status and require a contract holder to include in ordinary income
any income accrued under the contracts for the current and all prior taxable
years. Under certain circumstances described in the applicable Treasury
regulations, inadvertent failure to satisfy the applicable diversification
requirements may be corrected, but such a correction would require a payment to
the Internal Revenue Service based on the tax contract holders would have
incurred if they were treated as receiving the income on the contract for the
period during which the diversification requirements were not satisfied. Any
such failure may also result in adverse tax consequences for the insurance
company issuing the contracts. Failure by a Fund to qualify as a regulated
investment company would also subject the Fund to federal and state income
taxation on all of its taxable income and gain, whether or not distributed to
shareholders.
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 a given Fund 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 a 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 passive 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. A 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 each 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.
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, 1999,
the yield for the Growth and Income Fund was 1.51%.
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 (June 3, 1997) through
December 31, 1999, and for the fiscal year ending on such date, average annual
total return for the Growth and Income Fund was 10.96% and (3.85)%,
respectively.
<PAGE>
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.,
the Russell 2000 Index, the Consumer Price Index, and to data prepared by Lipper
Analytical Services, Inc., a widely recognized independent service which
monitors the performance of mutual funds, or Morningstar, Inc. Comparisons may
also be made to indices or data published in Money Magazine, Forbes, Barron's,
The Wall Street Journal, The Bond Buyer's Weekly 20-Bond Index, The Bond Buyer's
Index, The Bond Buyer, The New York Times, Business Week, Pensions and
Investments, and U.S.A. Today. In addition to performance information, general
information about these Funds that appears in a publication such as those
mentioned above may be included in advertisements and in reports to Variable
Contract Owners.
Each Fund may also compute aggregate total return for specified periods. The
aggregate total return is determined by dividing the net asset value of this
account at the end of the specified period by the value of the initial
investment and is expressed as a percentage. Calculation of aggregate total
return assumes reinvestment of all income dividends and capital gain
distributions during the period.
The Funds also may quote annual, average annual and annualized total return and
aggregate total return performance data for various periods other than those
noted above. Such data will be computed as described above, except that the
rates of return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return.
Quotations of yield or total return for the Funds will not take into account
charges and deductions against a Separate Account to which the Funds' Shares are
sold or charges and deductions against the Variable Contracts. The Funds' yield
and total return should not be compared with mutual funds that sell their shares
directly to the public since the figures provided do not reflect charges against
the Separate Accounts or the Variable Contracts. Performance information for any
Fund reflects only the performance of a hypothetical investment in the Fund
during the particular time period in which the calculations are based.
Performance information should be considered in light of the Funds' investment
objectives and policies, characteristics and quality of the portfolios and the
market conditions during the given time period, and should not be considered as
a representation of what may be achieved in the future.
Miscellaneous
Individual Trustees are elected by the Shareholders and, subject to removal by
the vote of two-thirds of the Board of Trustees, serve for a term lasting until
the next meeting of Shareholders at which Trustees are elected. Such meetings
are not required to be held at any specific intervals. Individual Trustees may
be removed by vote of the Shareholders voting not less than a majority of the
Shares then outstanding, cast in person or by proxy at any meeting called for
that purpose, or by a written declaration signed by Shareholders voting not less
than two-thirds of the Shares then outstanding. In accordance with current laws,
it is anticipated that an insurance company issuing a Variable Contract that
participates in the Funds will request voting instructions from variable
contract owners and will vote shares or other voting interests in the Separate
Account in proportion of the voting instructions received.
The 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.
FINANCIAL STATEMENTS
Financial statements for the Trust with respect to the Growth and Income Fund as
of December 31, 1999 for its fiscal year then ended, including notes thereto and
the reports of PricewaterhouseCoopers LLP thereon dated February 16, 2000 are
incorporated by reference from the Trust's 1999 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.
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 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 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>
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-888-467-8167
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
This Statement of Additional Information ("SAI") describes three diversified
investment portfolios (each a "Fund" and collectively the "Funds") of Variable
Insurance Funds (the "Trust"). The Funds are:
o HSBC Variable Growth and Income Fund;
o HSBC Variable Fixed Income Fund; and
o HSBC Variable Cash Management Fund.
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 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, 2000, 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 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
INVESTMENT OBJECTIVES AND POLICIES............................................1
INVESTMENT RESTRICTIONS......................................................22
Portfolio Turnover..................................................24
NET ASSET VALUE..............................................................24
Valuation of the Variable Cash Management Fund......................24
Valuation of the Other Funds........................................24
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................25
MANAGEMENT OF THE TRUST......................................................26
Trustees and Officers...............................................26
Investment Adviser..................................................29
Portfolio Transactions..............................................30
Federal Banking Law.................................................31
Administrator.......................................................31
Expenses............................................................32
Distributor.........................................................33
Custodian, Transfer Agent and Fund Accounting Services..............33
Independent Accountants.............................................34
Legal Counsel.......................................................34
Code of Ethics......................................................34
ADDITIONAL INFORMATION.......................................................35
Description of Shares...............................................35
Vote of a Majority of the Outstanding Shares........................36
Shareholder and Trustee Liability...................................36
Additional Tax Information..........................................37
Performance Information.............................................40
Miscellaneous.......................................................42
FINANCIAL STATEMENTS.........................................................42
APPENDIX .....................................................................i
<PAGE>
The Trust is an open-end management investment company which currently offers
nine separate funds, each with different investment objectives. This SAI
contains information about the following three Funds which are advised by HSBC
Asset Management (Americas) Inc. ("HSBC"): the HSBC Variable Growth and Income
Fund (the "Variable Growth and Income Fund") the HSBC Variable Fixed Income Fund
(the "Variable Fixed Income Fund"); and the HSBC Variable Cash Management Fund
(the "Variable Cash Management Fund").
Much of the information contained in this SAI expands upon subjects discussed in
the Prospectus 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
The following information supplements the investment objectives and policies of
the Funds as set forth in the Prospectuses.
Bank Obligations. Each Fund 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.
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.
Fixed time deposits are obligations of foreign branches of United States banks
or foreign banks which are payable on a stated maturity date and bear a fixed
rate of interest. Although fixed time deposits do not have a market, there are
no contractual restrictions on the right to transfer a beneficial interest in
the deposit to a third party.
The Variable Cash Management Fund may invest more than 25% of the current value
of its total assets in domestic bank obligations (including bank obligations
subject to repurchase agreements). The Variable Cash Management Fund will not
invest in any obligations of HSBC Holdings plc or its affiliates (as defined
under the Investment Company Act of 1940 (the "1940 Act")). The Variable Cash
Management Fund is permitted to invest in obligations of correspondent banks of
HSBC Holdings plc which are not affiliates of the Trust, but the Fund will not
give preference in its investment selections to those obligations.
The Variable Cash Management Fund limits its investments in United States bank
obligations to obligations of United States banks (including foreign branches)
which have more than $1 billion in total assets at the time of investment and
are members of the Federal Reserve System or are examined by the Comptroller of
the Currency or whose deposits are insured by the Federal Deposit Insurance
Corporation.
The Variable Cash Management Fund limits its investments in foreign bank
obligations to United States dollar denominated obligations of foreign banks
(including United States branches) which at the time of investment (i) have more
than $10 billion, or the equivalent in other currencies, in total assets; (ii)
have branches or agencies in the United States; and (iii) in the opinion of the
Fund's investment adviser, are of an investment quality comparable to
obligations of United States banks which may be purchased by the Fund and
present minimal credit risk. The Variable Cash Management Fund may not invest in
fixed time deposits subject to withdrawal penalties maturing in more than seven
calendar days; investments in fixed time deposits subject to withdrawal
penalties maturing from two business days through seven calendar days may not
exceed 10% of the value of the total assets of the Fund.
<PAGE>
The Variable Growth and Income Fund and the Variable Fixed Income Fund may
invest a portion of its assets in the obligations of foreign banks and foreign
branches of domestic banks. Such obligations include Eurodollar Certificates of
Deposit ("ECDs") which are U.S. dollar-denominated certificates of deposit
issued by offices of foreign and domestic banks located outside the 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; Canadian Time
Deposits ("CTDs") which are essentially the same as ETDs except they are issued
by Canadian offices of major Canadian banks; Schedule Bs, which are obligations
issued by Canadian branches of foreign or domestic banks; Yankee Certificates of
Deposit ("Yankee CDs") which are U.S. dollar-denominated certificates of deposit
issued by a U.S. branch of a foreign bank and held in the United States; and
Yankee Bankers' Acceptances ("Yankee BAs") which are U.S. dollar-denominated
bankers' acceptances issued by a U.S. branch of a foreign bank and held in the
United States.
Although the Funds may invest in obligations of foreign banks or foreign
branches of U.S. banks only when the investment adviser deems the instrument to
present minimal credit risk, such investments nevertheless entail risks that are
different from those of investments in domestic obligations of U.S. banks. These
additional risks include future political and economic developments, the
possible imposition of withholding taxes on interest income, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. In
addition, foreign branches of U.S. banks and U.S. branches of foreign banks may
be subject to less stringent reserve requirements and to different accounting,
auditing, reporting and record keeping standards than those applicable to
domestic branches of U.S. 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 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 two 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.
Commercial paper may include variable and floating rate instruments. Commercial
paper issues include securities issued by corporations without registration
under the Securities Act of 1933, as amended (the "1933 Act"), in reliance on
the exemption in Section 3(a)(3), and commercial paper issued in reliance on the
so-called "private placement" exemption in Section 4(2) ("Section 4(2) Paper").
Section 4(2) Paper is restricted as to disposition under the federal securities
laws in that any resale must similarly be made in an exempt transaction. Section
4(2) Paper is normally resold to other institutional investors through or with
the assistance of investment dealers which make a market in Section 4(2) Paper,
thus providing liquidity. For purposes of a Fund's limitation on purchases of
illiquid instruments, Section 4(2) Paper will not be considered illiquid if the
investment adviser has determined, in accordance with guidelines approved by the
Board of Trustees, that an adequate trading market exists for such securities.
Variable Amount Master Demand Notes. The Funds may invest in variable amount
master demand notes, which 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 and the issuer, they are
not normally traded. Although there is no secondary market in the notes, the
Funds may demand payment of principal and accrued interest at any time. While
the notes are not typically rated by credit rating agencies, issuers of variable
amount master demand notes (which are normally manufacturing, retail, financial,
and other business concerns) must satisfy the same criteria as set forth above
for commercial paper. HSBC 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.
<PAGE>
Variable And Floating Rate Demand Notes. The Funds may, from time to time, buy
variable or floating rate demand notes issued by corporations, bank holding
companies and financial institutions and similar taxable and tax-exempt
instruments issued by government agencies and instrumentalities. These
securities will typically have a maturity over one year but carry with them the
right of the holder to put the securities to a remarketing agent or other entity
at designated time intervals and on specified notice. The obligation of the
issuer of the put to repurchase the securities may be backed by a letter of
credit or other obligation issued by a financial institution. The purchase price
is ordinarily par plus accrued and unpaid interest. Generally, the remarketing
agent will adjust the interest rate every seven days (or at other specified
intervals) in order to maintain the interest rate at the prevailing rate for
securities with a seven-day or other designated maturity.
Short-Term Obligations. The Funds may invest in high quality short-term
obligations (with maturities of 12 months or less) such as domestic and foreign
commercial paper (including variable amount master demand notes), bankers'
acceptances, certificates of deposit, 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. Pending investment or
to meet anticipated redemption requests, a Fund may invest without limitation in
short-term obligations. For temporary defensive purposes, these investments may
constitute 100% of a 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 Variable Growth and Income
Fund and the Variable Fixed Income 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 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 of a Fund
and its transaction costs.
Corporate Debt Securities. The Variable Cash Management Fund's investments in
these securities are limited to securities such as bonds and debentures which
have thirteen months or less remaining to maturity and which are rated "A" or
better by S&P and "A" or better by Moody's and of comparable high quality
ratings by other nationally recognized statistical rating organizations
("NRSROs") that have rated such securities.
After purchase by the Variable Cash Management Fund, a security may cease to be
rated or its rating may be reduced below the minimum required for purchase.
Neither event will require a sale of such security. However if the security is
downgraded to a level below that permitted for money market funds under
applicable regulations, HSBC must report such event to the Board of Trustees as
soon as possible to permit the Board to reassess the security promptly to
determine whether it may be retained as an eligible investment for the Variable
Cash Management Fund. To the extent the ratings given by a NRSRO may change as a
result of changes in such organizations or their rating systems, the Variable
Cash Management Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in the
Prospectus and in this SAI.
The other Funds also may invest in U.S. dollar-denominated debt obligations
issued or guaranteed by U.S. corporations or U.S. commercial banks, U.S.
dollar-denominated obligations of foreign issuers and debt obligations of
foreign issuers denominated in foreign currencies. Such debt obligations
include, among others, bonds, notes, debentures and variable rate demand notes.
In choosing corporate debt securities on behalf of a Fund, its investment
adviser may consider (i) general economic and financial conditions; (ii) the
specific issuer's (a) business and management, (b) cash flow, (c) earnings
coverage of interest and dividends, (d) ability to operate under adverse
economic conditions, (e) fair market value of assets, and (f) in the case of
foreign issuers, unique political, economic or social conditions applicable to
such issuer's country; and, (iii) other considerations deemed appropriate.
The Variable Growth and Income Fund and Variable Fixed Income Fund will not
purchase corporate debt securities rated below Baa by Moody's or BBB by S&P or
to the extent certain U.S. or foreign debt obligations are unrated or rated by
other rating agencies, are determined to be of comparable quality ("Medium-Grade
Securities"). While "Baa"/"BBB" and comparable unrated securities may produce a
higher return than higher rated securities, they are subject to a greater degree
of market fluctuation and credit risk than the higher quality securities in
which the Funds may invest and may be regarded as having speculative
characteristics as well.
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 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.
<PAGE>
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, an investment adviser will conduct their own
independent credit analysis of Medium-Grade Securities.
After purchase, a security may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Funds. Neither event will require
a sale of such security. However, HSBC will consider such event in its
determination of whether a Fund should continue to hold the security. A security
which has had its rating downgraded or revoked may be subject to greater risk to
principal and income, and often involve greater volatility of price, than
securities in the higher rating categories. Such securities are also subject to
greater credit risks (including, without limitation, the possibility of default
by or bankruptcy of the issuers of such securities) than securities in higher
rating categories.
Foreign Investments. The Funds may invest in foreign securities, although the
Variable Cash Management Fund will limit such investments to U.S.
dollar-denominated obligations of foreign banks or foreign branches of U.S.
banks.
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.
Because foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies, there may be less publicly available information
about a foreign company than about a U.S. company. Volume and liquidity in most
foreign bond markets are less than in the U.S., and securities of many foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. Fixed commissions on foreign securities exchanges are generally
higher than negotiated commissions on U.S. exchanges, although the Funds 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.
<PAGE>
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 is uninvested and no return is earned
thereon. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Losses to a 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. 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.
Additionally, the Variable Growth and Income Fund and Variable Fixed Income Fund
may invest 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 Funds 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 more developed 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
a result to assess the value or prospects of an investment in such issuers.
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.
If a security is denominated in foreign currency, the value of the security to a
Fund will be affected by changes in currency exchange rates and in exchange
control regulations, and costs will be incurred in connection with conversions
between currencies. Currency risks generally increase in lesser developed
markets. Exchange rate movements can be large and can endure for extended
periods of time, affecting either favorably or unfavorably the value of a Fund's
assets. The value of the assets of a Fund as measured in U.S. dollars may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations.
A change in the value of any foreign currency against the U.S. dollar will
result in a corresponding change in the U.S. dollar value of securities
denominated in that currency. Such changes will also affect the income and
distributions to Shareholders of the Funds investing in securities that are not
U.S. dollar-denominated. In addition, although such Funds will receive income on
foreign securities in such currencies, a Fund will be required to compute and
distribute income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines materially after income has been accrued and translated into
U.S. dollars, the Funds could be required to liquidate portfolio securities to
make required distributions. Similarly, if an exchange rate declines between the
time a 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, the Variable Growth and Income 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 Variable Growth and Income Fund may invest in both sponsored and unsponsored
ADRs and 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.
Securities Of Foreign Governments And Supranational Organizations. The Variable
Growth and Income Fund and Variable Fixed Income Fund may invest in U.S. dollar
- - denominated debt securities issued by foreign governments, their political
subdivisions, governmental authorities, agencies and instrumentalities and
supranational organizations. A supranational organization is an entity
designated or supported by the national government of one or more countries to
promote economic reconstruction or development. Examples of supranational
organizations include, among others, the International Bank for Reconstruction
and Development (World Bank), the European Economic Community, the European Coal
and Steel Community, the European Investment Bank, the Inter- American
Development Bank, the Asian Development Bank, and the African Development Bank.
These Funds may also invest in "quasi-government securities" which are debt
obligations issued by entities owned by either a national, state or equivalent
government or are obligations of such a government jurisdiction which are not
backed by its full faith and credit and general taxing powers.
Investing in foreign government and quasi-government securities involves
considerations and possible risks not typically associated with investing in
obligations issued by the U.S. Government. The values of foreign investments are
affected by changes in governmental administration or economic or monetary
policy (in the U.S. or other countries) or changed circumstances in dealings
between countries. In addition, investments in foreign countries could be
affected by other factors not present in the United States, including
expropriation, confiscatory taxation and lack of uniform accounting and auditing
standards.
Foreign Currency Transactions. The value of the assets of the Variable Growth
and Income Fund and Variable Fixed Income 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 may incur costs in
connection with conversions between various currencies. The Funds 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 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, a Fund is able to protect itself against a possible loss between
trade and settlement dates resulting from an adverse change in the relationship
between the U.S. dollar and such foreign currency. However, this tends to limit
potential gains which might result from a positive change in such currency
relationships. The Funds also may 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 hedging strategy will be
successful is highly uncertain.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration of a forward currency contract. Accordingly, it may
be necessary for a Fund to purchase additional currency on the spot market if
the market value of the security is less than the amount of foreign currency the
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 the Fund is obligated to deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, it will incur a gain or a loss to the extent that there has been
movement in forward currency contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a new forward currency contract to
sell the foreign currency. Although such contracts tend to minimize the risk of
loss due to a decline in the value of the hedged currency, they also tend to
limit any potential gain which might result should the value of such currency
increase. The Funds will have to convert their holdings of foreign currencies
into U.S. dollars from time to time. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies.
<PAGE>
Standard & Poor's Depository Receipts. The Variable Growth and Income 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 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 investments in SPDRs, when aggregated with
all other investments in investment companies, may not exceed 10% of the total
assets of the Fund.
U.S. Government Obligations. The 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 may invest do not include Certificates of Accrual
on Treasury Securities ("CATS") or Treasury Income Growth Receipts ("TIGRs").
Obligations of certain agencies and instrumentalities of the U.S. Government,
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 of the Funds will
invest in the obligations of such agencies or instrumentalities only when HSBC
believes that the credit risk with respect thereto is minimal.
The Variable Growth and Income Fund and Variable Fixed Income 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.
Options. The Variable Growth and Income Fund and Variable Fixed Income Fund may
purchase put and call options on securities, securities indices and foreign
currencies and may write (sell) covered put and call options. The Variable Fixed
Income Fund will engage in options trading principally for hedging purposes.
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. A call option is covered if a Fund owns the underlying security covered
by the call or has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional cash consideration if
the underlying security is held in a segregated account by its custodian) upon
conversion or exchange of other securities held in its portfolio. A put option
is covered if a Fund maintains cash, or other liquid assets with a value equal
to the exercise price in a segregated account with its custodian. 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.
<PAGE>
When a portfolio security or currency subject to a call option is sold, a Fund
will effect a "closing purchase transaction"--the purchase of a call option on
the same security or currency with the same exercise price and expiration date
as the call option which the Fund previously has written. If a Fund is unable to
effect a closing purchase transaction, it will not be able to sell the
underlying security or currency until the option expires or the Fund delivers
the underlying security or currency upon exercise. In addition, upon the
exercise of a call option by the holder thereof, a Fund will forego the
potential benefit represented by market appreciation over the exercise price.
When a Fund writes an option, an amount equal to the net premium (the premium
less the commission) received by the 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 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 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 will
realize a gain or loss.
Covered call 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 a Fund. 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.
Once the decision to write a call option has been made, HSBC, 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.
Exercise prices of 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.
Where a Fund may purchase put options, that Fund is purchasing the right to sell
a specified security (or securities) within a specified period of time at a
specified exercise price. Puts may be acquired 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.
A 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 a 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. A Fund generally will
acquire puts only where the puts are available without the payment of any direct
or indirect consideration. However, if necessary or advisable, a 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).
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. A
Fund will segregate assets or otherwise cover index options that would require
it to pay cash upon exercise.
<PAGE>
A principal reason for writing put and call options is to attempt to realize,
through the receipt of premiums, a greater current return than would be realized
on the underlying securities alone. In return for the premium received for a
call option, a Fund foregoes the opportunity for profit from a price increase in
the underlying security above the exercise price so long as the option remains
open, but retains the risk of loss should the price of the security decline. In
return for the premium received for a put option, a Fund assumes the risk that
the price of the underlying security will decline below the exercise price, in
which case the put would be exercised and the Fund would suffer a loss. A Fund
may purchase put options in an effort to protect the value of a security it owns
against a possible decline in market value.
Bond Options. The Variable Fixed Income Fund may purchase put and call options
and write covered put and call options on securities in which that Fund may
invest directly, and that are traded on registered domestic securities exchanges
or that result from separate, privately negotiated transactions with primary
U.S. Government securities dealers recognized by the Board of Governors of the
Federal Reserve System (i.e., over-the-counter (OTC) options).
Forward Commitments, When-Issued and Delayed-Delivery Securities. The Variable
Growth and Income Fund and the Variable Fixed Income 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 may purchase and sell securities on a "forward commitment" basis.
These 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. These Funds will not pay for
such securities or start earning interest on them until they are received.
When one of these Funds 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 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 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
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 commitment to
purchase "when-issued" or "delayed-delivery" securities will not exceed 25% of
the value of each Fund's total assets.
When a 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 incurring a loss or missing the opportunity to obtain a price
or yield 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 Variable Growth and
Income Fund and Variable Fixed Income 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 that a Fund
purchases mortgage-related securities from such issuers which may, solely for
purposes of the 1940 Act, be deemed to be investment companies, the Fund's
investment in such securities will be subject to the limitations on its
investment in investment company securities.
<PAGE>
Mortgage-related securities in which these Funds may invest, 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 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 will receive when these amounts are
reinvested.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-related securities issued by FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of FNMA and are not backed by or entitled to
the full faith and credit of the United States. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to the timely payment of the principal and interest by FNMA. Mortgage-related
securities issued by FHLMC include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of
the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to the timely payment of interest, which is guaranteed by
FHLMC. FHLMC guarantees either ultimate collection or the timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
These Funds may invest in Collateralized Mortgage Obligations ("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 may fail to fully recoup its
initial investment in these securities even if the security is rated in the
highest rating category.
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, Variable Growth and Income Fund and Variable Fixed Income Fund may
invest in other asset-backed securities that may be developed in the future.
Illiquid and 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 1933 Act. A Fund will not
purchase Section 4(2) securities which have not been determined to be liquid in
excess of 15% (10% in the case of the Variable Cash Management Fund) 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 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. Rule 144A, a rule promulgated under Section 4(2) of the
1933 Act, 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>
HSBC 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 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 liquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
Investments in Municipal Securities. The Variable Fixed Income Fund may, when
deemed appropriate by HSBC and consistent with the investment objective of the
Fund, invest in obligations of state and local governmental issuers which carry
taxable yields that are comparable to yields of other fixed income instruments
of comparable quality, or which HSBC believes offer the potential for capital
appreciation. Municipal obligations may include bonds which may be categorized
as either "general obligation" or "revenue" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue bonds are secured by the net
revenue derived from a particular facility or group of facilities or, in some
cases, the proceeds of a special excise or other specific revenue source, but
not by the general taxing power of the issuer.
The Variable Fixed Income Fund may also invest in municipal notes rated at least
MIG-1 by Moody's or SP-1 by S&P. Municipal notes will consist of tax
anticipation notes, bond anticipation notes, revenue anticipation notes and
construction loan notes. Notes sold as interim financing in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuer.
The Fund also may invest in municipal commercial paper, provided such commercial
paper is rated at least "Prime-1" by Moody's or "A-1" by S&P or, if unrated, is
of comparable investment quality as determined by HSBC.
Investment Companies. The Funds may invest in securities issued by other
investment companies, including, but not limited to, money market investment
companies, within the limits prescribed by the 1940 Act. As a shareholder of
another investment company, a Fund would bear, along with other shareholders,
its pro rata portion of the expenses of such other investment company, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that a Fund bears directly in connection with its own operations, and
may represent a duplication of fees to Shareholders of a Fund.
Lending of Portfolio Securities. The Funds, from time to time, may lend
portfolio securities to broker-dealers, banks or institutional borrowers of
securities. The Funds must receive 100% collateral, in the form of cash or U.S.
Government securities. This collateral must be valued daily, and should the
market value of the loaned securities increase, the borrower must furnish
additional collateral to the lender. During the time portfolio securities are on
loan, the borrower pays the lender any dividends or interest paid on such
securities. Loans are subject to termination by the lender or the borrower at
any time. While the 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, it could experience delays in recovering its
securities and possible capital losses. The Funds will only enter into loan
arrangements with broker-dealers, banks or other institutions determined to be
creditworthy under guidelines established by the Board of Trustees.
Convertible Securities. The Variable Growth and Income Fund 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 Fund will
invest in convertible securities that are rated "BBB" by S&P and "Baa" by
Moody's, or higher, at the time of investment, or if unrated, are of comparable
quality.
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.
<PAGE>
When owned as part of a unit along with warrants, which are options to buy the
common stock, they function as convertible bonds, except that the warrants
generally will expire before the bond's maturity. Convertible securities are
senior to equity securities, and, therefore, have a claim to assets of the
corporation prior to the holders of common stock in the case of liquidation.
However, convertible securities are generally subordinated to similar
non-convertible securities of the same company. The interest income and
dividends from convertible bonds and preferred stocks provide a stream of income
with generally higher yields than common stocks, but lower than non-convertible
securities of similar quality.
The 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 HSBC, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objective. Otherwise,
the Funds will hold or trade the convertible securities. In selecting
convertible securities for the Fund, HSBC 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, HSBC 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.
Warrants. The Variable Growth and Income Fund may purchase warrants and similar
rights, which are privileges issued by corporations enabling the owners to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. The purchase of warrants
involves the risk that the Fund could lose the purchase value of a warrant if
the right to subscribe to additional shares is not exercised prior to the
warrant's expiration. Also, the purchase of warrants involves the risk that the
effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security.
Repurchase Agreements. Securities held by the Funds may be subject to repurchase
agreements. Under the terms of a repurchase agreement, a Fund would acquire
securities from member banks of the Federal Deposit Insurance Corporation and
registered broker-dealers that HSBC 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 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 Fund's custodian or another
qualified custodian, as appropriate, or in the Federal Reserve/Treasury
book-entry system.
Reverse Repurchase Agreements. The Funds may also enter into reverse repurchase
agreements in accordance with applicable investment restrictions. Pursuant to
such reverse repurchase agreements, a Fund would sell certain of its securities
to financial institutions such as banks and broker-dealers, and agree to
repurchase them at a mutually agreed upon date and price. At the time a Fund
enters into a reverse repurchase 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 involve the risk that the
market value of securities to be purchased by a Fund may decline below the price
at which it is obligated to repurchase the securities, or that the other party
may default on its obligation, so that the Fund is delayed or prevented from
completing the transaction.
<PAGE>
Futures Contracts and Options Thereon. The Variable Growth and Income Fund and
Variable Fixed Income 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, interest rate, 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 may engage in such futures transactions 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 these
Funds hold or intend to purchase. For example, when interest rates are expected
to rise or market values of portfolio securities are expected to fall, these
Funds 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, these Funds, 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 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 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 these Funds as regulated investment companies.
The Funds also may purchase and sell put and call options on futures contracts.
An option on a futures contract gives the purchaser the right, but not the
obligation, in return for the premium paid, to assume (in the case of a call) or
sell (in the case of a put) a position in a specified underlying futures
contract (which position may be a long or short position) a specified exercise
price at any time during the option exercise period. Sellers of options on
futures contracts, like buyers and sellers of futures contracts, make an initial
margin deposit and are subject to calls for variation margin.
Futures transactions involve brokerage costs and require a Fund to segregate
liquid assets, such as cash, U.S. Government securities or other liquid
securities to cover its obligation under such contracts. There is a possibility
that these Funds 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 had not entered into any futures
transactions. In addition, the value of futures positions may not prove to be
perfectly or even highly correlated with the value of its portfolio securities
and foreign currencies, limiting the Fund's ability to hedge effectively against
interest rate, foreign exchange rate and/or market risk and giving rise to
additional risks. There is no assurance of liquidity in the secondary market for
purposes of closing out futures positions.
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 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 will not enter into a futures contract or purchase an option
thereon if immediately thereafter the initial margin deposits for futures
contracts held by such Fund plus premiums paid by it for open options on futures
would exceed 5% of such Fund's total assets. Such Fund will not engage in
transactions in financial futures contracts or options thereon for speculation,
but only to attempt to hedge against changes in market conditions affecting the
values of securities which such Fund holds or intends to purchase. When futures
contracts or options thereon are purchased to protect against a price increase
on securities intended to be purchased later, it is anticipated that at least
25% of such intended purchases will be completed. When other futures contracts
or options thereon are purchased, the underlying value of such contracts will at
all times not exceed the sum of: (1) accrued profit on such contracts held by
the broker; (2) cash or high quality money market instruments set aside in an
identifiable manner; and (3) cash proceeds from investments due in 30 days.
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund's investment objective is fundamental and may not be changed without a
vote of the holders of a majority of the Fund's outstanding Shares. In addition,
the following investment restrictions may be changed with respect to a
particular Fund only by a vote of a majority of the outstanding Shares of that
Fund (as defined under "ADDITIONAL INFORMATION -- Vote of a Majority of the
Outstanding Shares" in this SAI).
None of the Funds will:
1. Purchase any securities which would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in securities of
one or more issuers conducting their principal business activities in the same
industry, provided that: (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
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; and (c)
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. With respect to the Variable Cash Management Fund, this
restriction does not apply to securities or obligations issued by U.S. banks;
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;
3. Borrow money or issue senior securities, except that a Fund may (i)
borrow from banks, so long as immediately after each borrowing there is asset
coverage of 300%, and (ii) enter into reverse repurchase agreements (or similar
investment techniques) and enter into transactions in options, futures, options
on futures, and other derivative instruments as described in the Funds'
Prospectuses and SAI from time to time;
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 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 and/or SAI 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 are not prohibited by this restriction).
The following additional investment restriction is not a fundamental policy and
therefore may be changed without the vote of a majority of the outstanding
Shares of a Fund. Except as provided in the fundamental policies described
above, none of the Funds may:
1. Purchase or otherwise acquire any securities if, as a result, more than
15% of the Fund's net assets (10% of the Variable Cash Management 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.
<PAGE>
Portfolio Turnover
Changes may be made in a Fund's portfolio consistent with the investment
objective and policies of the Fund whenever such changes are believed to be in
the best interests of the Fund and its Shareholders, and each Fund will be
managed without regard to its portfolio turnover rate. 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. High portfolio turnover rates will generally result in higher
transaction costs to a Fund, including brokerage commissions.
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 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 Variable Cash Management Fund
The Variable Cash Management Fund's portfolio securities are valued using the
amortized cost method of valuation. This involves valuing a security at cost on
the date of acquisition and thereafter assuming a constant accretion of a
discount or amortization of a premium to maturity, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund would receive if it sold the instrument. During such periods the yield to
investors in the Fund may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities.
Valuation of the Other Funds
Portfolio securities, the principal market for which is a securities exchange,
will be valued at the closing sales price on that exchange on the day of
computation, or, if there have been no sales during such day, at the latest bid
quotation. Portfolio securities, the principal market for which is not a
securities exchange, will be valued at their latest bid quotation in such
principal market. If no such bid price is available, then such securities will
be valued in good faith at their respective fair market values using methods
determined by or under the supervision of the Board of Trustees. Foreign
securities are valued based on quotations from the primary market in which they
are traded and are translated from the local currency into U.S. dollars using
current exchange rates. 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.
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Shares of each Fund are sold on a continuous basis by the Funds'
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.
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 conditions
which make payment in cash unwise, such as large-scale redemptions or market
illiquidity, 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.
The names of the Trustees, their addresses, ages, and principal occupations
during the past five years are set forth below:
Name, Address, and Age Principal Occupation During Past 5 Years
- ---------------------- ----------------------------------------
James H. Woodward Chancellor, University of North Carolina
University of North Carolina at Charlotte.
at Charlotte
Charlotte, NC 28223
Age: 60
Michael Van Buskirk Chief Executive Officer, Ohio Bankers
37 West Broad Street Association (industry trade association).
Suite 1001
Columbus, OH 43215
Age: 53
Walter B. Grimm* Employee of BISYS Fund Services (6/92-present).
3435 Stelzer Road
Columbus, Oh 43219
Age: 54
<PAGE>
* 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 person, and $250 for each special meeting
of the Board of Trustees attended by telephone. For the fiscal year ended
December 31, 1999, 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 $20,750
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 BB&T Funds, AmSouth Funds,
HSBC Mutual Funds Trust, HSBC Funds Trust, and Kent Funds.
The officers of the Trust, their addresses, ages, and principal occupations
during the past five years are as follows (unless otherwise indicated, the
address of each officer is 3435 Stelzer Road, Columbus, OH 43219):
<PAGE>
<TABLE>
<S> <C> <C>
Position(s) Held Principal Occupation
Name, Address, and Age With the Trust During Past 5 Years
- ---------------------- -------------- -------------------
Walter Grimm President and Chairman of the Employee of BISYS Fund Services
Age: 54 Board (6/92-present).
Frank Deutchki Vice President Employee of BISYS Fund Services (4/96 -
Age: 46 present); Vice President, Audit Director
at Mutual Funds Services Company, a
subsidiary of United States Trust
Company of New York (2/89 - 3/96).
Gregory Maddox Vice President and Assistant Employee of BISYS Fund Services (4/91 -
Columbia Square Secretary present).
Suite 500
1230 Columbia Street
San Diego, CA 92101
Age: 32
Charles L. Booth Vice President and Assistant Employee of BISYS Fund Services (1988 -
Age: 40 Secretary present).
Alaina Metz Secretary Employee of BISYS Fund Services (6/95 -
Age: 33 present); Supervisor, Mutual Fund Legal
Department, Alliance Capital Management
(5/89 - 6/95).
Gary Tenkman Treasurer Employee of BISYS Fund Services (4/98 -
Age: 29 present); Audit Manager Ernst & Young
LLP (1990 - 4/98).
Nimish Bhatt Principal Financial and Employee of BISYS Fund Services (7/96 -
Age: 36 Accounting Officer and present); Assistant Vice President,
Comptroller 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, 2000, 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 Adviser
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 Variable Growth and Income Fund, Variable
Fixed Income Fund, and Variable Cash Management Fund by HSBC pursuant to an
Investment Advisory Agreement dated October 1, 1999 (the "Investment Advisory
Agreement"). HSBC is the North American investment affiliate of HSBC Holdings
PLC (Hong Kong and Shanghai Banking Corporation) and HSBC Bank USA, and is
located at 140 Broadway, New York, New York 10005.
Under the Investment Advisory Agreement, HSBC has 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 Investment Advisory Agreement, each of the
following Funds is obligated to pay HSBC 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: 0.55% for the Variable Growth and Income Fund, 0.55%
for the Variable Fixed Income Fund, and 0.35% for the Variable Cash Management
Fund.
<PAGE>
Unless sooner terminated, the 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. The 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
HSBC. The Investment Advisory Agreement also terminates automatically in the
event of any assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that HSBC 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 HSBC 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 HSBC including, but not limited to, (i) descriptions of
HSBC's operations; (ii) descriptions of certain personnel and their functions;
and (iii) statistics and rankings related to HSBC's operations.
Portfolio Transactions
HSBC determines, 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 HSBC in its best judgment and in a manner deemed fair
and reasonable to Shareholders. In selecting a broker or dealer, HSBC 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 HSBC may receive orders
for transactions on behalf of the Funds. 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 HSBC informed concerning overall economic, market, political and
legal trends. Under some circumstances, HSBC'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 HSBC and does not reduce the fees payable to HSBC by
the Trust. Such information may be useful to HSBC 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 Funds. While HSBC generally seeks competitive commissions,
the Funds 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
HSBC. Any such other portfolio, investment company or account may also invest in
the same securities as the Funds. 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
HSBC 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, HSBC may aggregate
the securities to be sold or purchased for a Fund with those to be sold or
purchased for other Funds or for other portfolios, investment companies or
accounts in order to obtain best execution. In making investment recommendations
for a Fund, HSBC will not inquire or take into consideration whether an issuer
of securities proposed for purchase or sale by a Fund is a customer of HSBC or
the Funds' distributor, their parents or their subsidiaries or affiliates and,
in dealing with its customers, HSBC, its parent, subsidiaries, and affiliates
will not inquire or take into consideration whether securities of such customers
are held by the Trust.
Federal Banking Law
The Gramm-Leach-Bliley Act of 1999 repealed certain provisions of the
Glass-Steagall Act that had previously restricted the ability of banks and their
affiliates to engage in certain mutual fund activities. Nevertheless, HSBC's
activities remain subject to, and may be limited by, applicable federal banking
law and regulations. HSBC believes that it possesses the legal authority to
perform the services for the Funds contemplated by the Prospectus, this SAI, and
the Investment Advisory Agreement without violation of applicable statutes and
regulations. If future changes in these laws and regulations were to limit the
ability of HSBC to perform these services, the Board of Trustees would review
the Trust's relationship with HSBC and consider taking all action necessary in
the circumstances, which could include recommending 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 Fund Services
("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 HSBC under the Investment Advisory Agreement, by BISYS Ohio
as fund accountant and dividend disbursing agent, and by the Funds' custodians.
The Administrator provides financial services to institutional clients.
<PAGE>
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 HSBC under the
Investment Advisory Agreement, by the other investment advisers of the Trust's
portfolios, by the fund accountant and dividend disbursing agent, and by the
Fund's custodians. Under the Administration Agreement, the Administrator may
delegate all or any part of its responsibilities thereunder.
The Administrator receives a fee from each Fund for its services as
Administrator and expenses assumed pursuant to the Administration Agreement,
calculated daily and paid periodically, equal to the lesser of (a) 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 Trust
incurred administration fees equal to $17,985, of which $13,549 was waived or
reimbursed by BISYS. For the fiscal years ended December 31, 1998 and December
31, 1999, the Trust incurred administration fees equal to $105,793 and $157,948
of which $77,410 and $107,516, 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
HSBC 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.
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.
<PAGE>
Custodian, Transfer Agent and Fund Accounting Services
The Bank of New York has been retained, pursuant to a Custodian Agreement, to
act as custodian for the Funds. The Bank of New York's address is 90 Washington
Street, New York, New York 10286. Under the Custodian Agreement, the Custodian
maintains a custody account or accounts in the name of each Fund; receives and
delivers all assets for each Fund upon purchase and upon sale or maturity;
collects and receives all income and other payments and distributions on account
of the assets of each Fund; pays all expenses of each Fund; receives and pays
out cash for purchases and redemptions of shares of each Fund and pays out cash
if requested for dividends on shares of each Fund; calculates the daily value of
the assets of the Variable Fixed Income Fund; determines the daily net asset
value per share, net investment income and dividend rate for the Variable Fixed
Income Fund; and maintains records for the foregoing services. Under the
Custodian Agreement, each Fund has agreed to pay the Custodian for furnishing
custodian services a fee for certain administration and transaction charges and
out-of-pocket expenses.
The Board of Trustees has authorized The Bank of New York in its capacity as
custodian of each Fund to enter into Subcustodian Agreements with banks and
other entities that qualify under the 1940 Act to act as subcustodians with
respect to certain portfolio investments of the Funds.
BISYS Ohio serves as transfer agent and dividend disbursing agent for 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.
BISYS Ohio receives an annual fee per Variable Contract Owner account, subject
to certain per-Fund base fees, for its services as transfer agent.
Independent Accountants
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.
Code of Ethics
The Trust, HSBC and BISYS each have adopted a code of ethics, as required by
applicable law, which is designed to prevent affiliated persons of the Trust,
HSBC and BISYS from engaging in deceptive, manipulative, or fraudulent
activities in connection with securities held or to be acquired by the Funds
(which may also be held by persons subject to a code). There can be no assurance
that the codes will be effective in preventing such activities.
<PAGE>
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 nine series of Shares which represent interests in each
series of the Trust. The Trust's Declaration of Trust authorizes the Board of
Trustees to divide or redivide any unissued Shares of the Trust into one or more
additional series or classes by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting power,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.
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.
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' Prospectus and the SAI, "vote of a majority of the
outstanding Shares of the Trust or the Fund" means the affirmative vote, at an
annual or special meeting of Shareholders duly called, of the lesser of (a) 67%
or more of the votes of Shareholders of the Trust or the Fund present at such
meeting at which the holders of more than 50% of the votes attributable to the
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>
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. This discussion does not purport to be
complete or to deal with all aspects of federal income taxation that may be
relevant. This discussion is based upon present provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the regulations promulgated
thereunder, and judicial and administrative ruling authorities, all of which are
subject to change, which change may be retroactive. Prospective investors should
consult their own tax advisors with regard to the federal, state, local and
foreign tax aspects of an investment in a Fund.
Each Fund intends to qualify annually and to elect to be treated as a regulated
investment company under the Subchapter M of 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.
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.
<PAGE>
As a regulated investment company, each 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,
each 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.
Each Fund also intends to comply with the separate diversification requirements
imposed by Section 817(h) of the Code and the regulations thereunder on certain
insurance company separate accounts. These requirements, which are in addition
to the diversification requirements imposed on a Fund by the 1940 Act and
Subchapter M of the Code, place certain limitations on assets of each insurance
company separate account used to fund variable contracts. Because Section 817(h)
and those regulations treat the assets of a Fund as assets of the related
separate account, these regulations are imposed on the assets of the Fund.
Specifically, the regulations provide that, after a one year start-up period or
except as permitted by the "safe harbor" described below, as of the end of each
calendar quarter or within 30 days thereafter no more than 55% of the total
assets of a Fund may be represented by any one investment, no more than 70% by
any two investments, no more than 80% by any three investments and no more than
90% by any four investments. For this purpose, all securities of the same issuer
are considered a single investment, and each U.S. Government agency and
instrumentality is considered a separate issuer. Section 817(h) provides, as a
safe harbor, that a separate account will be treated as being adequately
diversified if the diversification requirements under Subchapter M are satisfied
and no more than 55% of the value of the account's total assets is attributable
to cash and cash items (including receivables), U.S. Government securities and
securities of other regulated investment companies. Failure by a Fund to both
qualify as a regulated investment company and satisfy the Section 817(h)
requirements would generally cause the variable contracts to lose their
favorable tax status and require a contract holder to include in ordinary income
any income accrued under the contracts for the current and all prior taxable
years. Under certain circumstances described in the applicable Treasury
regulations, inadvertent failure to satisfy the applicable diversification
requirements may be corrected, but such a correction would require a payment to
the Internal Revenue Service based on the tax contract holders would have
incurred if they were treated as receiving the income on the contract for the
period during which the diversification requirements were not satisfied. Any
such failure may also result in adverse tax consequences for the insurance
company issuing the contracts. Failure by a Fund to qualify as a regulated
investment company would also subject the Fund to federal and state income
taxation on all of its taxable income and gain, whether or not distributed to
shareholders.
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 a given Fund 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 a 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.
If a Fund invests in shares of a passive 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. A Fund may, however, be
able to elect alternative tax treatment for such investments that would avoid
this unfavorable result.
<PAGE>
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 each 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.
Yields of the Variable Growth and Income Fund and Variable Fixed Income Fund 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 standardized seven-day yield for the Variable Cash Management Fund is
computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account in that Fund having a balance of
one Share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from Shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the based
period return, and then multiplying the base period return by (365/base period).
The net change in the account value of the Variable Cash Management Fund
includes the value of additional Shares purchased with dividends from the
original Share, dividends declared on both the original Share and any such
additional Shares, and all fees, other than nonrecurring account or sales
charges, that are charged to all Shareholder accounts in proportion to the
length of the base period and assuming that Fund's average account size. The
capital changes to be excluded from the calculation of the net change in account
value are net realized gains and losses from the sale of securities and
unrealized appreciation and depreciation.
<PAGE>
The effective yield for the Variable Cash Management Fund is computed by
compounding the base period return, as calculated above by adding 1 to the base
period, raising the sum to a power equal to 365 divided by base period and
subtracting 1 from the result.
The 30-day yield and effective yield for the Variable Cash Management Fund are
calculated as described above except that the base period is 30 days rather then
seven days.
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.
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.
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.,
the Russell 2000 Index, the Consumer Price Index, and to data prepared by Lipper
Analytical Services, Inc., a widely recognized independent service which
monitors the performance of mutual funds, or Morningstar, Inc. Comparisons may
also be made to indices or data published in Money Magazine, Forbes, Barron's,
The Wall Street Journal, The Bond Buyer's Weekly 20-Bond Index, The Bond Buyer's
Index, The Bond Buyer, The New York Times, Business Week, Pensions and
Investments, and U.S.A. Today. In addition to performance information, general
information about these Funds that appears in a publication such as those
mentioned above may be included in advertisements and in reports to Variable
Contract Owners.
Each Fund may also compute aggregate total return for specified periods. The
aggregate total return is determined by dividing the net asset value of this
account at the end of the specified period by the value of the initial
investment and is expressed as a percentage. Calculation of aggregate total
return assumes reinvestment of all income dividends and capital gain
distributions during the period.
The Funds also may quote annual, average annual and annualized total return and
aggregate total return performance data for various periods other than those
noted above. Such data will be computed as described above, except that the
rates of return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return.
Quotations of yield or total return for the Funds will not take into account
charges and deductions against a Separate Account to which the Funds' Shares are
sold or charges and deductions against the Variable Contracts. The Funds' yield
and total return should not be compared with mutual funds that sell their shares
directly to the public since the figures provided do not reflect charges against
the Separate Accounts or the Variable Contracts. Performance information for any
Fund reflects only the performance of a hypothetical investment in the Fund
during the particular time period in which the calculations are based.
Performance information should be considered in light of the Funds' investment
objectives and policies, characteristics and quality of the portfolios and the
market conditions during the given time period, and should not be considered as
a representation of what may be achieved in the future.
Miscellaneous
Individual Trustees are elected by the Shareholders and, subject to removal by
the vote of two-thirds of the Board of Trustees, serve for a term lasting until
the next meeting of Shareholders at which Trustees are elected. Such meetings
are not required to be held at any specific intervals. Individual Trustees may
be removed by vote of the Shareholders voting not less than a majority of the
Shares then outstanding, cast in person or by proxy at any meeting called for
that purpose, or by a written declaration signed by Shareholders voting not less
than two-thirds of the Shares then outstanding. In accordance with current laws,
it is anticipated that an insurance company issuing a Variable Contract that
participates in the Funds will request voting instructions from variable
contract owners and will vote shares or other voting interests in the Separate
Account in proportion of the voting instructions received.
<PAGE>
The Trust is registered with the Securities and Exchange Commission as a
management investment company. Such registration does not involve supervision by
the Securities and Exchange Commission of the management or policies of the
Trust.
The Prospectus and this SAI omit certain of the information contained in the
Registration Statement filed with the Securities and Exchange Commission. Copies
of such information may be obtained from the Securities and Exchange Commission
upon payment of the prescribed fee.
The Prospectus and this SAI are not an offering of the securities herein
described in any state in which such offering may not lawfully be made. No
salesman, dealer, or other person is authorized to give any information or make
any representation other than those contained in the Prospectuses and this SAI.
FINANCIAL STATEMENTS
Since the Funds had not commenced operations as of the date of this SAI, there
are no financial statements to include in the SAI.
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
Description of Moody's bond ratings:
Excerpts from Moody's description of its bond ratings are listed as
follows: Aaa - judged to be the best quality and they carry the smallest degree
of investment risk; Aa - judged to be of high quality by all standards -
together with the Aaa group, they comprise what are generally known as
high-grade bonds; A - possess many favorable investment attributes and are to be
considered as "upper medium grade obligations"; Baa - considered to be medium
grade obligations, i.e., they are neither highly protected nor poorly secured
- -interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time; Ba - judged to have speculative
elements, their future cannot be considered as well assured; B - generally lack
characteristics of the desirable investment; Caa - are of poor standing - such
issues may be in default or there may be present elements of danger with respect
to principal or interest; Ca - speculative in a high degree, often in default; C
- - lowest rated class of bonds, regarded as having extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating
categories. The modifier 1 indicates that the security is in the higher end of
its rating category; the modifier 2 indicates a mid-range ranking; and modifier
3 indicates a ranking toward the lower end of the category.
Description of S&P's bond ratings:
Excerpts from S&P's description of its bond ratings are listed as
follows: AAA - highest grade obligations, in which capacity to pay interest and
repay principal is extremely strong; AA - has a very strong capacity to pay
interest and repay principal, and differs from AAA issues only in a small
degree; A - has a strong capacity to pay interest and repay principal, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories; BBB
- - regarded as having an adequate capacity to pay interest and repay principal;
whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories. This group is the lowest which qualifies for commercial
bank investment. BB, B, CCC, CC, C - predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligations; BB indicates the highest grade and C the lowest within the
speculative rating categories. D - interest or principal payments are in
default.
S&P applies indicators "+," no character, and "-" to its rating
categories. The indicators show relative standing within the major rating
categories.
Description of Moody's 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.
<PAGE>
Description of S&P's ratings for corporate and municipal bonds:
Investment grade ratings: AAA - the highest rating assigned by S&P,
capacity to pay interest and repay principal is extremely strong; AA - has a
very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in a small degree; A - has strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories; BBB - regarded as having an adequate capacity to pay
interest and repay principal - whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Speculative grade ratings: BB, B, CCC, CC, C - debt rated in these
categories is regarded as having predominantly speculative characteristics with
respect to capacity to pay interest and repay principal - while such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions; CI - reserved
for income bonds on which no interest is being paid; D -in default, and payment
of interest and/or repayment of principal is in arrears. Plus (+) or Minus (-) -
the ratings from "AA" to "CCC" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Description of S&P's 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>
Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
(800) __________
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
This Statement of Additional Information ("SAI") describes the Old Kent Core
Equity Fund (the "Fund"), a diversified investment portfolio of Variable
Insurance Funds (the "Trust").
The Trust offers an indefinite number of transferable units ("Shares") of the
Fund. Shares of the Fund 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 Fund also may be sold to
qualified pension and retirement plans, certain insurance companies, and the
investment adviser of the Fund. The Separate Accounts invest in Shares of the
Fund 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 Fund, dated May 1, 2000, 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 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
INVESTMENT OBJECTIVE AND POLICIES............................................1
Bank Obligations............................................................1
Commercial Paper............................................................2
Variable Amount Master Demand Notes.........................................2
Variable And Floating Rate Demand Notes.....................................3
Short-Term Obligations......................................................3
Corporate Debt Securities...................................................3
Foreign Investments.........................................................5
Securities Of Foreign Governments And Supranational Organizations...........7
Foreign Currency Transactions...............................................8
Standard & Poor's Depository Receipts.......................................9
U.S. Government Obligations.................................................9
Options....................................................................10
Forward Commitments, When-Issued and Delayed-Delivery Securities...........13
Mortgage-Related and Asset-Backed Securities...............................13
Illiquid and Restricted Securities.........................................15
Investment Companies.......................................................16
Lending of Portfolio Securities............................................16
Convertible Securities.....................................................16
Warrants...................................................................17
Repurchase Agreements......................................................18
Reverse Repurchase Agreements..............................................18
Futures Contracts and Options Thereon......................................18
Regulatory Restrictions....................................................19
INVESTMENT RESTRICTIONS......................................................20
Portfolio Turnover.........................................................21
NET ASSET VALUE..............................................................22
Valuation of the Fund......................................................22
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................23
MANAGEMENT OF THE TRUST......................................................24
Trustees and Officers......................................................24
Investment Adviser.........................................................26
Portfolio Transactions.....................................................28
Federal Banking Law........................................................29
Administrator..............................................................29
Expenses...................................................................30
Distributor................................................................31
Custodian, Transfer Agent and Fund Accounting Services.....................31
Independent Accountants....................................................32
Legal Counsel..............................................................32
Code of Ethics.............................................................32
ADDITIONAL INFORMATION.......................................................33
Description of Shares......................................................33
Vote of a Majority of the Outstanding Shares...............................34
Shareholder and Trustee Liability..........................................34
Additional Tax Information.................................................35
Performance Information....................................................38
Miscellaneous..............................................................40
FINANCIAL STATEMENTS.........................................................40
APPENDIX .....................................................................i
<PAGE>
The Trust is an open-end management investment company which currently offers
nine separate funds, each with different investment objectives. This SAI
contains information about the Old Kent Core Equity Fund, which is advised by
Lyon Street Asset Management Company ("Lyon Street").
Much of the information contained in this SAI expands upon subjects discussed in
the Prospectus of the Fund. Capitalized terms not defined herein are defined in
the Prospectus. No investment in the Fund should be made without first reading
the Fund's Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the investment objectives and policies of
the Fund as set forth in the Prospectus.
Bank Obligations. The Fund 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.
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.
Fixed time deposits are obligations of foreign branches of United States banks
or foreign banks which are payable on a stated maturity date and bear a fixed
rate of interest. Although fixed time deposits do not have a market, there are
no contractual restrictions on the right to transfer a beneficial interest in
the deposit to a third party.
The Fund may invest a portion of its assets in the obligations of foreign banks
and foreign branches of domestic banks. Such obligations include Eurodollar
Certificates of Deposit ("ECDs") which are U.S. dollar-denominated certificates
of deposit issued by offices of foreign and domestic banks located outside the
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; Canadian Time Deposits ("CTDs") which are essentially the same as ETDs
except they are issued by Canadian offices of major Canadian banks; Schedule Bs,
which are obligations issued by Canadian branches of foreign or domestic banks;
Yankee Certificates of Deposit ("Yankee CDs") which are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the United States; and Yankee Bankers' Acceptances ("Yankee BAs") which are U.S.
dollar-denominated bankers' acceptances issued by a U.S. branch of a foreign
bank and held in the United States.
Although the Fund may invest in obligations of foreign banks or foreign branches
of U.S. banks only when the investment adviser deems the instrument to present
minimal credit risk, such investments nevertheless entail risks that are
different from those of investments in domestic obligations of U.S. banks. These
additional risks include future political and economic developments, the
possible imposition of withholding taxes on interest income, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. In
addition, foreign branches of U.S. banks and U.S. branches of foreign banks may
be subject to less stringent reserve requirements and to different accounting,
auditing, reporting and record keeping standards than those applicable to
domestic branches of U.S. banks.
<PAGE>
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 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 two 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.
Commercial paper may include variable and floating rate instruments. Commercial
paper issues include securities issued by corporations without registration
under the Securities Act of 1933, as amended (the "1933 Act"), in reliance on
the exemption in Section 3(a)(3), and commercial paper issued in reliance on the
so-called "private placement" exemption in Section 4(2) ("Section 4(2) Paper").
Section 4(2) Paper is restricted as to disposition under the federal securities
laws in that any resale must similarly be made in an exempt transaction. Section
4(2) Paper is normally resold to other institutional investors through or with
the assistance of investment dealers which make a market in Section 4(2) Paper,
thus providing liquidity. For purposes of the Fund's limitation on purchases of
illiquid instruments, Section 4(2) Paper will not be considered illiquid if the
investment adviser has determined, in accordance with guidelines approved by the
Board of Trustees, that an adequate trading market exists for such securities.
Variable Amount Master Demand Notes. The Fund may invest in variable amount
master demand notes, which 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 the Fund and the issuer, they are
not normally traded. Although there is no secondary market in the notes, the
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. Lyon Street 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.
Variable And Floating Rate Demand Notes. The Fund may, from time to time, buy
variable or floating rate demand notes issued by corporations, bank holding
companies and financial institutions and similar taxable and tax-exempt
instruments issued by government agencies and instrumentalities. These
securities will typically have a maturity over one year but carry with them the
right of the holder to put the securities to a remarketing agent or other entity
at designated time intervals and on specified notice. The obligation of the
issuer of the put to repurchase the securities may be backed by a letter of
credit or other obligation issued by a financial institution. The purchase price
is ordinarily par plus accrued and unpaid interest. Generally, the remarketing
agent will adjust the interest rate every seven days (or at other specified
intervals) in order to maintain the interest rate at the prevailing rate for
securities with a seven-day or other designated maturity.
Short-Term Obligations. The 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, 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. Pending investment or
to meet anticipated redemption requests, the Fund may invest without limitation
in short-term obligations. For temporary defensive purposes, these investments
may constitute 100% of a Fund's portfolio and, in such circumstances, will
constitute a temporary suspension of its attempts to achieve its investment
objective.
<PAGE>
Corporate Debt Securities. The Fund may invest in U.S. dollar-denominated debt
obligations issued or guaranteed by U.S. corporations or U.S. commercial banks,
U.S. dollar-denominated obligations of foreign issuers and debt obligations of
foreign issuers denominated in foreign currencies. Such debt obligations
include, among others, bonds, notes, debentures and variable rate demand notes.
In choosing corporate debt securities on behalf of a Fund, its investment
adviser may consider (i) general economic and financial conditions; (ii) the
specific issuer's (a) business and management, (b) cash flow, (c) earnings
coverage of interest and dividends, (d) ability to operate under adverse
economic conditions, (e) fair market value of assets, and (f) in the case of
foreign issuers, unique political, economic or social conditions applicable to
such issuer's country; and, (iii) other considerations deemed appropriate.
The Fund will not purchase corporate debt securities rated below Baa by Moody's
or BBB by S&P or to the extent certain U.S. or foreign debt obligations are
unrated or rated by other rating agencies, are determined to be of comparable
quality ("Medium-Grade Securities"). While "Baa"/"BBB" and comparable unrated
securities may produce a higher return than higher rated securities, they are
subject to a greater degree of market fluctuation and credit risk than the
higher quality securities in which the Fund may invest and may be regarded as
having speculative characteristics as well.
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 generally subject to greater credit risk than
comparable higher-rated securities because issuers are more vulnerable to
economic downturns, higher interest rates or adverse issuer-specific
developments. In addition, the prices of Medium-Grade Securities are generally
subject to greater market risk and therefore react more sharply to changes in
interest rates. The value and liquidity of Medium-Grade Securities may be
diminished by adverse publicity and investor perceptions.
Because certain Medium-Grade Securities are traded only in markets where the
number of potential purchasers and sellers, if any, is limited, the ability of
the 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 the 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
the Fund may be required to reinvest redemption or call proceeds during a period
of relatively low interest rates.
The credit ratings issued by nationally recognized statistical rating
organization ("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, an investment adviser will conduct their own independent credit
analysis of Medium-Grade Securities.
After purchase, a security may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Fund. Neither event will require
a sale of such security. However, Lyon Street will consider such event in its
determination of whether a Fund should continue to hold the security. A security
which has had its rating downgraded or revoked may be subject to greater risk to
principal and income, and often involve greater volatility of price, than
securities in the higher rating categories. Such securities are also subject to
greater credit risks (including, without limitation, the possibility of default
by or bankruptcy of the issuers of such securities) than securities in higher
rating categories.
<PAGE>
Foreign Investments. The Fund may invest in foreign securities. Investment in
foreign securities is subject to special investment risks that differ in some
respects from those related to investments in securities of U.S. domestic
issuers. Such risks include political, social or economic instability in the
country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
limits on removal of currency or other assets, nationalization of assets,
foreign withholding and income taxation, and foreign trading practices
(including higher trading commissions, custodial charges and delayed
settlements). Such securities may be subject to greater fluctuations in price
than securities issued by U.S. corporations or issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The markets on which such
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. In addition, there may be less publicly
available information about a foreign company than about a U.S. domiciled
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. domestic companies. There is generally less government regulation of
securities exchanges, brokers and listed companies abroad than in the U.S.
Confiscatory taxation or diplomatic developments could also affect investment in
those countries. In addition, foreign branches of U.S. banks, foreign banks and
foreign issuers may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting, and recordkeeping standards than
those applicable to domestic branches of U.S. banks and U.S. domestic issuers.
Because foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies, there may be less publicly available information
about a foreign company than about a U.S. company. Volume and liquidity in most
foreign bond markets are less than in the U.S., and securities of many foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. Fixed commissions on foreign securities exchanges are generally
higher than negotiated commissions on U.S. exchanges, although the 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 the Fund is uninvested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Losses to a 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. 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.
Additionally, the Fund may invest 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
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 more developed
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 a result to assess the value or prospects of an investment in
such issuers.
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.
If a security is denominated in foreign currency, the value of the security to
the 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 the
Fund's assets. The value of the assets of the Fund as measured in U.S. dollars
may be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations.
<PAGE>
A change in the value of any foreign currency against the U.S. dollar will
result in a corresponding change in the U.S. dollar value of securities
denominated in that currency. Such changes will also affect the income and
distributions to Shareholders of the Fund investing in securities that are not
U.S. dollar-denominated. In addition, although the Fund will receive income on
foreign securities in such currencies, the Fund will be required to compute and
distribute income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines materially after income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make required distributions. Similarly, if an exchange rate declines between the
time the 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, the 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.
The Fund may invest in both sponsored and unsponsored ADRs and 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.
Securities Of Foreign Governments And Supranational Organizations. The Fund may
invest in U.S. dollar - denominated debt securities issued by foreign
governments, their political subdivisions, governmental authorities, agencies
and instrumentalities and supranational organizations. A supranational
organization is an entity designated or supported by the national government of
one or more countries to promote economic reconstruction or development.
Examples of supranational organizations include, among others, the International
Bank for Reconstruction and Development (World Bank), the European Economic
Community, the European Coal and Steel Community, the European Investment Bank,
the Inter- American Development Bank, the Asian Development Bank, and the
African Development Bank. The Fund may also invest in "quasi-government
securities" which are debt obligations issued by entities owned by either a
national, state or equivalent government or are obligations of such a government
jurisdiction which are not backed by its full faith and credit and general
taxing powers.
Investing in foreign government and quasi-government securities involves
considerations and possible risks not typically associated with investing in
obligations issued by the U.S. Government. The values of foreign investments are
affected by changes in governmental administration or economic or monetary
policy (in the U.S. or other countries) or changed circumstances in dealings
between countries. In addition, investments in foreign countries could be
affected by other factors not present in the United States, including
expropriation, confiscatory taxation and lack of uniform accounting and auditing
standards.
Foreign Currency Transactions. The value of the assets of the 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 the Fund may incur
costs in connection with conversions between various currencies. The 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 Fund may enter into forward currency contracts
in order to hedge against adverse movements in exchange rates between
currencies.
<PAGE>
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 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 Fund also may 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 hedging 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 the Fund to purchase additional currency on the spot market if
the market value of the security is less than the amount of foreign currency the
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 the Fund is obligated to deliver.
If the 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 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 Fund will have to convert its 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.
Standard & Poor's Depository Receipts. The 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 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 investments in SPDRs, when aggregated with
all other investments in investment companies, may not exceed 10% of the total
assets of the Fund.
U.S. Government Obligations. The Fund 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 Fund may invest do not include Certificates of Accrual
on Treasury Securities ("CATS") or Treasury Income Growth Receipts ("TIGRs").
Obligations of certain agencies and instrumentalities of the U.S. Government,
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. The Fund will invest
in the obligations of such agencies or instrumentalities only when Lyon Street
believes that the credit risk with respect thereto is minimal.
<PAGE>
The 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.
Options. The Fund may purchase put and call options on securities, securities
indices and foreign currencies and may write (sell) covered put and call
options.
A call option gives the purchaser the right to buy, and a writer has the
obligation to sell, the underlying security or foreign currency at the stated
exercise price at any time prior to the expiration of the option, regardless of
the market price or exchange rate of the security or foreign currency, as the
case may be. The premium paid to the writer is consideration for undertaking the
obligations under the option contract. A put option gives the purchaser the
right to sell the underlying security or foreign currency at the stated exercise
price at any time prior to the expiration date of the option, regardless of the
market price or exchange rate of the security or foreign currency, as the case
may be. A call option is covered if the Fund owns the underlying security
covered by the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration if the underlying security is held in a segregated account by its
custodian) upon conversion or exchange of other securities held in its
portfolio. A put option is covered if the Fund maintains cash, or other liquid
assets with a value equal to the exercise price in a segregated account with its
custodian. 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, the 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 previously has written. If a Fund is unable to
effect a closing purchase transaction, it will not be able to sell the
underlying security or currency until the option expires or the Fund delivers
the underlying security or currency upon exercise. In addition, upon the
exercise of a call option by the holder thereof, the Fund will forego the
potential benefit represented by market appreciation over the exercise price.
When the Fund writes an option, an amount equal to the net premium (the premium
less the commission) received by the 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 the
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 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 will
realize a gain or loss.
Covered call 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 the Fund. 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.
Once the decision to write a call option has been made, Lyon Street, 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 the Fund to write another call option on the underlying
security with either a different exercise price or expiration date or both. If
the 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 the 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. The 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.
<PAGE>
Exercise prices of 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, the 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. The 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 the Fund.
Where the Fund may purchase put options, the Fund is purchasing the right to
sell a specified security (or securities) within a specified period of time at a
specified exercise price. Puts may be acquired 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 generally will
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).
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
Fund will segregate assets or otherwise cover index options that would require
it to pay cash upon exercise.
A principal reason for writing put and call options is to attempt to realize,
through the receipt of premiums, a greater current return than would be realized
on the underlying securities alone. In return for the premium received for a
call option, the Fund foregoes the opportunity for profit from a price increase
in the underlying security above the exercise price so long as the option
remains open, but retains the risk of loss should the price of the security
decline. In return for the premium received for a put option, the Fund assumes
the risk that the price of the underlying security will decline below the
exercise price, in which case the put would be exercised and the Fund would
suffer a loss. The Fund may purchase put options in an effort to protect the
value of a security it owns against a possible decline in market value.
Forward Commitments, When-Issued and Delayed-Delivery Securities. The 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, the Fund may purchase and sell securities on a "forward commitment"
basis. The Fund will engage in when-issued and delayed-delivery transactions
only for the purpose of acquiring portfolio securities consistent with its
investment objective and policies, not for investment leverage. When-issued
securities involve a risk that the yield obtained in the transaction will be
less than that available in the market when delivery takes place. The Fund will
not pay for such securities or start earning interest on them until they are
received.
<PAGE>
When the Fund agrees to purchase securities on a "when-issued" or
"delayed-delivery" basis, its custodian will set aside cash or liquid securities
equal to the amount of the commitment in a separate account. Normally, the
custodian will set aside securities to satisfy the purchase commitment, and in
such a case, the Fund 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 the Fund
investing in securities on a when-issued or delayed delivery basis, net assets
will fluctuate to a greater degree when it sets aside securities to cover such
purchase commitments than when it sets aside cash. In addition, because the Fund
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 commitment to
purchase "when-issued" or "delayed-delivery" securities will not exceed 25% of
the value of the Fund's total assets.
When the Fund engages in "when-issued" or "delayed-delivery" transactions, it
relies on the seller to consummate the trade. Failure of the seller to do so may
result in the Fund incurring a loss or missing the opportunity to obtain a price
or yield 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 Fund 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 that
the Fund purchases mortgage-related securities from such issuers which may,
solely for purposes of the Investment Company Act of 1940, as amended (the "1940
Act"), be deemed to be investment companies, the Fund's investment in such
securities will be subject to the limitations on its investment in investment
company securities.
Mortgage-related securities in which the Fund may invest, 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 the 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 Fund will receive when these amounts are
reinvested.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage related securities
and among the securities that they issue. Mortgage-related securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-related securities issued by FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of FNMA and are not backed by or entitled to
the full faith and credit of the United States. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to the timely payment of the principal and interest by FNMA. Mortgage-related
securities issued by FHLMC include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of
the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to the timely payment of interest, which is guaranteed by
FHLMC. FHLMC guarantees either ultimate collection or the timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
<PAGE>
The Fund may invest in Collateralized Mortgage Obligations ("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, the Fund may fail to fully recoup its
initial investment in these securities even if the security is rated in the
highest rating category.
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, the Fund may invest in other asset-backed securities that may be
developed in the future.
Illiquid and 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 1933 Act. The 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 Fund 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. Rule 144A, a rule promulgated
under Section 4(2) of the 1933 Act, 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.
Lyon Street 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 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 the Fund's liquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
Investment Companies. The Fund may invest in securities issued by other
investment companies, including, but not limited to, money market investment
companies, within the limits prescribed by the 1940 Act. As a shareholder of
another investment company, the Fund would bear, along with other shareholders,
its pro rata portion of the expenses of such other investment company, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations, and
may represent a duplication of fees to Shareholders of the Fund.
Lending of Portfolio Securities. The Fund, from time to time, may lend portfolio
securities to broker-dealers, banks or institutional borrowers of securities.
The Fund 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 Fund
does 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 the Fund, it could experience delays in recovering its securities and
possible capital losses. The Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions determined to be creditworthy under
guidelines established by the Board of Trustees.
Convertible Securities. The Fund 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 Fund will invest in convertible
securities that are rated "BBB" by S&P and "Baa" by Moody's, or higher, at the
time of investment, or if unrated, are of comparable quality.
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.
The 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 Lyon Street, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, the Fund will hold or trade the convertible securities. In selecting
convertible securities for the Fund, Lyon Street 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, Lyon Street 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.
Warrants. The Fund may purchase warrants and similar rights, which are
privileges issued by corporations enabling the owners to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specified period of time. The purchase of warrants involves the risk
that the Fund could lose the purchase value of a warrant if the right to
subscribe to additional shares is not exercised prior to the warrant's
expiration. Also, the purchase of warrants involves the risk that the effective
price paid for the warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security.
Repurchase Agreements. Securities held by the Fund may be subject to repurchase
agreements. Under the terms of a repurchase agreement, the Fund would acquire
securities from member banks of the Federal Deposit Insurance Corporation and
registered broker-dealers that Lyon Street 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, the Fund 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 Fund's custodian or another qualified
custodian, as appropriate, or in the Federal Reserve/Treasury book-entry system.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements in accordance with applicable investment restrictions. Pursuant to
such reverse repurchase agreements, the Fund would sell certain of its
securities to financial institutions such as banks and broker-dealers, and agree
to repurchase them at a mutually agreed upon date and price. At the time the
Fund enters into a reverse repurchase 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 involve the risk that the
market value of securities to be purchased by the 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 the Fund is delayed or prevented
from completing the transaction.
Futures Contracts and Options Thereon. The 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, interest rate, 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. The Fund may engage in such futures transactions
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 the 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, the 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, the 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 the 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 the 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 the Fund as a regulated investment company.
The Fund also may purchase and sell put and call options on futures contracts.
An option on a futures contract gives the purchaser the right, but not the
obligation, in return for the premium paid, to assume (in the case of a call) or
sell (in the case of a put) a position in a specified underlying futures
contract (which position may be a long or short position) a specified exercise
price at any time during the option exercise period. Sellers of options on
futures contracts, like buyers and sellers of futures contracts, make an initial
margin deposit and are subject to calls for variation margin.
Futures transactions involve brokerage costs and require the Fund to segregate
liquid assets, such as cash, U.S. Government securities or other liquid
securities to cover its obligation under such contracts. There is a possibility
that the Fund may lose the expected benefit of futures transactions if interest
rates, securities prices or foreign exchange rates move in an unanticipated
manner. Such unanticipated changes may also result in poorer overall performance
than if the Fund had not entered into any futures transactions. In addition, the
value of futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities and foreign currencies,
limiting the Fund's ability to hedge effectively against interest rate, foreign
exchange rate and/or market risk and giving rise to additional risks. There is
no assurance of liquidity in the secondary market for purposes of closing out
futures positions.
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, the 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," the 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 the Fund plus premiums paid by it for open options on futures
would exceed 5% of the Fund's total assets. The 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 the 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
The 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 the Fund
only by a vote of a majority of the outstanding Shares of the Fund (as defined
under "ADDITIONAL INFORMATION -- Vote of a Majority of the Outstanding Shares"
in this SAI).
The Fund will not:
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; and (c)
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 the 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;
3. Borrow money or issue senior securities, except that the Fund may (i)
borrow from banks, so long as immediately after each borrowing there is asset
coverage of 300%, and (ii) enter into reverse repurchase agreements (or similar
investment techniques) and enter into transactions in options, futures, options
on futures, and other derivative instruments as described in the Fund's
Prospectus and SAI from time to time;
4. Make loans, except that the 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 securities issued by other persons, except to the extent that
the 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 and/or SAI 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 are not prohibited by this restriction).
The following additional investment restriction is not a fundamental policy and
therefore may be changed without the vote of a majority of the outstanding
Shares of the Fund. Except as provided in the fundamental policies described
above, the Fund may not:
1. 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 the
Fund's investments in illiquid securities to exceed the limitation set forth in
the Fund's Prospectus, the 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, the Fund would not be required to liquidate any
portfolio securities where the Fund would suffer a loss on the sale of such
securities.
<PAGE>
Portfolio Turnover
Changes may be made in the 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, and the Fund will be
managed without regard to its portfolio turnover rate. The portfolio turnover
rate for the Fund 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. High portfolio turnover rates will generally result in higher
transaction costs to the Fund, including brokerage commissions.
The portfolio turnover rate for the Fund is calculated by dividing the lesser of
the 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 the Fund is determined and the Shares of the Fund are
priced 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 Fund
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.
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Shares of the Fund are sold on a continuous basis by the Fund's distributor,
and the distributor has agreed to use appropriate efforts to solicit all
purchase orders. The public offering price of Shares of the Fund is its 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.
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 conditions
which make payment in cash unwise, such as large-scale redemptions or market
illiquidity, 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 Fund 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 Fund.
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 Trustees.
<PAGE>
MANAGEMENT OF THE TRUST
Trustees and Officers
Overall responsibility for management of the Trust rests with its Board of
Trustees, who are elected by the Shareholders of the Trust. The Trustees elect
the officers of the Trust to supervise actively its day-to-day operations.
The names of the Trustees, their addresses, ages, and principal occupations
during the past five years are set forth below:
Name, Address, and Age Principal Occupation During Past 5 Years
- ---------------------- ----------------------------------------
James H. Woodward Chancellor, University of North Carolina at
University of North Carolina Charlotte.
at Charlotte
Charlotte, NC 28223
Age: 60
Michael Van Buskirk Chief Executive Officer, Ohio Bankers
37 West Broad Street Association (industry trade association).
Suite 1001
Columbus, OH 43215
Age: 53
Walter B. Grimm* Employee of BISYS Fund Services (6/92-present).
3435 Stelzer Road
Columbus, Oh 43219
Age: 54
- ------------------------
* 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 person, and $250 for each special meeting
of the Board of Trustees attended by telephone. For the fiscal year ended
December 31, 1999, the Trust paid the following compensation to the Trustees of
the Trust:
<PAGE>
Aggregate Compensation Total Compensation from
Name from Trust* Trust and Fund Complex**
- ---- ------------------------ ------------------------
James H. Woodward $4,000 $20,750
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 BB&T Funds, AmSouth Funds,
HSBC Mutual Funds Trust, HSBC Funds Trust, and Kent Funds.
The officers of the Trust, their addresses, ages, and principal occupations
during the past five years are as follows (unless otherwise indicated, the
address of each officer is 3435 Stelzer Road, Columbus, OH 43219):
<TABLE>
<S> <C> <C> <C> <C>
Position(s) Held Principal Occupation
Name, Address, and Age With the Trust During Past 5 Years
- ---------------------- -------------- -------------------
Walter Grimm President and Chairman of the Employee of BISYS Fund Services
Age: 54 Board (6/92-present).
Frank Deutchki Vice President Employee of BISYS Fund Services (4/96 -
Age: 46 present); Vice President, Audit Director
at Mutual Funds Services Company, a
subsidiary of United States Trust Company
of New York (2/89 - 3/96).
Gregory Maddox Vice President and Assistant Employee of BISYS Fund Services (4/91 -
Columbia Square Secretary present).
Suite 500
1230 Columbia Street
San Diego, CA 92101
Age: 32
Alaina Metz Secretary Employee of BISYS Fund Services (6/95 -
Age: 33 present); Supervisor, Mutual Fund Legal
Department, Alliance Capital Management
(5/89 - 6/95).
Charles L. Booth Vice President and Employee of BISYS Fund Services (4/91 - Present).
Age: 40 Assistant Secretary
Gary Tenkman Treasurer Employee of BISYS Fund Services (4/98 -
Age: 29 present); Audit Manager Ernst & Young LLP
(1990 - 4/98).
Nimish Bhatt Principal Financial and Employee of BISYS Fund Services (7/96 -
Age: 36 Accounting Officer and present); Assistant Vice President,
Comptroller
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, 2000, 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 Adviser
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Fund's investment objective and restrictions, investment
advisory services are provided to the Fund by Lyon Street pursuant to an
Investment Advisory Agreement dated October 1, 1999 (the "Investment Advisory
Agreement"). Lyon Street is a wholly-owned subsidiary of Old Kent Bank ("Old
Kent"). As of December 31, 1999, Lyon Street managed assets of approximately
$6.2 billion. Lyon Street is located at 111 Lyon Street, N.W., Grand Rapids, MI
49503.
Old Kent is a Michigan banking corporation which, with its affiliates, provided
commercial and retail banking and trust services through more than [200] banking
offices in Michigan and Illinois as of December 31, 1999. Old Kent offers a
broad range of financial services, including commercial and consumer loans,
corporate and personal trust services, demand and time deposit accounts, letters
of credit and international financial services.
Old Kent is a subsidiary of Old Kent Financial Corporation, a bank holding
company headquartered in Grand Rapids, Michigan, with approximately $18.1
billion in total consolidated assets as of December 31, 1999. Through offices in
numerous states, Old Kent Financial Corporation and its subsidiaries provide a
broad range of financial services to individuals and businesses.
Under the Investment Advisory Agreement, Lyon Street has agreed to provide,
either directly or through one or more sub-advisers, investment advisory
services for the Fund as described in the Prospectus. For the services provided
and expenses assumed pursuant to the Investment Advisory Agreement, the Fund is
obligated to pay Lyon Street a fee, computed daily and paid monthly, at the
annual rate of 0.70%, calculated as a percentage of the average daily net assets
of the Fund.
Unless sooner terminated, the Investment Advisory Agreement continues in effect
as to the 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 the 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. The Investment Advisory Agreement is terminable as to the Fund at
any time on 60 days' written notice without penalty by the Trustees, by vote of
a majority of the outstanding Shares of the Fund, or by Lyon Street. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that Lyon Street 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 Lyon Street 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 Fund may
include descriptions of Lyon Street including, but not limited to, (i)
descriptions of Lyon Street's operations; (ii) descriptions of certain personnel
and their functions; and (iii) statistics and rankings related to Lyon Street's
operations.
<PAGE>
Portfolio Transactions
Lyon Street determines, subject to the general supervision of the Board of
Trustees and in accordance with the Fund's investment objective and
restrictions, which securities are to be purchased and sold by the 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 Lyon Street in its best judgment and in a manner deemed
fair and reasonable to Shareholders. In selecting a broker or dealer, Lyon
Street 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 Lyon Street may receive
orders for transactions on behalf of the Fund. 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 Lyon Street informed concerning overall economic, market,
political and legal trends. Under some circumstances, Lyon Street'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 the Fund's relevant
markets, or access to proprietary information about companies that are a
majority of the Fund's investments.
Research information so received is in addition to and not in lieu of services
required to be performed by Lyon Street and does not reduce the fees payable to
Lyon Street by the Fund. Such information may be useful to Lyon Street in
serving both the Fund 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 Fund. While Lyon Street generally seeks
competitive commissions, the Fund may not necessarily pay the lowest commission
available on each brokerage transaction for reasons discussed above.
Investment decisions for the Fund are made independently from those for any
other portfolio, investment company or account managed by Lyon Street. Any such
other portfolio, investment company or account may also invest in the same
securities as the Fund. When a purchase or sale of the same security is made at
substantially the same time on behalf of the Fund and another 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 Lyon
Street believes to be equitable to the Fund and such other portfolio, investment
company or account. In some instances, this investment procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained by the Fund. To the extent permitted by law, Lyon Street may aggregate
the securities to be sold by or purchased for the Fund with those to be sold or
purchased for other portfolios, investment companies or accounts in order to
obtain best execution. In making investment recommendations for the Fund, Lyon
Street will not inquire or take into consideration whether an issuer of
securities proposed for purchase or sale by the Fund is a customer of Lyon
Street or the Fund's distributor, their parents or their subsidiaries or
affiliates and, in dealing with its customers, Lyon Street, its parent,
subsidiaries, and affiliates will not inquire or take into consideration whether
securities of such customers are held by the Trust.
<PAGE>
Federal Banking Law
The Gramm-Leach-Bliley Act of 1999 repealed certain provisions of the
Glass-Steagall Act that had previously restricted the ability of banks and their
affiliates to engage in certain mutual fund activities. Nevertheless, as a
wholly owned subsidiary of Old Kent Financial Corporation, Lyon Street's
activities remain subject to, and may be limited by, applicable federal banking
law and regulations. Lyon Street believes that it possesses the legal authority
to perform the services for the Fund contemplated by the Prospectus, this SAI,
and the Investment Advisory Agreement without violation of applicable statutes
and regulations. If future changes in these laws and regulations were to limit
the ability of Lyon Street to perform these services, the Board of Trustees
would review the Trust's relationship with Lyon Street and consider taking all
action necessary in the circumstances, which could include recommending to
Shareholders the selection of another qualified advisor or, if that course of
action appeared impractical, that the Fund 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 Fund Services
("BISYS") served as general manager and administrator to the Trust. The
Administrator assists in supervising all operations of the Fund (other than
those performed by Lyon Street under the Investment Advisory Agreement, by BISYS
Ohio as fund accountant and dividend disbursing agent, and by the Fund'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 Fund
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 Fund,
including calculation of daily expense accruals; and generally assist in all
aspects of the Trust's operations other than those performed by Lyon Street
under the Investment Advisory Agreement, by the other investment advisers of the
Trust's portfolios, by the fund accountant and dividend disbursing agent, and by
the Fund's custodians. Under the Administration Agreement, the Administrator may
delegate all or any part of its responsibilities thereunder.
The Administrator receives a fee from the 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 0.045% of the 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
the Fund in order to increase the net income of one or more of the Fund
available for distribution as dividends. For the period from June 3, 1997
(commencement of operations) through December 31, 1997, the Trust incurred
administration fees equal to $17,985, of which $13,549 was waived or reimbursed
by BISYS. For the fiscal years ended December 31, 1998 and December 31, 1999,
the Trust incurred administration fees equal to $105,793 and $157,948,
respectively, of which 77,410 and $107,516, respectively, was waived or
reimbursed by BISYS.
The Administration Agreement is terminable with respect to the 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.
<PAGE>
Expenses
Lyon Street 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 Fund. The Fund 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 Fund's 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.
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 Fund in the distribution of its 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
Fund. 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.
Custodian, Transfer Agent and Fund Accounting Services
The Bank of New York has been retained, pursuant to a Custodian Agreement, to
act as custodian for the Fund. The Bank of New York's address is 90 Washington
Street, New York, New York 10286. Under the Custodian Agreement, the Custodian
maintains a custody account or accounts in the name of the Fund; receives and
delivers all assets for the Fund upon purchase and upon sale or maturity;
collects and receives all income and other payments and distributions on account
of the assets of the Fund; pays all expenses of the Fund; and receives and pays
out cash for purchases and redemptions of shares of the Fund and pays out cash
if requested for dividends on shares of the Fund. Under the Custodian Agreement,
the Fund has agreed to pay the Custodian for furnishing custodian services a fee
for certain administration and transaction charges and out-of-pocket expenses.
The Board of Trustees has authorized The Bank of New York in its capacity as
custodian of each Fund to enter into Subcustodian Agreements with banks and
other entities that qualify under the 1940 Act to act as subcustodians with
respect to certain portfolio investments of the Fund.
BISYS Ohio serves as transfer agent and dividend disbursing agent for 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 Fund, 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 Fund, 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 Fund.
BISYS Ohio receives an annual fee 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 0.02% of the Fund's
average daily net assets or $15,000.
<PAGE>
Independent Accountants
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.
Code of Ethics
The Trust, Lyon Street and BISYS each have adopted a code of ethics, as required
by applicable law, which is designed to prevent affiliated persons of the Trust,
Lyon Street and BISYS from engaging in deceptive, manipulative, or fraudulent
activities in connection with securities held or to be acquired by the Fund
(which may also be held by persons subject to a code). There can be no assurance
that the codes will be effective in preventing such activities.
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 nine series of Shares which represent interests in each
series of the Trust. The Trust's Declaration of Trust authorizes the Board of
Trustees to divide or redivide any unissued Shares of the Trust into one or more
additional series or classes by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting power,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.
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 the Fund are entitled
to receive the assets available for distribution belonging to the 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.
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.
<PAGE>
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 the Fund
affected by the matter. For purposes of determining whether the approval of a
majority of the outstanding Shares of the Fund will be required in connection
with a matter, the 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 the 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
the Fund.
Vote of a Majority of the Outstanding Shares
As used in the Fund's Prospectus and the SAI, "vote of a majority of the
outstanding Shares of the Trust or the Fund" means the affirmative vote, at an
annual or special meeting of Shareholders duly called, of the lesser of (a) 67%
or more of the votes of Shareholders of the Trust or the Fund present at such
meeting at which the holders of more than 50% of the votes attributable to the
Shareholders of record of the Trust or the Fund are represented in person or by
proxy, or (b) the holders of more than 50% of the outstanding votes of
Shareholders of the Trust or the Fund.
Shareholder and Trustee Liability
Under Massachusetts law, holders of units of interest in a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that Shareholders shall not be subject to any personal liability for the
obligations of the Trust. The Declaration of Trust provides for indemnification
out of the trust property of any Shareholder held personally liable solely by
reason of his or her being or having been a Shareholder. The Declaration of
Trust also provides that the Trust shall, upon request, reimburse any
Shareholder for all legal and other expenses reasonably incurred in the defense
of any claim made against the Shareholder for any act or obligation of the
Trust, and shall satisfy any judgment thereon. Thus, the risk of a Shareholder
incurring financial loss on account of Shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
The Declaration of Trust states further that no Trustee, officer, or agent of
the Trust shall be personally liable in connection with the administration or
preservation of the assets of the Trust or the conduct of the Trust's business;
nor shall any Trustee, officer, or agent be personally liable to any person for
any action or failure to act except for his own bad faith, willful misfeasance,
gross negligence, or reckless disregard of his duties. The Declaration of Trust
also provides that all persons having any claim against the Trustees or the
Trust shall look solely to the assets of the Trust for payment.
Additional Tax Information
The following discussion summarizes certain U.S. federal tax considerations
incidental to an investment in the Fund. This discussion does not purport to be
complete or to deal with all aspects of federal income taxation that may be
relevant. This discussion is based upon present provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the regulations promulgated
thereunder, and judicial and administrative ruling authorities, all of which are
subject to change, which change may be retroactive. Prospective investors should
consult their own tax advisors with regard to the federal, state, local and
foreign tax aspects of an investment in the Fund.
The Fund intends to qualify annually and to elect to be treated as a regulated
investment company under Subchapter M of the Code. If the 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.
To qualify as a regulated investment company, the 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.
<PAGE>
As a regulated investment company, the 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. The 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 the 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, the 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, the 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 the 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 Fund also intends to comply with the separate diversification requirements
imposed by Section 817(h) of the Code and the regulations thereunder on certain
insurance company separate accounts. These requirements, which are in addition
to the diversification requirements imposed on a Fund by the 1940 Act and
Subchapter M of the Code, place certain limitations on assets of each insurance
company separate account used to fund variable contracts. Because Section 817(h)
and those regulations treat the assets of a Fund as assets of the related
separate account, these regulations are imposed on the assets of the Fund.
Specifically, the regulations provide that, after a one year start-up period or
except as permitted by the "safe harbor" described below, as of the end of each
calendar quarter or within 30 days thereafter no more than 55% of the total
assets of a Fund may be represented by any one investment, no more than 70% by
any two investments, no more than 80% by any three investments and no more than
90% by any four investments. For this purpose, all securities of the same issuer
are considered a single investment, and each U.S. Government agency and
instrumentality is considered a separate issuer. Section 817(h) provides, as a
safe harbor, that a separate account will be treated as being adequately
diversified if the diversification requirements under Subchapter M are satisfied
and no more than 55% of the value of the account's total assets is attributable
to cash and cash items (including receivables), U.S. Government securities and
securities of other regulated investment companies. Failure by a Fund to both
qualify as a regulated investment company and satisfy the Section 817(h)
requirements would generally cause the variable contracts to lose their
favorable tax status and require a contract holder to include in ordinary income
any income accrued under the contracts for the current and all prior taxable
years. Under certain circumstances described in the applicable Treasury
regulations, inadvertent failure to satisfy the applicable diversification
requirements may be corrected, but such a correction would require a payment to
the Internal Revenue Service based on the tax contract holders would have
incurred if they were treated as receiving the income on the contract for the
period during which the diversification requirements were not satisfied. Any
such failure may also result in adverse tax consequences for the insurance
company issuing the contracts. Failure by a Fund to qualify as a regulated
investment company would also subject the Fund to federal and state income
taxation on all of its taxable income and gain, whether or not distributed to
shareholders.
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 Fund 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 the 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 the
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 the Fund.
<PAGE>
If the Fund invests in shares of a passive 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 the Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time the 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 the Fund's assets may limit the
extent to which the 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 the Fund.
Performance Information
The 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 Fund will not be advertised or included in sales literature
unless accompanied by comparable performance information for a separate account
to which the Fund offer its Shares.
Yields of the Fund 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 the 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 the Fund's Shares and to the relative risks associated
with the investment objective and policies of the 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.
Performance information for the Fund 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.,
the Russell 2000 Index, the Consumer Price Index, and to data prepared by Lipper
Analytical Services, Inc., a widely recognized independent service which
monitors the performance of mutual funds, or Morningstar, Inc. 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 the Fund that appears in a publication such as those mentioned
above may be included in advertisements and in reports to Variable Contract
Owners.
<PAGE>
The Fund may also compute aggregate total return for specified periods. The
aggregate total return is determined by dividing the net asset value of this
account at the end of the specified period by the value of the initial
investment and is expressed as a percentage. Calculation of aggregate total
return assumes reinvestment of all income dividends and capital gain
distributions during the period.
The Fund 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 Fund will not take into account
charges and deductions against a Separate Account to which the Fund's Shares are
sold or charges and deductions against the Variable Contracts. The Fund's yield
and total return should not be compared with mutual funds that sell their shares
directly to the public since the figures provided do not reflect charges against
the Separate Accounts or the Variable Contracts. Performance information for 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 Fund's 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 Fund will request voting instructions from variable contract
owners and will vote shares or other voting interests in the Separate Account in
proportion of the voting instructions received.
The 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.
FINANCIAL STATEMENTS
Since the Fund had not commenced operations as of the date of this SAI, there
are no financial statements to include in the SAI.
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
Description of Moody's bond ratings:
Excerpts from Moody's description of its bond ratings are listed as
follows: Aaa - judged to be the best quality and they carry the smallest degree
of investment risk; Aa - judged to be of high quality by all standards -
together with the Aaa group, they comprise what are generally known as
high-grade bonds; A - possess many favorable investment attributes and are to be
considered as "upper medium grade obligations"; Baa - considered to be medium
grade obligations, i.e., they are neither highly protected nor poorly secured
- -interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time; Ba - judged to have speculative
elements, their future cannot be considered as well assured; B - generally lack
characteristics of the desirable investment; Caa - are of poor standing - such
issues may be in default or there may be present elements of danger with respect
to principal or interest; Ca - speculative in a high degree, often in default; C
- - lowest rated class of bonds, regarded as having extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating
categories. The modifier 1 indicates that the security is in the higher end of
its rating category; the modifier 2 indicates a mid-range ranking; and modifier
3 indicates a ranking toward the lower end of the category.
Description of S&P's bond ratings:
Excerpts from S&P's description of its bond ratings are listed as
follows: AAA - highest grade obligations, in which capacity to pay interest and
repay principal is extremely strong; AA - has a very strong capacity to pay
interest and repay principal, and differs from AAA issues only in a small
degree; A - has a strong capacity to pay interest and repay principal, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories; BBB
- - regarded as having an adequate capacity to pay interest and repay principal;
whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories. This group is the lowest which qualifies for commercial
bank investment. BB, B, CCC, CC, C - predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligations; BB indicates the highest grade and C the lowest within the
speculative rating categories. D - interest or principal payments are in
default.
S&P applies indicators "+," no character, and "-" to its rating
categories. The indicators show relative standing within the major rating
categories.
Description of Moody's commercial paper ratings:
Excerpts from Moody's commercial paper ratings are listed as follows:
Prime - 1 - issuers (or supporting institutions) have a superior ability for
repayment of senior short-term promissory obligations; Prime - 2 - issuers (or
supporting institutions) have a strong ability for repayment of senior
short-term promissory obligations; Prime - 3 - issuers (or supporting
institutions) have an acceptable ability for repayment of senior short-term
promissory obligations; Not Prime - issuers do not fall within any of the Prime
categories.
Description of S&P's ratings for corporate and municipal bonds:
Investment grade ratings: AAA - the highest rating assigned by S&P,
capacity to pay interest and repay principal is extremely strong; AA - has a
very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in a small degree; A - has strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories; BBB - regarded as having an adequate capacity to pay
interest and repay principal - whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Speculative grade ratings: BB, B, CCC, CC, C - debt rated in these
categories is regarded as having predominantly speculative characteristics with
respect to capacity to pay interest and repay principal - while such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions; CI - reserved
for income bonds on which no interest is being paid; D -in default, and payment
of interest and/or repayment of principal is in arrears. Plus (+) or Minus (-) -
the ratings from "AA" to "CCC" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Description of S&P's 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 effective
February 25, 1999(6)
(5) Form of Establishment and Designation of Four Additional
Series
(6) Form of Amended 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(6)
(5) Form of Investment Advisory Agreement between Registrant
and HSBC Asset Management Americas, Inc.(7)
(6) Form of Investment Advisory Agreement between Registrant
and Lyon Street Asset Management Company(7)
(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)
(3) Form of Custodian Agreement between Registrant and The
Bank of New York
(h) (1) Form of Management and Administration Agreement between
Registrant and BISYS Fund Services Ohio, Inc. (6)
<PAGE>
(2) Form of Fund Accounting Agreement between
Registrant and BISYS Fund Services Ohio, Inc. (6)
(3) Form of Transfer Agency Agreement between
Registrant and BISYS Fund Services Ohio, Inc. (6)
(4) Form of Fund Participation Agreement with Hartford Life
Insurance Company(4)
(5) Form of Fund Participation Agreement with Allstate
Insurance Company*
(6) Form of Variable Contract Owner Servicing Agreement(6)
(i) Opinion and Consent of Counsel(2)
(j) Consent of Independent Auditors
(k) Not Applicable
(l) Purchase Agreement(2)
(m) Not Applicable
(n) Not Applicable
(p) Forms of Codes of Ethics
(q) (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) (6)
- ----------
* 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.
6 Filed with Post-Effective Amendment No. 6 to Registrant's Registration
Statement on April 1, 1999.
7 Filed with Post-Effective Amendment No. 7 to Registrant's Registration
Statement on July 16, 1999.
<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 (a)(1)) 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(s)" 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 26 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 26 of the registration statement of Form N-1A of
AmSouth Mutual Funds (File Nos. 33-21660 and 811-5551). Information
relating to the business and other connections of HSBC Asset
Management Americas, Inc. ("HSBC") and each director, officer or
partner of HSBC is hereby incorporated by reference to disclosure in
Item 26 of the registration statement of Form N-1A of HSBC Mutual
Funds Trust (File Nos. 33-33739 and 811-06057). Information relating
to the business and other connections of Lyon Street Asset Management
Company ("Lyon Street") and each director, officer or partner of Lyon
Street is hereby incorporated by reference to Schedules A and D of
Lyon Street Asset Management Company's Form ADV (File No. 801-55015).
<PAGE>
Item 27. Principal Underwriter
(a) BISYS Fund Services ("BISYS") acts as distributor for Registrant.
BISYS also distributes the securities of Alpine Equity Trust,
American Independence Funds Trust, American Performance Funds,
AmSouth Funds, The BB&T Mutual Funds Group, The Coventry Group,
The Eureka Funds, Fifth Third Funds, Governor Funds, Hirtle
Callaghan Trust, HSBC Funds Trust, HSBC Mutual Funds Trust, The
Infinity Mutual Funds, Inc., Magna Funds, Mercantile Mutual
Funds, Inc., Metamarkets.com, Meyers Investment Trust, MMA Praxis
Mutual Funds, M.S.D.&T. Funds, Pacific Capital Funds, Republic
Advisor Funds Trust, Republic Funds Trust, Sefton Funds Trust,
Summit Investment Trust, USAllianz Funds, USAllianz Funds
Variable Insurance Products Trust, The Victory Portfolios, The
Victory Variable Insurance Funds, and Vintage Mutual Funds, 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
WC Subsidiary Corporation Sole Limited Partner None
150 Clove Road
Little Falls, NJ 07424
BISYS Fund Services, Inc. Sole General Partner None
3435 Stelzer Road
Columbus, OH 43219
(c) Not Applicable
<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: 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; Banking and Trust Company, 434 Fayetteville Street
Mall, Raleigh, NC 27601; HSBC Asset Management Americas, Inc., 140
Broadway, New York, NY 10005; and Lyon Street Asset Management Company,
111 Lyon Street, N.W., Grand Rapids, MI 49503 (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.
<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 post-effective amendment to its
Registration Statement under 485(b) under the Securities Act and has duly caused
this Post-Effective Amendment No. 9 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 28th day of April, 2000.
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 28, 2000
Walter Grimm of the Board, and Trustee
________*__________ Principal Financial April 28, 2000
Nimish Bhatt and Accounting Officer
and Comptroller
________*__________ Trustee April 28, 2000
Michael Van Buskirk
________*________ Trustee April 28, 2000
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 q(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)(since redesignated as Exhibit q(4)) to
Post-Effective Amendment No. 6 to the Registrant's Registration
Statement.
<PAGE>
VARIABLE INSURANCE FUNDS
INDEX TO EXHIBITS FILED
WITH POST-EFFECTIVE AMENDMENT NO. 9
Exhibit Description
<TABLE>
<S> <C>
(a)(5) (filed as EX-99.B1(a)(5)) Form of Establishment and Designation of Four Additional Series
(a)(6) (filed as EX-99.B1(a)(6)) Form of Redesignation of Series
(g)(3) (filed as EX-99.B8(g)(3)) Form of Custodian Agreement between Registrant and
The Bank of New York
(j) (filed as EX-99.B11(j)) Consent of PricewaterhouseCoopers LLP
(p)(1) (filed as EX-99.B9(p)(1)) Form of Code of Ethics of the Registrant
(p)(2) (filed as EX-99.B9(p)(2)) Form of Code of Ethics of AmSouth Bank
(p)(3) (filed as EX-99.B9(p)(3)) Form of Code of Ethics of Branch Banking and Trust Company
(p)(4) (filed as EX-99.B9(p)(4)) Form of Code of Ethics of HSBC Asset Management
(p)(5) (filed as EX-99.B9(p)(5)) Form of Code of Ethics of Lyon Street Asset Management
(p)(6) (filed as EX-99.B9(p)(6)) Form of Code of Ethics of OakBrook Investments, LLC
(p)(7) (filed as EX-99.B9(p)(7)) Form of Code of Ethics of Rockhaven Asset Management, LLC
</TABLE>
VARIABLE INSURANCE FUNDS
Establishment and Designation of Four 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 four additional separate series (each a
"Fund," collectively the "Funds"), of a single class, the Funds hereby created
having the following special and relative rights:
1. The Funds shall be designated as follows:
Kent Variable Growth and Income Fund
HSBC Variable Growth and Income Fund
HSBC Variable Fixed Income Fund
HSBC Variable Cash Management Fund
2. The Funds 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 Funds under the
Securities Act of 1933. Each Share of each Fund shall be redeemable, shall
represent a pro rata beneficial interest in the assets of the Funds, and shall
be entitled to receive its pro rata share of net assets allocable to such Shares
of the Funds upon liquidation of the Funds, all as provided in the Declaration
of Trust. The proceeds of sales of Shares of the Funds, together with any income
and gain thereon, less any diminution or expenses thereof, shall irrevocably
belong to the Funds, unless otherwise required by law.
3. Each Share of each Fund shall be entitled to one vote for each
dollar of value invested (or fraction thereof in respect of a fractional Share)
on matters 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 Funds 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
Funds and all other series of the Trust (also referred to herein as 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: August 31, 1999 -------------------------------
James H. Woodward, as Trustee
-------------------------------
Michael Van Buskirk, as Trustee
-------------------------------
Walter B. Grimm, as Trustee
VARIABLE INSURANCE FUNDS
Amended Designation of 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 redesignates the shares of beneficial
interest of one series of shares of the Trust as follows:
FIRST: The series of shares of the Trust established and designated as
the Kent Variable Growth and Income Fund shall be redesignated as the
Old Kent Core Equity Fund without in any way changing the rights or
privileges of the Fund or its shareholders.
IN WITNESS WHEREOF, the undersigned have executed this instrument the
16th day of February, 2000.
- ---------------------------------- -------------------------------
Walter B. Grimm, as Trustee Michael Van Buskirk, as Trustee
- ----------------------------------
James H. Woodward, as Trustee
CUSTODY AGREEMENT
Agreement made as of this day of _______, 1999, between Variable Insurance
Funds, a Massachusetts business trust organized and existing under the laws of
the Commonwealth of Massachusetts, having its principal office and place of
business at 3435 Stelzer Road, Columbus, Ohio 43219-3035 (hereinafter called the
"Fund"), and THE BANK OF NEW YORK, a New York corporation authorized to do a
banking business, having its principal office and place of business at One Wall
Street, New York, New York 10286 (hereinafter called the "Custodian").
W I T N E S S E T H :
that for and in consideration of the mutual promises hereinafter set forth, the
Fund and the Custodian agree as follows: ARTICLE I.
DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless the
context otherwise requires, shall have the following meanings:
1. "Authorized Persons" shall be deemed to include any person, whether or
not such person is an officer or employee of the Fund, duly authorized by the
Board of Trustees of the Fund to execute any Certificate, instruction, notice or
other instrument on behalf of the Fund and listed in the Certificate annexed
hereto as Appendix A or such other Certificate as may be received by the
Custodian from time to time.
2. "Book-Entry System" shall mean the Federal Reserve/Treasury book-entry
system for United States and federal agency securities, its successor or
successors and its nominee or nominees.
3. "Call Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and payment of the
exercise price, as specified therein, to purchase from the writer thereof the
specified underlying Securities.
4. "Certificate" shall mean any notice, instruction, or other instrument in
writing, authorized or required by this Agreement to be given to the Custodian
which is actually received by the Custodian and signed on behalf of the Fund by
any two Authorized Persons, and the term Certificate shall also include
Instructions.
5. "Clearing Member" shall mean a registered broker-dealer which is a
clearing member under the rules of O.C.C. and a member of a national securities
exchange qualified to act as a custodian for an investment company, or any
broker-dealer reasonably believed by the Custodian to be such a clearing member.
6. "Collateral Account" shall mean a segregated account so denominated
which is specifically allocated to a Series and pledged to the Custodian as
security for, and in consideration of, the Custodian's issuance of (a) any Put
Option guarantee letter or similar document described in paragraph 8 of Article
V herein, or (b) any receipt described in Article V or VIII herein.
7. "Composite Currency Unit" shall mean the European Currency Unit or any
other composite unit consisting of the aggregate of specified amounts of
specified Currencies as such unit may be constituted from time to time.
8. "Covered Call Option" shall mean an exchange traded option entitling the
holder, upon timely exercise and payment of the exercise price, as specified
therein, to purchase from the writer thereof the specified underlying Securities
(excluding Futures Contracts) which are owned by the writer thereof and subject
to appropriate restrictions.
9. "Currency" shall mean money denominated in a lawful currency of any
country or the European Currency Unit.
<PAGE>
10. "Depository" shall mean The Depository Trust Company ("DTC"), a
clearing agency registered with the Securities and Exchange Commission, its
successor or successors and its nominee or nominees. The term "Depository" shall
further mean and include any other person authorized to act as a depository
under the Investment Company Act of 1940, its successor or successors and its
nominee or nominees, specifically identified in a certified copy of a resolution
of the Fund's Board of Trustees specifically approving deposits therein by the
Custodian.
11. "Financial Futures Contract" shall mean the firm commitment to buy or
sell fixed income securities including, without limitation, U.S. Treasury Bills,
U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of deposit,
and Eurodollar certificates of deposit, during a specified month at an agreed
upon price.
12. "Futures Contract" shall mean a Financial Futures Contract and/or Stock
Index Futures Contracts.
13. "Futures Contract Option" shall mean an option with respect to a
Futures Contract.
14. "FX Transaction" shall mean any transaction for the purchase by one
party of an agreed amount in one Currency against the sale by it to the other
party of an agreed amount in another Currency.
15. "Instructions" shall mean instructions communications transmitted by
electronic or telecommunications media including S.W.I.F.T.,
computer-to-computer interface, dedicated transmission line, facsimile
transmission signed by an Authorized Person and tested telex.
16. "Margin Account" shall mean a segregated account in the name of a
broker, dealer, futures commission merchant, or a Clearing Member, or in the
name of the Fund for the benefit of a broker, dealer, futures commission
merchant, or Clearing Member, or otherwise, in accordance with an agreement
between the Fund, the Custodian and a broker, dealer, futures commission
merchant or a Clearing Member (a "Margin Account Agreement"), separate and
distinct from the custody account, in which certain Securities and/or money of
the Fund shall be deposited and withdrawn from time to time in connection with
such transactions as the Fund may from time to time determine. Securities held
in the Book-Entry System or the Depository shall be deemed to have been
deposited in, or withdrawn from, a Margin Account upon the Custodian's effecting
an appropriate entry in its books and records.
17. "Money Market Security" shall be deemed to include, without limitation,
certain Reverse Repurchase Agreements, debt obligations issued or guaranteed as
to interest and principal by the government of the United States or agencies or
instrumentalities thereof, any tax, bond or revenue anticipation note issued by
any state or municipal government or public authority, commercial paper,
certificates of deposit and bankers' acceptances, repurchase agreements with
respect to the same and bank time deposits, where the purchase and sale of such
securities normally requires settlement in federal funds on the same day as such
purchase or sale.
18. "O.C.C." shall mean the Options Clearing Corporation, a clearing agency
registered under Section 17A of the Securities Exchange Act of 1934, its
successor or successors, and its nominee or nominees.
19. "Option" shall mean a Call Option, Covered Call Option, Stock Index
Option and/or a Put Option.
<PAGE>
20. "Oral Instructions" shall mean verbal instructions actually received by
the Custodian from an Authorized Person or from a person reasonably believed by
the Custodian to be an Authorized Person.
21. "Put Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and tender of the
specified underlying Securities, to sell such Securities to the writer thereof
for the exercise price.
22. "Reverse Repurchase Agreement" shall mean an agreement pursuant to
which the Fund sells Securities and agrees to repurchase such Securities at a
described or specified date and price.
23. "Security" shall be deemed to include, without limitation, Money Market
Securities, Call Options, Put Options, Stock Index Options, Stock Index Futures
Contracts, Stock Index Futures Contract Options, Financial Futures Contracts,
Financial Futures Contract Options, Reverse Repurchase Agreements, common stocks
and other securities having characteristics similar to common stocks, preferred
stocks, debt obligations issued by state or municipal governments and by public
authorities, (including, without limitation, general obligation bonds, revenue
bonds, industrial bonds and industrial development bonds), bonds, debentures,
notes, mortgages or other obligations, and any certificates, receipts, warrants
or other instruments representing rights to receive, purchase, sell or subscribe
for the same, or evidencing or representing any other rights or interest
therein, or any property or assets.
24. "Senior Security Account" shall mean an account maintained and
specifically allocated to a Series under the terms of this Agreement as a
segregated account, by recordation or otherwise, within the custody account in
which certain Securities and/or other assets of the Fund specifically allocated
to such Series shall be deposited and withdrawn from time to time in accordance
with Certificates received by the Custodian in connection with such transactions
as the Fund may from time to time determine.
25. "Series" shall mean the various portfolios, if any, of the Fund listed
on Appendix B hereto as amended from time to time.
26. "Shares" shall mean the shares of beneficial interest of the Fund, each
of which is, in the case of a Fund having Series, allocated to a particular
Series.
27. "Stock Index Futures Contract" shall mean a bilateral agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the value
of a particular stock index at the close of the last business day of the
contract and the price at which the futures contract is originally struck.
28. "Stock Index Option" shall mean an exchange traded option entitling the
holder, upon timely exercise, to receive an amount of cash determined by
reference to the difference between the exercise price and the value of the
index on the date of exercise.
<PAGE>
ARTICLE II.
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custodian as custodian of
the Securities and money at any time owned by the Fund during the period of this
Agreement.
2. The Custodian hereby accepts appointment as such custodian and agrees to
perform the duties thereof as hereinafter set forth. ARTICLE III.
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, the Fund will deliver or cause to be delivered to the Custodian
all Securities and all money owned by it, at any time during the period of this
Agreement, and shall specify with respect to such Securities and money the
Series to which the same are specifically allocated. The Custodian shall
segregate, keep and maintain the assets of the Series separate and apart. The
Custodian will not be responsible for any Securities and money not actually
received by it. The Custodian will be entitled to reverse any credits made on
the Fund's behalf where such credits have been previously made and money is not
finally collected. The Fund shall deliver to the Custodian a certified
resolution of the Board of Trustees of the Fund, substantially in the form of
Exhibit A hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis to deposit in the Book-Entry System all Securities
eligible for deposit therein, regardless of the Series to which the same are
specifically allocated and to utilize the Book-Entry System to the extent
possible in connection with its performance hereunder, including, without
limitation, in connection with settlements of purchases and sales of Securities,
loans of Securities and deliveries and returns of Securities collateral. Prior
to a deposit of Securities specifically allocated to a Series in the Depository,
the Fund shall deliver to the Custodian a certified resolution of the Board of
Trustees of the Fund, substantially in the form of Exhibit B hereto, approving,
authorizing and instructing the Custodian on a continuous and ongoing basis
until instructed to the contrary by a Certificate actually received by the
Custodian to deposit in the Depository all Securities specifically allocated to
such Series eligible for deposit therein, and to utilize the Depository to the
extent possible with respect to such Securities in connection with its
performance hereunder, including, without limitation, in connection with
settlements of purchases and sales of Securities, loans of Securities, and
deliveries and returns of Securities collateral. Securities and money deposited
in either the Book-Entry System or the Depository will be represented in
accounts which include only assets held by the Custodian for customers,
including, but not limited to, accounts in which the Custodian acts in a
fiduciary or representative capacity and will be specifically allocated on the
Custodian's books to the separate account for the applicable Series. Prior to
the Custodian's accepting, utilizing and acting with respect to Clearing Member
confirmations for Options and transactions in Options for a Series as provided
in this Agreement, the Custodian shall have received a certified resolution of
the Fund's Board of Trustees, substantially in the form of Exhibit C hereto,
approving, authorizing and instructing the Custodian on a continuous and
on-going basis, until instructed to the contrary by a Certificate actually
received by the Custodian, to accept, utilize and act in accordance with such
confirmations as provided in this Agreement with respect to such Series.
2. The Custodian shall establish and maintain separate accounts, in the
name of each Series, and shall credit to the separate account for each Series
all money received by it for the account of the Fund with respect to such
Series. Money credited to a separate account for a Series shall be disbursed by
the Custodian only:
(a) as hereinafter provided;
(b) pursuant to Certificates setting forth the name and address of the
person to whom the payment is to be made, the Series account from which payment
is to be made and the purpose for which payment is to be made; or
(c) in payment of the fees and in reimbursement of the expenses and
liabilities of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the Custodian shall
furnish the Fund with confirmations and a summary, on a per Series basis, of all
transfers to or from the account of the Fund for a Series, either hereunder or
with any co-custodian or sub-custodian appointed in accordance with this
Agreement during said day. Where Securities are transferred to the account of
the Fund for a Series, the Custodian shall also by book-entry or otherwise
identify as belonging to such Series a quantity of Securities in a fungible bulk
of Securities registered in the name of the Custodian (or its nominee) or shown
on the Custodian's account on the books of the Book-Entry System or the
Depository. At least monthly and from time to time, the Custodian shall furnish
the Fund with a detailed statement, on a per Series basis, of the Securities and
money held by the Custodian for the Fund.
<PAGE>
4. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, all Securities held by the Custodian hereunder, which are issued
or issuable only in bearer form, except such Securities as are held in the
Book-Entry System, shall be held by the Custodian in that form; all other
Securities held hereunder may be registered in the name of the Fund, in the name
of any duly appointed registered nominee of the Custodian as the Custodian may
from time to time determine, or in the name of the Book-Entry System or the
Depository or their successor or successors, or their nominee or nominees. The
Fund agrees to furnish to the Custodian appropriate instruments to enable the
Custodian to hold or deliver in proper form for transfer, or to register in the
name of its registered nominee or in the name of the Book-Entry System or the
Depository any Securities which it may hold hereunder and which may from time to
time be registered in the name of the Fund. The Custodian shall hold all such
Securities specifically allocated to a Series which are not held in the
Book-Entry System or in the Depository in a separate account in the name of such
Series physically segregated at all times from those of any other person or
persons.
5. Except as otherwise provided in this Agreement and unless otherwise
instructed to the contrary by a Certificate, the Custodian by itself, or through
the use of the Book-Entry System or the Depository with respect to Securities
held hereunder and therein deposited, shall with respect to all Securities held
for the Fund hereunder in accordance with preceding paragraph 4:
(a) collect all income, dividends and distributions due or payable;
(b) give notice to the Fund and present payment and collect the amount
payable upon such Securities which are called, but only if either (i) the
Custodian receives a written notice of such call, or (ii) notice of such call
appears in one or more of the publications listed in Appendix C annexed hereto,
which may be amended at any time by the Custodian without the prior notification
or consent of the Fund;
(c) present for payment and collect the amount payable upon all
Securities which mature;
(d) surrender Securities in temporary form for definitive Securities;
(e) execute, as custodian, any necessary declarations or certificates
of ownership under the Federal Income Tax Laws or the laws or regulations of any
other taxing authority now or hereafter in effect;
(f) hold directly, or through the Book-Entry System or the Depository
with respect to Securities therein deposited, for the account of a Series, all
rights and similar securities issued with respect to any Securities held by the
Custodian for such Series hereunder; and
(g) deliver to the Fund all notices, proxies, proxy soliciting
materials, consents and other written information (including, without
limitation, notices of tender offers and exchange offers, pendency of calls,
maturities of Securities and expiration of rights) relating to Securities held
pursuant to this Agreement which are actually received by the Custodian, such
proxies and other similar materials to be executed by the registered owner (if
Securities are registered otherwise than in the name of the Fund), but without
indicating the manner in which proxies or consents are to be voted.
6. Upon receipt of a Certificate and not otherwise, the Custodian, directly
or through the use of the Book-Entry System or the Depository, shall:
(a) execute and deliver to such persons as may be designated in such
Certificate proxies, consents, authorizations, and any other instruments whereby
the authority of the Fund as owner of any Securities held by the Custodian
hereunder for the Series specified in such Certificate may be exercised;
<PAGE>
(b) deliver any Securities held by the Custodian hereunder for the
Series specified in such Certificate in exchange for other Securities or cash
issued or paid in connection with the liquidation, reorganization, refinancing,
merger, consolidation or recapitalization of any corporation, or the exercise of
any conversion privilege and receive and hold hereunder specifically allocated
to such Series any cash or other Securities received in exchange;
(c) deliver any Securities held by the Custodian hereunder for the
Series specified in such Certificate to any protective committee, reorganization
committee or other person in connection with the reorganization, refinancing,
merger, consolidation, recapitalization or sale of assets of any corporation,
and receive and hold hereunder specifically allocated to such Series such
certificates of deposit, interim receipts or other instruments or documents as
may be issued to it to evidence such delivery;
(d) make such transfers or exchanges of the assets of the Series
specified in such Certificate, and take such other steps as shall be stated in
such Certificate to be for the purpose of effectuating any duly authorized plan
of liquidation, reorganization, merger, consolidation or recapitalization of the
Fund; and
(e) present for payment and collect the amount payable upon Securities
not described in preceding paragraph 5(b) of this Article which may be called as
specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the Custodian
shall not be required to obtain possession of any instrument or certificate
representing any Futures Contract, any Option, or any Futures Contract Option
until after it shall have determined, or shall have received a Certificate from
the Fund stating, that any such instruments or certificates are available. The
Fund shall deliver to the Custodian such a Certificate no later than the
business day preceding the availability of any such instrument or certificate.
Prior to such availability, the Custodian shall comply with Section 17(f) of the
Investment Company Act of 1940, as amended, in connection with the purchase,
sale, settlement, closing-out or writing of Futures Contracts, Options, or
Futures Contract Options by making payments or deliveries specified in
Certificates received by the Custodian in connection with any such purchase,
sale, writing, settlement or closing-out upon its receipt from a broker, dealer,
or futures commission merchant of a statement or confirmation reasonably
believed by the Custodian to be in the form customarily used by brokers,
dealers, or futures commission merchants with respect to such Futures Contracts,
Options, or Futures Contract Options, as the case may be, confirming that such
Security is held by such broker, dealer or futures commission merchant, in
book-entry form or otherwise, in the name of the Custodian (or any nominee of
the Custodian) as custodian for the Fund, provided, however, that
notwithstanding the foregoing, payments to or deliveries from the Margin
Account, and payments with respect to Securities to which a Margin Account
relates, shall be made in accordance with the terms and conditions of the Margin
Account Agreement. Whenever any such instruments or certificates are available,
the Custodian shall, notwithstanding any provision in this Agreement to the
contrary, make payment for any Futures Contract, Option, or Futures Contract
Option for which such instruments or such certificates are available only
against the delivery to the Custodian of such instrument or such certificate,
and deliver any Futures Contract, Option or Futures Contract Option for which
such instruments or such certificates are available only against receipt by the
Custodian of payment therefor. Any such instrument or certificate delivered to
the Custodian shall be held by the Custodian hereunder in accordance with, and
subject to, the provisions of this Agreement.
ARTICLE IV.
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other than a
purchase of an Option, a Futures Contract, or a Futures Contract Option, the
Fund shall deliver to the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, a Certificate, and (ii) with
respect to each purchase of Money Market Securities, a Certificate or Oral
Instructions, specifying with respect to each such purchase: (a) the Series to
which such Securities are to be specifically allocated; (b) the name of the
issuer and the title of the Securities; (c) the number of shares or the
principal amount purchased and accrued interest, if any; (d) the date of
purchase and settlement; (e) the purchase price per unit; (f) the total amount
payable upon such purchase; (g) the name of the person from whom or the broker
through whom the purchase was made, and the name of the clearing broker, if any;
and (h) the name of the broker to whom payment is to be made. The Custodian
shall, upon receipt of Securities purchased by or for the Fund, pay to the
broker specified in the Certificate out of the money held for the account of
such Series the total amount payable upon such purchase, provided that the same
conforms to the total amount payable as set forth in such Certificate or Oral
Instructions.
<PAGE>
2. Promptly after each sale of Securities by the Fund, other than a sale of
any Option, Futures Contract, Futures Contract Option, or any Reverse Repurchase
Agreement, the Fund shall deliver to the Custodian (i) with respect to each sale
of Securities which are not Money Market Securities, a Certificate, and (ii)
with respect to each sale of Money Market Securities, a Certificate or Oral
Instructions, specifying with respect to each such sale: (a) the Series to which
such Securities were specifically allocated; (b) the name of the issuer and the
title of the Security; (c) the number of shares or principal amount sold, and
accrued interest, if any; (d) the date of sale; (e) the sale price per unit; (f)
the total amount payable to the Fund upon such sale; (g) the name of the broker
through whom or the person to whom the sale was made, and the name of the
clearing broker, if any; and (h) the name of the broker to whom the Securities
are to be delivered. The Custodian shall deliver the Securities specifically
allocated to such Series to the broker specified in the Certificate against
payment of the total amount payable to the Fund upon such sale, provided that
the same conforms to the total amount payable as set forth in such Certificate
or Oral Instructions.
ARTICLE V.
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the Fund shall
deliver to the Custodian a Certificate specifying with respect to each Option
purchased: (a) the Series to which such Option is specifically allocated; (b)
the type of Option (put or call); (c) the name of the issuer and the title and
number of shares subject to such Option or, in the case of a Stock Index Option,
the stock index to which such Option relates and the number of Stock Index
Options purchased; (d) the expiration date; (e) the exercise price; (f) the
dates of purchase and settlement; (g) the total amount payable by the Fund in
connection with such purchase; (h) the name of the Clearing Member through whom
such Option was purchased; and (i) the name of the broker to whom payment is to
be made. The Custodian shall pay, upon receipt of a Clearing Member's statement
confirming the purchase of such Option held by such Clearing Member for the
account of the Custodian (or any duly appointed and registered nominee of the
Custodian) as custodian for the Fund, out of money held for the account of the
Series to which such Option is to be specifically allocated, the total amount
payable upon such purchase to the Clearing Member through whom the purchase was
made, provided that the same conforms to the total amount payable as set forth
in such Certificate.
2. Promptly after the sale of any Option purchased by the Fund pursuant to
paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate
specifying with respect to each such sale: (a) the Series to which such Option
was specifically allocated; (b) the type of Option (put or call); (c) the name
of the issuer and the title and number of shares subject to such Option or, in
the case of a Stock Index Option, the stock index to which such Option relates
and the number of Stock Index Options sold; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the Clearing Member through whom the sale was
made. The Custodian shall consent to the delivery of the Option sold by the
Clearing Member which previously supplied the confirmation described in
preceding paragraph 1 of this Article with respect to such Option against
payment to the Custodian of the total amount payable to the Fund, provided that
the same conforms to the total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Call Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian
a Certificate specifying with respect to such Call Option: (a) the Series to
which such Call Option was specifically allocated; (b) the name of the issuer
and the title and number of shares subject to the Call Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise price
per share; (f) the total amount to be paid by the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Call Option was exercised.
The Custodian shall, upon receipt of the Securities underlying the Call Option
which was exercised, pay out of the money held for the account of the Series to
which such Call Option was specifically allocated the total amount payable to
the Clearing Member through whom the Call Option was exercised, provided that
the same conforms to the total amount payable as set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian
a Certificate specifying with respect to such Put Option: (a) the Series to
which such Put Option was specifically allocated; (b) the name of the issuer and
the title and number of shares subject to the Put Option; (c) the expiration
date; (d) the date of exercise and settlement; (e) the exercise price per share;
(f) the total amount to be paid to the Fund upon such exercise; and (g) the name
of the Clearing Member through whom such Put Option was exercised. The Custodian
shall, upon receipt of the amount payable upon the exercise of the Put Option,
deliver or direct the Depository to deliver the Securities specifically
allocated to such Series, provided the same conforms to the amount payable to
the Fund as set forth in such Certificate.
<PAGE>
5. Promptly after the exercise by the Fund of any Stock Index Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to
the Custodian a Certificate specifying with respect to such Stock Index Option:
(a) the Series to which such Stock Index Option was specifically allocated; (b)
the type of Stock Index Option (put or call); (c) the number of Options being
exercised; (d) the stock index to which such Option relates; (e) the expiration
date; (f) the exercise price; (g) the total amount to be received by the Fund in
connection with such exercise; and (h) the Clearing Member from whom such
payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Covered
Call Option: (a) the Series for which such Covered Call Option was written; (b)
the name of the issuer and the title and number of shares for which the Covered
Call Option was written and which underlie the same; (c) the expiration date;
(d) the exercise price; (e) the premium to be received by the Fund; (f) the date
such Covered Call Option was written; and (g) the name of the Clearing Member
through whom the premium is to be received. The Custodian shall deliver or cause
to be delivered, in exchange for receipt of the premium specified in the
Certificate with respect to such Covered Call Option, such receipts as are
required in accordance with the customs prevailing among Clearing Members
dealing in Covered Call Options and shall impose, or direct the Depository to
impose, upon the underlying Securities specified in the Certificate specifically
allocated to such Series such restrictions as may be required by such receipts.
Notwithstanding the foregoing, the Custodian has the right, upon prior written
notification to the Fund, at any time to refuse to issue any receipts for
Securities in the possession of the Custodian and not deposited with the
Depository underlying a Covered Call Option.
7. Whenever a Covered Call Option written by the Fund and described in the
preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate instructing the Custodian to deliver, or
to direct the Depository to deliver, the Securities subject to such Covered Call
Option and specifying: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares subject
to the Covered Call Option; (c) the Clearing Member to whom the underlying
Securities are to be delivered; and (d) the total amount payable to the Fund
upon such delivery. Upon the return and/or cancellation of any receipts
delivered pursuant to paragraph 6 of this Article, the Custodian shall deliver,
or direct the Depository to deliver, the underlying Securities as specified in
the Certificate against payment of the amount to be received as set forth in
such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall promptly deliver
to the Custodian a Certificate specifying with respect to such Put Option: (a)
the Series for which such Put Option was written; (b) the name of the issuer and
the title and number of shares for which the Put Option is written and which
underlie the same; (c) the expiration date; (d) the exercise price; (e) the
premium to be received by the Fund; (f) the date such Put Option is written; (g)
the name of the Clearing Member through whom the premium is to be received and
to whom a Put Option guarantee letter is to be delivered; (h) the amount of
cash, and/or the amount and kind of Securities, if any, specifically allocated
to such Series to be deposited in the Senior Security Account for such Series;
and (i) the amount of cash and/or the amount and kind of Securities specifically
allocated to such Series to be deposited into the Collateral Account for such
Series. The Custodian shall, after making the deposits into the Collateral
Account specified in the Certificate, issue a Put Option guarantee letter
substantially in the form utilized by the Custodian on the date hereof, and
deliver the same to the Clearing Member specified in the Certificate against
receipt of the premium specified in said Certificate. Notwithstanding the
foregoing, the Custodian shall be under no obligation to issue any Put Option
guarantee letter or similar document if it is unable to make any of the
representations contained therein.
9. Whenever a Put Option written by the Fund and described in the preceding
paragraph is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Put Option was written; (b)
the name of the issuer and title and number of shares subject to the Put Option;
(c) the Clearing Member from whom the underlying Securities are to be received;
(d) the total amount payable by the Fund upon such delivery; (e) the amount of
cash and/or the amount and kind of Securities specifically allocated to such
Series to be withdrawn from the Collateral Account for such Series and (f) the
amount of cash and/or the amount and kind of Securities, specifically allocated
to such Series, if any, to be withdrawn from the Senior Security Account. Upon
the return and/or cancellation of any Put Option guarantee letter or similar
document issued by the Custodian in connection with such Put Option, the
Custodian shall pay out of the money held for the account of the Series to which
such Put Option was specifically allocated the total amount payable to the
Clearing Member specified in the Certificate as set forth in such Certificate
against delivery of such Securities, and shall make the withdrawals specified in
such Certificate.
<PAGE>
10. Whenever the Fund writes a Stock Index Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written; (b)
whether such Stock Index Option is a put or a call; (c) the number of options
written; (d) the stock index to which such Option relates; (e) the expiration
date; (f) the exercise price; (g) the Clearing Member through whom such Option
was written; (h) the premium to be received by the Fund; (i) the amount of cash
and/or the amount and kind of Securities, if any, specifically allocated to such
Series to be deposited in the Senior Security Account for such Series; (j) the
amount of cash and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in the Collateral Account for such
Series; and (k) the amount of cash and/or the amount and kind of Securities, if
any, specifically allocated to such Series to be deposited in a Margin Account,
and the name in which such account is to be or has been established. The
Custodian shall, upon receipt of the premium specified in the Certificate, make
the deposits, if any, into the Senior Security Account specified in the
Certificate, and either (1) deliver such receipts, if any, which the Custodian
has specifically agreed to issue, which are in accordance with the customs
prevailing among Clearing Members in Stock Index Options and make the deposits
into the Collateral Account specified in the Certificate, or (2) make the
deposits into the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund and described in the
preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written; (b)
such information as may be necessary to identify the Stock Index Option being
exercised; (c) the Clearing Member through whom such Stock Index Option is being
exercised; (d) the total amount payable upon such exercise, and whether such
amount is to be paid by or to the Fund; (e) the amount of cash and/or amount and
kind of Securities, if any, to be withdrawn from the Margin Account; and (f) the
amount of cash and/or amount and kind of Securities, if any, to be withdrawn
from the Senior Security Account for such Series; and the amount of cash and/or
the amount and kind of Securities, if any, to be withdrawn from the Collateral
Account for such Series. Upon the return and/or cancellation of the receipt, if
any, delivered pursuant to the preceding paragraph of this Article, the
Custodian shall pay out of the money held for the account of the Series to which
such Stock Index Option was specifically allocated to the Clearing Member
specified in the Certificate the total amount payable, if any, as specified
therein.
12. Whenever the Fund purchases any Option identical to a previously
written Option described in paragraphs, 6, 8 or 10 of this Article in a
transaction expressly designated as a "Closing Purchase Transaction" in order to
liquidate its position as a writer of an Option, the Fund shall promptly deliver
to the Custodian a Certificate specifying with respect to the Option being
purchased: (a) that the transaction is a Closing Purchase Transaction; (b) the
Series for which the Option was written; (c) the name of the issuer and the
title and number of shares subject to the Option, or, in the case of a Stock
Index Option, the stock index to which such Option relates and the number of
Options held; (d) the exercise price; (e) the premium to be paid by the Fund;
(f) the expiration date; (g) the type of Option (put or call); (h) the date of
such purchase; (i) the name of the Clearing Member to whom the premium is to be
paid; and (j) the amount of cash and/or the amount and kind of Securities, if
any, to be withdrawn from the Collateral Account, a specified Margin Account, or
the Senior Security Account for such Series. Upon the Custodian's payment of the
premium and the return and/or cancellation of any receipt issued pursuant to
paragraphs 6, 8 or 10 of this Article with respect to the Option being
liquidated through the Closing Purchase Transaction, the Custodian shall remove,
or direct the Depository to remove, the previously imposed restrictions on the
Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a Closing Purchase
Transaction with respect to any Option purchased or written by the Fund and
described in this Article, the Custodian shall delete such Option from the
statements delivered to the Fund pursuant to paragraph 3 of Article III herein,
and upon the return and/or cancellation of any receipts issued by the Custodian,
shall make such withdrawals from the Collateral Account, and the Margin Account
and/or the Senior Security Account as may be specified in a Certificate received
in connection with such expiration, exercise, or consummation.
<PAGE>
ARTICLE VI.
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the Fund shall
deliver to the Custodian a Certificate specifying with respect to such Futures
Contract, (or with respect to any number of identical Futures Contract(s)): (a)
the Series for which the Futures Contract is being entered; (b) the category of
Futures Contract (the name of the underlying stock index or financial
instrument); (c) the number of identical Futures Contracts entered into; (d) the
delivery or settlement date of the Futures Contract(s); (e) the date the Futures
Contract(s) was (were) entered into and the maturity date; (f) whether the Fund
is buying (going long) or selling (going short) on such Futures Contract(s); (g)
the amount of cash and/or the amount and kind of Securities, if any, to be
deposited in the Senior Security Account for such Series; (h) the name of the
broker, dealer, or futures commission merchant through whom the Futures Contract
was entered into; and (i) the amount of fee or commission, if any, to be paid
and the name of the broker, dealer, or futures commission merchant to whom such
amount is to be paid. The Custodian shall make the deposits, if any, to the
Margin Account in accordance with the terms and conditions of the Margin Account
Agreement. The Custodian shall make payment out of the money specifically
allocated to such Series of the fee or commission, if any, specified in the
Certificate and deposit in the Senior Security Account for such Series the
amount of cash and/or the amount and kind of Securities specified in said
Certificate.
2. (a) Any variation margin payment or similar payment required to be made
by the Fund to a broker, dealer, or futures commission merchant with respect to
an outstanding Futures Contract, shall be made by the Custodian in accordance
with the terms and conditions of the Margin Account Agreement.
(b) Any variation margin payment or similar payment from a broker,
dealer, or futures commission merchant to the Fund with respect to an
outstanding Futures Contract, shall be received and dealt with by the Custodian
in accordance with the terms and conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian hereunder is retained
by the Fund until delivery or settlement is made on such Futures Contract, the
Fund shall deliver to the Custodian a Certificate specifying: (a) the Futures
Contract and the Series to which the same relates; (b) with respect to a Stock
Index Futures Contract, the total cash settlement amount to be paid or received,
and with respect to a Financial Futures Contract, the Securities and/or amount
of cash to be delivered or received; (c) the broker, dealer, or futures
commission merchant to or from whom payment or delivery is to be made or
received; and (d) the amount of cash and/or Securities to be withdrawn from the
Senior Security Account for such Series. The Custodian shall make the payment or
delivery specified in the Certificate, and delete such Futures Contract from the
statements delivered to the Fund pursuant to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset a
Futures Contract held by the Custodian hereunder, the Fund shall deliver to the
Custodian a Certificate specifying: (a) the items of information required in a
Certificate described in paragraph 1 of this Article, and (b) the Futures
Contract being offset. The Custodian shall make payment out of the money
specifically allocated to such Series of the fee or commission, if any,
specified in the Certificate and delete the Futures Contract being offset from
the statements delivered to the Fund pursuant to paragraph 3 of Article III
herein, and make such withdrawals from the Senior Security Account for such
Series as may be specified in such Certificate. The withdrawals, if any, to be
made from the Margin Account shall be made by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
5. Notwithstanding any other provision in this Agreement to the contrary,
the Custodian shall deliver cash and Securities to a futures commission merchant
upon receipt of a Certificate from the Fund specifying: (a) the name of the
futures commission merchant; (b) the specific cash and Securities to be
delivered; (c) the date of such delivery; and (d) the date of the agreement
between the Fund and such futures commission merchant entered pursuant to Rule
17f-6 under the Investment Company Act 1940, as amended. Each delivery of such a
Certificate by the Fund shall constitute (x) a representation and warranty by
the Fund that the Rule 17f-6 agreement has been duly authorized, executed and
delivered by the Fund and the futures commission merchant and complies with Rule
17f-6, and (y) an agreement by the Fund that the Custodian shall not be liable
for the acts or omissions of any such futures commission merchant.
<PAGE>
ARTICLE VII.
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by the Fund,
the Fund shall promptly deliver to the Custodian a Certificate specifying with
respect to such Futures Contract Option: (a) the Series to which such Option is
specifically allocated; (b) the type of Futures Contract Option (put or call);
(c) the type of Futures Contract and such other information as may be necessary
to identify the Futures Contract underlying the Futures Contract Option
purchased; (d) the expiration date; (e) the exercise price; (f) the dates of
purchase and settlement; (g) the amount of premium to be paid by the Fund upon
such purchase; (h) the name of the broker or futures commission merchant through
whom such option was purchased; and (i) the name of the broker, or futures
commission merchant, to whom payment is to be made. The Custodian shall pay out
of the money specifically allocated to such Series, the total amount to be paid
upon such purchase to the broker or futures commissions merchant through whom
the purchase was made, provided that the same conforms to the amount set forth
in such Certificate.
2. Promptly after the sale of any Futures Contract Option purchased by the
Fund pursuant to paragraph 1 hereof, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to each such sale: (a) Series to
which such Futures Contract Option was specifically allocated; (b) the type of
Futures Contract Option (put or call); (c) the type of Futures Contract and such
other information as may be necessary to identify the Futures Contract
underlying the Futures Contract Option; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the broker or futures commission merchant through
whom the sale was made. The Custodian shall consent to the cancellation of the
Futures Contract Option being closed against payment to the Custodian of the
total amount payable to the Fund, provided the same conforms to the total amount
payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the Fund pursuant to
paragraph 1 is exercised by the Fund, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Futures
Contract Option was specifically allocated; (b) the particular Futures Contract
Option (put or call) being exercised; (c) the type of Futures Contract
underlying the Futures Contract Option; (d) the date of exercise; (e) the name
of the broker or futures commission merchant through whom the Futures Contract
Option is exercised; (f) the net total amount, if any, payable by the Fund; (g)
the amount, if any, to be received by the Fund; and (h) the amount of cash
and/or the amount and kind of Securities to be deposited in the Senior Security
Account for such Series. The Custodian shall make, out of the money and
Securities specifically allocated to such Series, the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Futures Contract Option: (a) the Series for which such Futures Contract Option
was written; (b) the type of Futures Contract Option (put or call); (c) the type
of Futures Contract and such other information as may be necessary to identify
the Futures Contract underlying the Futures Contract Option; (d) the expiration
date; (e) the exercise price; (f) the premium to be received by the Fund; (g)
the name of the broker or futures commission merchant through whom the premium
is to be received; and (h) the amount of cash and/or the amount and kind of
Securities, if any, to be deposited in the Senior Security Account for such
Series. The Custodian shall, upon receipt of the premium specified in the
Certificate, make out of the money and Securities specifically allocated to such
Series the deposits into the Senior Security Account, if any, as specified in
the Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
5. Whenever a Futures Contract Option written by the Fund which is a call
is exercised, the Fund shall promptly deliver to the Custodian a Certificate
specifying: (a) the Series to which such Futures Contract Option was
specifically allocated; (b) the particular Futures Contract Option exercised;
(c) the type of Futures Contract underlying the Futures Contract Option; (d) the
name of the broker or futures commission merchant through whom such Futures
Contract Option was exercised; (e) the net total amount, if any, payable to the
Fund upon such exercise; (f) the net total amount, if any, payable by the Fund
upon such exercise; and (g) the amount of cash and/or the amount and kind of
Securities to be deposited in the Senior Security Account for such Series. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in such Certificate make the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
<PAGE>
6. Whenever a Futures Contract Option which is written by the Fund and
which is a put is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Option was specifically
allocated; (b) the particular Futures Contract Option exercised; (c) the type of
Futures Contract underlying such Futures Contract Option; (d) the name of the
broker or futures commission merchant through whom such Futures Contract Option
is exercised; (e) the net total amount, if any, payable to the Fund upon such
exercise; (f) the net total amount, if any, payable by the Fund upon such
exercise; and (g) the amount and kind of Securities and/or cash to be withdrawn
from or deposited in, the Senior Security Account for such Series, if any. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in the Certificate, make out of the money and Securities
specifically allocated to such Series, the payments, if any, and the deposits,
if any, into the Senior Security Account as specified in the Certificate. The
deposits to and/or withdrawals from the Margin Account, if any, shall be made by
the Custodian in accordance with the terms and conditions of the Margin Account
Agreement.
7. Whenever the Fund purchases any Futures Contract Option identical to a
previously written Futures Contract Option described in this Article in order to
liquidate its position as a writer of such Futures Contract Option, the Fund
shall promptly deliver to the Custodian a Certificate specifying with respect to
the Futures Contract Option being purchased: (a) the Series to which such Option
is specifically allocated; (b) that the transaction is a closing transaction;
(c) the type of Futures Contract and such other information as may be necessary
to identify the Futures Contract underlying the Futures Option Contract; (d) the
exercise price; (e) the premium to be paid by the Fund; (f) the expiration date;
(g) the name of the broker or futures commission merchant to whom the premium is
to be paid; and (h) the amount of cash and/or the amount and kind of Securities,
if any, to be withdrawn from the Senior Security Account for such Series. The
Custodian shall effect the withdrawals from the Senior Security Account
specified in the Certificate. The withdrawals, if any, to be made from the
Margin Account shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing transaction
with respect to, any Futures Contract Option written or purchased by the Fund
and described in this Article, the Custodian shall (a) delete such Futures
Contract Option from the statements delivered to the Fund pursuant to paragraph
3 of Article III herein and, (b) make such withdrawals from and/or in the case
of an exercise such deposits into the Senior Security Account as may be
specified in a Certificate. The deposits to and/or withdrawals from the Margin
Account, if any, shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the exercise of a Futures
Contract Option described in this Article shall be subject to Article VI hereof.
10. Notwithstanding any other provision in this Agreement to the contrary,
the Custodian shall deliver cash and Securities to a futures commission merchant
upon receipt of a Certificate from the Fund specifying: (a) the name of the
futures commission merchant; (b) the specific cash and Securities to be
delivered; (c) the date of such delivery; and (d) the date of the agreement
between the Fund and such futures commission merchant entered pursuant to Rule
17f-6 under the Investment Company Act 1940, as amended. Each delivery of such a
Certificate by the Fund shall constitute (x) a representation and warranty by
the Fund that the Rule 17f-6 agreement has been duly authorized, executed and
delivered by the Fund and the futures commission merchant and complies with Rule
17f-6, and (y) an agreement by the Fund that the Custodian shall not be liable
for the acts or omissions of any such futures commission merchant.
ARTICLE VIII.
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the Fund shall
promptly deliver to the Custodian a Certificate specifying: (a) the Series for
which such short sale was made; (b) the name of the issuer and the title of the
Security; (c) the number of shares or principal amount sold, and accrued
interest or dividends, if any; (d) the dates of the sale and settlement; (e) the
sale price per unit; (f) the total amount credited to the Fund upon such sale,
if any, (g) the amount of cash and/or the amount and kind of Securities, if any,
which are to be deposited in a Margin Account and the name in which such Margin
Account has been or is to be established; (h) the amount of cash and/or the
amount and kind of Securities, if any, to be deposited in a Senior Security
Account, and (i) the name of the broker through whom such short sale was made.
The Custodian shall upon its receipt of a statement from such broker confirming
such sale and that the total amount credited to the Fund upon such sale, if any,
as specified in the Certificate is held by such broker for the account of the
Custodian (or any nominee of the Custodian) as custodian of the Fund, issue a
receipt or make the deposits into the Margin Account and the Senior Security
Account specified in the Certificate.
<PAGE>
2. In connection with the closing-out of any short sale, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to each
such closing-out: (a) the Series for which such transaction is being made; (b)
the name of the issuer and the title of the Security; (c) the number of shares
or the principal amount, and accrued interest or dividends, if any, required to
effect such closing-out to be delivered to the broker; (d) the dates of
closing-out and settlement; (e) the purchase price per unit; (f) the net total
amount payable to the Fund upon such closing-out; (g) the net total amount
payable to the broker upon such closing-out; (h) the amount of cash and the
amount and kind of Securities to be withdrawn, if any, from the Margin Account;
(i) the amount of cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account; and (j) the name of the broker
through whom the Fund is effecting such closing-out. The Custodian shall, upon
receipt of the net total amount payable to the Fund upon such closing-out, and
the return and/or cancellation of the receipts, if any, issued by the Custodian
with respect to the short sale being closed-out, pay out of the money held for
the account of the Fund to the broker the net total amount payable to the
broker, and make the withdrawals from the Margin Account and the Senior Security
Account, as the same are specified in the Certificate.
ARTICLE IX.
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters a Reverse Repurchase Agreement with
respect to Securities and money held by the Custodian hereunder, the Fund shall
deliver to the Custodian a Certificate, or in the event such Reverse Repurchase
Agreement is a Money Market Security, a Certificate or Oral Instructions
specifying: (a) the Series for which the Reverse Repurchase Agreement is
entered; (b) the total amount payable to the Fund in connection with such
Reverse Repurchase Agreement and specifically allocated to such Series; (c) the
broker or dealer through or with whom the Reverse Repurchase Agreement is
entered; (d) the amount and kind of Securities to be delivered by the Fund to
such broker or dealer; (e) the date of such Reverse Repurchase Agreement; and
(f) the amount of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in a Senior Security
Account for such Series in connection with such Reverse Repurchase Agreement.
The Custodian shall, upon receipt of the total amount payable to the Fund
specified in the Certificate or Oral Instructions make the delivery to the
broker or dealer, and the deposits, if any, to the Senior Security Account,
specified in such Certificate or Oral Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described in
preceding paragraph 1 of this Article, the Fund shall promptly deliver a
Certificate or, in the event such Reverse Repurchase Agreement is a Money Market
Security, a Certificate or Oral Instructions to the Custodian specifying: (a)
the Reverse Repurchase Agreement being terminated and the Series for which same
was entered; (b) the total amount payable by the Fund in connection with such
termination; (c) the amount and kind of Securities to be received by the Fund
and specifically allocated to such Series in connection with such termination;
(d) the date of termination; (e) the name of the broker or dealer with or
through whom the Reverse Repurchase Agreement is to be terminated; and (f) the
amount of cash and/or the amount and kind of Securities to be withdrawn from the
Senior Securities Account for such Series. The Custodian shall, upon receipt of
the amount and kind of Securities to be received by the Fund specified in the
Certificate or Oral Instructions, make the payment to the broker or dealer, and
the withdrawals, if any, from the Senior Security Account, specified in such
Certificate or Oral Instructions.
<PAGE>
ARTICLE X.
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities specifically allocated
to a Series held by the Custodian hereunder, the Fund shall deliver or cause to
be delivered to the Custodian a Certificate specifying with respect to each such
loan: (a) the Series to which the loaned Securities are specifically allocated;
(b) the name of the issuer and the title of the Securities, (c) the number of
shares or the principal amount loaned, (d) the date of loan and delivery, (e)
the total amount to be delivered to the Custodian against the loan of the
Securities, including the amount of cash collateral and the premium, if any,
separately identified, and (f) the name of the broker, dealer, or financial
institution to which the loan was made. The Custodian shall deliver the
Securities thus designated to the broker, dealer or financial institution to
which the loan was made upon receipt of the total amount designated as to be
delivered against the loan of Securities. The Custodian may accept payment in
connection with a delivery otherwise than through the Book-Entry System or
Depository only in the form of a certified or bank cashier's check payable to
the order of the Fund or the Custodian drawn on New York Clearing House funds
and may deliver Securities in accordance with the customs prevailing among
dealers in securities.
2. Promptly after each termination of the loan of Securities by the Fund,
the Fund shall deliver or cause to be delivered to the Custodian a Certificate
specifying with respect to each such loan termination and return of Securities:
(a) the Series to which the loaned Securities are specifically allocated; (b)
the name of the issuer and the title of the Securities to be returned, (c) the
number of shares or the principal amount to be returned, (d) the date of
termination, (e) the total amount to be delivered by the Custodian (including
the cash collateral for such Securities minus any offsetting credits as
described in said Certificate), and (f) the name of the broker, dealer, or
financial institution from which the Securities will be returned. The Custodian
shall receive all Securities returned from the broker, dealer, or financial
institution to which such Securities were loaned and upon receipt thereof shall
pay, out of the money held for the account of the Fund, the total amount payable
upon such return of Securities as set forth in the Certificate.
ARTICLE XI.
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits to, or
withdrawals from, a Senior Security Account as specified in a Certificate
received by the Custodian. Such Certificate shall specify the Series for which
such deposit or withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such Series to be
deposited in, or withdrawn from, such Senior Security Account for such Series.
In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and the number of shares or the principal amount
of any particular Securities to be deposited by the Custodian into, or withdrawn
from, a Senior Securities Account, the Custodian shall be under no obligation to
make any such deposit or withdrawal and shall so notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin Account to
the broker, dealer, futures commission merchant or Clearing Member in whose
name, or for whose benefit, the account was established as specified in the
Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions with
respect to Securities deposited in any Margin Account shall be dealt with in
accordance with the terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and security interest in and
to any property at any time held by the Custodian in any Collateral Account
described herein. In accordance with applicable law the Custodian may enforce
its lien and realize on any such property whenever the Custodian has made
payment or delivery pursuant to any Put Option guarantee letter or similar
document or any receipt issued hereunder by the Custodian. In the event the
Custodian should realize on any such property net proceeds which are less than
the Custodian's obligations under any Put Option guarantee letter or similar
document or any receipt, such deficiency shall be a debt owed the Custodian by
the Fund within the scope of Article XIV herein.
<PAGE>
5. On each business day the Custodian shall furnish the Fund with a
statement with respect to each Margin Account in which money or Securities are
held specifying as of the close of business on the previous business day: (a)
the name of the Margin Account; (b) the amount and kind of Securities held
therein; and (c) the amount of money held therein. The Custodian shall make
available upon request to any broker, dealer, or futures commission merchant
specified in the name of a Margin Account a copy of the statement furnished the
Fund with respect to such Margin Account.
6. Promptly after the close of business on each business day in which cash
and/or Securities are maintained in a Collateral Account for any Series, the
Custodian shall furnish the Fund with a statement with respect to such
Collateral Account specifying the amount of cash and/or the amount and kind of
Securities held therein. No later than the close of business next succeeding the
delivery to the Fund of such statement, the Fund shall furnish to the Custodian
a Certificate specifying the then market value of the Securities described in
such statement. In the event such then market value is indicated to be less than
the Custodian's obligation with respect to any outstanding Put Option guarantee
letter or similar document, the Fund shall promptly specify in a Certificate the
additional cash and/or Securities to be deposited in such Collateral Account to
eliminate such deficiency.
ARTICLE XII.
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of the resolution of the
Board of Trustees of the Fund, certified by the Secretary or any Assistant
Secretary, either (i) setting forth with respect to the Series specified therein
the date of the declaration of a dividend or distribution, the date of payment
thereof, the record date as of which shareholders entitled to payment shall be
determined, the amount payable per Share of such Series to the shareholders of
record as of that date and the total amount payable to the Dividend Agent and
any sub-dividend agent or co-dividend agent of the Fund on the payment date, or
(ii) authorizing with respect to the Series specified therein the declaration of
dividends and distributions on a daily basis and authorizing the Custodian to
rely on Oral Instructions or a Certificate setting forth the date of the
declaration of such dividend or distribution, the date of payment thereof, the
record date as of which shareholders entitled to payment shall be determined,
the amount payable per Share of such Series to the shareholders of record as of
that date and the total amount payable to the Dividend Agent on the payment
date.
2. Upon the payment date specified in such resolution, Oral Instructions or
Certificate, as the case may be, the Custodian shall pay out of the money held
for the account of each Series the total amount payable to the Dividend Agent
and any sub-dividend agent or co-dividend agent of the Fund with respect to such
Series.
ARTICLE XIII.
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver to the
Custodian a Certificate duly specifying:
(a) the Series, the number of Shares sold, trade date, and price; and
(b) the amount of money to be received by the Custodian for the sale of
such Shares and specifically allocated to the separate account in the name of
such Series.
2. Upon receipt of such money from the Transfer Agent, the Custodian shall
credit such money to the separate account in the name of the Series for which
such money was received.
3. Upon issuance of any Shares of any Series described in the foregoing
provisions of this Article, the Custodian shall pay, out of the money held for
the account of such Series, all original issue or other taxes required to be
paid by the Fund in connection with such issuance upon the receipt of a
Certificate specifying the amount to be paid.
<PAGE>
4. Except as provided hereinafter, whenever the Fund desires the Custodian
to make payment out of the money held by the Custodian hereunder in connection
with a redemption of any Shares, it shall furnish to the Custodian a Certificate
specifying:
(a) the number and Series of Shares redeemed; and
(b) the amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting forth the
Series and number of Shares received by the Transfer Agent for redemption and
that such Shares are in good form for redemption, the Custodian shall make
payment to the Transfer Agent out of the money held in the separate account in
the name of the Series the total amount specified in the Certificate issued
pursuant to the foregoing paragraph 4 of this Article.
6. Notwithstanding the above provisions regarding the redemption of any
Shares, whenever any Shares are redeemed pursuant to any check redemption
privilege which may from time to time be offered by the Fund, the Custodian,
unless otherwise instructed by a Certificate, shall, upon receipt of an advice
from the Fund or its agent setting forth that the redemption is in good form for
redemption in accordance with the check redemption procedure, honor the check
presented as part of such check redemption privilege out of the money held in
the separate account of the Series of the Shares being redeemed.
ARTICLE XIV.
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian should in its sole discretion advance funds on behalf
of any Series which results in an overdraft because the money held by the
Custodian in the separate account for such Series shall be insufficient to pay
the total amount payable upon a purchase of Securities specifically allocated to
such Series, as set forth in a Certificate or Oral Instructions, or which
results in an overdraft in the separate account of such Series for some other
reason, or if the Fund is for any other reason indebted to the Custodian with
respect to a Series, including any indebtedness to The Bank of New York under
the Fund's Cash Management and Related Services Agreement (except a borrowing
for investment or for temporary or emergency purposes using Securities as
collateral pursuant to a separate agreement and subject to the provisions of
paragraph 2 of this Article), such overdraft or indebtedness shall be deemed to
be a loan made by the Custodian to the Fund for such Series payable on demand
and shall bear interest from the date incurred at a rate per annum (based on a
360-day year for the actual number of days involved) equal to 1/2% over
Custodian's prime commercial lending rate in effect from time to time, such rate
to be adjusted on the effective date of any change in such prime commercial
lending rate but in no event to be less than 6% per annum. In addition, the Fund
hereby agrees that the Custodian shall have a continuing lien, security
interest, and security entitlement in and to any property including any
investment property or any financial asset specifically allocated to such Series
at any time held by it for the benefit of such Series or in which the Fund may
have an interest which is then in the Custodian's possession or control or in
possession or control of any third party acting in the Custodian's behalf. The
Fund authorizes the Custodian, in its sole discretion, at any time to charge any
such overdraft or indebtedness together with interest due thereon against any
balance of account standing to such Series' credit on the Custodian's books. In
addition, the Fund hereby covenants that on each Business Day on which either it
intends to enter a Reverse Repurchase Agreement and/or otherwise borrow from a
third party, or which next succeeds a Business Day on which at the close of
business the Fund had outstanding a Reverse Repurchase Agreement or such a
borrowing, it shall prior to 9 a.m., New York City time, advise the Custodian,
in writing, of each such borrowing, shall specify the Series to which the same
relates, and shall not incur any indebtedness not so specified other than from
the Custodian.
<PAGE>
2. The Fund will cause to be delivered to the Custodian by any bank
(including, if the borrowing is pursuant to a separate agreement, the Custodian)
from which it borrows money for investment or for temporary or emergency
purposes using Securities held by the Custodian hereunder as collateral for such
borrowings, a notice or undertaking in the form currently employed by any such
bank setting forth the amount which such bank will loan to the Fund against
delivery of a stated amount of collateral. The Fund shall promptly deliver to
the Custodian a Certificate specifying with respect to each such borrowing: (a)
the Series to which such borrowing relates; (b) the name of the bank, (c) the
amount and terms of the borrowing, which may be set forth by incorporating by
reference an attached promissory note, duly endorsed by the Fund, or other loan
agreement, (d) the time and date, if known, on which the loan is to be entered
into, (e) the date on which the loan becomes due and payable, (f) the total
amount payable to the Fund on the borrowing date, (g) the market value of
Securities to be delivered as collateral for such loan, including the name of
the issuer, the title and the number of shares or the principal amount of any
particular Securities, and (h) a statement specifying whether such loan is for
investment purposes or for temporary or emergency purposes and that such loan is
in conformance with the Investment Company Act of 1940 and the Fund's
prospectus. The Custodian shall deliver on the borrowing date specified in a
Certificate the specified collateral and the executed promissory note, if any,
against delivery by the lending bank of the total amount of the loan payable,
provided that the same conforms to the total amount payable as set forth in the
Certificate. The Custodian may, at the option of the lending bank, keep such
collateral in its possession, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory note or loan
agreement. The Custodian shall deliver such Securities as additional collateral
as may be specified in a Certificate to collateralize further any transaction
described in this paragraph. The Fund shall cause all Securities released from
collateral status to be returned directly to the Custodian, and the Custodian
shall receive from time to time such return of collateral as may be tendered to
it. In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and number of shares or the principal amount of
any particular Securities to be delivered as collateral by the Custodian, the
Custodian shall not be under any obligation to deliver any Securities.
ARTICLE XV.
INSTRUCTIONS
1. With respect to any software provided by the Custodian to a Fund in
order for the Fund to transmit Instructions to the Custodian (the "Software"),
the Custodian grants to such Fund a personal, nontransferable and nonexclusive
license to use the Software solely for the purpose of transmitting Instructions
to, and receiving communications from, the Custodian in connection with its
account(s). The Fund shall use the Software solely for its own internal and
proper business purposes, and not in the operation of a service bureau, and
agrees not to sell, reproduce, lease or otherwise provide, directly or
indirectly, the Software or any portion thereof to any third party without the
prior written consent of the Custodian. The Fund acknowledges that the Custodian
and its suppliers have title and exclusive proprietary rights to the Software,
including any trade secrets or other ideas, concepts, know how, methodologies,
or information incorporated therein and the exclusive rights to any copyrights,
trademarks and patents (including registrations and applications for
registration of either) or statutory or legal protections available with respect
thereof. The Fund further acknowledges that all or a part of the Software may be
copyrighted or trademarked (or a registration or claim made therefor) by the
Custodian or its suppliers. The Fund shall not take any action with respect to
the Software inconsistent with the foregoing acknowledgments, nor shall the Fund
attempt to decompile, reverse engineer or modify the Software. The Fund may not
copy, sell, lease or provide, directly or indirectly, any of the Software or any
portion thereof to any other person or entity without the Custodian's prior
written consent. The Fund may not remove any statutory copyright notice, or
other notice including the software or on any media containing the Software. The
Fund shall reproduce any such notice on any reproduction of the Software and
shall add statutory copyright notice or other notice to the Software or media
upon the Bank's request. Custodian agrees to provide reasonable training,
instruction manuals and access to Custodian's "help desk" in connection with the
Fund's user support necessary to use of the Software. At the Fund's request,
Custodian agrees to permit reasonable testing of the Software by the Fund.
2. The Fund shall obtain and maintain at its own cost and expense all
equipment and services, including but not limited to communications services,
necessary for it to utilize the Software and transmit Instructions to the
Custodian. The Custodian shall not be responsible for the reliability,
compatibility with the Software or availability of any such equipment or
services or the performance or nonperformance by any nonparty to this Custody
Agreement.
<PAGE>
3. The Fund acknowledges that the Software, all data bases made available
to the Fund by utilizing the Software (other than data bases relating solely to
the assets of the Fund and transactions with respect thereto), and any
proprietary data, processes, information and documentation (other than which are
or become part of the public domain or are legally required to be made available
to the public) (collectively, the "Information"), are the exclusive and
confidential property of the Custodian. The Fund shall keep the Information
confidential by using the same care and discretion that the Fund uses with
respect to its own confidential property and trade secrets and shall neither
make nor permit any disclosure without the prior written consent of the
Custodian. Upon termination of this Agreement or the Software license granted
hereunder for any reason, the Fund shall return to the Custodian all copies of
the Information which are in its possession or under its control or which the
Fund distributed to third parties. The provisions of this Article shall not
affect the copyright status of any of the Information which may be copyrighted
and shall apply to all Information whether or not copyrighted.
4. The Custodian reserves the right to modify, at its own expense, the
Software from time to time without prior notice and the Fund shall install new
releases of the Software as the Custodian may direct. The Fund agrees not to
modify or attempt to modify the Software without the Custodian's prior written
consent. The Fund acknowledges that any modifications to the Software, whether
by the Fund or the Custodian and whether with or without the Custodian's
consent, shall become the property of the Custodian.
5. The Custodian and its manufacturers and suppliers make no warranties or
representations of any kind with regard to the Software or the method(s) by
which the Fund may transmit Instructions to the Custodian, express or implied,
including but not limited to any implied warranties of merchantability or
fitness for a particular purpose.
6. EXPORT RESTRICTIONS. EXPORT OF THE SOFTWARE IS PROHIBITED BY UNITED
STATES LAW. THE FUND AGREES THAT IT WILL NOT UNDER ANY CIRCUMSTANCES RESELL,
DIVERT, TRANSFER, TRANSSHIP OR OTHERWISE DISPOSE OF THE SOFTWARE (IN ANY FORM)
IN OR TO ANY OTHER COUNTRY. IF THE CUSTODIAN DELIVERS THE SOFTWARE TO THE FUND
OUTSIDE THE UNITED STATES, THE SOFTWARE WAS EXPORTED FROM THE UNITED STATES IN
ACCORDANCE WITH EXPORT ADMINISTRATIVE REGULATIONS. DIVERSION CONTRARY TO U.S.
LAWS PROHIBITED. The Fund hereby authorizes Custodian to report its name and
address to government agencies to which Custodian is required to provide such
information by law.
7. Where the method for transmitting Instructions by the Fund involves an
automatic systems acknowledgment by the Custodian of its receipt of such
Instructions, then in the absence of such acknowledgment the Custodian shall not
be liable for any failure to act pursuant to such Instructions, the Fund may not
claim that such Instructions were received by the Custodian, and the Fund shall
deliver a Certificate by some other means.
8. (a) The Fund agrees that where it delivers to the Custodian Instructions
hereunder, it shall be the Fund's sole responsibility to ensure that only
persons duly authorized by the Fund transmit such Instructions to the Custodian.
The Fund will cause all persons transmitting Instructions to the Custodian to
treat applicable user and authorization codes, passwords and authentication keys
with extreme care, and irrevocably authorizes the Custodian to act in accordance
with and rely upon Instructions received by it pursuant hereto.
(b) The Fund hereby represents, acknowledges and agrees that it is fully
informed of the protections and risks associated with the various methods of
transmitting Instructions to the Custodian and that there may be more secure
methods of transmitting instructions to the Custodian than the method(s)
selected by the Fund. The Fund hereby agrees that the security procedures (if
any) to be followed in connection with the Fund's transmission of Instructions
provide to it a commercially reasonable degree of protection in light of its
particular needs and circumstances.
<PAGE>
9. The Fund hereby represents, warrants and covenants to the Custodian that
this Agreement has been duly approved by a resolution of its Board of Trustees,
and that its transmission of Instructions pursuant hereto shall at all times
comply with the Investment Company Act.
10. The Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, its ability to send
Instructions as promptly as practicable, and in any event within 24 hours after
the earliest of (i) discovery thereof, (ii) the Business Day on which discovery
should have occurred through the exercise of reasonable care and (iii) in the
case of any error, the date of actual receipt of the earliest notice which
reflects such error, it being agreed that discovery and receipt of notice may
only occur on a business day. The Custodian shall promptly advise the Fund
whenever the Custodian learns of any errors, omissions or interruption in, or
delay or unavailability of, the Fund's ability to send Instructions.
11. Custodian will indemnify and hold harmless the Fund with respect to any
liability, damages, loss or claim incurred by or brought against Fund by reason
any claim or infringement against any patent, copyright, license or other
property right arising out or by reason of the Fund's use of the Software in the
form provided under this Section. Custodian at its own expense will defend such
action or claim brought against Fund to the extent that it is based on a claim
that the Software in the form provided by Custodian infringes any patents,
copyrights, license or other property right, provided that Custodian is provided
with reasonable written notice of such claim, provided that the Fund has not
settled, compromised or confessed any such claim without the Custodian's written
consent, in which event Custodian shall have no liability or obligation
hereunder, and provided Fund cooperates with and assists Custodian in the
defense of such claim. Custodian shall have the right to control the defense of
all such claims, lawsuits and other proceedings. If, as a result of any claim of
infringement against any patent, copyright, license or other property right,
Custodian is enjoined from using the Software, or if Custodian believes that the
System is likely to become the subject of a claim of infringement, Custodian at
its option may in its sole discretion either (a) at its expenses procure the
right for the Fund to continue to use the Software, or (b), replace or modify
the Software so as to make it non-infringing, or (c) may discontinue the license
granted herein upon written notice to Fund.
ARTICLE XVI.
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as sub-custodian
for each Series' Securities for which the primary market is outside the United
States ("Foreign Securities") and other assets, the foreign banking
institutions, foreign branches of U.S. banks, and foreign securities
depositories and clearing agencies designated on Schedule I hereto ("Foreign
Sub-Custodians"). The Fund may designate any additional foreign sub-custodian
with which the Custodian has an agreement for such entity to act as the
Custodian's agent, as its sub-custodian and any such additional foreign
sub-custodian shall be deemed added to Schedule I. Upon receipt of a Certificate
from the Fund, the Custodian shall cease the employment of any one or more
Foreign Sub-Custodians for maintaining custody of the Fund's assets and such
Foreign Sub-Custodian shall be deemed deleted from Schedule I.
2. Each delivery of a Certificate to the Custodian in connection with a
transaction involving the use of a Foreign Sub-Custodian shall constitute a
representation and warranty by the Fund that its Board of Trustees, or its third
party foreign custody manager as defined in Rule 17f-5 under the Investment
Company Act of 1940, as amended, if any, has determined that use of such Foreign
Sub-Custodian satisfies the requirements of such Investment Company Act of 1940
and such Rule 17f-5 thereunder.
3. The Custodian shall identify on its books as belonging to each Series of
the Fund the Foreign Securities of such Series held by each Foreign
Sub-Custodian. At the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims by the Fund
or any Series against a Foreign Sub-Custodian as a consequence of any loss,
damage, cost, expense, liability or claim sustained or incurred by the Fund or
any Series if and to the extent that the Fund or such Series has not been made
whole for any such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with the terms
of the applicable Foreign Sub-Custodian agreement, use reasonable efforts to
arrange for the independent accountants of the Fund to be afforded access to the
books and records of any Foreign Sub-Custodian insofar as such books and records
relate to the performance of such Foreign Sub-Custodian under its agreement with
the Custodian on behalf of the Fund.
<PAGE>
5. The Custodian will supply to the Fund from time to time, as mutually
agreed upon, statements in respect of the securities and other assets of each
Series held by Foreign Sub-Custodians, including but not limited to an
identification of entities having possession of each Series' Foreign Securities
and other assets, and advices or notifications of any transfers of Foreign
Securities to or from each custodial account maintained by a Foreign
Sub-Custodian for the Custodian on behalf of the Series.
6. The Custodian shall transmit promptly to the Fund all notices, reports
or other written information received pertaining to the Fund's Foreign
Securities, including without limitation, notices of corporate action, proxies
and proxy solicitation materials.
7. Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for securities received for the account of any Series and
delivery of securities maintained for the account of such Series may be effected
in accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer.
8. Notwithstanding any other provision in this Agreement to the contrary,
with respect to any losses or damages arising out of or relating to any actions
or omissions of any Foreign Sub-Custodian the sole responsibility and liability
of the Custodian shall be to take appropriate action at the Fund's expense to
recover such loss or damage from the Foreign Sub-Custodian. It is expressly
understood and agreed that the Custodian's sole responsibility and liability
shall be limited to amounts so recovered from the Foreign Sub-Custodian.
ARTICLE XVII.
FX TRANSACTIONS
1. Whenever the Fund shall enter into an FX Transaction, the Fund shall
promptly deliver to the Custodian a Certificate or Oral Instructions specifying
with respect to such FX Transaction: (a) the Series to which such FX Transaction
is specifically allocated; (b) the type and amount of Currency to be purchased
by the Fund; (c) the type and amount of Currency to be sold by the Fund; (d) the
date on which the Currency to be purchased is to be delivered; (e) the date on
which the Currency to be sold is to be delivered; and (f) the name of the person
from whom or through whom such currencies are to be purchased and sold. Unless
otherwise instructed by a Certificate or Oral Instructions, the Custodian shall
deliver, or shall instruct a Foreign Sub-Custodian to deliver, the Currency to
be sold on the date on which such delivery is to be made, as set forth in the
Certificate, and shall receive, or instruct a Foreign Sub-Custodian to receive,
the Currency to be purchased on the date as set forth in the Certificate.
2. Where the Currency to be sold is to be delivered on the same day as the
Currency to be purchased, as specified in the Certificate or Oral Instructions,
the Custodian or a Foreign Sub-Custodian may arrange for such deliveries and
receipts to be made in accordance with the customs prevailing from time to time
among brokers or dealers in Currencies, and such receipt and delivery may not be
completed simultaneously. The Fund assumes all responsibility and liability for
all credit risks involved in connection with such receipts and deliveries, which
responsibility and liability shall continue until the Currency to be received by
the Fund has been received in full.
<PAGE>
3. Any FX Transaction effected by the Custodian in connection with this
Agreement may be entered with the Custodian, any office, branch or subsidiary of
The Bank of New York Company, Inc., or any Foreign Sub-Custodian acting as
principal or otherwise through customary banking channels. The Fund may issue a
standing Certificate with respect to FX Transaction but the Custodian may
establish rules or limitations concerning any foreign exchange facility made
available to the Fund. The Fund shall bear all risks of investing in Securities
or holding Currency. Without limiting the foregoing, the Fund shall bear the
risks that rules or procedures imposed by a Foreign Sub-Custodian or foreign
depositories, exchange controls, asset freezes or other laws, rules, regulations
or orders shall prohibit or impose burdens or costs on the transfer to, by or
for the account of the Fund of Securities or any cash held outside the Fund's
jurisdiction or denominated in Currency other than its home jurisdiction or the
conversion of cash from one Currency into another currency. The Custodian shall
not be obligated to substitute another Currency for a Currency (including a
Currency that is a component of a Composite Currency Unit) whose
transferability, convertibility or availability has been affected by such law,
regulation, rule or procedure. Neither the Custodian nor any Foreign
Sub-Custodian shall be liable to the Fund for any loss resulting from any of the
foregoing events.
ARTICLE XVIII.
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article XVI, neither
the Custodian nor its nominee shall be liable for any loss or damage, including
counsel fees, resulting from its action or omission to act or otherwise, either
hereunder or under any Margin Account Agreement, except for any such loss or
damage arising out of its own negligence or willful misconduct. In no event
shall the Custodian be liable to the Fund or any third party for special,
indirect or consequential damages or lost profits or loss of business, arising
under or in connection with this Agreement, even if previously informed of the
possibility of such damages and regardless of the form of action. The Custodian
may, with respect to questions of law arising hereunder or under any Margin
Account Agreement, apply for and obtain the advice and opinion of counsel to the
Fund, or of its own counsel, at the expense of the Fund, and shall be fully
protected with respect to anything done or omitted by it in good faith in
conformity with such advice or opinion. The Custodian shall be liable to the
Fund for any loss or damage resulting from the use of the Book-Entry System or
any Depository arising by reason of any negligence or willful misconduct on the
part of the Custodian or any of its employees or agents.
2. Without limiting the generality of the foregoing, the Custodian shall be
under no obligation to inquire into, and shall not be liable for:
(a) the validity of the issue of any Securities purchased, sold, or
written by or for the Fund, the legality of the purchase, sale or writing
thereof, or the propriety of the amount paid or received therefor;
(b) the legality of the sale or redemption of any Shares, or the
propriety of the amount to be received or paid therefor;
(c) the legality of the declaration or payment of any dividend by the
Fund;
(d) the legality of any borrowing by the Fund using Securities as
collateral;
(e) the legality of any loan of portfolio Securities, nor shall the
Custodian be under any duty or obligation to see to it that any cash collateral
delivered to it by a broker, dealer, or financial institution or held by it at
any time as a result of such loan of portfolio Securities of the Fund is
adequate collateral for the Fund against any loss it might sustain as a result
of such loan. The Custodian specifically, but not by way of limitation, shall
not be under any duty or obligation periodically to check or notify the Fund
that the amount of such cash collateral held by it for the Fund is sufficient
collateral for the Fund, but such duty or obligation shall be the sole
responsibility of the Fund. In addition, the Custodian shall be under no duty or
obligation to see that any broker, dealer or financial institution to which
portfolio Securities of the Fund are lent pursuant to Article X of this
Agreement makes payment to it of any dividends or interest which are payable to
or for the account of the Fund during the period of such loan or at the
termination of such loan, provided, however, that the Custodian shall promptly
notify the Fund in the event that such dividends or interest are not paid and
received when due; or
<PAGE>
(f) the sufficiency or value of any amounts of money and/or Securities
held in any Margin Account, Senior Security Account or Collateral Account in
connection with transactions by the Fund. In addition, the Custodian shall be
under no duty or obligation to see that any broker, dealer, futures commission
merchant or Clearing Member makes payment to the Fund of any variation margin
payment or similar payment which the Fund may be entitled to receive from such
broker, dealer, futures commission merchant or Clearing Member, to see that any
payment received by the Custodian from any broker, dealer, futures commission
merchant or Clearing Member is the amount the Fund is entitled to receive, or to
notify the Fund of the Custodian's receipt or non-receipt of any such payment.
3. The Custodian shall not be liable for, or considered to be the Custodian
of, any money, whether or not represented by any check, draft, or other
instrument for the payment of money, received by it on behalf of the Fund until
the Custodian actually receives and collects such money directly or by the final
crediting of the account representing the Fund's interest at the Book-Entry
System or the Depository.
4. The Custodian shall have no responsibility and shall not be liable for
ascertaining or acting upon any calls, conversions, exchange offers, tenders,
interest rate changes or similar matters relating to Securities held in the
Depository, unless the Custodian shall have actually received timely notice from
the Depository. In no event shall the Custodian have any responsibility or
liability for the failure of the Depository to collect, or for the late
collection or late crediting by the Depository of any amount payable upon
Securities deposited in the Depository which may mature or be redeemed, retired,
called or otherwise become payable. However, upon receipt of a Certificate from
the Fund of an overdue amount on Securities held in the Depository the Custodian
shall make a claim against the Depository on behalf of the Fund, except that the
Custodian shall not be under any obligation to appear in, prosecute or defend
any action, suit or proceeding in respect to any Securities held by the
Depository which in its opinion may involve it in expense or liability, unless
indemnity satisfactory to it against all expense and liability be furnished as
often as may be required.
5. The Custodian shall not be under any duty or obligation to take action
to effect collection of any amount due to the Fund from the Transfer Agent of
the Fund nor to take any action to effect payment or distribution by the
Transfer Agent of the Fund of any amount paid by the Custodian to the Transfer
Agent of the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obligation to take action
to effect collection of any amount if the Securities upon which such amount is
payable are in default, or if payment is refused after due demand or
presentation, unless and until (i) it shall be directed to take such action by a
Certificate and (ii) it shall be assured to its satisfaction of reimbursement of
its costs and expenses in connection with any such action.
7. The Custodian may in addition to the employment of Foreign
Sub-Custodians pursuant to Article XVI appoint one or more banking institutions
as Depository or Depositories, as Sub-Custodian or Sub-Custodians, or as
Co-Custodian or Co-Custodians including, but not limited to, banking
institutions located in foreign countries, of Securities and money at any time
owned by the Fund, upon such terms and conditions as may be approved in a
Certificate or contained in an agreement executed by the Custodian, the Fund and
the appointed institution.
8. The Custodian shall not be under any duty or obligation (a) to ascertain
whether any Securities at any time delivered to, or held by it or by any Foreign
Sub-Custodian, for the account of the Fund and specifically allocated to a
Series are such as properly may be held by the Fund or such Series under the
provisions of its then current prospectus, or (b) to ascertain whether any
transactions by the Fund, whether or not involving the Custodian, are such
transactions as may properly be engaged in by the Fund.
<PAGE>
9. The Custodian shall be entitled to receive and the Fund agrees to pay to
the Custodian all out-of-pocket expenses and such compensation as may be agreed
upon from time to time between the Custodian and the Fund. The Custodian may
charge such compensation and any expenses with respect to a Series incurred by
the Custodian in the performance of its duties pursuant to such agreement
against any money specifically allocated to such Series. Unless and until the
Fund instructs the Custodian by a Certificate to apportion any loss, damage,
liability or expense among the Series in a specified manner, the Custodian shall
also be entitled to charge against any money held by it for the account of a
Series such Series' pro rata share (based on such Series, net asset value at the
time of the charge to the aggregate net asset value of all Series at that time)
of the amount of any loss, damage, liability or expense, including counsel fees,
for which it shall be entitled to reimbursement under the provisions of this
Agreement. The expenses for which the Custodian shall be entitled to
reimbursement hereunder shall include, but are not limited to, the expenses of
sub-custodians and foreign branches of the Custodian incurred in settling
outside of New York City transactions involving the purchase and sale of
Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate, notice or
other instrument in writing received by the Custodian and reasonably believed by
the Custodian to be a Certificate. The Custodian shall be entitled to rely upon
any Oral Instructions actually received by the Custodian hereinabove provided
for. The Fund agrees to forward to the Custodian a Certificate or facsimile
thereof confirming such Oral Instructions in such manner so that such
Certificate or facsimile thereof is received by the Custodian, whether by hand
delivery, telecopier or other similar device, or otherwise, by the close of
business of the same day that such Oral Instructions are given to the Custodian.
The Fund agrees that the fact that such confirming instructions are not
received, or that contrary instructions are received, by the Custodian shall in
no way affect the validity of the transactions or enforceability of the
transactions hereby authorized by the Fund. The Fund agrees that the Custodian
shall incur no liability to the Fund in acting upon Oral Instructions given to
the Custodian hereunder concerning such transactions provided such instructions
reasonably appear to have been received from an Authorized Person.
11. The Custodian shall be entitled to rely upon any instrument,
instruction or notice received by the Custodian and reasonably believed by the
Custodian to be given in accordance with the terms and conditions of any Margin
Account Agreement. Without limiting the generality of the foregoing, the
Custodian shall be under no duty to inquire into, and shall not be liable for,
the accuracy of any statements or representations contained in any such
instrument or other notice including, without limitation, any specification of
any amount to be paid to a broker, dealer, futures commission merchant or
Clearing Member.
12. The books and records pertaining to the Fund which are in the
possession of the Custodian shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the Investment Company
Act of 1940, as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representatives, shall have
access to such books and records during the Custodian's normal business hours.
Upon the reasonable request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's authorized
representative, and the Fund shall reimburse the Custodian its expenses of
providing such copies. Upon reasonable request of the Fund, the Custodian shall
provide in hard copy or on micro-film, whichever the Custodian elects, any
records included in any such delivery which are maintained by the Custodian on a
computer disc, or are similarly maintained, and the Fund shall reimburse the
Custodian for its expenses of providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report obtained by the
Custodian on the system of internal accounting control of the Book-Entry System,
the Depository or O.C.C., and with such reports on its own systems of internal
accounting control as the Fund may reasonably request from time to time.
<PAGE>
14. The Fund agrees to indemnify the Custodian against and save the
Custodian harmless from all liability, claims, losses and demands whatsoever,
including attorney's fees, howsoever arising or incurred because of or in
connection with this Agreement, including the Custodian's payment or non-payment
of checks pursuant to paragraph 6 of Article XIII as part of any check
redemption privilege program of the Fund, except for any such liability, claim,
loss and demand arising out of the Custodian's own negligence or willful
misconduct.
15. Subject to the foregoing provisions of this Agreement, including,
without limitation, those contained in Article XVI and XVII the Custodian may
deliver and receive Securities, and receipts with respect to such Securities,
and arrange for payments to be made and received by the Custodian in accordance
with the customs prevailing from time to time among brokers or dealers in such
Securities. When the Custodian is instructed to deliver Securities against
payment, delivery of such Securities and receipt of payment therefor may not be
completed simultaneously. The Fund assumes all responsibility and liability for
all credit risks involved in connection with the Custodian's delivery of
Securities pursuant to instructions of the Fund, which responsibility and
liability shall continue until final payment in full has been received by the
Custodian.
16. The Custodian shall have no duties or responsibilities whatsoever
except such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied in this Agreement
against the Custodian.
ARTICLE XIX.
TERMINATION
1. Either of the parties hereto may terminate this Agreement by giving to
the other party a notice in writing specifying the date of such termination,
which shall be not less than ninety (90) days after the date of giving of such
notice. In the event such notice is given by the Fund, it shall be accompanied
by a copy of a resolution of the Board of Trustees of the Fund, certified by the
Secretary or any Assistant Secretary, electing to terminate this Agreement and
designating a successor custodian or custodians, each of which shall be a bank
or trust company having not less than $2,000,000 aggregate capital, surplus and
undivided profits. In the event such notice is given by the Custodian, the Fund
shall, on or before the termination date, deliver to the Custodian a copy of a
resolution of the Board of Trustees of the Fund, certified by the Secretary or
any Assistant Secretary, designating a successor custodian or custodians. In the
absence of such designation by the Fund, the Custodian may designate a successor
custodian which shall be a bank or trust company having not less than $2,000,000
aggregate capital, surplus and undivided profits. Upon the date set forth in
such notice this Agreement shall terminate, and the Custodian shall upon receipt
of a notice of acceptance by the successor custodian on that date deliver
directly to the successor custodian all Securities and money then owned by the
Fund and held by it as Custodian, after deducting all fees, expenses and other
amounts for the payment or reimbursement of which it shall then be entitled.
2. If a successor custodian is not designated by the Fund or the Custodian
in accordance with the preceding paragraph, the Fund shall upon the date
specified in the notice of termination of this Agreement and upon the delivery
by the Custodian of all Securities (other than Securities held in the Book-Entry
System which cannot be delivered to the Fund) and money then owned by the Fund
be deemed to be its own custodian and the Custodian shall thereby be relieved of
all duties and responsibilities pursuant to this Agreement, other than the duty
with respect to Securities held in the Book Entry System which cannot be
delivered to the Fund to hold such Securities hereunder in accordance with this
Agreement.
ARTICLE XX.
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two of the
present Authorized Persons of the Fund under its seal, setting forth the names
and the signatures of the present Authorized Persons. The Fund agrees to furnish
to the Custodian a new Certificate in similar form in the event that any such
present Authorized Person ceases to be an Authorized Person or in the event that
other or additional Authorized Persons are elected or appointed. Until such new
Certificate shall be received, the Custodian shall be fully protected in acting
under the provisions of this Agreement upon Oral Instructions or signatures of
the Authorized Persons as set forth in the last delivered Certificate.
2. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at 90
Washington Street, New York, New York 10286, or at such other place as the
Custodian may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund shall be sufficiently given if addressed
to the Fund and mailed or delivered to it at its office at the address for the
Fund first above written, or at such other place as the Fund may from time to
time designate in writing.
<PAGE>
4. This Agreement may not be amended or modified in any manner except by a
written agreement executed by both parties with the same formality as this
Agreement and approved by a resolution of the Board of Trustees of the Fund.
5. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund without the written consent
of the Custodian, or by the Custodian without the written consent of the Fund,
authorized or approved by a resolution of the Fund's Board of Trustees.
6. This Agreement shall be construed in accordance with the laws of the
State of New York without giving effect to conflict of laws principles thereof.
Each party hereby consents to the jurisdiction of a state or federal court
situated in New York City, New York in connection with any dispute arising
hereunder and hereby waives its right to trial by jury.
7. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
8. A copy of the Declaration of Trust of the Fund is on file with the
Secretary of The Commonwealth of Massachusetts, and notice is hereby given that
this instrument is executed on behalf of the Board of Trustees of the Fund as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of the Trustees or shareholders individually but are
binding only upon the assets and property of the Fund; provided, however, that
the Declaration of Trust of the Fund provides that the assets of a particular
Series of the Fund shall under no circumstances be charged with liabilities
attributable to any other Series of the Fund and that all persons extending
credit to, or contracting with or having any claim against a particular Series
of the Fund shall look only to the assets of that particular Series for payment
of such credit, contract or claim.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers, thereunto duly authorized and their
respective seals to be hereunto affixed, as of the day and year first above
written.
Variable Insurance Funds
[SEAL] By:_______________________
Attest:
_______________________
THE BANK OF NEW YORK
[SEAL] By:_______________________
Name:
Title:
Attest:
_______________________
<PAGE>
APPENDIX A
I, __________, President and I, ________, of Variable Insurance Funds, a
Massachusetts business trust (the "Fund"), do hereby certify that: The following
persons have been duly authorized in conformity with the Fund's Declaration of
Trust and By-Laws to execute any Certificate, instruction, notice or other
instrument on behalf of the Fund, and the signatures set forth opposite their
respective names are their true and correct signatures:
Name Position Signature
____________________ ___________________ ____________________
<PAGE>
APPENDIX B
SERIES
HSBC Variable Cash Management Fund
HSBC Variable Growth & Income Fund
HSBC Fixed Income Fund
<PAGE>
APPENDIX C
I, _________________, a Vice President with THE BANK OF NEW YORK do hereby
designate the following publications:
The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal
<PAGE>
EXHIBIT A
CERTIFICATION
The undersigned, ____________, hereby certifies that he or she is the duly
elected and acting of Variable Insurance Funds, a Massachusetts business trust
(the "Fund"), and further certifies that the following resolution was adopted by
the Board of Trustees of the Fund at a meeting duly held on _______, 1999, at
which a quorum was at all times present and that such resolution has not been
modified or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of _______, 1999,
(the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis to deposit in the Book-Entry System, as defined in the Custody
Agreement, all securities eligible for deposit therein, regardless of the Series
to which the same are specifically allocated, and to utilize the Book-Entry
System to the extent possible in connection with its performance thereunder,
including, without limitation, in connection with settlements of purchases and
sales of securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Variable
Insurance Funds, as of the day of _________, 1999.
[SEAL]
<PAGE>
EXHIBIT B
CERTIFICATION
The undersigned, _________ , hereby certifies that he or she is the duly
elected and acting of Variable Insurance Funds, a Massachusetts business trust
(the "Fund"), and further certifies that the following resolution was adopted by
the Board of Trustees of the Fund at a meeting duly held on _______, 1999, at
which a quorum was at all times present and that such resolution has not been
modified or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of _______, 1999,
(the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis until such time as it receives a Certificate, as defined in the
Custody Agreement, to the contrary to deposit in the Depository, as defined in
the Custody Agreement, all securities eligible for deposit therein, regardless
of the Series to which the same are specifically allocated, and to utilize the
Depository to the extent possible in connection with its performance thereunder,
including, without limitation, in connection with settlements of purchases and
sales of securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Variable
Insurance Funds, as of the day of _______, 1999.
[SEAL]
<PAGE>
EXHIBIT B-1
CERTIFICATION
The undersigned, ___________ , hereby certifies that he or she is the duly
elected and acting of Variable Insurance Funds, a Massachusetts business trust
(the "Fund"), and further certifies that the following resolution was adopted by
the Board of Trustees of the Fund at a meeting duly held on _______, 1999, at
which a quorum was at all times present and that such resolution has not been
modified or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of ______, 1999,
(the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis until such time as it receives a Certificate, as defined in the
Custody Agreement, to the contrary to deposit in the Participants Trust Company
as Depository, as defined in the Custody Agreement, all securities eligible for
deposit therein, regardless of the Series to which the same are specifically
allocated, and to utilize the Participants Trust Company to the extent possible
in connection with its performance thereunder, including, without limitation, in
connection with settlements of purchases and sales of securities, loans of
securities, and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Variable
Insurance Funds, as of the day of ________, 1999.
[SEAL]
<PAGE>
EXHIBIT C
CERTIFICATION
The undersigned, ____________ , hereby certifies that he or she is the duly
elected and acting of Variable Insurance Funds, a Massachusetts business trust
(the "Fund"), and further certifies that the following resolution was adopted by
the Board of Trustees of the Fund at a meeting duly held on __________, 1999, at
which a quorum was at all times present and that such resolution has not been
modified or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of ________, 1999,
(the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis until such time as it receives a Certificate, as defined in the
Custody Agreement, to the contrary, to accept, utilize and act with respect to
Clearing Member confirmations for Options and transaction in Options, regardless
of the Series to which the same are specifically allocated, as such terms are
defined in the Custody Agreement, as provided in the Custody Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Variable
Insurance Funds, as of the day of __________, 1999.
[SEAL]
<PAGE>
EXHIBIT D
The undersigned, ___________ , hereby certifies that he or she is the duly
elected and acting of Variable Insurance Funds, a Massachusetts business trust
(the "Fund"), further certifies that the following resolutions were adopted by
the Board of Trustees of the Fund at a meeting duly held on __________, 1999, at
which a quorum was at all times present and that such resolutions have not been
modified or rescinded and are in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to the Custody
Agreement between The Bank of New York and the Fund dated as of __________, 1999
(the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis to act in accordance with, and to rely on Instructions (as defined
in the Custody Agreement).
RESOLVED, that the Fund shall establish access codes and grant use of such
access codes only to Authorized Persons of the Fund as defined in the Custody
Agreement, shall establish internal safekeeping procedures to safeguard and
protect the confidentiality and availability of user and access codes, passwords
and authentication keys, and shall use Instructions only in a manner that does
not contravene the Investment Company Act of 1940, as amended, or the rules and
regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Variable
Insurance Funds, as of the day of __________, 1999.
[SEAL]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Post-Effective Amendment
No. 9 to the Registration Statement on Form N-1A (File No. 33-81800) of our
report dated February 16, 2000 relating to the financial statements and
financial highlights appearing in the December 31, 1999 Annual Report to the
Shareholders of the BB&T Growth and Income Fund and our report dated February
14, 2000, relating to the financial statements and financial highlights
appearing in the December 31, 1999 Annual Reports to Shareholders of AmSouth
Select Equity Fund and AmSouth Equity Income Fund, which are also incorporated
by reference into the Registration Statement. We also consent to the references
to our Firm under the captions "Financial Highlights" in the Prospectuses and
"Financial Statements" and "Independent Accountants" in the Statements of
Additional Information.
/s/PricewaterhouseCoopers LLP
Columbus, Ohio
April 28, 2000
Variable Insurance Funds
CODE OF ETHICS
Dated ___, 2000
The following Code of Ethics is adopted by Variable Insurance
Funds (the "Trust") pursuant to Rule 17j-1 under the Investment Company Act of
1940 (the "Act"). This Code is intended to ensure that all acts, practices and
courses of business engaged in by access persons (as defined) of the Trust
reflect high standards and comply with the requirements of Section 17(j) of the
Act and Rule 17j-1 thereunder. Any such access person shall not be subject to
this Code of Ethics if such person is subject to another organization's code of
ethics that has been approved by the Board of Trustees of the Trust.
I. Definitions
A. "Access person" means (1) any director, trustee, officer, general
partner, managing member, or advisory person (as defined) of the Trust or any
investment adviser or investment sub-adviser to a series of the Trust
(collectively, the "Advisers"); or (2) any director, officer or general partner
of BISYS Fund Services ("BISYS") who, in the ordinary course of business, makes,
participates in or obtains information regarding, the purchase or sale of a
security (as defined) by the Trust, or whose functions or duties in the ordinary
course of business relate to the making of any recommendation to the Trust
regarding the purchase or sale of securities.
B. "Advisory person" means (1) any employee of the Trust or an Adviser (or
of any company in a control relationship to the Trust, or an Adviser) who, in
connection with his or her regular functions or duties, makes, participates in,
or obtains information regarding the purchase or sale of a security by the
Trust, or whose functions relate to the making of any recommendations with
respect to such purchases or sales; and (2) any natural person in a control
relationship to the Trust or an Adviser who obtains information concerning
recommendations made to the Trust with regard to the purchase or sale of a
security by the Trust.
C. "Beneficial ownership" shall be interpreted in the same manner as it
would be under Rule 16a-1(a)(2) in determining whether a person is subject to
the provisions of Section 16 of the Securities Exchange Act of 1934 and the
rules and regulations thereunder.
D. "Control" shall have the same meaning as that set forth in Section
2(a)(9) of the Act. Section 2(a)(9) provides that "control" generally means the
power to exercise a controlling influence over the management or polices of a
company, unless such power is solely the result of an official position with
such company.
E. A "security held or to be acquired" means: (1) any security which, within
the most recent 15 days: (a) is or has been held by the Trust; or (b) is being
or has been considered by the Trust or an Adviser for purchase by the Trust; and
(2) any option to purchase or sell, and any security convertible into or
exchangeable for, a security described in clause (1) above.
F. An "initial public offering" means an offering of securities registered
under the Securities Act of 1933, the issuer of which, immediately before the
registration, was not subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934.
<PAGE>
G. "Investment personnel" means: (1) any employee of the Trust or an Adviser
(or of any company in a control relationship to the Trust or an Adviser) who, in
connection with his or her regular functions or duties, makes or participates in
making recommendations regarding the purchase or sale of securities by the
Trust; and (2) any natural person who controls the Trust or an Adviser and who
obtains information concerning recommendations made to the Trust regarding the
purchase or sale of securities by the Trust.
H. A "limited offering" means an offering that is exempt from registration
under the Securities Act of 1933 pursuant to Section 4(2) or Section 4(6) or
pursuant to Rule 504, Rule 505, or Rule 506 under the Securities Act of 1933.
I. "Purchase or sale" for purposes of this Code of Ethics and each Exhibit
or other appendix hereto includes, among other things, the writing of an option
to purchase or sell a security.
J. "Security" shall have the meaning set forth in Section 2(a)(36) of the
Act, except that it shall not include direct obligations of the Government of
the United States, bankers' acceptances, bank certificates of deposit,
commercial paper and high quality short-term debt instruments, including
repurchase agreements, and shares of registered open-end investment companies,
or such other securities as may be excepted under the provisions of Rule 17j-1.
II. Prohibitions
A. Generally. Rule 17j-l under the Act makes it unlawful for any affiliated
person of the Trust, BISYS, or any affiliated person of an Adviser or BISYS,
directly or indirectly, in connection with the purchase or sale of a security
held or to be acquired by the Trust:
(1) To employ any device, scheme or artifice to defraud the Trust;
(2) To make to the Trust any untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements made to the
Trust, in light of the circumstances under which they are made, not misleading;
(3) To engage in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon the Trust; or
<PAGE>
(4) To engage in any manipulative practice with respect to the Trust.
It is the policy of the Trust that no access person shall engage in any
act, practice or course of conduct that would violate the provisions of Rule
17j-1 set forth above.
B. Initial Public Offerings and Limited Offerings. No investment personnel
may acquire any direct or indirect beneficial ownership in any securities in an
initial public offering or in a limited offering unless the President of the
Trust (or his or her delegate) or the Chief Compliance Officer of the
appropriate Adviser (or his or her delegate) has authorized the transaction in
advance.
III. Procedures
A. Reporting. In order to provide the Trust with information to enable it to
determine with reasonable assurance whether the provisions of Rule 17j-1 are
being observed by its access persons, each access person of the Trust, other
than a Trustee who is not an "interested person" (as defined in the Act) of the
Trust, shall submit the following reports in the forms attached hereto as
Exhibits A-D to the Trust's President (or his or her delegate) showing all
transactions in securities in which the person has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership:
(1) Initial Holding Report. Exhibit A shall initially be filed no later
than 10 days after that person becomes an access person.
(2) Periodic Reports. Exhibits B and C shall be filed no later than 10
days after the end of each calendar quarter, but transactions over which such
person had no direct or indirect influence or control need not be reported. No
such periodic report needs to be made if the report would duplicate information
contained in broker trade confirmations or account statements received by the
Trust no later than 10 days after the end of each calendar quarter and/or
information contained in the Trust's records.
(3) Annual Report. Exhibit D must be submitted by each access person
within 30 days after the end of each calendar year.
B. Independent Trustees. A Trustee who is not an "interested person" of the
Trust shall not be required to submit the reports required under paragraph
III.A, except that such a Trustee shall file a Securities Transaction Report in
the form attached as Exhibit B with respect to a transaction in a security where
he or she knew at the time of the transaction or, in the ordinary course of
fulfilling his or her official duties as a Trustee, should have known that
during the 15 day period immediate preceding or after the date of the
transaction, such security is or was purchased or sold by the Trust, or was
considered for purchase or sale by an Adviser or the Trust. No report is
required if the Trustee had no direct or indirect influence or control over the
transaction.
<PAGE>
C. Notification. The Trust's President (or his or her delegate) shall
notify each access person of the Trust who may be required to make reports
pursuant to this Code of Ethics that such person is subject to reporting
requirements and shall deliver a copy of this Code of Ethics to each such
person.
IV. Review and Enforcement
A. Review.
(1) The President of the Trust (or his or her delegate) shall from time
to time review the reported personal securities transactions of access persons
for compliance with the requirements of this Code of Ethics.
(2) If the President of the Trust (or his or her delegate) determines
that a violation of this Code of Ethics may have occurred, before making a final
determination that a material violation has been committed by an individual, the
President of the Trust (or his or her delegate) may give such person an
opportunity to supply additional information regarding the transaction in
question.
B. Enforcement.
(1) If the President of the Trust (or his or her delegate) determines
that a material violation of this Code of Ethics has occurred, he or she shall
promptly report the violation to the Trustees of the Trust. The Trustees, with
the exception of any person whose transaction is under consideration, shall take
such actions as they consider appropriate, including imposition of any sanctions
that they consider appropriate.
(2) No person shall participate in a determination of whether he or she
has committed a violation of this Code of Ethics or in the imposition of any
sanction against himself or herself. If, for example, a securities transaction
of the President of the Trust is under consideration, a Trustee of the Trust
designated for the purpose by the Trustees of the Trust shall act in all
respects in the manner prescribed herein for the President.
C. Reporting to Board. No less frequently than annually, the Trust shall
furnish to the Trust's Board of Trustees, and the Board must consider, a written
report that:
(1) Describes any issues arising under the Code of Ethics or procedures
since the last report to the Board of Trustees, including, but not limited to,
information about material violations of the Code of Ethics or procedures and
sanctions imposed in response to the material violations; and
(2) Certifies that the Trust has adopted procedures reasonably necessary
to prevent access person from violating the Code of Ethics.
V. Records
The Trust shall maintain records in the manner and to the extent set forth
below, under the conditions described in Rule 31a-2(f)(1) under the Act, which
records shall be available for appropriate examination by representatives of the
Securities and Exchange Commission.
o A copy of this Code of Ethics and any other code of ethics which is, or
at any time within the past five years has been, in effect shall be
preserved in an easily accessible place;
o A record of any violation of this Code of Ethics and of any action
taken as a result of such violation shall be preserved in an easily
accessible place for a period of not less than five years following the
end of the fiscal year in which the violation occurs;
o A copy of each report made pursuant to this Code of Ethics by an access
person, including any information provided in lieu of reports, shall be
preserved by the Trust for a period of not less than five years from
the end of the fiscal year in which it is made, the first two years in
an easily accessible place;
o A list of all persons who are, or within the past five years have been,
required to make reports pursuant to this Code of Ethics, or who are or
were responsible for reviewing these reports, shall be maintained in an
easily accessible place;
o A copy of each report to the Board shall be preserved by the Trust for
at least five years after the end of the fiscal year in which it is
made, the first two years in an easily accessible place; and
o The Trust shall preserve a record of any decision, and the reasons
supporting the decision, to approve the acquisition by investment
personnel of securities under Section II.B of this Code of Ethics for
at least five years after the end of the fiscal year in which the
approval is granted, the first two years in an easily accessible place.
VI. Miscellaneous
A. Confidentiality. All reports of securities transactions and any
other information filed with the Trust pursuant to this Code of Ethics shall be
treated as confidential, except as regards appropriate examinations by
representatives of the Securities and Exchange Commission.
B. Amendment; Interpretation of Provisions. The Trustees may from time
to time amend this Code of Ethics or adopt such interpretations of this Code of
Ethics as they deem appropriate.
<PAGE>
ANNUAL CERTIFICATION OF
VARIABLE INSURANCE FUNDS
The undersigned hereby certifies on behalf of Variable Insurance Funds
(the "Trust"), to the Board of Trustees pursuant to Rule 17j-1(c)(2)(B) under
the Investment Company Act of 1940, and pursuant to Section IV.C(2) of the
Trust's Code of Ethics, that the Trust has adopted procedures that are
reasonably necessary to prevent access persons from violating the Code of
Ethics.
Date: ______________________ ______________________________
President
<PAGE>
EXHIBIT A
Variable Insurance Funds
Initial Holdings Report
To the President:
As of the below date, I held the following position in these securities
in which I may be deemed to have a direct or indirect beneficial ownership, and
which are required to be reported pursuant to the Trust's Code of Ethics:
Broker/Dealer or
No. of Principal Bank Where
Security Shares Amount Account is Held
This report (i) excludes holdings with respect to which I had no direct
or indirect influence or control, and (ii) is not an admission that I have or
had any direct or indirect beneficial ownership in the securities listed above.
Date: ____________________________ Signature: _________________________
<PAGE>
EXHIBIT B
Variable Insurance Funds
Securities Transaction Report
For the Calendar Quarter Ended _________________
To the President:
During the quarter referred to above, the following transactions were
effected in securities in which I may be deemed to have had, or by reason of
such transaction acquired, direct or indirect beneficial ownership, and which
are required to be reported pursuant to the Trust's Code of Ethics:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Broker/
Nature of Dealer or
Security Principal Transaction Bank Through
(including interest and maturity Date of No. of Amount of (Purchase, Whom
date, if any) Transaction Shares Transaction Sale, Other) Price Effected
------------- ----------- ------ ----------- ------------ ----- --------
</TABLE>
This report (i) excludes transactions with respect to which I had no
direct or indirect influence or control, and (ii) is not an admission that I
have or had any direct or indirect beneficial ownership in the securities listed
above.
Date: ____________________________ Signature: ________________________
<PAGE>
EXHIBIT C
Variable Insurance Funds
Account Establishment Report
For the Calendar Quarter Ended _________________
To the President:
During the quarter referred to above, the following accounts were
established for securities in which I may be deemed to have a direct or indirect
beneficial ownership, and is required to be reported pursuant to the Trust's
Code of Ethics:
Broker/Dealer or
Bank Where Date
Account Was Account Was
Established Established
Date: ____________________________ Signature: ______________________
<PAGE>
EXHIBIT D
Variable Insurance Funds
Annual Holdings Report
To the President:
As of December 31, ___, I held the following positions in securities in
which I may be deemed to have a direct or indirect beneficial ownership, and
which are required to be reported pursuant to the Trust's Code of Ethics:
Broker/Dealer or
No. of Principal Bank Where
Security Shares Amount Account is Held
This report is not an admission that I have or had any direct or
indirect beneficial ownership in the securities listed above.
Date: ____________________________ Signature: ________________________
FORM OF AMSOUTH BANK CODE OF ETHICS
STATEMENT OF RESPONSIBILITIES
Table of Contents Page
Forward 1
Summary and Key Points 3
Borrowings By Officers and Employees 5
Civic Responsibilities 5
Commitment of Sponsorship 6
Confidential and Insider Information 6
Conflicts of Interest 8
Dishonest Acts 14
Personal Conduct 15
Personal Investments 16
Political Activities 18
Reporting and Clearance Procedure 19
Trust Employees 19
Index
FORWARD
The success of any bank or banking organization can be largely
attributed to the degree to which its directors, officers and employees act in
all things so as to inspire public trust and confidence. We can be extremely
proud of our past performance in this area and must constantly work to maintain
and enhance our reputation for integrity and trustworthiness. A written
statement of corporate and individual responsibilities to be followed by
directors, officers and employees of AmSouth Bancorporation and all of its
subsidiaries has been in effect for a number of years, and is now being
presented in a new format as one of the booklets in the AmSouth Employee
Information Package.
This booklet has been prepared so that you will be well-informed of
your responsibilities. However, it is both impractical and unnecessary to set
forth rules to cover all conceivable situations in which a conflict of interest
or other unethical situation may arise. Therefore, the following pages give you
policy statements in several of the more sensitive areas where problems are
likely to occur. Particular attention should also be given to AmSouth's
Personnel Policy Manual and the summary of these policies contained in the "You
and AmSouth" booklet in your Employee Information Package. The Statement of
Responsibilities provides you only with certain guidelines; therefore, common
sense is an absolute necessity in avoiding potentially embarrassing situations.
In no way should this statement be construed as establishing maximum standards
of conduct rather than minimum standards.
This Statement of Responsibilities has been adopted by the Board of
Directors of AmSouth Bancorporation to apply to all officers, directors and
employees of the corporation and all of its subsidiaries. Following the
principles and guidelines contained herein are a condition of employment for
each and every employee. For the sake of convenience, the word "employee" is
used throughout to refer to officers, directors and employees, except where the
context clearly requires a different reading.
You are requested to read this material carefully and to retain this
booklet for future reference. Throughout this booklet AmSouth Bancorporation may
be referred to as "AmSouth", "the company" or the "Bank" and the principles and
guidelines herein shall apply to all such entities unless the context and
language specifically states otherwise. It is essential that the stated
principles be observed at all times and that any situation not consistent with
these principles immediately be discussed with the appropriate group, regional,
division, or affiliate executive officer.
C. Dowd Ritter
President and
Chief Executive Officer
AmSouth Bancorporation
<PAGE>
SUMMARY AND KEY POINTS
The following is a summary of the concepts contained within the Statement of
Responsibilities. This summary is not exhaustive and is not a substitute for
being familiar with the material contained herein. The guidelines established
herein and in the Statement of Responsibilities apply to all employees of
AmSouth Bancorporation and any subsidiary or affiliate.
1. You are expected to conduct your financial affairs in a manner
which will be above criticism.
2. You are encouraged to take part in community, charitable, church,
civic, educational, and fraternal activities to the extent that
it does not significantly affect time spent on AmSouth business.
Prior to seeking election or appointment to a political office,
you must discuss the situation with the area executive or
department head and where appropriate, gain their approval.
3. You cannot commit AmSouth as a sponsor of any organization or
function without prior written consent of the appropriate
executive.
4. You are prohibited from using confidential information obtained
through your employment for your own benefit or for the benefit
of your family, friends or others. Confidential information is to
be used solely in the performance of your job. Upon the
termination of your employment, all information and documents
must be promptly returned to AmSouth. This information remains
the property of AmSouth.
5. You must manage your personal and business affairs in a manner
which will avoid situations that lead to a conflict of interest
or even the appearance of such a conflict. For example, you
should not borrow money from a customer or accept a gift of more
than nominal value from a customer. You should not solicit,
receive or accept any item or any advantage with the intent of
being influenced in connection with AmSouth business.
6. You are to avoid transactions for accounts in which you have some
personal interest, including family members and close, personal
friends.
7. If you are known or are suspected to have committed a dishonest
or fraudulent act, AmSouth is required by law to report the act
to Federal law enforcement agencies.
8. If you become aware, or reasonably suspect, that another employee
has committed a dishonest act in the course of his/her
employment, you must report the facts to a member of management.
9. You should not give legal, tax or investment advice (unless
designated to do so), nor should you recommend attorneys,
accountants or insurance brokers to customers or other third
parties.
10. You should use extreme caution in investing directly or
indirectly in the stock or in the business of a customer,
borrower, supplier or competitor of AmSouth to avoid a conflict
of interest.
<PAGE>
BORROWINGS BY OFFICERS AND EMPLOYEES
Borrowings by Employees
Subject to specific rules and regulations contained in AmSouth's Loan
Policy Manual, employees are encouraged to meet their credit needs by borrowing
from AmSouth.
Borrowings by Officers
(a) Regulation O. Regulation O of the Federal Reserve Board places
limitations on the borrowings by certain bank officers from their employer. Each
banking subsidiary of AmSouth Bancorporation has designated, by action of its
Board of Directors, the senior officers to whom Regulation O applies. Any
officer in doubt about the applicability of this regulation should check with
the Secretary of AmSouth Bancorporation.
(b) Non-regulation O Officers. Loans to such officers may be made by
their employer on a sound credit basis, subject to rules and regulations
contained in AmSouth's Loan Policy Manual and in accordance with all applicable
laws and related regulations.
(c) Borrowing from Non-affiliated Lending Institutions. Subject to
rules contained in AmSouth's Loan Policy Manual and to applicable banking
regulations, principally as to reporting requirements, all officers are
authorized to borrow from other banks or reputable financial institutions on
customary terms and conditions to meet proper credit needs. Although there are
no limitations on the amount of indebtedness to such outside institutions, all
officers are expected to conduct their financial affairs in a manner which will
be above criticism.
(d) Special attention should be paid to the applicable provisions,
particularly regarding "insider" loans, of Titles I, VIII and IX of the
Financial Institutions Regulatory and Interest Rate Control Act of 1978 in order
to insure full compliance.
CIVIC RESPONSIBILITIES
AmSouth is dedicated to discovering and meeting, to the best of its
ability, the legitimate banking needs of individuals, organizations and
businesses within all of the communities served by the bank. Employee
involvement in local communities is a vital part of this effort and provides a
most important resource in helping to assess and meet the banking needs of
customers and potential customers. All employees are encouraged to participate
and be fully involved in community activities and to establish meaningful and
ongoing contacts with community groups and governmental entities. Employees are
encouraged to take part in community, charitable, church, civic, educational and
fraternal activities, to the extent that their time and talents permit. However,
if the nature and extent of the activity would significantly encroach on the
time usually spent on business, the prior approval of the appropriate division
or regional executive should be obtained.
<PAGE>
COMMITMENT OF SPONSORSHIP
No employee should commit AmSouth or any of its subsidiaries as a
sponsor of any organization or function in connection with which AmSouth's name
would or might be used without the prior written consent of the appropriate
division or regional executive.
CONFIDENTIAL AND INSIDER INFORMATION
Personal Use
Information received as an employee of a bank has traditionally been
considered to be, and is, confidential in nature. Such information is to be held
in the strictest possible confidence.
The use of confidential information obtained through your employment
for your own benefit or for the benefit of your family or friends is prohibited.
The use of the confidential information about one customer to benefit the
private interests of another customer or any other person is also prohibited.
Financial information concerning AmSouth Bancorporation and its
subsidiaries should not be released to anyone unless it has previously been
published in reports to our shareholders or otherwise made generally available
to the public.
Confidential information may, in some circumstances, be considered
"insider information" which, if used or disclosed, could subject the employee
and anyone to whom the information has been communicated to legal liability,
Insider information is material information which has not been publicly
disclosed. Information is material if it might, if generally known, have an
effect on the market price of the company's stock. The rules against disclosing
or acting on insider information are very difficult to apply. Therefore, all
employees must be extremely cautious in discussing corporate affairs with any
outsiders, and any doubt should be resolved in favor of non-disclosure and
non-action.
Between Departments
Often, employees are in possession of confidential credit or other
information which, if disclosed, could have a material effect on the market
price of the customer's securities. Under no circumstances should information be
revealed to employees of the Trust Division when this information might
influence the purchase or sale of securities in which the Trust Division has an
interest. Trust employees should neither obtain nor review commercial credit
files.
<PAGE>
Information Protection and Disclosure
Information and data are essential to the business of AmSouth
Bancorporation and its subsidiaries ("AmSouth"). Therefore, information and data
concerning AmSouth and its customers are to be protected by every officer and
employee from unauthorized modification, destruction, theft, or disclosure,
whether accidental or intentional.
In the course of your employment with AmSouth, you may have access to
confidential information about AmSouth, its plans, its policies and procedures,
its products, its electronic data systems, and its customers' banking accounts,
loans, and personal or business finances. As an employee, you must assure that
this confidential information will not be disclosed to anyone outside the
employment of AmSouth except in those situations where AmSouth is authorized by
a customer to release information about that customer or where AmSouth is
required to release information pursuant to a subpoena, court order or other
legal process. Confidential information will be used solely in the performance
of your job responsibilities, and you have a responsibility to adhere to the
security precautions and procedures of this institution, including, but not
limited to, the specific ones stated below:
1. Your use of all confidential information and assigned computer
user identification code(s) will be limited to the performance
of your specific job responsibilities with AmSouth. Further,
you must promptly notify the Information Protection Services
Department upon discovery of the improper use of such
confidential information or the use of your assigned user
identification code and password by any other party.
2. It is a specific violation of AmSouth's security policy and of
various laws to force balance any account, remove any bank
funds for your personal benefit, change bank documents or
computer files for your personal benefit, or inaccurately
record any information with bank documents for your personal
benefit. If guilty of such actions, you will be subject to
immediate termination or employment and probably criminal
prosecution.
3. Upon termination of your employment, whether voluntary or
otherwise, you will immediately return to AmSouth all papers,
documents, computer generated lists, computer files, disks or
diskettes, computer programs, flowcharts, customer lists, and
any other data which are property of AmSouth.
4. All computer programs, software, algorithms and computer
processing systems of AmSouth are to be considered the
confidential and exclusive property of AmSouth.
<PAGE>
5. Your access and use of customer or employee information for
personal gain, or other unauthorized activities, may
constitute a violation of federal statutes and can result in
the incident being reported to the U.S. Attorney for
prosecution on criminal charges. Federal Law (18 U.S.C.
Section 1030) makes it a crime for anyone to knowingly access
a computer without authorization or, having accessed a
computer with authorization, to use the opportunity such
access provides for purposes to which their access does not
extend. This statute would preclude the unauthorized obtaining
of information contained in records of the bank. Violation of
any or all of these information security procedures may result
in termination of your employment and criminal prosecution.
CONFLICTS OF INTEREST
Introduction
A conflict of interest of the appearance of a conflict of interest can
arise whenever an employee or member of his other immediate family has a
financial or other interest in a customer, borrower, supplier or other person or
company dealing with AmSouth Bancorporation or any of its subsidiaries. In this
context, "immediate family" includes the employee's spouse, parents, children,
brothers, sisters, in-laws and any relative living in the same household with
the employee. Each employee must manage his personal and business affairs in a
manner which will avoid situations that might lead to a conflict, or even the
appearance of a conflict between the employee's own interests and his or her
duty to AmSouth Bancorporation and its subsidiaries, shareholders and customers.
Directors are subject to various federal regulations designed to prevent
conflicts of interest. The following statements do not, therefore, apply to
directors, except as specifically indicated.
Processing Transactions
Employees generally should avoid processing transactions for accounts
in which they have some personal interest. Such accounts include an employee's
personal account or an account on which the employee signs with another person,
accounts belonging to members of any employee's family or to close personal
friends of the employee. The term transaction should be broadly interpreted to
include, but not to be limited to, the acceptance of a deposit in a demand
deposit account, the processing of a loan payment, or the waiver of an overdraft
charge or other fees. As a rule, employees' actions and decisions should reflect
the objective of serving the interest of AmSouth rather than favoring any one
person or group at the expense of AmSouth. For example, in most instances,
employees should serve co-workers, family members and friends just as they would
other customers of the Bank. Exceptions should be discussed with the supervising
management of the unit. Employees should also avoid participation in
transactions that circumvent established bank policies, for example, using
internal bank accounts (such as the Intrabank Settlement account) for purposes
other than those for which the accounts are intended. Processing personal
transactions through internal accounts to avoid possible overdrafts or the
required paperwork is not appropriate. All transactions should be properly run
and validated through a teller window. Transactions should not be placed in a
teller's work without the teller's knowledge. In addition, employees should not
be asked to document another person's approval of a transaction by forgoing that
person's signature or initials on the documents, such as general ledger or
intrabank settlement tickets.
<PAGE>
These examples are not a comprehensive list of possible conflicts of
interest. Situations not covered above or elsewhere in the Statement of
Responsibilities should result in consultation with a supervisor or a
representative of the Law Department.
To reiterate, any action that could be construed to be primarily for
the benefit of the employee, a co-worker or someone in a close personal
relationship to the employee, rather than primarily for the benefit of AmSouth's
customers and stockholders, should be questioned. Those questions should be
directed to a supervisor or more senior manager, or a representative of the Law
Department.
Dealing with Customers in Business Ventures
The participation, directly or indirectly, by any employee in any
business venture with a customer or supplier subjects the employee and his or
her employer to a possible conflict of interest. The conflict would arise if the
participation is to such an extent that it does affect or might seem to affect
judgments or decisions which the employee would need to make on behalf of his
employer.
Clearly, the facts surrounding each such participations will determine
whether a potential conflict of interest is present. However, business
associations of any kind should be closely evaluated and should be approved in
writing by the appropriate division or regional executive as well as being
reported to the President of AmSouth Bancorporation. Further, the employee
should disqualify himself from participating in decisions concerning any loan or
other transaction with any company in which he has a material interest. This
prohibition is not intended to apply to ownership of less than 5% of the common
stock of corporations traded on a national securities exchange. See also,
PERSONAL INVESTMENTS, page 16.
Borrowing from Customers
Employees may not borrow from customers or suppliers of AmSouth
Bancorporation or its subsidiaries, other than recognized lending institutions.
Employees calling on and doing business with correspondent banks may not become
personally indebted to such banks. The term "borrow" does not apply to normal
credit granted by merchants in connection with the purchase of goods and
services carried on open account, nor does it apply to credit obtained from a
member of one's family.
<PAGE>
Gifts or Fees
A. Receiving Gifts (Bank Bribery Act). Under the Bank Bribery Act, 18 U.S.C.
215, it is a federal crime for any director or employee or any agent or
attorney of a bank or bank holding company to corruptly solicit, demand,
accept or agree to accept for his or her own benefit or the benefit of any
other person, anything of value (such as a gift or a fee) from anyone with
the intent of being influenced or rewarded in connection with any business
or transaction with a bank or bank holding company. All transactions and
business with the bank or holding company are covered, including (1) loans
and other extensions of credit, (2) underwriting transactions, (3)
investment advice, (4) trust matters, (5) deposit accounts, (6) purchases
from suppliers, (7) referral of business, etc. The statute is broadly
worded and appears to cover receipt of benefits such as (1) commissions,
(2) special discounts, (3) free services, or (4) other payments or
concessions from attorneys, insurance and real estate agents, salesmen and
the like who may offer inducements for giving or referring business to
them.
Liability extends also to any person who gives, offers or promises
anything of value to any person, with intent to influence or reward a
director, employee, agent, or attorney of a financial institution
connection with any business or transaction of such financial institution.
In other words, the Bank Bribery Act applies not only to the person
receiving or asking for a gift or fee, but also to any person who gives,
offers or promises it.
The penalty for a violation of the law is as follows: If the value of
the thing offered or received exceeds $100, the offense is a felony
punishable by up to five (5) years' imprisonment and a fine of $5000 or
three times the value of the bribe or gratuity. If the value does not
exceed $100, the offense is a misdemeanor punishable by up to one year's
imprisonment and a maximum fine of $1000.
In keeping with the law, directors and employees of AmSouth are
expressly prohibited from (1) soliciting for themselves or a third party
(other than the bank itself) anything of value from any customer,
prospective customer, competitor, supplier, attorney or any other person in
return for any business service or confidential information of the bank;
and (2) accepting anything of value (other than bona fide salary, wages and
fees referred to in 18 U.S.C. 215(c) from their employer) from any
customer, prospective customer competitor, supplier, attorney or any other
person in connection with the business of the bank, either before or after
a transaction is discussed or consummated.
<PAGE>
Regulatory guidelines provide that acceptance, from someone doing or
seeking to do business with the bank, of the following gifts, favors and
entertainment is not prohibited:
1. Acceptance of gifts, gratuities, amenities or favors based on
obvious family or personal relationships (such as those between
the parents, children or spouse of the director or employee)
where the circumstances make it clear that it is those
relationships rather than the business of the bank which are the
motivating factors;
2. Acceptance of meals, refreshments, entertainment, accommodations
or travel arrangements, all of reasonable value, in the course of
a meeting or other occasion, the purpose of which is to hold bona
fide business discussions or to foster better business relations,
provided that the expense would be paid for by the bank as a
reasonable business expense if not paid for by the other party;
3. Acceptance of loans from other banks or financial institutions on
customary terms to finance proper and usual activities, such as
home mortgage loans, except where prohibited by law;
4. Acceptance of advertising or promotional material of reasonable
value, such as pens, pencils, note pads, key chains, calendars
and similar items;
5. Acceptance of discounts or rebates on merchandise or services
that do not exceed those available to other customers;
6. Acceptance of gifts of reasonable value (i.e., not in excess of
$75.00) that are related to commonly recognized events or
occasions, such as a promotion, new job, wedding, retirement,
holiday or birthday; or
7. Acceptance of civic, charitable, educational or religious
organization awards for recognition of service or accomplishment
not in excess of $100.00, except where specifically approved by
the Chief Executive Officer or President of AmSouth
Bancorporation after a full disclosure of the facts.
On a case-by-case basis, the President of AmSouth Bancorporation may
approve other circumstances, not described above, in which an employee may
accept something of value in connection with the bank's business. Approval may
be given (i) only in writing, (ii) on the basis of a full written disclosure of
all relevant facts submitted by the employee; and (iii) if acceptance is
consistent with the Bank Bribery Act.
Regardless of the source or value of any gift or favor, a director or
employee and members of their family must decline any gift offered under
circumstances indicating or appearing to indicate that its purpose is to
influence the director or employee in the performance of his or her job and any
gift that might have, or reasonably appear to have, such an effect.
<PAGE>
Gifts of cash (or cash equivalent) in any amount are expressly
prohibited, as well as any gift which would be viewed as lavish or expensive by
a reasonable person, such as the use of a vacation home or hunting lodge.
Employees must also refuse any gift, even of nominal value, if it is part of a
pattern or practice which when viewed as a whole would be considered lavish or
expensive. An example would be a pattern of expensive meals or entertainment.
Any time a director or employee is offered or received something of
value from a customer, prospective customer or supplier beyond what is
authorized in this Statement of Responsibilities, this fact must be reported in
writing to the General Auditor of AmSouth Bancorporation. A report must be made
even if the gift is refused. The General Auditor will maintain a file of all
such disclosures for a period of five years from the date of receipt. When
questions arise as to the legality of a gift, employees are urged to seek the
advice of the Law Department.
B. Gift Giving. Employees may not, on behalf of AmSouth or its subsidiaries in
connection with any transaction or business, directly or indirectly give,
offer or promise any gift, bribe, kickback, favor, discount, price
concession, loan, service or anything else of value to any individual,
business entity, organization, governmental unit, public official,
political party or other person for the purpose of influencing the action
of the recipient. This standard of conduct is not intended to prohibit
normal business practices such as providing meals, entertainment, tickets
to cultural and sporting events, promotional gifts, favors, discounts,
price concessions, gifts given as a token of friendship or special occasion
gifts (such as Christmas), so long as they are of a nominal and reasonable
value under the circumstances and promote legitimate business development.
Signing on Customer Accounts
Employees are not to sign on customers' accounts, act as deputy or
co-lessee of customers' safe deposit boxes, or otherwise represent customers.
This does not include situations which would exist if the person were not an
employee (i.e., blood or marriage relationship or officer of an organization).
<PAGE>
Self-Dealing
Employees and their immediate families, either acting individually or
in a fiduciary capacity, may not sell assets to nor purchase assets from AmSouth
Bancorporation or any of its subsidiaries unless such purchase or sale is at a
fair market value price and full documentation of the same is maintained in the
files of AmSouth Bancorporation or the subsidiary which is a party to the
transaction. No such purchases shall be made if the subject property was
acquired by AmSouth Bancorporation or any subsidiary by repossession or
foreclosure. This prohibition does not apply to the purchase of assets, such as
promotional premium items, offered by AmSouth Bancorporation or any subsidiary
to the general public. Employees and their immediate families are also
prohibited from personally extending credit to any person (other than a member
of his or her family) who has applied for and was denied such credit by AmSouth
Bancorporation or any of its subsidiaries.
Outside Directorships, Partnerships and Sole Proprietorships
Service by an employee as a director or officer of, or other
involvement with, another business organization may create a potential conflict
of interest.
Therefore, no employee should accept any directorship or officership of
any business or become a member of any partnership or other business venture
without the prior written approval of the appropriate division or regional
executive and the written concurrence of the President of AmSouth
Bancorporation.
Indemnification of an employee serving as a director or officer of
another business may be available under the appropriate certificate of
incorporation only if the employee performs such service at the specific written
request of the Board of Directors of his employer.
Outside Employment
An officer or employee may have outside employment so long as the
outside employment is not incompatible with his or her employment with AmSouth
and so long as such employment is fulfilled solely during off-duty hours. Any
outside employment of officers should be discussed in advance with the
appropriate division or regional executive and written approval obtained from
that person. No such employment will be approved if it will or could result in
conflict of interest. Non-officer employees should refer to the Personnel Policy
Manual.
Fiduciary Appointments
No employees should accept an appointment as either a sole fiduciary or
as a co-fiduciary with someone other than his or her employer. Fiduciary
services are available through AmSouth Bank, and it is inappropriate for
employees of AmSouth Bancorporation or any of its subsidiaries to compete with
the Bank. Further, third parties might assume that such an employee could render
substantially the same professional services as offered by a bank trust
department.
<PAGE>
In addition, an employee could well face the problem of having undue
demands placed on his or her time to perform fiduciary duties which can be
performed only during business hours, when full attention should be devoted to
his or her regular employment.
The above statements do not apply to those fiduciary appointments based
upon close family relationships, when accepting such an appointment would not
result in undue demands on the time of the employee. However, the acceptance of
any such appointment should be discussed in advance with the head of AmSouth
Bank's Trust Division and written approval obtained.
A supplement to this section for trust employees will be found
beginning on page 20.
Legal, Tax and Investment Advice
On occasion, conversations with customers may result in a request by
the customer that an employee comment upon the legality or illegality of a
proposed transaction. In addition, questions are often raised concerning the tax
consequences of a contemplated financial transaction or the advisability of
making or retaining an investment. Extreme care must be exercised in such
discussions with customers, and no employee should say anything which might be
interpreted as the giving of legal advice or advice as to tax matters. Advice
concerning equity investments should only be given by the trust investment staff
and then only in accordance with adopted procedures. Employees should encourage
customers to consult with their own attorneys, accountants and investment
advisors on matters of this type.
Recommending Other Firms to Customers
Employees are not to recommend attorneys, accountants, insurance
brokers or agents, stock brokers, real estate agents or the like to customers
unless, in every case, several selections are given. The attorneys and
accountants utilized by AmSouth Bancorporation and its subsidiaries may properly
be included among the recommendations, but no preference should be expressed and
they should never constitute the sole recommendations. This section does not
apply to situations where AmSouth requires or recommends another firm for use in
connection with a business transaction between AmSouth and a customer.
Dishonest Acts
Federal statutes contain a number of criminal laws applicable to
employees.
These laws include, but are not limited to:
(1) Corruptly soliciting, demanding or receiving any fee, commission
or gift with the intention of being influenced or rewarded in
connection with any business of a bank or bank holding company
(18 U.S.C. Section 215)
(2) Consenting to any corporate political contribution (18 U.S.C.
Section 610)
(3) Theft, embezzlement or misapplication of funds or assets (18
U.S.C. Section 656)
(4) Making extortionate extension of credit (18 U.S.C. Sections
891-896)
<PAGE>
(5) Unauthorized issuance of obligations or the making of false
entries (18 U.S.C. Section 1005)
(6) Certifying a check drawn on an account in which there are not
sufficient collected funds (18 U.S.C. Section 501 and 18 U.S.C.
Section 1004)
(7) Making loans to bank examiners (18 U.S.C. Section 212)
(8) Unauthorized access to or use of confidential information through
or in connection with a computer (18 U.S.C. Section 1030)
(9) Knowingly permitting the proceeds of some form of illegal
activity to be utilized in a financial transaction or permitting
a transaction to be structured so as to avoid a transaction
reporting requirement under state or federal law (18 U.S.C.
Section 1956) and
(10) Willfully failing to complete and file a required transaction
report (31 C.F.R. Section 103.49).
If any employee is known or suspected to have committed a dishonest or
fraudulent act, his employer is required by law to report the act as soon as it
is discovered to federal law enforcement agencies and to regulatory authorities.
Employees who become aware of, or reasonably suspect, that another
employee has committed a dishonest act in the course of his employment must
report the facts immediately to the Director of Internal Audit of AmSouth
Bancorporation. Federal criminal law provides that "whoever knowing that an
offense...(breach of federal criminal law) has been committed, received,
relieves, comforts or assists the offender in order to hinder or prevent his
apprehension, trial or punishment, is an accessory after the fact." (18 U.S.C.
Section 3). An accessory after the fact is subject to fines and imprisonment as
provided by law. In addition, the employee may be held personally liable for
damages resulting to his or her employer (12 U.S.C. Section 503).
<PAGE>
PERSONAL CONDUCT
AmSouth Bancorporation and it subsidiaries have no intention of
attempting to control or regulate the private lives of employees. Each employee
is expected to monitor his personal conduct so that he or she does not bring
discredit to this organization.
Certain specific regulations governing personal conduct while at work
are contained in the Personnel Policy Manual.
<PAGE>
PERSONAL INVESTMENTS
Introduction
Because investments are an area in which a conflict of interest or an
appearance of a conflict of interest may very easily develop, extreme caution
should be taken by employees in investing directly or indirectly in the stock or
in the business of a customer, borrower, supplier or competitor of AmSouth
Bancorporation or any of its subsidiaries. Directors are subject to various
federal regulations governing conflicts of interest which might arise in
connection with investments. The following statements do not therefore, apply to
directors, except as specifically indicated.
Investments in Competitors, Customers or Suppliers
Employees, like any other individuals, may make and liquidate
investments in the stock and securities of AmSouth Bancorporation and other
corporations. However, no employee shall ever engage in such transactions as
result of material inside information obtained in the course of employment or
from any other source.
Any employee who has, either directly or beneficially, a material
interest in any customer, supplier or competitor of AmSouth Bancorporation or
any of its subsidiaries is to immediately disclose that fact to the Secretary of
AmSouth Bancorporation by a written memorandum to contain such detail as the
Secretary finds necessary or advisable.
Definitions:
(1) As used above, direct ownership and beneficial ownership are defined as
follows:
(a) Direct - Securities registered in your own name or held for your
benefit in the name of your broker or nominee.
(b) Beneficial - (1) Securities owned for your benefit in a partnership,
trust, profit-sharing plan or other entity, or (2) securities held in
the name of your spouse, minor children or other relatives who live in
your home.
(2) As used above, material interest is defined as follows:
(a) In situations where the employee is not in the position of negotiating
or approving transactions with the entity in which he or s he has an
interest, a material interest is either a 5% beneficial ownership of
the securities or an interest having a fair market value of $50,000,
whichever is less.
<PAGE>
(b) In cases where the employee is in a position of negotiating or
approving transactions with a customer, supplier or competitor in
which he or she has an interest, a material interest is either a 5%
beneficial ownership interest or an ownership interest having a fair
market value exceeding $10,000, whichever is less.
Investment in AmSouth Bancorporation Stock
While investment by employees in AmSouth Bancorporation stock and
securities is certainly appropriate, no employee should engage in such
transactions, or encourage others to do so, based on material inside information
obtained in the course of employment or otherwise. Such information includes
changes in earnings, proposed new services, unexpected losses or profits, etc.
The federal securities laws provide that any profit realized by a
director or certain officers of an issuer of registered securities, such as
AmSouth Bancorporation, from any purchase and sale, or sale and purchase, of the
issuer's equity securities within a six-month period, must be recovered by the
issuer:
The following suggestions by the New York Stock Exchange may serve as a
guide to directors and officers buying or selling AmSouth Bancorporation stock:
"1. One appropriate method of purchase might be a periodic
investment program where the directors or officers make
regular purchases under an established program administered by
a broker and where the timing of purchases is outside the
control of the individual."
"2. It would also seem appropriate for officials to buy or sell
stock in their companies for a 30-day period commencing one
week after the annual report has been mailed to shareholders
and otherwise broadly circulated (provided, of course, that
the annual report has adequately covered important corporate
developments and that no new major undisclosed developments
occur within that period)."
<PAGE>
"3. Transactions may also be appropriate under the following
circumstances, provided that prior to making a purchase or
sale a director or officer contacts the chief executive
officer of the company to be sure there are no important
developments pending which need to be made public before an
insider could properly participate in the market."
<PAGE>
"(a).Following a release of quarterly results, which
includes adequate comment on new developments during
the period. This timing of transactions might be even
more appropriate where the report has been mailed to
shareholders."
"(b).Following the wide dissemination of information on the
status of the company and current results. For example,
transactions may be appropriate after a proxy statement
or prospectus which gives such information in
connection with a merger or new financing."
"(c) At those times when there is relative stability in the
company's operations and the market for its securities.
Under these circumstances, timing of transactions may
be relatively less important. Of course such periods of
relative stability will vary greatly from time to time
and will also depend to a large extent on the nature of
the industry or the company."
"4. Where a development of major importance is expected to reach the
appropriate time for announcement within the next few months,
transactions by directors and officers should be avoided."
"5. Corporate officials should wait until after the release of
earnings, dividends or other important developments have appeared
in the press before making a purchase or sale. This permits the
news to be widely disseminated and negates the inference that
officials had an inside advantage. Similarly, transactions just
prior to important press releases should be avoided."
POLITICAL ACTIVITIES
AmSouth recognizes and believes in the importance of all citizens
taking an active interest in our political and governmental processes. Employees
are encouraged to keep themselves well-informed concerning political issues and
candidates and to take an active interest in all such matters. Voting is a
personal right and privilege and AmSouth will cooperate with employees to assure
that they are able to get to the polls on election days. However, participation
by employees in any election campaign must be undertaken in off-duty hours and
at their own expense without any use whatsoever of AmSouth facilities or
equipment, except with respect to administration of AmSouth authorized PACs
(political action committees). In every case, employees participating in
political activities do so as individual citizens and not as representatives of
AmSouth Bancorporation or any of its subsidiaries.
<PAGE>
All corporations, which include AmSouth Bancorporation and all of its
subsidiaries, are forbidden from making contributions or expenditures, direct or
indirect, relating to any election, including the nominating process, for any
Federal office or offices. Similar restrictions apply to banks with respect to
state or local offices. AmSouth's policy is that there will not be any corporate
contributions to candidates for any offices. Expenditures for the administration
costs of PACs are exempt from the above restrictions. AmSouth has established
political action committees to which directors and certain officers may make
contributions. Information concerning these PACs may be obtained from AmSouth's
Governmental Affairs Office in Birmingham.
AmSouth may make limited contributions in connection with a campaign to
gain passage or seek defeat of a referendum proposal, but such will be made only
with the approval of the chief executive officer of AmSouth Bancorporation.
Violations of the various political contributions laws constitute a criminal
offense both by the corporation and the corporate representative who consented
to the same. To avoid even the appearance of corporate sponsorship or
endorsement, neither AmSouth Bancorporation's nor any subsidiary's name or
address should be used in mailed material or fund collection, nor should AmSouth
Bancorporation or any subsidiary be identified in any advertisement or
literature.
Any officer or employee desiring to run for an elective political
office or to accept an appointment to a state or local government office should
discuss the matter in advance with the appropriate division or regional
executive in order to make certain that the duties of the office and the time
away from the job will not materially interfere with assigned job
responsibilities or create a conflict of interest. If election or appointment
would materially interfere or create a conflict, it will be the executive's
responsibility to make such changes in duties and compensation as may be
dictated. Written notice of an intent to seek public office must be sent to the
President of AmSouth Bancorporation. For further information, see the Personnel
Policy Manual.
Under no circumstances whatsoever are funds to be given to any
individual's political campaign in the name of AmSouth Bancorporation or any of
its subsidiaries. This prohibition applies not only to corporate funds, but also
to individual funds given in the name of the corporate entity. Any existing
AmSouth political action committee (PAC) is covered by numerous other rules and
regulations; this section does not apply to it.
REPORTING AND CLEARANCE PROCEDURE
Throughout this booklet references are made to the clearance of certain
activities by employees. Each employee should initially consult with his or her
immediate supervisor. Executive officers will communicate directly with the
chief executive officer of AmSouth Bancorporation. The chief executive officer
of AmSouth Bancorporation and all AmSouth Bancorporation directors will
communicate with the Audit Committee of the AmSouth Bancorporation Board of
Directors.
<PAGE>
TRUST EMPLOYEES
Employees of AmSouth's Trust Division are, by law, held to the highest
standards of fiduciary responsibility. To assist trust personnel in the
performance of these responsibilities within the letter and spirit of the law,
this section contains information and material which is specifically applicable
to trust personnel. Trust employees are to be guided by this section as well as
by the other principles set forth in this Statement of Responsibilities.
Fiduciary Appointments
Trust employees should review with particular care the material set
forth under the heading Fiduciary Appointments on page 13. Before accepting any
personal fiduciary appointment whatsoever, a trust employee should obtain the
written approval of the head of AmSouth's Trust Division. Such approval will be
given only in extraordinary circumstances.
Loans of Trust Funds
Federal law makes it a crime for a bank to loan to any employee any
funds held in trust by the bank. In additions, any employee who participates in
making such a loan or to whom such a loan is made, is subject to fine or
imprisonment, or both.
Confidential and Insider Information
If a trust employee receives material inside information about a
corporation, the employee should immediately and exclusively report the receipt
of such information to the head of the Trust Division in order that appropriate
action, as legally permissible, can be taken to protect the interests of AmSouth
and its trust customers.
A commercial loan officer may well receive material inside information
from a corporate borrower to assist in evaluating a proposed loan. Such
information is highly confidential and is to be restricted to those who need to
know it. Trust employees are strictly prohibited from any access to such
information, whether the access is on a formal or informal basis. It is also
inappropriate for trust employees to discuss or exchange information regarding
any particular issuer of securities with employees from the commercial banking
area.
Personal Investments
In addition to complying with the principles set forth under the
heading PERSONAL INVESTMENTS on page 16, the following specific principles are
applicable to trust and brokerage service employees.
(1) An employee may not use his or her position to obtain leverage to
purchase new issues or other thinly-traded securities.
<PAGE>
(2) Employees who are in a position to influence the selection of
brokers or placement of commissions should not accept any
favors, direct or indirect, from members of the brokerage
community which could in any way result in the employee being
obligated to, or appearing to be obligated to, the broker or
brokers.
(3) No employee shall purchase or sell a security based on
knowledge of a probable change in his or her employer's
investment attitude toward, or action with respect to, that
security. Persons who perform investment research activities
are specifically cautioned against transactions in securities
which they anticipate recommending at a subsequent time for
purchase or sale.
(4) Employees who have knowledge that their employer is effecting
or proposes to effect transactions in a security must not
effect personal transactions in such securities if these
transactions would have an adverse effect on the execution
prices obtained by their employer.
(5) An employee who knows that his or her employer either intends
to purchase a new corporate issue or has not completed its
purchase of a new issue shall not subscribe to the same issue
for his or her own account until the employer has completed
its transactions.
Outside Directorships
Trust employees are sometimes called upon to act as directors or
officers of corporations, all or substantially all of the stock of the stock of
which is owned and controlled by one or more trusts or estates of which the
Trust Division is executor or trustee. A typical case would be that of a family
company created by a testator during his lifetime or pursuant to his will. In
such cases, the employee must receive authorization from the head of the Trust
Division before he can accept the appointment. No employee of the Trust Division
shall personally receive a fee or honorarium for serving as an officer or
director of such company. If a fee is received, it shall be deposited to the
relevant trust account.
Beneficiary Under a Will or Trust
In order to prevent real or apparent conflicts of interest and to be
certain that no reasonable, disinterested third party could allege a conflict of
interest, extreme care must be taken in connection with bequests under wills or
trusts. All trust employees must report to the head of the Trust Division any
gift of a beneficial interest or legacy under wills or trusts of customers of
their employer, other than those from a relative. This report must be made as
soon as the employee learns of the proposed or actual gift. If the head of the
Trust Division determines that a real or apparent conflict of interest exists,
or could exist, by reason of the bequest of gift, it will be necessary for the
employee to renounce the bequest or make every reasonable effort to be relieved
of the beneficial designation under the will or trust agreement.
Investment Advice
On occasion a member of the investment staff may be requested to
provide investment advice to someone other than a customer or a prospective
customer of the Trust Division. Requests for free advice when there is no
continuing relationship with the recipient of the advice should be discouraged.
A characteristic of the securities market is change. The qualities of a sound
investment may change over time to the point where the security is financially
unsound. Investment staff personnel have no way of following recommendations
made to persons who are not continuing customers since they are not recorded on
the records of the Trust Division. By the time they become aware of a prior
recommendation to an outsider, that person may have suffered a financial loss.
Therefore, extreme care should be exercised in offering investment advice to
people other than those with whom Trust Division personnel have a continuing
relationship.
BRANCH BANKING AND TRUST COMPANY
CODE OF ETHICS
GOVERNING THE CONDUCT OF ITS
INVESTMENT ADVISORY SERVICE
TO INVESTMENT COMPANIES
STATEMENT OF GENERAL PRINCIPLES
It is the policy of Branch Banking and Trust Company (BB&T) that Portfolio
Managers, Investment Personnel and Access Persons1 should (1) at all times place
the interests of the shareholder first; (2) conduct all personal securities
transactions in a manner that is consistent with the Code of Ethics and any
actual or potential conflict of interest or any abuse of the individual's
position of trust and responsibility; and (3) adhere to the fundamental standard
that BB&T personnel should not take inappropriate advantage of their positions.
GOVERNING STANDARDS
This Code of Ethics shall be governed by Rule 17j-1 under the Investment Company
Act of 1940 and the Investment Company Institute's Guidelines on Personal
Investing.
Portfolio Managers, Investment Personnel, or Access Persons shall not in the
connection with the purchase or sale by such person of a security "held or to be
acquired" by any investment company portfolio (a "Fund") of the BB&T Mutual
Funds Group (the "Trust") commit the following:
1) Employ a device, scheme, or artifice to defraud the Fund;
2) Make to the Fund any untrue statement of a material fact or omit to state
to the Fund a material fact necessary in order to make the statements made,
in light of the circumstances under which they are made, not misleading;
3) Engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon the Fund; or
4) Engage in any manipulative practice with respect to the Fund.
A security is "held or to be acquired" if within the most recent 15 days it (1)
is or has been held by a Fund, or (2) is being or has been considered by a Fund,
or the investment adviser for a Fund (BB&T) for purchase by a Fund. A purchase
or sale includes the writing of an option to purchase or sell.
SUBSTANTIVE RESTRICTIONS ON PERSONAL INVESTMENT ACTIVITIES
1. Initial Public Offerings
Portfolio Managers and Investment Personnel are prohibited from acquiring
any securities in an initial public offering.
2. Private Placement
Portfolio Managers and Investment Personnel shall, when purchasing
securities in a private placement:
- -----------------------------
1 Portfolio Managers have the responsibility and authority to make decisions
about fund investments, while Investment Personnel include the analysts and
traders who provide information and advice to a portfolio manager or who help
execute the portfolio manager's decisions. Access persons are those, who in the
course of their normal workplace duties, obtain information about the funds'
purchases and sales of securities.
<PAGE>
A. Obtain the prior written approval of the Investment Management Group
Manager and Trust Counsel.
B. Disclose the Investment when they are involved in any subsequent
decision to invest in the issuer on behalf of a Fund, and refer the
decision to purchase securities of the issuer to the Investment
Management Group Manager.
3. Blackout Periods
A. Same Day
Portfolio Managers, Investment Personnel and Access Persons are
prohibited from executing a securities transaction on a day when a Fund
has a pending "buy" or "sell" order in the same security until that
order is executed or withdrawn. Any profits realized on trades within
the proscribed periods will be disgorged.
B. Seven Day
Portfolio Managers are prohibited from buying or selling a security
within at least seven (7) calendar days before and after the Fund he or
she manages trades in that security. Any profits realized on trades
within the proscribed periods will be disgorged.
4. Ban on Short-Term Trading Profits
Portfolio Managers and Investment Personnel are prohibited from profiting
in the purchase and sale, or the sale and purchase, of the same (or
equivalent) securities within 60 calendar days. Any profits realized on
trades within the proscribed periods will be disgorged.2
5. Gifts
Portfolio Managers and Investment Personnel are prohibited from receiving
any gift or other thing of more than $100 value from any person or entity
that does business with or on behalf of a Fund.
6. Service as a Director
Portfolio Mangers and Investment Personnel are prohibited from serving on
the board of directors of publicly traded companies, without prior
authorization from the Trust Committee of BB&T and the Funds' Board of
Directors.
- -----------------
2 Note: This prohibition applies regardless of portfolio holdings or securities
transactions of a Fund.
<PAGE>
DISCLOSURE AND REPORTING REQUIREMENTS
1. Preclearance
Portfolio Managers, Investment Personnel and Access Persons are required to
preclear all transactions in securities in which the person has, or by
reason of the transaction acquires, any direct or indirect beneficial
ownership3 ("Personal Securities") with the Director of Corporate
Compliance or Trust Counsel.
2. Records of Securities Transactions
Portfolio Managers, Investment Personnel, and Access Persons are required
to direct their brokers to provide the Director of Corporate Compliance, on
a timely basis, duplicate copies of confirmations of all Personal
Securities transactions and copies of periodic statements for all
securities accounts. Reportable transactions do not include (1) securities
issued or guaranteed by the United States Government, its agencies or
instrumentalities; (2) bankers acceptances; (3) bank certificates of
deposit; (4) commercial paper; and (5) shares of registered open-end
investment companies.
3. Disclosure of Personal Holdings
Portfolio Managers and Investment Personnel are required to disclose all
Personal Securities holdings upon commencement of employment and thereafter
on an annual basis.
4. Certification of Compliance with Code of Ethics
Portfolio Managers, Investment Personnel and Access Persons are required to
certify annually that they have read and understand the Code of Ethics.
They must further certify that they have complied with the requirements of
the Code of Ethics and that they have disclosed or reported all Personal
Securities transactions required to be disclosed or reported.
COMPLIANCE PROCEDURES
In order to provide Branch Banking and Trust Company with information to enable
it to determine with reasonable assurance whether the provisions of the Code of
Ethics are being observed by Portfolio Managers, Investment Personnel and Access
Persons:
1. The Director of Corporate Compliance shall notify each Portfolio Manager,
Investment Personnel, and Access Person of the reporting requirements of
the Code of Ethics and shall deliver a copy of the Code to each person.
2. Each Portfolio Manager, Investment Personnel, and Access Person shall
submit to the Director of Corporate Compliance on an annual basis, an
Annual Certification of Compliance with the Code of Ethics as prescribed in
Exhibit A. The annual certification shall be filed with the Director of
Corporate Compliance within ten (10) calendar days after year-end.
3. Each Portfolio Manager and Investment Personnel shall submit to the
Director of Corporate Compliance upon commencement of employment and
thereafter on an annual basis, reports in the form prescribed in Exhibit B,
Personal Securities Holdings. The annual report shall be filed with the
Director of Corporate Compliance with ten (10) calendar days after
year-end.
4. Each Portfolio Manager, Investment Personnel, and Access Person shall
submit to the Director of Corporate Compliance on a quarterly basis,
reports in the form prescribed in Exhibit C, Personal Securities
Transactions. The quarterly reports shall be filed with the Director of
Corporate Compliance within ten (10) calendar days after quarter-end.
- ---------------
3 Beneficial ownership of a security is determined in the same manner as it
would be for the purposes of Section 16 of the Securities Exchange Act of 1934,
except that such determination should apply to all securities. Generally, a
person should consider himself the beneficial owner of securities held by his
spouse, his minor children, a relative who shares his home, or other persons if
by reason of any contact, understanding, relationship agreement or other
arrangement, he obtains from such ownership. He should also consider himself the
beneficial owner of securities if he can invest or revest title in himself now
or in the future.
<PAGE>
5. Decisions regarding the preclearance of all securities transactions for
Portfolio Managers, Investment Personnel, and Access Persons shall be
documented in writing by the Director of Corporate Compliance or Trust
Counsel. Portfolio Managers, Investment Personnel, and Access Persons shall
make arrangements with their broker to provide the Director of Corporate
Compliance, on a timely basis, with copies of confirmations of all Personal
Securities transactions and copies of periodic statements for all
securities accounts.
6. The Director of Corporate Compliance shall report to the Trust Committee of
the BB&T Board of Directors:
A. at the next meeting following the receipt of the annual report of
holdings, the results of the review.
B. any apparent violation of the Code at the first meeting subsequent to
the discovery of the violation.
7. The Trust Committee of the Board of Directors of BB&T shall consider
reports made to it and shall determine whether the policies established in
the Code of Ethics have been violated, and what sanctions, if any, should
be imposed. The Trust Committee of the Board of Directors of BB&T shall
review the operation of this policy at least annually or as dictated by
changes in applicable securities regulations.
8. This Code of Ethics, a copy of each Personal Securities Holding Report and
Personal Securities Transactions Report by the parties covered in the Code,
any written report prepared by the Director of Corporate Compliance, and
lists of all persons required to make reports shall be preserved with
Branch Banking and Trust Company for the period required by Rule 17j-1
under the Investment Company Act of 1940.
Adopted August 24, 1995
The Trust Committee of
The Board of Directors
Branch Banking and Trust Company
<PAGE>
Branch Banking and Trust Company
ANNUAL CERTIFICATION OF COMPLIANCE
Underlined terms have the meaning assigned to them in the Branch Banking and
Trust Company Code of Ethics Governing the Conduct of its Investment Advisor
Service to Investment Companies dated August 24, 1995.
To Compliance Officer:
As a Portfolio Manager, Investment Personnel or Access Person, I certify that I
have read and understand the Investment Company Code of Ethics. I further
certify that I have complied with the requirements of the Code and that I have
disclosed or reported all personal securities holdings and/or transactions
required to be reported by the Code.
- ---------------- -----------------------------------------
Date Signature
------------------------------------------
Print Name
<PAGE>
Branch Banking and Trust Company
PERSONAL SECURITIES TRANSACTIONS REPORT
FOR THE CALENDAR QUARTER ENDING _____________
Underlined terms have the meaning assigned to them in the Branch Banking and
Trust Company Code of Ethics Governing the Conduct of its Investment Advisor
Service to Investment Companies dated August 24, 1995.
To Compliance Officer:
As a Portfolio Manager, Investment Personnel or Access Person, I am disclosing
the following information regarding my personal securities to comply with the
Investment Company Code of Ethics. I further understand that the Code of Ethics
does not require me to report transactions in (1) securities issued or
guaranteed by the United States Government, its agencies or instrumentalities,
(2) bankers acceptances, (3) bank certificates of deposit, (4) commercial paper,
and (5) shares of registered open-end investment companies.
1. I certify that I have not made any purchases or sales of personal
securities that require reporting within the quarter ending
__________________.
---------------- -----------------------------------------
Date Signature
------------------------------------------
Print Name
OR
2. I certify that the following personal securities holdings that require
reporting by me are accurate and complete for the quarter ending
__________________.
<TABLE>
<S> <C> <C> <C>
Date of Security No. of Shares/ Broker or Bank Utilized
Transaction Name Dollar Amount Acquire Holding
</TABLE>
--------------- -----------------------------------------
Date Signature
-----------------------------------------
Print Name
<PAGE>
Branch Banking and Trust Company
PERSONAL SECURITIES TRANSACTIONS REPORT
FOR THE CALENDAR YEAR ENDING _____________
Underlined terms have the meaning assigned to them in the Branch Banking and
Trust Company Code of Ethics Governing the Conduct of its Investment Advisor
Service to Investment Companies dated August 24, 1995.
To Compliance Officer:
As a Portfolio Manager, Investment Personnel or Access Person, I am disclosing
the following information regarding my personal securities to comply with the
Investment Company Code of Ethics. I further understand that the Code of Ethics
does not require me to report transactions in (1) securities issued or
guaranteed by the United States Government, its agencies or instrumentalities,
(2) bankers acceptances, (3) bank certificates of deposit, (4) commercial paper,
and (5) shares of registered open-end investment companies.
1. I certify that I have not made any purchases or sales of personal
securities that require reporting within the year ending
__________________.
---------------- -----------------------------------------
Date Signature
-----------------------------------------
Print Name
OR
2. I certify that the following personal securities holdings that require
reporting by me are accurate and complete for the year ending
__________________.
<TABLE>
<S> <C> <C> <C>
Date of Security No. of Shares/ Broker or Bank Utilized
Transaction Name Dollar Amount Acquire Holding
</TABLE>
--------------- -----------------------------------------
Date Signature
-----------------------------------------
Print Name
` Adopted: June 28, 1996
Revised: October 27, 1999
Each Registered Investment Company or series thereof (each of which is
considered to be a Fund for this purpose) for which HSBC Asset Management
Americas Inc. presently or hereafter provides investment advisory or principal
underwriter services
CODE OF ETHICS
This Code of Ethics (the "Code") establishes rules of conduct
for persons who are associated with the Funds referred to above. The Code
governs their personal investment and other investment-related activities.
The basic rule is very simple: put the client's interests
first. Officers, Directors and employees owe a fiduciary duty to, among others,
the Shareholders of the Funds, to conduct their personal Securities transactions
in a manner which does not interfere with Fund portfolio transactions or
otherwise take unfair advantage of their relationships with the Funds. Persons
covered by the Code must adhere to these general principles as well as comply
with the Code's specific provisions.
Some of the rules are imposed specifically by law. For
example, the laws that govern investment advisers specifically prohibit
fraudulent activity, making statements that are not true or that are misleading
or omit something that is significant in the context and engaging in
manipulative practices. These are general concepts, of course, and over the
years the courts, the regulators and investment advisers issued interpretations
and established codes of conduct for their employees and others who have access
to their investment decisions and trading activities. Indeed, the rules obligate
investment advisers to adopt written rules that are reasonably designed to
prevent the illegal activities described above and must follow procedures that
will enable them to prevent such activities.
<PAGE>
No Covered Person shall, in connection with the purchase or
sale, directly or indirectly, by such person of a security held or to be
acquired by the Funds:
o employ any device, scheme or artifice to defraud the Funds;
o make to the Funds any untrue statement of a material fact or omit
to the Funds a material fact necessary in order to make the
statement made, in light of the circumstances under which they
are made, not misleading;
o engage in any act, practice or course of business which would
operate as a fraud or deceit upon the Funds;
o engage in any manipulative practice with respect to the Funds;
o trade while in possession of material non-public information for
personal or HSBC Asset Management America Inc. investment
accounts, or disclose such information to others in or outside
HSBC Asset Management Americas Inc. who have no need for this
information.
It is a violation of federal securities laws to buy or sell securities
while in possession of material non-public information and illegal to
communicate such information to a third party who buys or sells.
This Code is intended to assist persons associated with the
Funds in fulfilling their obligations under the law. The first part lays out who
the Code applies to, the second part deals with personal investment activities,
the third part deals with other sensitive business practices, and subsequent
parts deal with reporting and administrative procedures.
The Code is very important to the Funds and persons associated
with the Funds. Violations not only cause persons associated with the Funds
embarrassment, loss of business, legal restrictions, fines and other punishments
but for employees lead to demotion, suspension, firing, ejection from the
securities business and very large fines.
I. Applicability
(A) The Code applies to each of the following:
1. The Funds referred to at the top of page one of the
Code. A listing of the Funds, which is periodically
updated, is attached as Exhibit A.
2. Any officer, director or Advisory Person (as defined
below) of any Funds or the Fund's investment adviser.
3. Any director, officer or general partner of a
principal underwriter who, in the ordinary course of
business, makes, participates in or obtains
information regarding, the purchase or sale of
Securities by the Fund or whose functions or duties
in the ordinary course of business relate to the
making of any recommendation to the Fund regarding
the purchase or sale of Securities.
<PAGE>
4. The Code shall not apply to any director, officer,
general partner or person if such individual is
required to comply with another organization's code
of ethics pursuant to Rule 17j-1 under the Investment
Company Act of 1940, as amended.
(B) Definitions
1. Access Persons. The persons described in items (A)2 and
(A)3 above.
2. Access Person Account. Includes all advisory, brokerage,
trust or other accounts or forms of direct beneficial
ownership in which one or more Access Person and/or one
or more members of an Access Person's immediate family
have a substantial proportionate economic interest.
Immediate family includes an Access Person's spouse and
minor children living with the Access Person. A
substantial proportionate economic interest will
generally be 10% of the principal amount in the case of
an account in which only one Access Person has an
interest and 25% of the principal amount in the case of
an account in which more than one Access Person has an
interest, whichever is first applicable. Investment
partnerships and similar indirect means of ownership are
also included.
As an exception, accounts in which one or more Access
Persons and/or their immediate family have a substantial
proportionate interest which are maintained with persons
who have no affiliation with the Funds or Affiliates of
the Funds and with respect to which no Access Person
has, in the judgment of the Divisional Compliance
Officer after reviewing the terms and circumstances, any
direct or indirect influence or control over the
investment or portfolio execution process are not Access
Person Accounts.
3. Advisory Person. Any employee of the Fund or investment
adviser (or of any company in a control relationship to
the Fund or investment adviser) who, in connection with
his or her regular functions or duties, makes,
participates in, or obtains information regarding the
purchase or sale of Securities by a Fund, or whose
functions relate to the making of any recommendations
with respect to the purchases or sales; or any natural
person in a control relationship to the Fund or
investment adviser who obtains information concerning
recommendations made to the Fund with regard to the
purchase or sale of Securities by the Fund.
4. Associate Portfolio Managers. Access Persons who are
engaged in securities research and analysis for
designated Funds or are responsible for investment
recommendations for designated Funds but who are not
particularly responsible for investment decisions with
respect to any Funds.
<PAGE>
5. Covered Persons. The Funds and the Access Persons.
6. Divisional Compliance Officer. The Divisional
Compliance Officer of the Funds identified in (A)1
above shall be ______________, an individual who is
an employee of HSBC Asset Management Americas Inc.
7. Investment Personnel. (i) Any employee of the Fund or
investment adviser (or of any company in a control
relationship to the Fund or investment adviser) who,
in connection with his or her regular functions or
duties, makes or participates in making
recommendations regarding the purchase or sale of
securities by the Fund; or (ii) any natural person
who controls the Fund or investment adviser and who
obtains information concerning recommendations made
to the Fund regarding the purchase or sale of
securities by the Fund.
For purposes of the Code, the Compliance Officer of
the Administrator shall only be responsible for a Covered
Person's compliance with this Code, unless such Covered Person
is otherwise excluded under (A) 4 above.
8. Portfolio Managers. Access Persons who are
principally responsible for investment decisions with
respect to any of the Funds.
9. Security. Any financial instrument treated as a
security for investment purposes and any related
instrument such as futures, forward or swap contract
entered into with respect to one or more securities,
a basket of or an index of securities or components
of securities. However, the term security does not
include securities issued by the Government of the
United States, bankers' acceptances, bank
certificates of deposit, commercial paper and high
quality short-term debt instruments, including
repurchase agreements or shares of registered
open-end investment companies.
<PAGE>
II. Restrictions on Personal Investing Activities
(A) Basic Restriction on Investing Activities
If a purchase or sale order is pending or under active
consideration for any Fund, neither the same Security nor any
related Security (such as an option, warrant or convertible
security) may be bought or sold for any Access Person Account.
(B) Initial Public Offerings
No Security or related Security may be acquired in an initial
public offering for any Investment Personnel.
(C) Blackout Period
No Security or related Security may be bought or sold for the
account of any Portfolio Manager or Associate Portfolio
Manager during the period commencing seven (7) calendar days
prior to and ending seven (7) calendar days after the purchase
or sale (or entry of an order for the purchase or sale) of
that Security or any related Security for the account of any
Fund with respect to which such person has been designated a
Portfolio Manager or Associate Portfolio Manager.
(D) Exempt Transactions
Participation on an ongoing basis in an issuer's dividend
reinvestment or stock purchase plan, participation in any
transaction over which no Access Person had any direct or
indirect influence or control and involuntary transactions
(such as mergers, inheritances, gifts, etc.) are exempt from
the restrictions set forth in paragraphs (A) and (C) above
without case by case preclearance under paragraph (F) below.
(E) Permitted Exceptions
Purchases and sales of the following Securities are exempt
from the restrictions set forth in paragraphs A and C above if
such purchases and sales comply with the preclearance
requirements of paragraph (F) below (provided that purchases
and sales of Municipal Securities need not comply with the
preclearance requirements of paragraph (F) below):
1. Non-convertible fixed income Securities rated at least
"A";
2. Equity Securities of a class having a market
capitalization in excess of $1 billion;
3. Equity Securities of a class having a market
capitalization in excess of $500 million if the
transaction in question and the aggregate amount of such
Securities and any related Securities purchased and sold
for the Access Person Account in question during the
preceding 60 days does not exceed $10,000 or 100 shares;
and
4. Municipal Securities.
In addition, the exercise of rights that were received pro
rata with other securityholders is exempt if the preclearance
procedures are satisfied.
<PAGE>
(F) Pre-Clearance of Personal Securities Transactions
No Security may be bought or sold for an Access Person Account
unless (i) the Access Person obtains prior approval from the
Divisional Compliance Officer or, in the absence of the
Divisional Compliance Officer, from a designee of the
Divisional Compliance Officer; (ii) the approved transaction
is completed on the same day approval is received; and (iii)
the Divisional Compliance Officer does not rescind such
approval prior to execution of the transaction (See paragraph
H below for details of the Pre-Clearance Process.)
(G) Private Placements
The Divisional Compliance Officer will not approve purchases
or sale of Securities that are not publicly traded, unless the
Access Person provides full details of the proposed
transaction (including written certification that the
investment opportunity did not arise by virtue of such
person's activities on behalf of any Fund) and the Divisional
Compliance Officer concludes, after consultation with one or
more of the relevant Portfolio Managers, that the Fund would
have no foreseeable interest in investing in such Security.
(H) Pre-Clearance Process
1. No Securities may be purchased or sold for any Access
Person Account unless the particular transaction has
been approved in writing by the Divisional Compliance
Officer. The Divisional Compliance Officer shall review,
not less frequently than biweekly (once every two
weeks), reports from the trading desk (or, if
applicable, confirmations from brokers) to assure that
all transactions effected for Access Person Accounts are
effected in compliance with this Code.
2. No Securities may be purchased or sold for any Access
Person Account other than through the trading desk
designated by the Divisional Compliance Officer, unless
express permission is granted by the Divisional
Compliance Officer. Such permission may be granted only
on the condition that the third party broker supply the
Divisional Compliance Officer, on a timely basis,
duplicate copies of confirmations of all personal
Securities transactions for such Access Person in the
accounts maintained with such third party broker and
copies of periodic statements for all such accounts.
3. A Trading Approval Form, attached as Exhibit B, must be
completed and submitted to the Divisional Compliance
Officer for approval prior to entry of an order.
<PAGE>
4. After reviewing the proposed trade and the level of
potential investment interest on behalf of the Funds in
the Security in question and the Funds restricted lists,
the Divisional Compliance Officer shall approve (or
disapprove) a trading order on behalf of an Access
Person as expeditiously as possible. The Divisional
Compliance Officer will generally approve transactions
described in paragraph (E) above unless the Security in
question or a related security is on the Restricted List
or the Divisional Compliance Officer believes for any
other reason that the Access Person Account should not
trade in such Security at such time.
5. Once an Access Person's Trading Approval Form is
approved, the form must be forwarded to the trading desk
(or, if a third party broker is permitted, to the
Divisional Compliance Officer) for execution on the same
day. If the Access Person's trading order request is not
approved, or is not executed on the same day it is
approved, the clearance lapses although such trading
order request may be resubmitted at a later date.
6. In the absence of the Divisional Compliance Officer, an
Access Person may submit his or her Trading Approval
Form to a designee of the Divisional Compliance Officer
if the Divisional Compliance Officer in its sole
discretion wishes to appoint one. Trading Approval for
the Divisional Compliance Officer must be obtained from
a designated supervisory person of the Divisional
Compliance Officer. In no case will the Trading Desk
accept an order for an Access Person Account unless it
is accompanied by a signed Trading Approval Form.
7. The Divisional Compliance Officer shall review all
Trading Approval Forms, all initial, quarterly and
annual disclosure certifications and the trading
activities on behalf of all Funds with a view to
ensuring that all Covered Persons are complying with the
spirit as well as the detailed requirements of this
Code.
The provisions of this Section II shall not apply to any
Access Person who is either a "disinterested" director or an officer of the Fund
who is not employed by the investment adviser, or an affiliate thereof, other
than those where they knew or should have known in the course of their duties as
a director or officer that any Fund of which he is a director or officer has
made or makes a purchase or sale of the same or a related Security within 15
days before or after the purchase or sale of such Security or related Security
by such director or officer.
<PAGE>
III. Other Investment-Related Restrictions
(A) Gifts
No Advisory Person shall accept any gift or other item of more
than $100 in value from any person or entity that does
business with or on behalf of any Fund.
(B) Service As a Director
No Portfolio Manager or Assistant Portfolio Manager shall
commence service on the Board of Directors of a publicly
traded company or any company in which any Fund has an
interest without prior authorization from the Divisional
Compliance Officer based upon a determination that the Board
service would not be inconsistent with the interests of the
Funds.
IV. Report and Additional Compliance Procedures
(A) Every Covered Person, including disinterested
directors of the Funds, must submit to the Divisional
Compliance Officer reports (forms of which are
appended as Exhibit C) containing the information set
forth in below with respect to transactions in any
Security in which such Covered Person has or by
reason of such transactions acquires, any direct or
indirect beneficial ownership (as defined in Exhibit
D) in the Security; provided, however, that:
(1) a Covered Person who is required to make
reports only because he is a director of one
of the Funds and who is a "disinterested"
director thereof need not make an initial or
annual holdings report, or a quarterly
transaction report with respect to any
transactions other than those where he knew
or should have known in the course of his
duties as a director that any Fund of which
he is a director has purchased or sold same
or a related Security or the Fund or its
investment adviser it considers purchasing
or selling such Security or a related
security within 15 days before or after the
purchase or sale of such Security or related
Security by such director.
(2) a Covered Person need not make a report with
respect to any transaction effected for any
account over which such person does not have
any direct or indirect influence or control;
and
(3) a Covered Person need not make a quarterly
report with respect to any transaction
affected through the trading desk designated
by the Divisional Compliance Officer.
(4) a Covered Person will be deemed to have
complied with the quarterly requirements of
this Article IV insofar as the Divisional
Compliance Officer receives in a timely
fashion duplicate monthly or quarterly
brokerage statements on which all
transactions required to be reported
hereunder are described.
<PAGE>
(B) Initial Holdings Reports. No later than 10 calendar
days after the person becomes an Access Person, the
following information:
(i) The title, number of shares and principal
amount of each Covered Security in which the
Access Person had any direct or indirect
beneficial ownership when the person became
an Access Person;
(ii) The name of any broker, dealer or bank with
whom the Access Person maintained an account
in which any securities were held for the
direct or indirect benefit of the Access
Person as of the date the person became an
Access Person; and
(iii) The date that the report is submitted by the
Access Person
(C) Quarterly Transaction Reports. No later than 10
calendar days after the end of a calendar quarter,
the following information:
(1) With respect to any transaction during the
quarter in a Covered Security in which the
Access Person had any direct or indirect
beneficial ownership:
(a) The date of the transaction, the
title and number of shares and the
principal amount of each Security
involved;
(b) The nature of the transaction
(i.e., purchase, sale or any other
type of acquisition or
disposition);
(c) The price at which the transaction
was effected;
(d) The name of the broker, dealer or
bank with or through whom the
transaction was effected; and
(e) The date that the report is
submitted by the Access Person.
<PAGE>
(2) With respect to any account established by
the Access Person in which any securities
were held during the quarter for the direct
or indirect benefit of the Access Person:
(a) The name of the broker, dealer or
bank with whom the Access Person
established the account;
(b) The date the account was
established; and
(c) The date that the report is
submitted by the Access Person.
<PAGE>
(D) Annual Holdings Reports. Annually, the following
information (which information must be current as of
a date no more than 30 calendar days before the
report is submitted):
(1) The title, number of shares and principal
amount of each Security in which the Access
Person had any direct or indirect beneficial
ownership;
(2) The name of any broker, dealer or bank with
whom the Access Person maintains an account
in which any securities are held for the
direct or indirect benefit of the Access
Person; and
(3) The date that the report is submitted by the
Access Person.
(E) Any report submitted to comply with the requirements
of this Article IV may contain a statement that the
report shall not be construed as admission by the
person making such report that he has any direct or
indirect benefit ownership in the Security to which
the report relates.
(F) Annually each Covered Person must certify on a report
(the form of which is appended as Exhibit E) that he
has read and understood the Code and recognizes that
he is subject to such Code. In addition, annually
each covered Person must certify that he has
disclosed or reported all personal Securities
transactions required to be disclosed or reported
under the Code and that he is not subject to any
regulatory disability.
V. Administration of Code of Ethics
(A) No less frequently than annually, every Fund and its
investment advisers and principal underwriters must
furnish to the Fund's board of directors, and the
board of directors must consider, a written report
that
(1) Describes any issues arising under the Code
or procedures since the last report to the
board of trustees, including, but not
limited to, information about material
violations of the Code or procedures and
sanctions imposed in response to the
material violations; and
(2) Certifies that the Fund, investment adviser
or principal underwriter, as applicable, has
adopted procedures reasonably necessary to
prevent Access Persons from violating the
Code
<PAGE>
VI. Sanctions
Upon discovering that a Covered Person has not complied with the
requirements of this Code, the Board of Directors of the relevant Fund
may impose whatever sanctions within its power the Board deems
appropriate, including, among other things, termination of the Fund's
adviser or recommendations of disgorgement of profit, censure,
suspension or termination of employment. Material violations of
requirements of this Code by employees of Covered Persons and any
sanctions imposed in connection therewith shall be reported not less
frequently than quarterly to the Board of Directors of any relevant
Fund.
VII. Exceptions
The Board of Trustees reserves the right to decide, on a case by case
basis, exceptions to any provisions under this Code. Any exceptions
made hereunder will be maintained in writing by the Board of Trustees
of any relevant Fund at its next scheduled meeting.
VIII. Preservation of Documents
This Code, a copy of each report by a Covered Person, any written
report made hereunder by the Funds, Affiliates of the Funds or the
Divisional Compliance Officer, and lists of all persons required to
make or review reports, shall be preserved with the records of the
relevant Fund for a five year period in an easily accessible place.
IX. Other Laws, Rules and Statements of Policy
Nothing contained in this Code shall be interpreted as relieving any
Covered Person from acting in accordance with the provision of any
applicable law, rule or regulation or any other statement of policy or
procedure governing the conduct of such person adopted by Funds or
Affiliates of the Funds.
X. Further Information
If any person has any question with regard to the applicability of the
provisions of this Code generally or with regard to any Securities
transaction or transactions, he should consult the Divisional
Compliance Officer.
<PAGE>
Exhibit A
List of Registered Investment Companies
HSBC Funds Trust
HSBC Mutual Funds Trust
<PAGE>
Exhibit B
HSBC FUNDS TRUST
HSBC MUTUAL FUNDS TRUST
PRE-CLEARANCE TRADING APPROVAL FORM
I, ___________________________________________________ (name), am an Access
Person and seek pre-clearance to engage in the transaction described below:
Acquisition or Disposition (circle one)
Name of Account: ____________________________________________
Account Number: ____________________________________________
Date of Request: ____________________________________________
Security: ____________________________________________
Amount or # of Shares: _______________________________________
Broker: ____________________________________________
If the transaction involves a Security that is not publicly traded, a
description of proposed transaction, source of investment opportunity and any
potential conflicts of interest:
I hereby certify that, to the best of my knowledge, the transaction described
herein is not prohibited by the Funds' Code of Ethics dated October 27, 1999 and
that the opportunity to engage in the transaction did not arise by virtue of my
activities on behalf of any Client.
Signature: ______________________________________
Print Name:
Approved or Disapproved (Circle One)
Date of Approval:
Signature: ______________________________________
Print Name:
If approval is granted, please forward this form to the trading desk (or if a
third party broker is permitted, to the Divisional Compliance Officer) for
immediate execution.
<PAGE>
Exhibit C
HSBC FUNDS TRUST
HSBC MUTUAL FUNDS TRUST
INITIAL TRANSACTION REPORT
Report Submitted by:__________________________________________________________
Print Your Name
The following table supplies the information required by
Section IV(B) of the Code of Ethics dated October 27, 1999 for the period
specified below.
<TABLE>
<S> <C> <C> <C> <C>
Name of the Broker/Dealer
Price Per with or through Nature of
Securities (Name Quantity of Share or Other whom the Ownership of
and Symbol) Securities Unit Transaction Securities
was Effected
- --------------------------------------------------------------------------------------------------------
To the extent specified above, I hereby disclaim beneficial
ownership of any security listed in this Report or in brokerage statements or
transaction confirmations provided by you.
- --------------------------------------------------------------------------------------------------------
</TABLE>
I CERTIFY THAT I AM FULLY FAMILIAR WITH THE CODE OF ETHICS AND
THAT TO THE BEST OF MY KNOWLEDGE THE INFORMATION FURNISHED IN THIS REPORT IS
TRUE AND CORRECT FOR THE PERIOD OF __________, 199_ THROUGH 199_.
Signature _________________________ Date_______________________
Position _________________________
<PAGE>
HSBC Funds Trust
HSBC Mutual Funds Trust
QUARTERLY TRANSACTION REPORT
Report Submitted by: _____________________________________________________
Print Your Name
This transaction report (the "Report") is submitted pursuant
to Section IV(B) of the Code of Ethics of the Funds and supplies information
with respect to transactions in any Security in which you may be deemed to have,
or by reason of such transaction acquire, any direct or indirect beneficial
ownership interest for the period specified below. If you were not employed by
us during this entire period, amend the dates specified below to cover your
period of employment.
Unless the context otherwise requires, all terms used in the
Report shall have the same meaning as set forth in the Code of Ethics dated
October 27, 1999.
If you have no reportable transactions, sign and return this
page only. If you have reportable transactions, complete, sign and return page 3
and any attachments.
- --------------------------------------------------------------------------------
I HAD NO REPORTABLE SECURITIES TRANSACTIONS DURING THE PERIOD
__________, 199_ THROUGH _________, 199_. I CERTIFY THAT I AM FULLY FAMILIAR
WITH THE CODE OF ETHICS AND THAT TO THE BEST OF MY KNOWLEDGE THE INFORMATION
FURNISHED IN THIS REPORT IS TRUE AND CORRECT.
Signature
- ---------------------------------
Position
- ---------------------------------
Date
- ---------------------------------
<PAGE>
HSBC FUNDS TRUST
HSBC MUTUAL FUNDS TRUST
QUARTERLY TRANSACTION REPORT
Report Submitted by:__________________________________________________________
Print Your Name
The following table supplies the information required by
Section IV(C) of the Code of Ethics dated October 27, 1999 for the period
specified below. Transactions reported on brokerage statements or duplicate
confirmations actually received by the Divisional Compliance Officer do not have
to be listed although it is your responsibility to make sure that such
statements or confirmations are complete and have been received in a timely
fashion.
<TABLE>
<S> <C> <C> <C> <C> <C>
Name of the
Whether Purchase, Broker/Dealer
Securities Date of Sale, Short Sale, Quantity of Price Per Share with or through Nature of
(Name and Transaction or Other Type of Securities or Other Unit whom the Ownership of
Symbol ----------- Disposition or ----------- -------------- Transaction Securities
- ---------- Acquistion was Effected ------------
---------------- ----------------
- ------------------------------------------------------------------------------------------------------------------------------------
To the extent specified above, I hereby disclaim beneficial
ownership of any security listed in this Report or in brokerage statements or
transaction confirmations provided by you.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
I CERTIFY THAT I AM FULLY FAMILIAR WITH THE CODE OF ETHICS AND
THAT TO THE BEST OF MY KNOWLEDGE THE INFORMATION FURNISHED IN THIS REPORT IS
TRUE AND CORRECT FOR THE PERIOD OF __________, 199_ THROUGH 199_.
Signature _________________________ Date_______________________
Position _________________________
<PAGE>
HSBC FUNDS TRUST
HSBC MUTUAL FUNDS TRUST
ANNUAL TRANSACTION REPORT
Report Submitted by:__________________________________________________________
Print Your Name
The following table supplies the information required by
Section IV(D) of the Code of Ethics dated October 27, 1999 for the period
specified below.
<TABLE>
<S> <C> <C> <C> <C> <C>
Name of the Broker/Dealer
Securities Price Per with or through Nature of
(Name and Quantity of Share or Other whom the Ownership of
Symbol Securities Unit Transaction Securities
- ---------- ------------ -------------- was Effected -------------
------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
To the extent specified above, I hereby disclaim beneficial
ownership of any security listed in this Report or in brokerage statements or
transaction confirmations provided by you.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
I CERTIFY THAT I AM FULLY FAMILIAR WITH THE CODE OF ETHICS AND
THAT TO THE BEST OF MY KNOWLEDGE THE INFORMATION FURNISHED IN THIS REPORT IS
TRUE AND CORRECT FOR THE PERIOD OF __________, 199_ THROUGH 199_.
Signature _________________________ Date_______________________
Position _________________________
<PAGE>
Exhibit D
BENEFICIAL OWNERSHIP
For purposes of the attached Code of Ethics, "beneficial
ownership" shall be interpreted in the same manner as it would be in determining
whether a person is subject to the provisions of Section 16 of the Securities
Exchange Act of 1934 and the rules and regulations thereunder, except the
determination of direct or indirect beneficial ownership shall apply to all
securities that a Covered Person has or acquires. The term "beneficial
ownership" of securities would include not only ownership of securities held by
a Covered Person for his own benefit, whether in bearer form or registered in
his name or otherwise, but also ownership of securities held for his benefit by
others (regardless of whether or how they are registered) such as custodians,
brokers, executors, administrators, or trustees (including trusts in which he
has only a remainder interest), and securities held for his account by pledges,
securities owned by a partnership in which he is a member if he may exercise a
controlling influence over the purchase, sale of voting of such securities, and
securities owned by any corporation or similar entry in which he owns securities
if the shareholder is a controlling shareholder of the entity and has or shares
investment control over the entity's portfolio.
Ordinarily, this term would not include securities held by
executors or administrators in estates in which a Covered Person is a legatee or
beneficiary unless there is a specified legacy to such person of such securities
or such person is the sole legatee or beneficiary and there are other assets in
the estate sufficient to pay debts ranking ahead of such legacy, or the
securities are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by a Covered Person where such person enjoys "financial
benefits substantially equivalent to ownership." The Securities and Exchange
Commission has said that although the final determination of beneficial
ownership is a question to be determined in the light of the facts of the
particular case, generally a person is regarded as the beneficial owner of
securities held in the name of his or her spouse and their minor children.
Absent special circumstances such relationship ordinarily results in such person
obtaining financial benefits substantially equivalent to ownership, e.g.,
application of the income derived from such securities to maintain a common
home, or to meet expenses that such person otherwise would meet from other
sources, or the ability to exercises a controlling influence over the purchase,
sale or voting of such securities.
A Covered Person also may be regarded as the beneficial owner
of securities held in the name of another person, if by reason of any contract,
understanding, relationship, agreement, or other agreement, he obtains therefrom
financial benefits substantially equivalent to those of ownership.
A Covered Person also is regarded as the beneficial owner of
securities held in the name of a spouse, minor children or other person, even
though he does not obtain therefrom the aforementioned benefits of ownership, if
he can vest or revest title in himself at once or at some future time.
<PAGE>
Exhibit E
HSBC FUNDS TRUST
HSBC MUTUAL FUNDS TRUST
ANNUAL CERTIFICATION OF CODE OF ETHICS
A. I (a Covered Person) hereby certify that I have read
and understood the Code of Ethics dated October 27, 1999,
and recognize that I am subject to its provisions. In
addition, I hereby certify that I have complied with the
requirements of the Code of Ethics and that I have disclosed
or reported all personal Securities transactions required to
be disclosed or reported under the Code of Ethics;
B. Within the last ten years there have been no complaints
or disciplinary actions filled against me by any regulated
securities or commodities exchange, any self-regulatory
securities or commodities organization, any attorney
general, or any governmental office or agency regulating
insurance securities, commodities or financial transactions
in the United States, in any state of the United States, or
in any other country;
C. I have not within the last ten years been convicted of
or acknowledged commission of any felony or misdemeanor
arising out of my conduct as an employee, salesperson,
officer, director, insurance agent, broker, dealer,
underwriter, investment manager or investment advisor; and
D. I have not been denied permission or otherwise enjoined
by order, judgment or decree of any court of competent
jurisdiction, regulated securities or commodities exchange,
self-regulatory securities or commodities organization or
other federal or state regulatory authority from acting as
an investment advisor, securities or commodities broker or
dealer, commodity pool operator or trading advisor or as an
affiliated person or employee of any investment company,
bank, insurance company or commodity broker, dealer, pool
operator or trading advisor, or from engaging in or
continuing any conduct or practice in connection with any
such activity or the purchase or sale of any security.
Print Name: ______________
Signature: ______________
Date: ______________
LYON STREET ASSET MANAGEMENT COMPANY
CODE OF ETHICS
FOR SECURITIES TRANSACTIONS
Effective February 25, 2000
<PAGE>
LYON STREET ASSET MANAGEMENT COMPANY
CODE OF ETHICS
for
SECURITIES TRANSACTIONS
I. Preamble.............................................................1
II. Definitions..........................................................2
A. "Access Persons"................................................2
B. "Account".......................................................2
C. "Asset Manager".................................................2
D. "Control".......................................................2
E. "Designated Compliance Person"..................................2
F. "Family Members"................................................2
G. "Initial Public Offering".......................................2
H. "Investment Personnel"..........................................3
I. "Limited Offering"..............................................3
J. "Person Subject to this Code of Ethics".........................3
K. "Personal Account"..............................................3
L. "Purchase or Sale of a Subject Security"........................4
M. "Rule 17j-1"....................................................4
N. "SEC"...........................................................4
O. "Subject Security"..............................................4
III. Statement of General Principles......................................5
A. General Fiduciary Principals....................................5
B. Principals Applicable to Registered Investment Companies Managed by
Lyon Street Asset Management Company............................5
IV. Applicability........................................................6
V. Specific Restrictions on Transactions................................6
A. Access Persons..................................................6
1. Substantive Restrictions....................................6
a. Blackout Period.........................................6
b. New Issues..............................................6
c. Restrictions Applicable to Related Securities...........6
2. Compliance Procedures.......................................6
a. Prenotification.........................................6
<PAGE>
B. Investment Personnel.............................................7
1. Substantive Restrictions.....................................7
a. Blackout Period..........................................7
b. New Issues...............................................7
c. Short-Term Trading.......................................7
d. Prior Approval...........................................7
e. Restrictions Applicable to Related Securities............7
2. Compliance Procedures........................................8
a. Prenotification..........................................8
C. Asset Managers...................................................8
1. Substantive Restrictions.....................................8
a. Blackout Period..........................................8
b. New Issues...............................................8
c. Short-Term Trading.......................................8
d. Prior Approval...........................................8
e. Restrictions Applicable to Related Securities............9
2. Compliance Procedures........................................9
a. Prenotification..........................................9
D. Exceptions.......................................................9
VI. Reporting.............................................................9
A. Initial Reports..................................................9
B. Quarterly Transaction Reports...................................10
C. Annual Reports..................................................10
D. Exceptions from Reporting Requirements..........................11
VII. Sanctions............................................................11
VIII. Administration.......................................................11
A. Responsibilities of the President of Lyon Street Asset Management
Company.........................................................11
B. Responsibilities of the Designated Compliance Person............12
C. Responsibilities of the Board of Directors......................13
IX. Interpretations......................................................13
X. Effective Date.......................................................13
<PAGE>
Prenotification and Preapproval Request Memorandum..................Exhibit A
Initial Reports.....................................................Exhibit B
Quarterly Transaction Report........................................Exhibit C
Annual Reports......................................................Exhibit D
Appointment of Asset Manager for Prenotification Review
and Preapproval Authority...........................................Exhibit E
Summary Chart of Responsibilities...................................Exhibit F
<PAGE>
LYON STREET ASSET MANAGEMENT COMPANY
CODE OF ETHICS
for
SECURITIES TRANSACTIONS
I. Preamble.
The officers, directors, employees and certain other affiliated persons
of Lyon Street Asset Management Company, a Michigan investment advisor, in
varying degrees participate in or are aware of fiduciary and investment services
provided to registered investment companies, institutional investment clients,
mutual fund asset allocation programs, personal trusts and estates,
guardianships, employee benefit trusts, and other types of investment advisory
accounts. The fiduciary relationships thus created require adherence to the
highest standards of conduct and integrity. Common law and federal regulations
establish that the foremost duty owed by a fiduciary to its beneficiaries is
that of undivided loyalty. Accordingly, personnel acting in a fiduciary capacity
must carry out their duties for the exclusive benefit of the beneficiaries or
shareholders and must always seek to avoid any situation in which corporate or
personal interests may conflict with fiduciary interests. In order to avoid such
situations, this Code of Ethics establishes guidelines intended to prevent any
intentional or unintentional transgressions, without unnecessarily interfering
with the privacy and freedom of the individuals concerned. This Code of Ethics
has been adopted by the Board of Directors of Lyon Street Asset Management
Company.
In addition to the requirements of this Code of Ethics, Lyon Street
Asset Management Company officers, directors and employees who are also officers
or employees of Old Kent Bank and engaged in the provision of fiduciary services
are required to comply with bank policies and procedures, many of which are set
forth in the Investment Services Policy Book of Old Kent Bank. In general,
employees may not solicit or accept anything of value from anyone in connection
with the business of Lyon Street Asset Management Company, or its corporate
affiliate Old Kent Bank, unless the gift is of minimal value and does not in any
way influence the recipient or suggest to others that the recipient might be
influenced. Similarly, both Lyon Street Asset Management Company's policy and
the Old Kent Bank Investment Services policy regarding confidentiality require
that employees keep all confidential and proprietary information in complete
confidence.
Lyon Street Asset Management Company, its officers, directors and
employees may also be required to comply with other rules or policies imposing
separate requirements. For example, these persons may be subject to state and
federal laws imposing restrictions with respect to personal securities
transactions, including, but not limited to, Rule 17j-1 issued by the Securities
and Exchange Commission ("SEC") under the Investment Company Act of 1940, as
amended.
<PAGE>
II. Definitions. The following definitions apply to this Code of Ethics:
A. "Access Person" means:
1. Any officer or director of Lyon Street Asset Management
Company;
2.Any employee of Lyon Street Asset Management Company, Old Kent
Bank or Old Kent Financial Corporation (or of any other company
in a control relationship to Lyon Street Asset Management
Company), including all Investment Personnel and all Asset
Managers, as defined below, who in connection with his or her
regular functions or duties makes, participates in, or obtains
information regarding the purchase or sale of Subject Securities
by a registered investment company, or whose functions relate to
the making of any recommendations with respect to the purchase or
sale of Subject Securities by a registered investment company;
and
3. Any natural person in a control relationship to Lyon Street
Asset Management Company who obtains information concerning
recommendations made to a registered investment company with
regard to the purchase or sale of Subject Securities by the
registered investment company.
All Access Persons will be so identified by the President of Lyon
Street Asset Management Company and notified by the Designated
Compliance Person.
B. "Account" means an account through which Lyon Street Asset
Management Company provides investment services to one or more
registered investment companies or other persons, corporations or
entities.
C. "Asset Manager" means an employee of Lyon Street Asset Management
Company entrusted with the direct responsibility and authority to make
investment decisions affecting an Account. All Asset Managers will be
so identified by the President of Lyon Street Asset Management Company
and notified by the Designated Compliance Person.
D. "Control" has the same meaning as in section 2(a)(9) of the
Investment Company Act of 1940, as amended.
E. "Designated Compliance Person" means the person appointed by the
Board of Directors of Lyon Street Asset Management Company, or his/her
designee if (s)he is absent or otherwise unavailable.
F. "Family Members" of any person subject to this Code of Ethics means
the spouse, any minor children, older children living at the subject
person's home, older children primarily financially supported by the
subject person, and any other relatives (by marriage or otherwise)
living in the household of the person subject to this Code of Ethics.
G. "Initial Public Offering" means an offering of securities registered
under the Securities Act of 1933, the issuer of which, immediately
before the registration, was not subject to the reporting requirements
of sections 13 or 15(d) of the Securities Exchange Act of 1934.
<PAGE>
H. "Investment Personnel" means:
1. Any employee of Lyon Street Asset Management Company, Old Kent
Bank or Old Kent Financial Corporation (or of any other company
in a control relationship to Lyon Street Asset Management
Company), who, in connection with his or her regular functions or
duties, makes or participates in making recommendations regarding
the purchase or sale of securities by a registered investment
company; and
2. Any natural person who controls Lyon Street Asset Management
Company and who obtains information concerning recommendations
made to a registered investment company regarding the purchase or
sale of securities by the registered investment company.
All Investment Personnel will be so identified by the President
of Lyon Street Asset Management Company and notified by the
Designated Compliance Person.
I. "Limited Offering" means an offering that is exempt from
registration under the Securities Act of 1933 pursuant to section 4(2)
or section 4(6) or pursuant to rule 504, rule 505, or rule 506 under
the Securities Act of 1933.
J. "Person Subject to this Code of Ethics" is any person who is an
Access Person, Investment Personnel and/or an Asset Manager.1
K. "Personal Account" of any Person Subject to this Code of Ethics
means:
1. Any account as to which such person has direct or indirect
beneficial ownership2;
2. Accounts of any other individual or entity, which accounts
are managed or controlled by or through the Person Subject
to this Code of Ethics, other than any of the Accounts
managed by Lyon Street Asset Management Company;
1 The persons excluded from this Code's coverage are excluded because they are
not in a position to abuse their fiduciary obligations to engineer personal
investment gain. Nevertheless, all persons employed by Lyon Street Asset
Management Company are subject to the general rules of ethical conduct adopted
by or required from Lyon Street Asset Management Company. Dual employees are
subject also to the rules of ethical conduct of Old Kent Bank, when acting as
its representative.
2 For purposes of this Code, beneficial ownership is interpreted in the same
manner as it would be under rule 16a-1(a)(2) under the Securities and Exchange
Act of 1934 in determining whether a person is the beneficial owner of a
security for purposes of section 16 of the Securities and Exchange Act of 1934
and the rules and regulations thereunder.
<PAGE>
3. Accounts of any other individual or entity to whom the
Person Subject to this Code of Ethics gives advice with
regard to the acquisition or disposition of securities,
other than any of the Accounts managed by Lyon Street Asset
Management Company; and
4. Accounts over which the Family Members of the Person Subject
to this Code of Ethics exercise discretion or control
outside the scope of their business employment.
Provided, however, that the term "Personal Account" shall not
be construed in a manner which would impose a limitation or restriction
upon the normal conduct of business by directors, officers, employees
and affiliates of Lyon Street Asset Management Company.
L. "Purchase or Sale of a Subject Security" includes, among other
things, the writing of an option to purchase or sell a Subject
Security.
M. "Rule 17j-1" means Rule 17j-1 promulgated by the Securities and
Exchange Commission under the Investment Company Act of 1940, as
amended.
N. "SEC" means the Securities and Exchange Commission.
O. "Subject Security" shall have the following meaning: any note,
stock, treasury stock, bond, debenture, evidence of indebtedness,
certificate of interest or participation in any profit sharing
agreement, collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust
certificate, certificate of deposit for a security, fractional
undivided interest in oil, gas, or other mineral rights, any put, call,
straddle, option or privilege on any security or any group or index of
securities (including any interest therein or based on the value
thereof), or any put, call straddle, option, or privilege entered into
on a national securities exchange relating to foreign currency, or in
general, any interest or instrument commonly known as a "security", or
any certificate of interest or participation in, temporary or interim
certificate for, receipt for, guarantee of, or warrant or right to
subscribe to or purchase, any of the foregoing.
For purposes of this Code of Ethics, "Subject Security" shall
not include: securities which are issued by the Government of the
United States, shares of registered open-end investment companies
(mutual funds), securities which are acquired through dividend
reinvestment programs, bankers' acceptances, bank certificates of
deposit, commercial paper or high quality short-term debt instruments,
including repurchase agreements. A high quality short-term debt
instrument is any instrument that has a maturity at issuance of less
than 366 days and that is rated in one of the two highest rating
categories by a Nationally Recognized Statistical Rating Organization.
<PAGE>
III. Statement of General Principles.
A. GENERAL FIDUCIARY PRINCIPLES. The following general fiduciary
principles govern the personal investment activities of Lyon Street
Asset Management Company officers and employees:
1. The interests of Lyon Street Asset Management Company's
fiduciary customers come first. In any matter involving both a
Personal Account and securities held or to be acquired by any
Account for which Lyon Street Asset Management Company serves
as fiduciary, Lyon Street Asset Management Company employees
resolve any known or reasonably anticipated conflict of
interest in favor of the fiduciary Account.
2. All Persons Subject to this Code of Ethics conduct their
personal securities transactions in a manner consistent with
the Code of Ethics and in such a manner as to avoid any actual
or potential conflict of interest.
3. Lyon Street Asset Management Company personnel do not take
inappropriate advantage of their positions.
B. PRINCIPLES APPLICABLE TO REGISTERED INVESTMENT COMPANIES MANAGED BY
LYON STREET ASSET MANAGEMENT COMPANY. It is unlawful for any affiliated
person of, or any affiliated person of an investment adviser of, a
registered investment company, in connection with the purchase or sale,
directly or indirectly, by the person of a security held or to be
acquired by a registered investment company:
1. To employ any device, scheme or artifice to defraud the
registered investment company;
2. To make any untrue statement of a material fact to the
registered investment company or omit to state a material
fact necessary in order to make the statements made to the
registered investment company, in light of the circumstances
under which they are made, not misleading;
3. To engage in any act, practice or course of business that
operates or would operate as a fraud or deceit on the
registered investment company; or
4. To engage in any manipulative practice with respect to the
registered investment company.
A security held or to be acquired by a registered investment
company is any Subject Security which, within the most recent 15 days,
is or has been considered by Lyon Street Asset Management Company for
purchase by a registered investment company, is being or has been
considered by Lyon Street Asset Management Company for purchase by a
registered investment company, and any option to purchase or sell, and
any security convertible into or exchangeable for, such a Subject
Security.
<PAGE>
IV. Applicability.
The provisions of this Code of Ethics shall apply to all Persons
Subject to this Code of Ethics. Any person notified by the Designated Compliance
Person that he or she is an Access Person, Investment Personnel and/or an Asset
Manager shall have the individual duty to comply with the provisions of this
Code of Ethics applicable to the category to which the person belongs.
V. Specific Restrictions on Transactions.
This Code of Ethics applies the following specific restrictions to the
categories of persons named.
A. ACCESS PERSONS. Access Persons shall do (or refrain from doing)
the following:
1. Substantive Restrictions.
a. Blackout Period. An Access Person shall not
purchase or sell a Subject Security for a Personal
Account on a day during which any Account has a "buy"
or "sell" order for the same security, until that
order is executed or withdrawn. For the purposes of
these blackout restrictions only, Personal Accounts
do not include accounts of Family Members, unless the
Access Person directed or otherwise participated in
decisions regarding investments made for the Family
Member's account.
b. New Issues. Access Persons shall not acquire for a
Personal Account any Subject Security in an Initial
Public Offering.
c. Restrictions Applicable to Related Securities.
Transactions in securities related in value to a
Subject Security, including warrants, convertible
securities, and options, are restricted in the same
manner as are transactions in the Subject Security
itself.
2. Compliance Procedures.
a. Prenotification. All Access Persons shall have all
Subject Security transactions for Personal Accounts
reviewed by the President of Lyon Street Asset
Management Company prior to the transactions being
executed (see Exhibit A, attached). If the President
approves the transaction, then the Access Person
shall have 24 hours to execute the transaction.
During the 24-hour period, the President may verbally
revoke the approval if additional information is
obtained indicating that the transaction may violate
the provisions of this Code of Ethics. Verbal
revocations are effective immediately, are applicable
to previously approved transactions that have not yet
been executed, and will be confirmed in writing.
<PAGE>
For purposes of this prenotification
requirement, Personal Accounts do not include
accounts of Family Members unless the Access Person
directed or otherwise participated in decisions
regarding investments made for the Family Member's
account.
B. INVESTMENT PERSONNEL. All Investment Personnel shall do (or refrain
from doing) the following:
1. Substantive Restrictions.
a. Blackout Period. Investment Personnel shall not
purchase or sell a Subject Security for a Personal
Account on a day during which any Account has a "buy"
or "sell" order for the same security, until that
order is executed or withdrawn. For the purposes of
these blackout restrictions only, Personal Accounts
do not include accounts of Family Members, unless the
Investment Personnel directed or otherwise
participated in decisions regarding investments made
for the Family Member's account.
b. New Issues. Investment Personnel shall not acquire
for a Personal Account any Subject Security in an
Initial Public Offering.
c. Short-Term Trading. Investment Personnel must
request authority from the President of Lyon Street
Asset Management Company to profit from the purchase
and sale, or sale and purchase, of the same Subject
Securities within 60 calendar days.
d. Prior Approval. Investment Personnel shall not,
without the express prior approval of the President
of Lyon Street Asset Management Company, (i) acquire
for a Personal Account any Subject Security in a
Limited Offering or (ii) serve on the board of
directors of a publicly traded company. Where an
Investment Personnel has been authorized to obtain
Subject Securities of an issuer in a Limited
Offering, such person shall disclose that investment
when involved in the consideration of the same
issuer's Subject Securities for an Account, and any
subsequent decision to purchase Subject Securities of
the same issuer for an Account shall be independently
reviewed by appropriate personnel of Lyon Street
Asset Management Company having no personal interest
in the issuer. Where service as a director is
authorized, safeguards such as a "Chinese Wall" may
be required.
e. Restrictions Applicable to Related Securities.
Transactions in securities related in value to a
Subject Security, including warrants, convertible
securities, and options, are restricted in the same
manner as are transactions in the Subject Security
itself.
<PAGE>
2. Compliance Procedures.
a. Prenotification. All Investment Personnel shall
have all Subject Security transactions for Personal
Accounts reviewed by the President of Lyon Street
Asset Management Company prior to the transactions
being executed (see Exhibit A, attached). If the
President approves the transaction, then the
Investment Personnel shall have 24 hours to execute
the transaction. During the 24-hour period, the
President may verbally revoke the approval if
additional information is obtained indicating that
the transaction may violate the provisions of this
Code of Ethics. Verbal revocations are effective
immediately, are applicable to previously approved
transactions that have not yet been executed, and
will be confirmed in writing.
For purposes of this prenotification
requirement only, Personal Accounts do not include
accounts of Family Members unless the Investment
Personnel directed or otherwise participated in
decisions regarding investments made for the Family
Member's account.
C. ASSET MANAGERS. All Asset Managers shall do (or refrain from doing)
the following:
1. Substantive Restrictions.
a. Blackout Period. An Asset Manager shall not
purchase a Subject Security for a Personal Account
within at least seven calendar days after that
Subject Security is traded by an Account for which
the Asset Manager is a manager. An Asset Manager who
manages a registered investment company that the
Board of Directors has identified as an index fund is
exempt from this restriction for purposes of that
index fund. For the purposes of these blackout
restrictions only, Personal Accounts do not include
accounts of Family Members, unless the Asset Manager
directed or otherwise participated in decisions
regarding investments made for the Family Member's
account.
b. New Issues. Asset Managers shall not acquire for
any Personal Account any Subject Security in an
Initial Public Offering.
c. Short-Term Trading. Asset Managers must request
authority from the President of Lyon Street Asset
Management Company to profit from the purchase and
sale, or sale and purchase, of the same Subject
Securities within 60 calendar days.
d. Prior Approval. Asset Managers shall not, without
the express prior approval of the President of Lyon
Street Asset Management Company, (i) acquire for any
Personal Accounts any Subject Security in a Limited
Offering or (ii) serve on the board of directors of a
publicly traded company. Where an Asset Manager has
been authorized to obtain Subject Securities of an
issuer in a Limited Offering, such person shall
disclose that investment when involved in the
consideration of the same issuer's Subject Securities
for an Account, and any subsequent decision to
purchase Subject Securities of the same issuer for an
Account shall be independently reviewed by personnel
with no personal interest in the issuer. Where
service as a director is authorized, safeguards such
as a "Chinese Wall" may be required.
<PAGE>
e. Restrictions Applicable to Related Securities.
Transactions in securities related in value to a
Subject Security, including warrants, convertible
securities, and options, are restricted in the same
manner as are transactions in the Subject Security
itself.
2. Compliance Procedures.
a. Prenotification. All Asset Managers shall have all
Subject Security transactions for Personal Accounts
reviewed by the President of Lyon Street Asset
Management Company prior to the transactions being
executed (see Exhibit A, attached). If the President
approves the transaction, then the Asset Manager
shall have 24 hours to execute the transaction.
During the 24-hour period, the President may verbally
revoke the approval if additional information is
obtained indicating that the transaction may violate
the provisions of this Code of Ethics. Verbal
revocations are effective immediately, are applicable
to previously approved transactions that have not yet
been executed, and will be confirmed in writing.
For purposes of this prenotification
requirement only, Personal Accounts do not include
accounts of Family Members unless the Asset Manager
directed or otherwise participated in decisions
regarding investments made for the Family Member's
account.
D. EXCEPTIONS. Upon demonstration of a hardship involving special
circumstances, the President of Lyon Street Asset Management Company
may grant an exception from time to time to one of the above
restrictions for Access Persons, Investment Personnel or Asset
Managers, but only if the President knows of no abuse.
VI. Reporting.
A. INITIAL REPORTS. No later than 10 days after a person becomes
subject to this Code of Ethics, he or she must provide the information
listed below to the Designated Compliance Person (see Exhibit B,
attached):
1. A certification that the Person Subject to this Code of
Ethics has read and understands the Code of Ethics and agrees
to comply with its terms and conditions;
2. The title, number of shares and principal amount of each
Subject Security in any Personal Account of the Person Subject
to this Code of Ethics as of the date the person became
subject to this Code of Ethics;
3. The name of any broker, dealer or bank with whom any
Personal Account maintained by the Person Subject to this Code
of Ethics was held as of the date the person became subject to
this Code of Ethics; and
<PAGE>
4. The date that the report is submitted by the Person Subject
to this Code of Ethics.
B. QUARTERLY TRANSACTION REPORTS. No later than 10 days after the end
of a calendar quarter, every Person Subject to this Code of Ethics must
report the information listed below to the Designated Compliance Person
(see Exhibit C, attached):
1. With respect to any transaction during the quarter in a
Subject Security in a Personal Account:
a. The date of the transaction, the title, the
interest rate and maturity date (if applicable), the
number of shares, and the principal amount of each
Subject Security involved;
b. The nature of the transaction (i.e., purchase,
sale or any other type of acquisition or disposition;
c. The price of the Subject Security at which the
transaction was effected;
d. The name of the broker, dealer or bank with or
through which the transaction was effected; and
e. The date that the report is submitted by the
Person Subject to this Code of Ethics.
2. With respect to any Personal Account established by the
Person Subject to this Code of Ethics during the quarter:
a. The name of the broker, dealer or bank with whom
the Person Subject to this Code of Ethics established
the account;
b. The date the account was established; and
c. The date that the report is submitted by the
Person Subject to this Code of Ethics.
C. ANNUAL REPORTS. No later than January 30 of each year, every Person
Subject to this Code of Ethics must provide the information listed
below to the Designated Compliance Person (see Exhibit D, attached):
1. A certification that the Person Subject to this Code of
Ethics has read and understands the Code of Ethics and has
complied and will continue to comply with its terms and
conditions;
2. The title, number of shares and principal amount of each
Subject Security in a Personal Account on December 31 of the
previous year;
<PAGE>
3. The name of any broker, dealer or bank with whom the Person
Subject to this Code of Ethics maintained a Personal Account
as of December 31 of the previous year; and
4. The date the report is submitted by the Person Subject to
this Code of Ethics.
D. EXCEPTIONS FROM REPORTING REQUIREMENTS. No report needs to be filed
with respect to transactions effected for any account over which the
Person Subject to this Code of Ethics does not have any direct or
indirect influence or control.
VII. Sanctions.
Any Person Subject to this Code of Ethics who violates any part of it
will be subject to disciplinary actions including, possibly, dismissal. In
addition, any securities transaction executed in violation of this Code of
Ethics, such as short-term trading or trading during blackout periods, shall be
unwound or, if that is not practical, profits will be disgorged to a designated
charity. Finally, violations and suspected violations of criminal laws will be
reported to the appropriate authorities as required by applicable law or
regulation.
VIII. Administration.
A. RESPONSIBILITIES OF THE PRESIDENT OF LYON STREET ASSET MANAGEMENT
COMPANY. The President of Lyon Street Asset Management Company shall
identify each Person Subject to this Code of Ethics and provide the
Designated Compliance Person with such person's name and the date on
which such person became subject to this Code of Ethics. The President
shall review with the Board of Directors at least quarterly the list
of persons subject to this Code of Ethics.
The President shall be responsible for the prenotification and
preapproval requirements contained in this Code of Ethics. The
President shall review all prenotification and preapproval requests
with the object of identifying any applicable prohibition or limitation
and keeping a record of good faith efforts to meet the requirements of
this Code of Ethics. The President may grant a prenotification request
if the transaction would not violate any provision of this Code of
Ethics. The President may grant short-term trading authority so long as
he or she concludes there is no abuse. The President may approve
acquisitions of securities in a Limited Offering or service on the
board of directors of a publicly traded company only where such actions
are consistent with the interest of the Accounts and the beneficiaries
or shareholders. The President may verbally revoke any approval if
additional information is obtained indicating that the transaction may
violate the provisions of this Code of Ethics.
<PAGE>
If the President is or will be unavailable to perform the
prenotification and preapproval responsibilities, he or she may, by
means of the form attached as Exhibit E or other similar written
instructions, designate another Asset Manager to substitute for
purposes of affirming or denying trades. The President (or any
temporarily designated Asset Manager) may not approve transactions for
his or her own Personal Accounts, but instead shall seek any required
approval from and make any required reporting to the Designated
Compliance Person.
The President shall determine what action should be taken in
response to any violation of this Code of Ethics. In determining the
disposition of a violation, the President shall consider, among other
things, whether there have been previous violations by the same
individual, whether the Person Subject to this Code of Ethics knew or
should have known that the transaction was a prohibited transaction and
whether the Person Subject to this Code of Ethics engaged in the
transaction with the view to making a profit on the anticipated market
action of the Subject Security resulting from Account transactions. In
rare instances where a violation has occurred but no abuse is involved
and the equities of the situation strongly support an exemption, the
President may find it equitable that no sanctions be imposed. If it has
been determined that an officer, director or employee of Lyon Street
Asset Management Company has material nonpublic information, the
President shall cause measures to be implemented to prevent
dissemination of such information, and, if necessary, restrict
officers, directors and employees from trading the securities.
If the President is or will be unavailable to determine what
action should be taken in response to a violation, the Board of
Directors shall determine the disposition of the violation.
B. RESPONSIBLITIES OF THE DESIGNATED COMPLIANCE PERSON. The
Designated Compliance Person is responsible for administering the
requirements of this Code of Ethics, except for those particular
responsibilities otherwise assigned herein.
The Designated Compliance Person shall provide each Person
Subject to this Code of Ethics with a copy of the Code of Ethics
initially upon such person being determined to be subject to the Code
and annually thereafter.
The Designated Compliance Person shall furnish to the board of
directors of any registered investment company for which Lyon Street
Asset Management Company acts as investment adviser, no less frequently
than annually, a written report that: (1) describes any issues relating
to an access person of the investment company that arose under this
Code of Ethics or procedures adopted pursuant to this Code of Ethics
since the last report to the board of directors of the investment
company, including, but not limited to, information about material
violations of this Code or any applicable procedures and sanctions
imposed in response to the material violations; and (2) certifies that
Lyon Street Asset Management Company has adopted procedures reasonably
necessary to prevent access persons of the investment company from
violating this Code.
The Designated Compliance Person shall maintain all records
required by this Code of Ethics and Rule 17j-1(f).
<PAGE>
If the Designated Compliance Person believes or has been notified
that a Person Subject to this Code of Ethics may have engaged in any
transaction prohibited by this Code, the Designated Compliance Person
shall cause an investigation to be conducted. The Designated Compliance
Person shall report all investigations, any actual or suspected
violations of this Code, and any actions taken in response to such
violations to the President of Lyon Street Asset Management Company
and/or the Board of Directors, in a timely manner.
If the Designated Compliance Person is or will be absent or
unavailable, he or she will, by written instructions in the form of a
memorandum, designate another Compliance Department staff member to
substitute temporarily as the Designated Compliance Person. If the
Designated Compliance Person is unable to serve but has not designated
a temporary replacement, then the Board of Directors shall serve as the
Designated Compliance Person or shall appoint a temporary or permanent
successor Designated Compliance Person.
C. RESPONSIBILITIES OF THE BOARD OF DIRECTORS. The Board of Directors
shall review and monitor this Code of Ethics and shall appoint a
Designated Compliance Person as needed from time to time.
IX. Interpretations.
Any questions regarding the applicability, meaning or administration of
this Code of Ethics shall be referred in advance of any contemplated transaction
to the Designated Compliance Person for interpretation. A summary chart of the
responsibilities of the Persons Subject to this Code of Ethics is attached as
Exhibit F, but such persons are directed to consult the full text of the Code of
Ethics to determine their exact responsibilities.
X. Effective Date.
Upon adoption by the Board of Directors, this Code of Ethics shall be
effective as of February 25, 2000, and any amendments shall become effective
when adopted or as otherwise designated when adopted.
<PAGE>
EXHIBIT A
LYON STREET ASSET MANAGEMENT COMPANY
PRENOTIFICATION/PREAPPROVAL REQUEST MEMORANDUM
To: Joe Keating
From:
Date:
Subject: ______ Purchase for Personal Account
______ Sale from Personal Account
Please approve the following transaction(s):
Buy Sell Shares Subject Security Description:
- ---- ----- ------- -------------------------------------------
- ---- ----- ------- -------------------------------------------
- ---- ----- ------- -------------------------------------------
Check if you are:
------ Access Person
------ Investment Personnel
------ Asset Manager
If transaction is for a family member, check one:
------ Spouse
------ Minor Child
------ Dependent Child
------ Other Household Member
Check if the transaction is:
------ Initial Public Offering
------ Limited Offering
------ Short-term trade (buy/sell within 60 days)
- ------- ---------- ----------------------------- ----------
Approve Disapprove Joseph T. Keating, President Date
<PAGE>
EXHIBIT B
LYON STREET ASSET MANAGEMENT COMPANY
CODE OF ETHICS
INITIAL ACKNOWLEDGEMENT
I acknowledge that I have received a copy of Lyon Street Asset Management
Company's Code of Ethics. I have read and understand the policies and procedures
set forth in the Code of Ethics and I agree to comply in all respects with such
policies and procedures, including the making of required reports and
disclosures. I know such failure may constitute a violation of federal and state
securities laws and regulations that may subject me to civil liabilities,
criminal penalties and/or employment sanctions.
- ---------------------------------- ------------------------
Signature Date
__________________________________ Please return this signature page to
Print Name the Designated Compliance Person
<PAGE>
LYON STREET ASSET MANAGEMENT COMPANY
Code of Ethics Initial Report of Securities Holdings
This report MUST BE returned to the Designated Compliance Person no later than
10 days after the Date of Applicability, set forth below
<TABLE>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Date of Applicability of Code of Ethics:
- -----------------------------------------------------------------------------------------------------------
Name of Officer, Director or Employee: (1)
1. I _____ do ______ do not (check one) have any securities holdings that are
required to be reported under Lyon Street Asset Management Company's Code
of Ethics.
2. Following is the required information for all my securities holdings as of
the Date of Applicability:
--------------------------------------------------------------------------------------------------------------------------
Number of Shares of Price Per Share Name of Account Your Relationship
Stock or Principal Or in Which Security To
Name of Issuer and Description of Security Amount of Bonds Per Bond Held (if other than the Account
your name singly)
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
3. Following is the required information for all brokers, dealers or banks
with whom I maintained a Personal Account as of the Date of Applicability:
-----------------------------------------------------------------------------------------------------------------------------
Name of Broker, Dealer or Bank Address of Broker, Dealer or Bank name singly) the Account
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Date: ____________________ Signature: _______________________________________
</TABLE>
EXHIBIT C
<PAGE>
LYON STREET ASSET MANAGEMENT COMPANY
Code of Ethics Quarterly Report of Securities Transactions
o Under SEC regulations, this report MUST BE returned to the Designated
Compliance Person no later than 10 days after quarter-endo
Quarter Ending:
Name of Officer, Director or Employee: (1)
1. I _____ did ______ did not (check one) have any transactions in Subject
Securities during the quarter which are required to be reported under Lyon
Street Asset Management Company's Code of Ethics.
2. Reportable Transactions: (complete either (a) or (b))
(a) __________I certify that the transaction reports attached hereto are
a complete and accurate record
(b) Following is the required information for all my reportable transactions
during the quarter:
<TABLE>
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
Date of Name of Issuer and Number of Interest Rate Nature of Price Per Name of
Transaction Description of Shares of and Maturity Transaction (Buy, Share or Per Broker/Dealer or
Security Stock or Date (if Sell, Make or Bond Bank Effecting
Principal applicable) Receive a Gift, or Transaction
Amount of Other Transaction)
Bonds
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
Name of Account in Your
Which Security Relationship to
Held (if other the Account
than your name
singly)
--------------------- ------------------
--------------------- ------------------
--------------------- ------------------
--------------------- ------------------
</TABLE>
<PAGE>
3. Brokers, Dealers or Banks with whom I established a Personal Account:
(complete either (a) or (b))
(a) I certify that the brokers, dealers or banks shown on the statements
which are attached hereto are the only brokers, dealers or banks with
whom I maintained a Personal Account at any time during the quarter.
(b) Following is the required information for all brokers, dealers or banks
with whom I established a Personal Account during the quarter:
<TABLE>
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
Date Account Name on Account Your Relationship
Established Name of Broker, Dealer or Bank Address of Broker, Dealer or Bank (if other than To the Account
your name singly)
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
Date: ____________________ Signature: _______________________________________
</TABLE>
<PAGE>
EXHIBIT D
LYON STREET ASSET MANAGEMENT COMPANY
CODE OF ETHICS ANNUAL ACKNOWLEDGEMENT
I have read and understand the policies and procedures set forth in Lyon Street
Asset Management Company's Code of Ethics. I certify that I have, to date,
complied and will continue to comply in all respects with such policies and
procedures, including the making of required reports and disclosures. I know
such failure may constitute a violation of federal and state securities laws and
regulations that may subject me to civil liabilities, criminal penalties and/or
employment sanctions.
- ---------------------------------- ------------------------
Signature Date
__________________________________ Please return this signature page to
Print Name the Designated Compliance Person
<PAGE>
LYON STREET ASSET MANAGEMENT COMPANY
Code of Ethics Annual Report of Securities Holdings
<TABLE>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Under SEC regulations, this report MUST BE returned to the Designated Compliance Person no later than January 30
Year Ending: December 31,
- ----------------------------------------------------------------------------------------------------------------
Name of Officer, Director or Employee: (1)
1. I _____ did ______ did not (check one) have any securities holdings as of
the date set forth above that are required to be reported under Lyon Street
Asset Management Company's Code of Ethics.
2. Securities Holdings: (complete either (a) or (b))
(a) I certify that the list of securities attached hereto is a complete and
accurate record of all Subject Securities held by me in a Personal
Account on December 31, {year}.
(b) Following is the required information for all my securities holdings as
of December 31, {year}:
--------------------------------------------------------------------------------------- ---------------------------------------
Number of Shares of Price Per Share Name of Account Your Relationship
Stock or Principal Or in Which Security Held) To
Name of Issuer and Description of Security Amount of Bonds Per Bond if other than the Account
your name singly)
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
3. Brokers, Dealers or Banks with whom I maintained a Personal Account:
(complete either (a) or (b))
(a) I certify that the list of brokers, dealers or banks attached hereto are
the only brokers, dealers or banks with whom I maintained a Personal
Account on December 31, {year}.
(b) Following is the required information for all brokers, dealers or banks
with whom I maintained a Personal Account as of December 31, {year}:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
Your Relationship
Name on Account (if other than your To
Name of Broker, Dealer or Bank Address of Broker, Dealer or Bank name singly) the Account
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Date: ____________________ Signature: _____________________
<PAGE>
EXHIBIT E
Appointment of Asset Manager for Prenotification Review and
Preapproval Authority
I, Joseph T. Keating, hereby appoint _______________________ to provide trade
prenotification review and preapproval in my place during my anticipated absence
from _________________________ to ________________________. If (s)he is unable
or unwilling to serve in this capacity then the Board of Directors shall
exercise this function under the Code of Ethics.
---------------------------
Joseph T. Keating
- ------------------------------
Signature of Designee
cc: Kenneth C. Krei
<PAGE>
EXHIBIT F
This chart is designed as a quick reference for your convenience. The full terms
of the Code of Ethics control and should be consulted to amplify or explain
anything set forth herein.
<TABLE>
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Blackout Period New Issues Prenotification Reporting
Requirements
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Access
Persons Can't effect a purchase or sale Shall not acquire All Subject Securities Initial,
of a Subject Security for a in a Personal transactions in Personal Quarterly and
Personal Account on a day during Account any Subject Accounts must be Annual
which any Account has a "buy" or Securities in an approved by the
"sell" order for the same Subject Initial Public President prior to the
Security. Offering. transactions being
executed.
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Investment Personnel
Can't effect a purchase or sale Shall not acquire All Subject Securities Initial,
of a Subject Security for a in a Personal transactions in Personal Quarterly and
Personal Account on a day during Account any Subject Accounts must be Annual
which any Account has a "buy" or Securities in an approved by the
"sell" order for the same Subject Initial Public President prior to the
Security. Offering. transactions being
executed.
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Asset
Managers Can't purchase a Subject Security Shall not acquire All Subject Securities Initial,
for a Personal Account within at in a Personal transactions in Personal Quarterly and
least seven calendar days after Account any Subject Accounts must be Annual
that Subject Security is traded Securities in an approved by the
by an Account for which the Asset Initial Public President prior to the
Manager is a manager. (This Offering. transactions being
restriction is not applicable to executed.
index funds identified as such by
the Board of Directors).
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Short-Term Trading Prior Approval
------------------------ -----------------------------
------------------------ -----------------------------
N/A N/A
------------------------ -----------------------------
------------------------ -----------------------------
Must request authority Express prior approval of
from the President to the President is required
profit from the to either (a) acquire
purchase and sale, or securities in a Limited
sale and purchase, of Offering or (b) serve on
the same Subject the board of directors of a
Securities within 60 publicly traded company.
calendar days.
------------------------ -----------------------------
------------------------ -----------------------------
Must request authority Express prior approval of
from the President to the President is required
profit from the to either (a) acquire
purchase and sale, or securities in a Limited
sale and purchase, of Offering or (b) serve on
the same Subject the board of directors of a
Securities within 60 publicly traded company.
calendar days.
<PAGE>
- -----------------------------------------------------------------------------------------
Transactions in securities related in value to a Subject Security, including
warrants, convertible securities and options, are restricted in the same manner as
are transactions in the Subject Security itself. "Subject Security" means any note,
stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of
interest or participation in any profit sharing agreement, collateral-trust
certificate, preorganization certificate or subscription, transferable share,
investment contract, voting-trust certificate, certificate of deposit for a security,
fractional undivided interest in oil, gas, or other mineral rights, any put, call,
straddle, option or privilege on any security or any group or index of securities
(including any interest therein or based on the value thereof), or any put, call
straddle, option, or privilege entered into on a national securities exchange
relating to foreign currency, or in general, any interest or instrument commonly
known as a "security", or any certificate of interest or participation in, temporary
or interim certificate for, receipt for, guarantee of, or warrant or right to
subscribe to or purchase, any of the foregoing.
"Subject Security" does not include: securities which are issued by the Government of the
United States, shares of registered open-end investment companies (mutual funds),
securities which are acquired through dividend reinvestment programs, bankers'
acceptances, bank certificates of deposit, commercial paper or high quality short-term
debt instruments, including repurchase agreements. A high quality short-term debt
instrument is any instrument that has a maturity at issuance of less than 366 days and
that is rated in one of the two highest rating categories by a Nationally Recognized
Statistical Rating Organization
</TABLE>
Section 5
- --------------------------------------------------------------------------------
Code of Ethics
While OakBrook is confident of its officers and employees integrity and good
faith, there are certain instances where officers and employees possess
knowledge regarding present or future transactions or have the ability to
influence portfolio transactions made by the Company for its clients in
securities in which they personally invest. In these situations, personal
interest may conflict with that of the Company's clients.
In view of the above, OakBrook has adopted this Code of Ethics to specify or
prohibit certain types of transactions deemed to create conflicts of interest
(or the potential for or appearance of), and to establish reporting requirements
and enforcement procedures.
5.1 Statement of General Principles
In recognition of the trust and confidence placed in OakBrook by its clients and
to stress OakBrook's belief that its operations are directed to the benefit of
its clients, the Company has developed and adopted the following general
principles to guide its employees, officers, and directors.
1. The interests of the client are paramount and all associated persons of the
Company must conduct themselves in such a manner that the interests of the
clients take precedence over all others.
2. All personal securities transactions by associated persons of the Company
must be accomplished in such a way as to avoid any conflict between the
interest of the Company's clients and the interest of any associated
person.
3. All associated persons of the Company must avoid actions that allow
personal benefit or profit from their position with regard to the Company's
clients.
5.2 Definitions
1. "Access Person" - any director, officer, or associated person who
recommends the purchase or sale of securities for the Company on behalf of
the client.
2. "Beneficial Ownership" of a security - a person is considered to be a
beneficial owner of any securities in which he has a direct or indirect
monetary interest or is held by his spouse, his minor children, a relative
who shares his home, or other persons by reason of any contract,
arrangement, understanding or relationship that provides him with sole or
shared voting or investment power.
3. "Control" - means the power to exercise a controlling influence over the
management or policies of a company, unless such power is solely the result
of an official position with such company. Ownership of 25% or more of a
company's outstanding voting security is presumed to give the holder
control over the company.
<PAGE>
4. "Investment Personnel" - means all Access Persons who occupy the position
of portfolio manager with respect to the clients of OakBrook or any
separately-managed series thereof (a "Fund"), and all Access Persons who
provide or supply information and/or advice to any portfolio manager, or
who execute or help execute any portfolio manager's decisions.
5. "Purchase or Sale of a Security" - includes, among other things, the
writing of an option to purchase or sell a security.
6. "Security" shall have the same meaning as set forth in Section 2(a)(36) of
the 1940 Act, except that it shall not include securities issued by the
Government of the United States or an agency thereof, banker's acceptances,
bank certificates of deposit, commercial paper and registered open-end
mutual funds.
7. "Security Held or to be Acquired" by the client means any security which,
within the most recent fifteen calendar days, (i) is or has been held by
the clients or (ii) is being or has been considered by the Company for
purchase by the clients.
8. "Security is Being Purchased or Sold" by the client from the time when a
purchase or sale has been communicated to the Company until the time when
such transaction has been fully completed or terminated.
5.3 Prohibited Purchases and Sales of Securities
1. No access person shall, in connection with the purchase or sale, directly
or indirectly:
a) employ and device, scheme or artifice to defraud;
b) make any untrue statement of a material fact or omit to state a
material fact;
c) engage in any act, practice or course of business which would operate
as a fraud or deceit; or
d) engage in any manipulative practice
2. No access person may purchase or sell, directly or indirectly, any security
in which he had or by reason of such transaction acquires any beneficial
ownership, within 24 hours before or after the time that the same (or a
related) security is being purchased or sold by a client.
3. No investment personnel may acquire securities as part of an initial public
offering by the issuer.
4. No investment personnel shall purchase or sell, directly or indirectly, any
security in which he had or by reason of such transaction acquires any
beneficial ownership within 7 days before or after the time that the same
(or a related) security is being purchased or sold by any client for which
he acts as the portfolio manager.
<PAGE>
5.4 Pre-Clearance Transactions
1. Except as provided in Section 5.4.2 below, all investment personnel must
pre-clear each proposed transaction in securities with the compliance
officer prior to proceeding with the transaction. In determining whether to
grant such clearance, the compliance officer shall refer to Section 5.4.3
below.
2. The requirements of Section 5.4.1 shall not apply to the following
transactions:
a) Purchases or sales over which the Investment Personnel has no direct
or indirect influence or control.
b) Purchases or sales which are non-volitional on the part of either the
Investment Personnel or any Fund, including purchases or sales upon
exercise of puts or calls Written by the Investment Personnel and
sales from a margin account pursuant to a bona fide margin call.
c) Purchases which are part of an automatic dividend reinvestment plan.
d) Purchases effected upon the exercise of rights issued by an issuer pro
rata to all holders of a class of its securities, to the extent such
rights were acquired from such issuer.
3. The following transactions must be approved by the compliance officer.
a) Transactions which appear on reasonable inquiry and investigation to
present no reasonable likelihood of harm to the clients and which are
otherwise in accordance with Rule 17j-1.
b) Purchases or sales of securities which are not eligible for purchase
or sale by any client, as determined by reference to the Act and Blue
Sky laws and regulations thereunder, the investment objectives and
policies and investment restrictions of the clients and their series,
and undertakings made to regulatory authorities.
c) Transactions which the Compliance Officer after consideration of all
the facts and circumstances, determines to be in accordance with
Section 4.3 and to present no reasonable likelihood of harm to the
clients.
5.5 Additional Restrictions and Requirements
1. No Access Person shall accept or receive any gift in excess of $100 value
from any person or entity that does business with or on behalf of OakBrook.
2. Each Access Person must have duplicate statements for all personal
brokerage accounts sent to the compliance officer. Compliance with this
provision can be effected by the Access Person providing duplicate copies
of all such statements directly to the compliance officer within two
business days of receipt by the Access Person.
3. No Investment Personnel may accept a position as a director, trustee or
general partner of a publicly-traded company unless such position has been
presented to and approved by the Company.
4. All Investment Personnel must provide to the compliance officer a complete
listing of all securities owned by such a person as of the effective date
of employment, and thereafter must submit a revised list of such holdings
to the compliance officer as of January 1 of each subsequent year. The
initial listing must be submitted within 10 days of the date upon which
such person first became an Access Person, and each update thereafter must
be provided no later than 10 days after the start of the subsequent year. A
report form and reminder will be sent to all Investment Personnel prior to
year-end. (see Exhibit 5)
<PAGE>
5.6 Reporting Obligation
1. The Company shall create and maintain a listing of all Access Persons,
Investment Personnel, and Compliance Officers.
2. Each Access Person shall report all transactions in securities in which the
person has, or by reason of such transaction acquires, any direct or
indirect beneficial ownership. This may be accomplished by sending
duplicates of brokerage account statements to the compliance officer or
submitting the form listed as Exhibit #1.
3. Each Access Person shall sign an acknowledgment at the time this Code is
adopted or at the time such person becomes an Access Person and on an
annual basis thereafter that he has read, understands, and agrees to abide
by this Code.
5.7 Reports
1. Each Access Person shall submit quarterly reports of personal securities
transactions to the compliance officer. The compliance officer shall submit
confidential quarterly reports with respect to his or her own personal
securities transactions to an officer designated to receive his or her
reports ("alternate compliance officer") who shall act in all respects in
the manner prescribed herein for the compliance officer.
2. Any such report may contain a statement that the report shall not be
construed as an admission by the person making such report that he has any
direct or indirect beneficial ownership in the security to which the report
relates.
3. Every Access Person shall report the name of any publicly-owned company (or
any company anticipating a public offering of its equity securities) and
the total number of its shares beneficially owned by him if such total
ownership is more than 0.5% of the company's outstanding shares.
4. Every report shall be made no later than 10 days after the end of the
calendar quarter in which the transaction to which the report relates was
effected, and shall contain the following information:
a) The date of the transaction, the title and the number of shares or the
principal amount of each security involved;
b) The nature of the transaction (i.e., purchase, sale or any other type
of acquisition or disposition);
c) The price at which the transaction was effected;
d) The name of the broker/dealer or bank with or through whom the
transaction was effected; and
e) The date the report was signed.
<PAGE>
5. In the event no reportable transactions occurred during the quarter, the
report should be so noted and returned, signed and dated.
6. Report forms will be sent to all Access Persons by the compliance officer.
5.8 Review and Enforcement
The compliance officer shall review reported personal securities transactions,
brokerage statements, and/or the clients' securities transactions to determine
whether a violation of this Code may have occurred. Before making any
determination that a violation has been committed by any person, the compliance
officer shall give such person an opportunity to supply additional explanatory
material.
If the compliance officer determines that a violation of this Code may have
occurred, he shall submit his written determination, together with the
confidential monthly report and any additional explanatory material provided by
the individual, to the Counsel for the Company, who shall make an independent
determination as to whether a violation has occurred.
If the Counsel for the Company finds that a violation has occurred, the Counsel
for the Company shall impose upon the individual such sanctions as he or she
deems appropriate and shall report the violation and the sanction imposed to the
Company.
No person shall participate in a determination of whether he has committed a
violation of the Code or of the imposition of any sanction against himself. If a
securities transaction of the Counsel for the Company is under consideration,
any other Counsel shall act in all respects in the manner prescribed herein for
the Counsel for the Company.
5.9 Records
The Company shall maintain records in the manner and to the extent set forth
below, and will make them available for examination by employees of the
Securities and Exchange Commission.
1. A copy of this Code and any other code which is, or at any time within the
past five years has been, in effect shall be preserved in an easily
accessible place;
2. A record of any violation of this Code and any action taken as a result of
such violation shall be preserved in an easily accessible place for a
period of not less than five years following the end of the fiscal year in
which the violation occurs;
3. A copy of each report made by an officer or Supervisor pursuant to this
Code shall be preserved for a period of not less than five years from the
end of the fiscal year in which it is made, the first two years in an
easily accessible place; and
4. A list of all persons who are, or within the past five years have been,
required to make reports pursuant to this Code shall be maintained in an
easily accessible place.
5.10 Miscellaneous
All reports of securities transactions and any other information filed with the
Company pursuant to this Code shall be treated as confidential. The Company may
from time to time adopt such interpretations of this Code as it deems
appropriate.
The Counsel for the Company, or an appropriate member of OakBrook, shall report
to OakBrook at least annually as to the operation of this Code and shall address
in any such report the need (if any) for further changes or modifications to
this Code.
Section 18
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Code of Ethics
While RAM is confident of its employees integrity and good faith, there are,
certain instances, where employees possess knowledge regarding present or future
transactions or have the ability to influence portfolio transactions made by the
Company for its clients in securities in which they personally invest. In these
situations personal interest may conflict with that of the Company's clients.
In view of the above, RAM has adopted this Code of Ethics to specify or prohibit
certain types of transactions deemed to create conflicts of interest (or the
potential for or appearance of), and to establish reporting requirements and
enforcement procedures.
It is also RAM's desire and intention to have each of its employees who are
members of the Association for Investment Management and Research ("AIMR")
comply with the AIMR's Code of Ethics and Standards of Professional Conduct.
Accordingly, a copy of the AIMR's Code of Ethics and Standards of Professional
Conduct is attached hereto as Exhibit #7. The AIMR's Code of Ethics and
Standards of Professional Conduct is hereby incorporated in its entirety as
additional guidelines for those investment personnel who are covered by it.
18.1 Statement of General Principles
In recognition of the trust and confidence placed in RAM by its clients
and to stress RAM's belief that its operations are directed to the
benefit of its clients, the Company has developed and adopted the
following general principles to guide its employees, officers, and
directors.
1. The interests of the clients are paramount and all associated
persons of the Company must conduct themselves in such a
manner that the interests of the clients take precedence over
all others.
2. All personal securities transactions by associated persons of
the Company must be accomplished in such a way as to avoid any
conflict between the interest of the Company's clients and the
interest of any associated person.
3. All associated persons of the Company must avoid actions or
activities that allow personal benefit or profit from their
position with regard to the Company's clients.
18.2 Definitions
1. Access Person-any director, officer, or associated person who
recommends the purchase or sale of securities for the Company
on behalf of the client.
2. "Beneficial Ownership" of a security - a person is considered
to be a beneficial owner of any securities in which he has a
direct or indirect monetary interest or is held by his spouse,
his minor children, a relative who shares his home, or other
persons by reason of any contract, arrangement, understanding
or relationship that provides him with sole or shared voting
or investment power.
<PAGE>
3. "Control" - means the power to exercise a controlling
influence over the management or policies of a company, unless
such power is solely the result of an official position with
such company. Ownership of 25% or more of a company's
outstanding voting security is presumed to give the holder
control over the company.
4. "Investment Personnel" - means all Access Persons who occupy
the position of portfolio manager with respect to the clients
of RAM or any separately-managed series thereof (a "Fund"),
and all Access Persons who provide or supply information
and/or advice to any portfolio manager (or Trust Officer), or
who execute or help execute any portfolio manager's decisions.
5. "Purchase or Sale of a Security" includes, among other things,
the writing of an option to purchase or sell a security.
6. "Security" shall have the same meaning as that set forth in
Section 2(a)(36) of the 1940 Act, except that it shall not
include securities issued by the Government of the United
States or an agency thereof, banker's acceptances, bank
certificates of deposit, commercial paper and registered
open-end mutual funds.
7. A "Security Held or to be Acquired" by the clients means any
security which, within the most recent fifteen days, (i) is or
has been held by the clients or (ii) is being or has been
considered by the Company for purchase by the clients.
8. A Security is "being purchased or sold" by the clients from
the time when a purchase or sale has been communicated to the
Company until the time when such transaction has been fully
completed or terminated.
18.3 Prohibited Purchases and Sales of Securities
1. No Access Person shall, in connection with the purchase or
sale, directly or indirectly:
a. employ any device, scheme or artifice to defraud;
b. make any untrue statement of a material fact or omit to
state a material fact;
c. engage in any act, practice or course of business which
would operate as a fraud or deceit; or
d. engage in any manipulative practice.
2. No Access Person or Investment Personnel shall purchase or
sell, directly or indirectly, any security owned in accounts
or Funds managed by RAM. If any such Access Person or
Investment Personnel is the owner of a security (or related
security) which RAM decides to buy for an account or Fund, he
or she shall have the right to sell the security prior to
RAM's purchase of it. If any such person does not sell the
security prior to RAM's purchase for an account or Fund, he or
she must own it as long as the account or Fund owns the
security.
3. No Investment Personnel may acquire securities as part of an
initial public offering or limited public offering (i.e., a
private placement) by the issuer.
4. No Investment Personnel shall purchase or sell, directly or
indirectly, any security for the purpose or with the result of
realizing a short-term gain within 60 days from the date said
security (or related security) was acquired.
<PAGE>
18.4 Pre-Clearance of Transactions
1. Except as provided in Section 18.4.2, below, all Investment
Personnel must pre-clear each proposed transaction in
securities with a designated Supervisor prior to proceeding
with the transaction. In determining whether to grant such
clearance, the designated Supervisor shall refer to the
Section 18.4.3, below.
2. The requirements of Section 18.4.1 shall not apply to the
following transactions:
a. Purchases or sales over which the Investment Personnel
has no direct or indirect influence or control.
b. Purchases or sales which are non-volitional on the part
of either the Investment Personnel or any Fund,
including purchases or sales upon exercise of puts or
calls Written by the Investment Personnel and sales
from a margin account pursuant to a bona fide margin
call.
c. Purchases which are part of an automatic dividend
reinvestment plan.
d. Purchases effected upon the exercise of rights issued
by an issuer pro rata to all holders of a class of its
securities, to the extent such rights were acquired from
such issuer.
3. The following transactions must be approved by the designated
Supervisor.
a. Transactions which appear upon reasonable inquiry and
investigation to present no reasonable likelihood of
harm to the clients and which are otherwise in
accordance with Rule 17j-1.
b. Purchases or sales of securities which are not
eligible for purchase or sale by any client, as
determined by reference to the Act and blue sky laws
and regulations thereunder, the investment objectives
and policies and investment restrictions of the
clients and their series, and undertakings made to
regulatory authorities.
c. Transactions which the designated Supervisor after
consideration of all the facts and circumstances,
determines to be in accordance with Section 18.3 and
to present no reasonable likelihood of harm to the
clients.
18.5 Additional Restrictions and Requirements
1. No Access Person shall accept or receive any gift in excess of
$100 value from any person or entity that does business with
or on behalf of RAM.
2. Each Access Person must have duplicate statements for all
personal brokerage accounts sent to the designated Supervisor.
Compliance with this provision can be effected by the Access
Person providing duplicate copies of all such statements
directly to the designated Supervisor within two business days
of receipt by the Access Person.
3. No Investment Personnel may accept a position as a director,
trustee or general partner of a publicly-traded company unless
such position has been presented to and approved by the
Company and by Trusts' Board of Trustees as consistent with
the interests of the Trusts and their shareholders.
<PAGE>
4. All Access Persons must provide to the designated Supervisor a
complete listing of all securities owned by such person as of the
effective date of employment (an "Initial Holdings Report"), and
thereafter must submit a revised list of such holdings to the
designated Supervisor as of January 1 of each subsequent year (an
"Annual Holdings Report"). The Initial Holdings Report must be
submitted within 10 days of the date upon which such person first
became an Access Person of the Trusts, and each update thereafter
must be provided no later than 30 days after the start of the
subsequent year. A report form and reminder will be sent to all
Access Persons prior to year-end. (see Exhibit #9).
18.6 Reporting Obligation
1. The Advisor shall create and maintain a listing of all Access
Persons, Investment Personnel, and designated Supervisors.
2. Each Access Person shall report all transactions in securities
in which the person has, or by reason of such transaction
acquires, any direct or indirect beneficial ownership. (see
Exhibit #2).
3. Each Access Person shall sign an acknowledgment at the time
this Code is adopted or at the time such person becomes an
Access Person and on an annual basis thereafter that he has
read, understands, and agrees to abide by this Code.
18.7 Reports
1. Each Access Person shall submit quarterly reports of personal
securities transactions to the designated Supervisor. The designated
Supervisor shall submit confidential quarterly reports with respect
to his or her own personal securities transactions to an officer
designated to receive his or her reports ("Alternate designated
Supervisor"), who shall act in all respects in the manner prescribed
herein for the designated Supervisor.
2. Any such report may contain a statement that the report shall not be
construed as an admission by the person making such report that he
has any direct or indirect beneficial ownership in the security to
which the report relates.
3. Every Access Person shall report the name of any publicly-owned
company (or any company anticipating a public offering of its equity
securities) and the total number of its shares beneficially owned by
him.
4. Reports per Section 18.5.4 above.
5. Quarterly security transaction report shall be made not later than
10 days after the end of the calendar quarter in which the
transaction to which the report relates was effected, and shall
contain the following information:
a. The date of the transaction, the title and the number of shares
or the principal amount of each security involved;
b. The nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
c. The price at which the transaction was effected;
d. The name of the broker/dealer or bank with or through whom the
transaction was effected; and
e. The date the report was signed.
<PAGE>
6. In the event no reportable transactions occurred during the quarter,
the report should be so noted and returned, signed and dated.
7. Report forms will be sent to all Access Persons by the designated
Supervisor prior to the end of each quarter.
18.8 Review and Enforcement
The designated Supervisor shall review reported personal securities
transactions, brokerage statements, and/or the clients' securities
transactions to determine whether a violation of this Code may have
occurred. Before making any determination that a violation has been
committed by any person, the designated Supervisor shall give such
person an opportunity to supply additional explanatory material.
If the designated Supervisor determines that a violation of this Code
may have occurred, he shall submit his written determination, together
with the confidential monthly report and any additional explanatory
material provided by the individual, to the Counsel for the Advisor,
who shall make an independent determination as to whether a violation
has occurred.
If the Counsel for the Advisor finds that a violation has occurred, the
Counsel for the Advisor shall impose upon the individual such sanctions
as he or she deems appropriate and shall report the violation and the
sanction imposed to the Board of Trustees of the Trusts.
No person shall participate in a determination of whether he has
committed a violation of the Code or of the imposition of any sanction
against himself. If a securities transaction of the Counsel for the
Advisor is under consideration, any other Counsel shall act in all
respects in the manner prescribed herein for the Counsel for the
Advisor.
On an annual basis, the designated Supervisor shall provide a written
report of any material violation, and the sanctions imposed to the
Board of Trustees of the Trusts.
Further, RAM shall certify to the Board of Trustees that if it has
adopted procedures reasonably necessary to prevent violations of this
Code.
18.9 Records
The Company shall maintain records in the manner and to the extent set
forth below, and will make them available for examination by
representatives of the Securities and Exchange Commission.
The Company shall maintain list of Access Persons and Investment
Personnel. (see Exhibit #10).
1. A copy of this Code and any other code which is, or at any
time within the past five years has been, in effect shall be
preserved in an easily accessible place;
2. A record of any violation of this Code and any action taken as
a result of such violation shall be preserved in an easily
accessible place for a period of not less than five years
following the end of the fiscal year in which the violation
occurs;
3. A copy of each report made by an officer or Supervisor
pursuant to this Code shall be preserved for a period of not
less than five years from the end of the fiscal year in which
it is made, the first two years in an easily accessible place;
and
4. A list of all persons who are, or within the past five years
have been, required to make reports pursuant to this Code
shall be maintained in an easily accessible place.
18.10 Miscellaneous
All reports of securities transactions and any other information filed
with the Company pursuant to this Code shall be treated as
confidential. The Company may from time to time adopt such
interpretations of this Code as it deems appropriate.
The Counsel for the Company, or an appropriate member of RAM, shall
report to RAM and to the Board of Trustees of the Trusts at least
annually as to the operation of this Code and shall address in any such
report the need (if any) for further changes or modifications to this
Code.
Any material change must be reviewed and approved within six months of
such change by the Board of Trustees of the Trusts. This Code will be
filed as an exhibit to the Trusts' Registration Statements.
